Tax Deductions And Credits For College Students To Save Money

Tax Deductions And Credits For College Students To Save Money

In the past 20 years, the cost of attending college has tripled and increased almost 8 times faster than wages. While public higher education is mostly a state responsibility, the federal government does incentivize continuing education through tax deductions and tax credits.

To understand how you might take advantage of these tax deductions as a college student or recent graduate, we’ve gathered 7 tax deductions and credits you should know to save the most money on your tax bill this year.

What is a Tax Deduction vs. a Tax Credit?

Tax deductions work to reduce your taxable income. For example, if you earn $50,000 in adjusted gross income as a single filer and claim a tax deduction worth $1,000, your net taxable income becomes $49,000. With this income, you fall into the 22% income tax bracket, saving you $220 in taxes, all things equal.

Tax credits work to reduce your tax liability dollar-for-dollar. For example, take the same situation as above. If you have $50,000 in adjusted gross income, you fall in the 22% tax bracket and pay $6,790 in federal income taxes. A $1,000 tax credit reduces this dollar-for-dollar, meaning you now only owe $5,790. You can see why tax credits are more valuable than tax deductions as a result.

1. Retirement Account Contributions (IRA)

It might seem odd to start with retirement when you’re just starting on your career journey or only have a weekend job, but this is a valuable tax deduction for students in the long-run. Before picking a stock trading app to invest this money, make sure you do your stock market research first.

Regardless of how you choose to invest, the tax code awards this behavior by offering you the ability to deduct your contributions from your taxable income if you make them into a traditional IRA. You can contribute $6,000 per year or your earned income, whichever is greater. Start saving for retirement early so you can benefit from compound growth.

2. Capital Gain Losses

If you trade stocks in a taxable account, you hopefully only make gains. But, we live in a realistic world. Not all of our investments will turn out to be winners. Depending on your state of residence, you may be able to start investing before the age of 21.

When you choose to sell your losing positions, you can harvest these tax losses to lower your taxable income. Each year, you can offset your capital gains with capital losses and claim up to $3,000 in losses against your earned income. Any unused capital losses roll forward indefinitely until you’ve completely offset capital gains in future years or you have used up your annual $3,000 maximum deduction against earned income.

3. American Opportunity Tax Credit

If you pay your own way for college, including tuition, fees, and other qualified higher education expenses, you may have the ability to claim the American Opportunity tax credit (AOTC) to lower your tax bill dollar-for-dollar.

This credit can be worth up to $2,500 per year for four years of schooling after high school if enrolled at least half-time and working towards a degree. To claim the full credit, you can claim the first $2,000 of qualified expenses and then up to 25% of the next $2,000, or $500, totaling $2,500.

4. Lifetime Learning Credit

Closely related to the American Opportunity tax credit, this one also lowers your tax bill on a dollar-for-dollar basis, but only one can be claimed. The Lifetime Learning Credit can help pay for undergraduate, graduate, or professional degree courses.

This credit does not carry a minimum enrollment amount (meaning you don’t need to be enrolled at least half time), and you don’t need to work towards a degree. Down the road, if you choose to return to school to earn additional credentials or need to take continuing education coursework to maintain licenses, you can apply the Lifetime Learning Credit to your tax bill.

5. Recovery Rebate Tax Credit

As part of the CARES Act, many Americans received a stimulus check or two. If you aren’t claimed as a dependent on someone’s tax return in 2020, and you didn’t receive a check, you could claim the Recovery Rebate Tax Credit on your return. People received these payments last year as an advance payment, but technically it counts as a tax credit on your 2020 return.

6. Student Loan Interest Deduction

If you’re one of 42 million Americans with outstanding student loans, you can deduct the interest paid as part of your student loan payments. To qualify for this deduction, you need to have paid at least $600 in student loan interest during the year and may deduct up to a maximum of $2,500 each year. Like most deductions and credits listed here, you will need to meet certain income limitations to claim this deduction.

7. Earned Income Tax Credit

If you attend college as an older student and earn a low-to-moderate income, you may also qualify for the earned income tax credit. The refundable nature of the credit means even if your tax bill falls below $0 (meaning you are due a tax refund), you can claim whatever negative balance the earned income tax credit produces.

For example, if you owed $2,000 in taxes before claiming the earned income tax credit but it amounts to $2,500 in value, this will lead to a negative tax bill of $500, which can then be returned to you via a tax refund.


A Guide For College Grads On Your Company Benefits Plan

A Guide For College Grads On Your Company Benefits Plan

Congratulations, Graduate!


Mark Twain

Hopefully, there will be a commencement season this year. It is one of my favorite times of the year, and I don’t even have a child going to college yet. As a professor and a hopeful nerd, I enjoy college grads getting all kinds of accolades and advice on life and read as many commencement speeches as I can. Some of those speeches through the years have become legendary.

For one of the most inspiring, read or listen to the commencement speech of Steve Jobs, co-founder of Apple, at Stanford University in 2005.

Enjoy This Moment of Sunshine

After years of toil at your college and most likely working hard in high school to land at your top college choice, you have earned the chance to enjoy this moment. The time between college and starting your first job is an excellent time to take a breather. And travel time to visit family, friends, and possibly part-time employment.

The value of obtaining your bachelor’s degree remains a significant factor in your lifelong income and financial well-being.

Your First Job After College

On average, most graduates believe the benefits of their education meet or exceed the costs. Likely you are either starting your first job soon or are engaged in your search.  According to its survey, the National Association of Colleges and Employers (NACE), the average annual salary for college grads is about $50,000. Those who majored in computers, engineering, mathematics, health sciences, and business were the highest earners, with salaries ranging between $52,000 and $71,000. 

 Tips For Making The Most Of Your First Job:


1. Perfection Is The Enemy Of The Good

You are beginning your professional life. You don’t know what to anticipate in your new environment. Expect to make mistakes and learn from them.

Prepare for your job interview for the job. Start by reading their annual report and articles to understand the company. Competence is what you are aiming for when you first get started in your new job.

2. Paying Your Dues

Initially, you are not likely to get the “cool” assignments. You will be doing a lot of the grunt work or doing something you believe is beneath you. Everyone goes through this feeling. Remain enthusiastic as your co-workers and boss may want to see how you handle the easy work before giving you more tasks.

3. Volunteer To Help Others But Complete Your Work

When I hired associates to work with me I often had “eager beavers” wanting to do everything everyone else was doing, leaving behind the work I asked them to complete. Instead, they would rush their work, doing a shabby job.

4. Seek Opportunities To Learn New Skills

As you get deeper into the swing of your job, complete tasks on or ahead of schedule, become a sponge. Learn as much as possible and take advantage of any company-sponsored training offered to you. Strengthen your existing skills and build your abilities to be a problem solver. 

 5. Do More Than Asked

I heard a great story from a now successful executive at a major newspaper firm. She elevated herself from the entry-level job, by completing her work efficiently, then helping others.  Along the way, she picked essential skills to make herself invaluable. As a result, she is now a senior manager of the firm.

6. Understand Your Company Benefits Package

According to the Bureau of Labor Statistics, the combined benefits plan adds about 30% to your total compensation. In a tight employment market, companies often become more generous with their benefits. Besides the standard vacation days, your benefits package may vary widely.

A recent Glassdoor survey said 4 out of 5 employees prefer benefits to a raise.

Your Company Benefits Package:


Retirement 401K Plan

As soon as you begin to work at your new firm, you need to set up an account to start saving in your 401K plan. Better yet, automate contributions directly from your paycheck. You need to understand the dollar amount or percentage of company matching contribution with any defined cap amounts on employee contribution.

For example, Discover, the credit card company, has a generous company match up to 7%.

What is the vesting period of the company’s matching contribution for the 401K? If vesting is partial or two years, you will more likely keep the company’s match amount than if the vesting period is 5 years or more. Many companies have partial vesting.

As this is your first job, you may not expect to stay the five years required to earn the company’s contribution. People no longer stay in the same company for years. However, you should still begin to put money in your 401K. If you leave your job, you have options for your 401K. You can leave it in the old plan or roll it over to your new employer or roll this 401K into an IRA. 

Student Loans Repayment

Student loan repayment as an employee benefit is in its infancy period. It could grow into a core part of a company’s benefits package. According to SHRM’s 2019 survey, about 8% of employers repay student loans as an attractive benefit.

More companies are helping with student loans, especially since the IRS ruling a few years back. Abbott Laboratories was a pioneer in addressing student loan repayments giving employees the option. Employees can contribute toward their student debt rather than to the 401K plan. However, they still get the 401K employer’s match contribution even if the worker didn’t contribute themselves.

Company Stock Ownership Plans Differ Widely

They are a desirable benefit for the employees to participate in the company’s growth and may offer tax deductions.

For closely-held or private corporations, Employee Stock Option Plans or ESOPs means that the company is owned partly or entirely by employees. Publix, the supermarket company, is among the largest owned.

Employee Stock Purchase Plans or ESPPs are offered by 52% of most public corporations through employee participation is relatively low at 42%.

The ESPP plan is usually offered as a tax-qualified plan. All employees may participate based on a minimum number of years at the company. These employees may buy stock during “an offering period” over  3 months-to-27 months, set at a discount up to 15% from the market price.

Employees can profit immediately or over a longer holding period. If holding more than a year and a day, your income is taxed at the capital gains rate. Make sure you diversify your investment portfolio beyond holding any concentrated positions.

A Word of Caution

Sometimes employees can expand their stock ownership on a tax-advantaged basis, even buying the shares inside their 401K plans. I have significant concerns about employees using their employer’s stock in their 401k for three main reasons:

  • Owning too much stock of the company you are working for is too much risk no matter how great the company is as your employer. Too many eggs in one basket are hazardous, and you need diversification.
  • WorldCom and Enron’s financial scandals were devastating for those company employees who received an excessive amount of compensation in their company stock for bonuses and 401K plans. There was little heads up of the calamity coming.
  • Many lost their life savings along with the devaluation of their homes due to their proximity to corporate headquarters. I knew many of the WorldCom folks.

 Health Insurance

Not surprisingly, 58% of new college grads want 100% employer-paid medical insurance but only 7.5% of employers provide that. You need to understand the premiums, deductibles, and co-pays you are responsible for and your plan covers.


If there is a high deductible, determine whether your employer contributes to health savings accounts (HSAs). An HSA is a tax-advantaged account for individuals covered by high deductibles, not subject to federal income tax at the time of deposits.  HSA funds are used to pay for qualified medical expenses and may cover over-the-counter medications with a doctor’s prescription.

FSAs – Health Care Flexible Spending Plans 

 A flex plan allows employees to pay for specific unreimbursed healthcare and dependent care expenses with pretax dollars. This plan helps to offset some of the costs not met with the main health insurance up to a capped amount (e.g., $2,000).

Dental and Vision insurance is offered by about 62% of employers and is considered a desirable perk for college grads. Vision insurance is part of the more significant health insurance, allowing regular eye exams and some employer contribution for glasses.

Disability Insurance

According to Social Security Administration, 25% of all 20-year-olds will be disabled by the age of 67. Disability insurance is an essential part of any package, but few believe they need this insurance. 42% of private sector companies offer this insurance.

This insurance plan replaces a portion of an employee’s gross income, usually up to 50%-60% to you, while you are disabled subject to a physician’s approval. You buy this insurance on a short-term and long-term basis. The employer may pay the premium in part or in whole. The employee will pay the rest.

On a short-term basis, the disability benefits extend up to 52 weeks, kicking in 1-14 days after the employee cannot work and has applied their sick days.

Life Insurance 

Usually, employers offer a relatively small amount of life insurance rather than enough to protect you and your family fully. The employee can increase its coverage amount by paying the premiums on a monthly or quarterly basis through its company’s group term life plan at reduced rates than what they would pay on their own.

Tuition Reimbursement 

Most employers are often willing to provide tuition reimbursement for advanced education rather than lose the employee. The refund can correlate to grades. An “A” would 100% reimbursement, “B” gets 75%, and so on.

Increasingly, companies are offering online courses to employees to complete their degrees for high school and college, as well as “English as a Second Language.”

Unique Lifestyle Benefits  

There is a long list of excellent benefits often found to be high quality among the best companies. Flexible work options are becoming more standard after given the broad experience many have had during the pandemic. Here are some of the best I found:

  • egg freezing for female employees
  • adoption and surrogacy assistance and reimbursement
  • employee relief fund for national disaster victims
  • doctor’s office or medical clinic onsite
  •  counseling sessions to reduce stress
  • high-quality dining
  • leave of absences to care for family members or newborns
  • financial aid coaches
  •  career planning
  • discounts or full paid courses for high school, undergraduate degrees, yoga, and ESL
  • flex hours or work from home
  • dry cleaning on-premises
  • paid time off for volunteering
  • pet insurance
  • onsite gym
  • personal or professional time off
  • child daycare or  day elder care

Maybe There Is A Free Lunch

Take advantage of your company benefits plan by reading it thoroughly. Ask questions of human resources to understand it better. Work diligently and convey a positive attitude. Whether this is your first job or your fifth job, your company benefits package is a meaningful part of your compensation.

Thank you for reading! What is in your company benefits package? What are the benefits you value the most? Please share your thoughts with us!






10 Steps Women Should Take Negotiating Salary Compensation

10 Steps Women Should Take Negotiating Salary Compensation

” No wonder women don’t negotiate as often as men. It’s like trying to cross a minefield backward in high heels.”

 Sheryl Sandberg, “Lean In: Women, Work, and the Will To Lead”

The gender gap remains in the usual places for women–less pay, work fewer years in the workplace with time out for children and other dependents, lower savings for retirement–but women are gaining ground.

More women are graduating college and hold more graduate degrees than men. They are reaching higher corporate levels, and there are more women-owned or founded businesses. They are making progress, as women are primary breadwinners in 41% of US homes but still carry the additional caregiving and household duties.  

Women Need To Be Assertive But Find It Hard To Negotiate

When it comes to women achieving success in their careers, moving from entry levels to ever-higher corporate levels, they need to understand how to negotiate compensation packages better. Women tend to be less assertive and more accommodative than men. That may leave significant money on the table, starting with their first job’s salary.

When women get a lower salary than men for the same job and experience, we should not dismiss that difference even for just one year. It becomes cumulative. She starts with a lower base. Even if she and her male counterpart get identical raises and promotions over the same years worked, the impact of compounding interest leaves a sizable gap in her comparable net worth.

Women Pay A Greater Social Cost

Studies have pointed to the “social cost of negotiating” which negatively impacts those who are self-advocating for a salary raise. It shows that the hit was significantly worse for women than men.

“Aggressive and hard-charging women violate unwritten rules about acceptable social conduct. Men are continually applauded for ambitious and powerful and successful, but women who display these same traits often pay a social penalty paid by women who display these traits. Female accomplishments come at a cost.”    Sheryl Sandberg

Research shows women make better advocates when they represent others than for themselves. Women fear backlash when it is for themselves but are better when they negotiate for others.

10 Steps Women Should Take When Negotiating


1. When You Limit Yourself To The Offer 

Before you go gangbusters, know that specific jobs may not be negotiable. Entry-level positions may be less negotiable, especially when you have little to no experience in the field.

Typically, teaching, union, hourly positions, government, and civil jobs have stated pay scales. Increasingly, companies are being more transparent with structured compensation schemes easier to understand.

2. Do Your Research First

Be aware of the typical salary ranges for jobs in your field and your geographic area. It may be difficult for you to negotiate when it’s your first job. However, you can inquire what the high and low salaries reflect.

Glassdoor, Payscale, and are good places to start to find average salaries. Their sites may provide you information for your first job offer and be a source as your role expands at the firm. A search can provide you with relevant documentation when you seek a raise.

Speak to people who you know are working in jobs of interest to you. Ask them about the drivers of success and challenges and companies that may have opportunities. Another place to learn from is Linkedin, an excellent professional networking website source to use. Job boards are helpful when you begin the interviewing process, and reach out to human resources representatives in your field.

You should learn what the industry norms are for your field and how it relates to your education and experience.

Always be prepared to reflect on successes thus far, especially when asking for raises and promotions.

3. Build your Negotiation Skills

It is not unusual to be uncomfortable to ask for higher pay, bonuses, benefits, or promotions. Take a class to develop your negotiating skills,  or find a good negotiation coach.

I strongly recommend articles and YouTubes by Stanford Graduate School of Business Professor Margaret Neale. Her videos focus on strengthening negotiation skills for women. She is a negotiation expert and author of “Getting (More of) What You Want.”

Negotiation Is A Lifelong Skill

Lifelong skills are core in many aspects of your career and life overall. Specifically, negotiation skills require the ability to communicate, take on a challenge, critical thinking, and problem-solving. Being able to negotiate for yourself is essential  These skills will help build your confidence the right way, prepare thoroughly on the key issues, and listening to the other side’s perspective. 

Don’t be afraid to practice by doing a video of yourself. Listen to your voice and tone. Watch your demeanor and body language. Ask someone to critique you. Stay positive, sit straight, and sound confident.

Practice for real by calling your cable company, asking for a reduced bill, negotiating your interest rate on your credit card, asking for a reduced price for a used or new car, for example. Be armed with information before you make the call. Imagine the power of reducing costs by practicing your negotiation!

4. Getting A Job

If you have completed the interview process for a job you desire, show your enthusiasm but not discuss salary. Wait for the offer, and the position is firmly in your pocket before you discuss compensation. Don’t be the first to provide a definitive dollar amount or a range you are seeking. You should find out the typical salary range by doing your research ahead of time (see below). 

If offered a job but not yet the salary terms, ask for the range. Don’t accept on the spot. Be thoughtful, understand the package, and be ready to negotiate. Your goal is to exceed the high end of the range because you are their best candidate.

A  2019 Glassdoor survey found 40% of employees–39% of men and 42% of women–accepted their salary offer and did not negotiate in their current or most recent job. These statistics reflect better gender parity, a significant change from the March 2016 survey when 59% of employees–52% of men and 68% of women– accepted their salary without negotiation. Women have further to go and should be able to say “No.”

5. Take Time To Mull Offer And Show You Are Serious

If you are unsure of the offer, ask for a little time to contemplate it. Even if you are silently jumping for joy, ask the hiring manager for extra time to decide. They will appreciate your seriousness. If you do want to accept the offer, give it orally and follow up immediately in writing. Ask for a letter confirming your acceptance and agreed-upon salary, your title, incentives, and benefits

If there is a gap between the figure you had in mind and their offer, you may want to open the door to negotiate. You can say you are excited about the offer and the organization. Ask if there is any leeway in the compensation. You want to be genuinely motivated, especially if you are confident in your skills and experience.

Consider Trade-Offs

If the salary gap is too large, it may be too hard to overcome unless other parts of the package, like bonuses or stock options, can bridge the salary difference.  Benefits that accompany your package may be up for negotiation between you and the employer. Make sure that this is possible ahead of time by speaking to HR.

Some companies have extra money set aside with expectations that prospective employees may ask for better compensation packages, but a lower percentage of women negotiate than men.

Salary History Bans Are Growing

By the way, if asked about salary history, change the topic to the position. Discussion of your salary history may be illegal in your state.  Massachusetts was among the first states to make it illegal to ask for that confidential information on an interview in 2016. As of 2021, 29 states now have salary history bans. 

Related Post: Challenges Women Entrepreneurs Face And Overcome

6. Keep Track of Your Accomplishments

As you move up the corporate ladder, keep a personal journal of what you have done, not hours worked. You need to build your list of selling points with real achievements like successful presentations. Examples of these are landing a lucrative contract, strong customer sales or satisfaction, or training new employees. It will strengthen your conversations when you pitch for more money and benefits.

Women often undervalue their worth and, as a result, have lower expectations for themselves. Confidence-building is just as important as your hard work, diligence, and skills. It took time for me to strengthen my self-assurance to take stands when necessary and to be able to convince others.

7. Solicit Manager Support

It is always a good idea to have management in your corner who can provide you support and feedback. Your manager can provide you with advice on how to advance in your career or get desirable assignments. Take the initiative to talk to your managers about how things are going. Look for mentors.

Ask your supervisor for suggestions on professional development or online course opportunities. Showing your engagement as a long-term player is a  positive reflection of your motivation.

Ask your boss for constructive criticism over coffee or lunch. Be professional, loyal, and supportive.

I was fortunate to have had good support from my research director, Charlie. He was often a good-sounding board, providing advice and valuable feedback in a complex environment, particularly for women. He treated people professionally and equally.


8. Getting A Raise

You always want to be paid what you are worth, whether you are changing jobs or moving up the ladder. If you remain in your organization, you have a record of accomplishments, your ability to work with or manage others, and a reputation. You can use internal and external sources to find out what people are making in the field.

When I was an equity analyst at a major global investment bank, I was happy with my package and not looking to leave. I ignored recruiter calls. That was a mistake. When I finally decided to talk to a recruiter, I found out that I had been underpaid (despite making big bucks!) relative to my male counterparts.

It is always good to listen to what you may be worth externally. Of course, there are “switching costs,” adjusting to different firms, management, and colleagues, having to maintain or rebuild your reputation for a new audience, other demands, and culture.

9. Know Your Worth

Often, talking to outsiders validate that you are in the right place. Nevertheless, use information like higher salaries or compensation packages to get what you want and need. Arrange to meet with your boss and speak honestly. Provide your accomplishments, share your continued enthusiasm to work with the firm, and specifically her/him and team.

Ask for the money you believe you deserve. If you cannot get to the exact dollar, consider your package and what upgrades you may want. As you move up in your firm to more senior positions, and there are specific times to discuss your annual package, it is not unusual to have an attorney with employment law expertise to assist you in negotiations.

Related Post: Ten Ways For Women To Achieve Their Financial Independence

10. Compensation, Incentives, And Benefits

Your salary is not the only part of the compensation package to consider.  Other incentives, benefits, and perks can be a big part of your compensation package. Some companies have been quite progressive and innovative. Investigate what these companies offer. In 2021, as hopefully the pandemic fades as bad memory for all of us, working from home may be in greater demand and more acceptable to more employers

Important features of a compensation package are:

Incentives such as bonuses and equity options are essential to your total compensation and may dwarf salaries. You want to know if there is a signing bonus, annual bonuses, and how you may earn equity options. Sometimes your title and position may dictate increased access to sweeteners to your compensation package. 

Learn about the company benefits such as Insurance and amounts (flexible spending or health spending plans, health, medical, disability, life, dental, and vision), 401K retirement plans and its employer-matching program, vacation, sick, and comprehensive family paid leave, college/graduate school tuition reimbursement, and other benefits.

Increasingly, companies offer other benefits and perks specific to your family situation, or you can negotiate for them to be in your package:

Flextime or work from home;

professional development opportunities;

commuter offerings like access to a car on weekdays;

Gym pass or discounts;

Severance packages in the event of a merger & acquisition of your company or elimination of your job;

An extra vacation to match the 4-5 weeks you had at your previous employer; and

Work-life balance offerings like working from home, flexible hours, child care cost reimbursements, extended parental leave.

The Corner Office

Sometimes there are perks for certain levels of attaining specific corporate levels. Years after I became the first managing director or MD (male or female) in my department after our Research Director, I was abruptly told to pack my stuff and moved to a huge corner office by a moving company. Frankly, I thought I was being let go, and no one came to talk to me.

Closing the door, I put my head down to do some work. A knock on my door, my boss walked in, asking, “Don’t you like your new digs?” He then told me he was embarrassed to tell me that managing directors get corner offices. However, I never asked for it and he was going to promote one of the men to MD’s, and already that person asked for the other corner office.

So I was entitled to a large office with space for a couch, I just didn’t know to ask. Don’t make my mistake!

Related Post: A Guide For College Grads On Your Company Benefits Plan

Final Thoughts

As women progress in their careers, compensation packages may become more complex.  Attorneys may do your bidding for you in negotiations. However, you need to understand what you deserve. Women are not getting what they are worth yet. Positive changes are happening for women in the workplace and elsewhere.

How has your experience been in getting a new job, a salary raise, and better benefits? Please share the post with others. If you found this article of value, please visit The Cents of Money and find others you may like. Give us your thoughts.  We are happy to hear from you!












All About The Personal Financial Statement

All About The Personal Financial Statement

By keeping tabs on your finances, you can create a secure and fulfilling future. That’s where a personal financial statement comes in. At its core, a personal financial statement offers an overview of where you stand financially at any point in time. It can help you succeed in various aspects of your life.

Why You Need a Personal Financial Statement

There are several reasons you may want to create a personal financial statement. It can help you if you’d like to:

  • Take out a loan.
  • Apply for financial aid.
  • Make a guarantee.
  • Design a retirement, estate, college savings, or other financial plans.
  • Lease a commercial office or other types of business space.
  • Develop strategies to reduce your tax burden.
  • Run for public office.
  • Keep track of your credit.

Ideally, your personal financial statement will show that you have a positive net worth and your assets are greater than your liabilities. This can allow you to position yourself as a responsible borrower and someone who knows how to manage their money well. It may also prove that you’re thriving with your finances.

How a Personal Financial Statement Can Change Your Money Habits

A personal financial statement can be instrumental in the way you think about your money and manage it. Here’s why: When you see your net worth, you’ll realize that many of your previous and future behaviors affect that figure. It informs you of whether or not you’re on track to meet your financial goals. A high, positive net worth, for example, may mean that you’re closer to your dream of:

  • Buying a dream home or rental property.
  • Retiring early.
  • Working part-time instead of full-time so you can spend more time with your family.
  • Donating more money to a cause or organization you value.
  • Funding your children’s college.

Low or negative net worth can give you a wake-up call. It may be just what you need to change your behaviors and be more cautious with the way you spend your money. You may be more likely to get out of debt, pick up a side job, and stick to a budget if you’re displeased with this figure.

What’s Included in a Personal Financial Statement

The three major components of your personal financial statement are as follows:

Balance Sheet

Your balance sheet is an overview of your personal net worth and will list all of your assets and liabilities. Assets may include your home, car, savings accounts, and investment accounts. Liabilities, however, might be your mortgage, auto, student loans, and credit card balances. Your balance sheet will state the difference between your assets’ total value and the total amounts you owe on your liabilities. It’s a great representation of your net worth.

Income Statement

Your income statement will consist of your salary, bonuses, and commissions. If you have other income from interest, a side job, or dividends, you’ll include this information as well. Your income statement will also outline your insurance premiums, income taxes, and any other consistent cash outflows you may have. With your income statement, you can determine whether you spend more than you earn and what you can do to improve the way you spend money.

Cash Flow Statement

A cash flow statement shows how you spend your money. It breaks down your cash into three main categories: fixed, non-discretionary expenses, variable, non-discretionary expenses, and discretionary expenses or fun money. It bridges the void of information from the Balance Sheet and Income Statement. You can use a cash flow statement to figure out if you’re on the right path to building wealth and meeting your goals.

What to Exclude From a Personal Financial Statement

Now that you know what’s included in personal financial statements let’s discuss what they should exclude. Your personal financial statements will not contain any business-related assets or liabilities. The only exception is a personal loan for your business or any other tool you’re directly accountable for.

Your personal financial statements mustn’t include anything you rent or personal belongings like household goods or furniture, as their values are rarely high enough to be considered assets.

How Often Should You Update Your Personal Financial Statements?

Once you prepare your personal financial statements for the first time, your work is not done. Since your finances will likely change regularly, your personal financial statements require frequent updates. It’s essential to review and modify your statements every month or every other month. This way, you’ll always be up-to-date on where you stand with your finances and can make adjustments to your spending and saving habits as necessary.

Personal Financial Statement vs. Business Financial Statement

Business financial statements usually consist of a profit and loss statement and balance sheet. As stated, personal financial statements include a balance sheet, income statement, and cash flow statement.

With a business financial statement, you can start or grow your business and obtain small business loans to help you do so. However, personal financial statements focus on your personal life and can help you achieve your personal financial goals like buying a house, retiring, or sending your children to college.

Ways to Increase Your Net Worth

Your net worth is essentially the value of your assets over your liabilities. You can have plenty of assets and have plenty of liabilities, meaning you don’t have a high net worth. On the flip side, you can have minimal assets but no liabilities and solid net worth.

So what is the ideal net worth? It depends on your age, unique lifestyle, and comfort level. There is no hard and fast number that everyone agrees with. However, you can use a formula developed by Thomas Stanley and William Danko, authors of the book “The Millionaire Next Door,” to get an idea of where your net worth stands. The formula is Net Worth=AgeXPretax Income/10. If your pretax income is $60,000 and you’re 35, for example, your ideal net worth would be $210,000, according to this formula. There are 18 financial ratios you should know, including this one.

Of course, this is just one way to look at your net worth and doesn’t necessarily mean that you’re struggling with your finances if you’re below the $210,000 mark. It’s all about what type of net worth you feel comfortable with. Another way to use your personal financial statement is to look at your liquid net worth that provides a more conservative view.

If your personal financial statements prove that your net worth is in the negative or lower than you’d like it to be, don’t worry. There are a variety of ways you can achieve a positive or higher figure. Here are several suggestions.

  • Cut Expenses: The less money you spend, the more you can use towards saving and investing. Take a look at your budget and figure out where you can reduce or eliminate expenses. If you rarely use that gym membership, for example, cancel it. If you tend to overspend on dining out, cook more meals at home. Remember that even a few dollars here and there can add up and increase your net worth in the long run.
  • Look for New Income Sources: If your 8 to 5 job doesn’t pay enough, don’t be afraid to earn money through other outlets. Depending on your schedule, preferences, and interests, you may want to take on a second job or freelance work. Or perhaps you have many items that you no longer need or want and can sell them on Craigslist or Facebook Marketplace.
  • Buy a House: If you’re currently renting, saving for a house may be a good option. Your mortgage payments can allow you to build equity, which can increase your net worth. If you do pursue homeownership, make sure you choose a home at or below your means. Otherwise, it can turn into a liability rather than a wealth-building tool.
  • Build an Emergency Fund: Unfortunately, life happens, and your car may break down, or your roof may need to be replaced when you least expect it. In these situations, it’s helpful to have an emergency fund. With an emergency fund, you can cover these unexpected expenses and avoid debt. Most financial experts recommend three to six months’ worth of savings in an emergency fund.
  • Get Out of Debt: Although it’s easier said than done, do your best to reduce or eliminate your debt. This includes your student loans, mortgage, credit card debt, car debt, and other places you make monthly payments to.
  • Invest: The sooner you begin to invest, the better. Once you have an emergency fund, make your money work for you via investing. You may want to consider some investment vehicles, including a 401(k), Roth IRA, Traditional IRA, and 529.
  • Get Insured: Insurance can protect you financially when and if the going gets tough. Life insurance, car insurance, and health insurance are important investments that can protect your (and your family’s) financial future.

How to Prepare Personal Financial Statements

If you’d like to prepare personal financial statements, you have two options. You can go the DIY route and complete them yourself. Fortunately, there are many free and fee-based templates available to guide you through the process.

Another option is to consult a financial advisor or hire a financial coach to help you. They can provide you with the expert guidance you need to ensure your personal financial statements are thorough and accurate. Even if you create your own statements, a financial advisor may review them and provide you with the peace of mind of knowing it’s in good shape.

A financial advisor can also help you increase your net worth. Once they learn more about your particular situation, they can make appropriate recommendations and steer you toward a healthier, happier financial future.


Understanding Inflation And How To Protect Yourself From Its Effects

Understanding Inflation And How To Protect Yourself From Its Effects

We almost always have some inflation, meaning wages and prices increase which helps job creation and economic growth. The absence of inflation is deflation, which means declining prices and could cause or worsen a recession as businesses lay off workers.

For years, we have had low inflation with relatively stable pricing, largely due to the Federal Reserve’s efforts.  However, the low inflation levels could change as our economy rebounds from the pandemic. To find higher rates, you have to go back to 1990 when inflation was 6.1%. Double-digit inflation was more common in the 1970s, with its peak at 13.3% in 1979.

The Federal Reserve’s Monetary Policy’s Actions

The Federal Reserve has dual goals: maintaining relative pricing stability and sustainable economic growth with full employment. In the Great Recession and in March 2020, due to the pandemic-related economic downturn, the Fed steered towards accommodative monetary action to drop their fed funds rates to the lowest levels of zero-to 0.025% to stimulate the economy. 

Chair Powell and the Fed intend to keep interest rates low through 2022 and have said they would be more tolerant of inflation rates that exceeded their 2% target. There is a reasonable possibility that we will see higher inflation soon.

Will The Fed Stick With Their Accommodative Policy?

Despite their intentions to stay with an accommodate policy, the Fed’s policy mandate is to adjust their stance to changing information. The 10-year Treasury note’s yield has been rising and could signal higher inflation expectations. The Fed has tools to combat high inflation such as raising interest rates. 

It is not clear if the Fed will change gears but we can prepare ourselves. Should inflation increase to moderate levels above 2%, there are ways to protect ourselves from the potential erosion of our money. Moderate inflation may provide some benefits. You need some level of inflation to promote more spending.

Reasons Why We May See Higher Inflation

  • The Fed intends to remain accommodative for a while, with lower rates and liquidity.
  •  A potential $1.9 trillion fiscal support for those businesses and households in need is on the table.
  • The number of people getting vaccinated is rising, which may help boost the economy.
  • We are saving more with the latest US personal savings rate remaining high at 13.7%, about twice the rate seen in 2019.
  • Credit card balances at the end of 2020 reflect the largest yearly decline since 1999, reflects consumer spending is down.

These factors, if combined, may unleash consumer spending to kick up our economy and contribute to higher inflation. Offsetting these factors is high unemployment levels staying stubbornly high and may keep inflation low for now.

With low inflation, it has been difficult for anyone to earn any income in a low-yielding environment without taking on more investment risk. For investors with 60/40 retirement portfolios investing in stocks and bonds, respectively, some have shifted more significant proportion into stocks.

Investors will need to seek assets that are at least keeping pace with rising inflation. Holding cash in savings and checking accounts are suitable for liquidity purposes.  However, their safety feature will diminish as their values erode with rising inflation.  Later on, we have a list of investments that can protect you during a higher inflationary environment.

What Is Inflation And How Does It Affect Your Buying Power?

The definition of inflation is a steady rise in the general level of prices of goods and services. For example,  a gallon of milk cost $1.57 in 1975 rising to $2.20 in 1985 as a result of high inflation in the 1970s to early 1980s. It now costs $3.61 in 2021. The changes in prices are due to inflation, not scarcity. 

As a result of inflation, your purchasing power, the amount of goods and services that one’s income will buy, goes down. When prices rise, purchasing power declines, usually falling by the reciprocal amount of the price increase. Your paycheck may stay flat or go up more slowly, leaving you with less money. Union members may be an exception as they receive a cost of living wages as part of their contract.  

Calculating of Inflation

The US Bureau of Labor Statistics calculates inflation monthly using the consumer price index (CPI). The CPI is the best measurement of changes in prices of all goods and services purchased for consumption in urban households. This index tracks a market basket of food, transportation, housing, health care, and entertainment, broken down into over 400 subcategories bought by end-users.

The CPI is a cost of living index with a starting reference point from 1982-1984 as the base period of 100. The CPI for January 2021 was 261 reported on February 10, 2021, the cost of living would have risen 161% since the base period [(261-100)/100= 1.61 of 161%]. If car prices rose 15% over the past five years, you may be paying $34,500 for a car that had cost $30,000 ($30,000 x 1.15%).

Economists tend to look at sequential (quarter-quarter) or year-to-year changes in the CPI. The most recent sequential rise in January increased by 0.3%, and up 1.4% since a year ago. These price increases confirm the low inflation we have had since the Great Recession began in 2007.

The Purchase Pricing Index, or PPI, is similar to the CPI but measures wholesale prices from raw material through the production stages. When PPI rises, the higher costs often are passed on to consumers.

Low inflation has stymied returns from the low inflation environment from low-risk income-based investment portfolios as we discussed here..

What Contributes To Inflation?

There are various factors that may influence inflation.

Higher Demand

Demand-pull inflation occurs when total demand for goods and services in an economy outpaces supply. In the early 1970s, a strong economy caused oil prices to rise and pushed up inflation to 12% in 1974. Strong consumer demand for goods and services could result in higher spending leading to higher inflation.

Increase In Production Costs

A different way of rising prices than demand-pull can come from increases in production costs without higher demand is known as cost-push inflation. Higher production costs can come through increased wages, raw materials, depletion of natural resources, droughts, or higher taxes. Businesses are not always able to pass these higher costs onto consumers.

There have been conflicting views on whether raising the federal minimum wage to $15 per hour would cause inflation. One side of the argument points to wage hikes which have been slow to come for many employees, and therefore, increases are overdue. Wage growth often leads to a more robust economy.

However, the pandemic-related recession has caused high unemployment that has crippled many small businesses. Many believe that we should have an improved economy and higher employment before raising wages.

Natural Disaster Shortages 

Prices can rise when shortages in goods and services associated with natural disasters such as severe weather conditions, droughts, floods, fires, or avian flu. These disasters impact manufacturing plants, businesses, and residential areas. These unpredictable events may put temporary or long-term pressures on the production of goods, causing inflation due to scarcity.

In 2010, British Petroleum’s oil spill was the largest marine disaster in the Gulf of Mexico, causing higher gas and seafood prices. This area accounted for one-third of all seafood consumed in the US. About 40% of the Gulf waters needed to be closed to commercial and recreational fishing due to the spill.

Government Overspending

The US budget deficit has been rising from already high levels since the pandemic to counter the economic downturn. A government budget deficit occurs when expenses outpace revenues, not unlike the household budget.

Multiple fiscal stimulus packages related to hardships caused by the pandemic have been essential to provide funds to businesses and unemployed workers. This boost to government spending has required the US Treasury to raise capital and increase money creation by printing money. Both US Treasury and the Federal Reserve have increased money supply to increase liquidity and keep the financial markets calm, but a higher money supply typically leads to higher inflation.

Higher Prices From Higher Demand Post-Pandemic 

Many businesses lost revenues during the pandemic because of social distancing needs. As more people are vaccinated, our economy may rebound from strong demand in travel, entertainment, dining out, and going about life more normally. We may see some prices go up with increased demand and pressure to recoup lost revenues.

Different Kinds of Inflation

The various forms of inflation that are most worrisome are stagflation, deflation, and hyperinflation.


Deflation is when there is an overall decrease in the cost of the economy’s goods and services. When price declines are minimal, consumers may spend more. When deflation is more pronounced, we may demand less, expecting more price declines. Businesses, anticipating lower spending, will cut production to prevent swelling inventories, and layoffs may result.

This deflationary scenario is considered the opposite of inflation and its evil twin. The Federal Reserve uses a 2% inflation target as part of its monetary policy, preferring low inflation to deflation. Deflation can send an economy into a recession or a worse downturn, causing layoffs.


Stagflation refers to a stagnant economy reflected in high unemployment and high inflation simultaneously. This problematic situation, spurred by an oil shock, lasted from the early 1970s into the early 1980s and was challenging to resolve. 


Hyperinflation has not been around for a while. The closest the US experienced hyperinflation was during the Civil War, and I think that is where everyone wants to see it, that is, in history. Between 1921 and 1923, the Weimar Republic, Germany’s government, experienced hyperinflation rising over 300%!

Relationship Between Inflation And Interest Rates

Inflation and interest rates are not the same thing, but they relate to each other. There is a tendency for interest rates and inflation to have an inverse relationship. When interest rates are low, it stimulates economic activity, and inflation rises. But, when interest rates are high, consumers slow spending, the economy slows, and inflation declines. It takes time for the economic changes to take place.  

Investing For Protection From Inflation

As an investor, you should have a better understanding of inflation so that you can protect yourself from its effects. Some investments keep better pace with rising inflation than others. Real or physical assets often appreciate at or faster than inflation, and can provide better returns for investors. It is helpful when investing to understand the economy as we discuss here.

Money Market Securities

Cash and cash-equivalent securities make poor investments in a low-yielding environment. However, when inflation rises, the annual percentage yield (APY) will increase. Seniors have been clamoring for 5% CD yields which do not currently exist. Should inflation rise to higher levels, having cash to investing in money market accounts that are FDIC-insured will be a desirable place.

Build CD Ladders

The six-month CD rate hit a high of over 17% in March 1980 when inflation was 14.8%. I don’t think anyone wants to see inflation reach those levels or expects inflation of that magnitude. However, you can build a CD ladder to take advantage of rising APYs offered by the banks and credit unions.

You can start with short-term periods such as three or six-month CDs as inflation rises, lengthening their maturities as high inflation stabilizes, locking in nice returns. CDs are a less risky way to earn higher returns, especially if inflation is over 5%.

TIPS And Other inflation-indexed Bonds

Currently, bonds at fixed rates do not yield meaningful returns. However, bonds with variable rates are worthwhile investments in rising inflationary environments.

Treasury Inflation-Protected Securities, or TIPS, are issued and backed by the full faith of the US Government. They are considered the safest security, most liquid,  and rated AAA for the highest quality. Holders receive interest income twice per year at a fixed rate. These securities are an excellent way to diversify your portfolio for the least risk among other inflation hedges.

As inflation-protected securities, TIPs provide investors with a guaranteed real rate of return. The principal of TIPS increases with inflation and decreases with deflation measured by the CPI. At maturity, you are either paid the adjusted or original principal, whichever is greater. Like all Treasury securities, TIPs are exempt from state and local taxes.

Municipal Inflation-Linked Bonds

 Like TIPS, investors can buy municipal (munis) inflation-linked securities that track CPI and adjust the bond’s principal. These securities can keep pace with inflation better than a municipal bond without this feature.

Compared to TIPS, munis do not have backing from the federal government, are less liquid, and its ratings vary by municipality.  Funding purposes are to build roads, schools, airports, or infrastructure projects. To offset its higher risks, holders of muni bonds are tax-exempt from federal income taxes.

Corporate Inflation-Linked Bonds

Corporate bonds may have inflation-linked features, similar to the other bonds, adjusting to the CPI changes to better pace with higher prices. These securities tend to have higher risks that vary by the quality of the corporation. These bonds are less liquid than Treasury securities (every investment is!) and don’t have any tax-exemption benefits for their holders like Treasuries or municipal securities.

Variable-rate bonds have floating interest rates for coupon payments. Municipal and corporate bonds may have this variable feature that is adjusted to the current money market rate for their interest rate.


Gold is an inflation hedge and offers diversification for any investment portfolio. As a physical asset, gold is in limited supply. Central banks own gold in their portfolios as part of their foreign exchange reserves.

Gold prices were up 25% in 2020, among the best-performing assets. You can buy gold in its physical form as bars or coins. Typically, gold doesn’t pay dividends. However, some gold mining stocks pay dividends (e.g., Newmont and Barrick) individually,  as gold miner ETFs or SPDR Gold Shares or GLD, the bullion is in a fund.

Silver is an inflation hedge with a lower price point, attractive for retail investors.


Commodities are not just pork bellies. As an inflation hedge, it is a broad group with many different products you earn and store. There are three main categories:

  •  Agriculture commodities include food, meat, timber, and cotton.
  • Energy has crude oil and its refined products.
  • Metals categories are largely precious metals and industrial metals.

As the price of the commodity rises, the product that contains the commodity will likely rise. When aluminum or steel prices rise, manufacturers may pass on the higher costs to consumers.

Real Estate Investment Trust or REITs

Real estate property makes excellent investments when inflation rises, but it may require work to maintain. A REIT is a company that owns and operates income-producing real estate. There are many different REITs for equity, retail mortgage, health care or hospitals, and data storage, providing diversification for any portfolio.

They generate stable income from above-average dividend yields. That’s because REITs are required to distribute at least 90% of their taxable income to shareholders annually.

Common Stocks

Stocks, as an asset class, have historically provided returns that beat inflation. They are a sturdy investment for the 60/40 investment portfolio, with inflation-indexed bonds likely to do better when there is higher inflation.

Certain sectors may perform better than others. Energy stocks, much like the commodity itself, are often inflation hedges. Financial stocks earn better income margins on loans in times of inflation, and healthcare insurers have performed better when higher inflation appears.

We already mentioned REITs and gold stocks as a worthy area to invest in if inflation rises. Let’s add Dividend Aristocrat companies for inflation protection. They are represented by stocks that raise their dividends consistently for at least 25 consecutive years. There are different stocks in various sectors and are available as ETFs.

Another way to invest in stocks is to buy the S&P 500 index as a fund or ETF for inflation protection and diversification. If you choose to purchase stocks individually or as a sector, you may want to avoid utilities, consumer discretionary stocks, or companies with debt-laden balance sheets, like United Rentals.

Final Thoughts

Many are suggesting that higher inflation is on the horizon over the next few years. That may be as we haven’t had meaningful inflation since 1991. Higher inflation, so long as we don’t have stagflation or hyperinflation, is manageable. There are several investments that are attractive as inflation hedges for protection.

Thank you for reading! Share any comments or feedback, we would love to hear from you. Please share this post with others if you found something of value, and come join us at The Cents of Money!



7 Deadly Sins Of Investing And How To Avoid Them

7 Deadly Sins Of Investing And How To Avoid Them

In Seven, the neo-noir thriller, detectives David Mills and William Somerset (played by Brad Pitt and Morgan Freeman) track down a serial killer who uses the seven deadly sins as a motif in his murders. Investing may not be as lethal as a serial murderer. Here, we discuss the seven deadly sins of investing,  how they may impact our stock performance through destructive mistakes, and how we can avoid them.

What Is Investing?

Investing is a way to potentially grow the amount of money you have. The goal of making investments is to buy financial securities and hopefully sell them at a higher price in the future than what you initially paid. A saver can become an investor by giving your money a chance to work for you.

Investing is the best path to achieve wealth but it’s not a straight road. Unlike saving, investing involve some risks that could cause you to lose money.  You need to understand these hazards so you may be able to mitigate them. Investors purchase stocks and bonds with long term goals, unlike traders who have short term plans.

We can lose money when investing leads to emotional behavior or bad habits. Start investing as early as you can so you can earn money on top of the money you already earned, called compounding returns. Stay focused and purposeful so you can avoid behavioral biases which often play a detrimental role. Using financial discipline when investing can help you to achieve success

The seven deadly sins passed down from the Catholic Church of the Middle Ages may cause investors to perform poorly as modern examples for each deadly sin. The seven deadly sins are lust, gluttony, greed, sloth, wrath, envy, and pride.

1. Lust

When thinking of this deadly sin, I can’t help thinking about Jordan Belfort, better known as The Wolf of Wall Street. Belfort, or what we see of him, nearly defines every deadly sin. For that reason, he and the movie based on his memoir is pure entertainment and instructive for those who lust after sex and money.

As the first deadly sin, lust is a strong craving or intense longing such as sexual desire. It can also mean hunger for money. From an investor’s point of view, falling in love with your investments can be hazardous. Heavily favoring one stock may result in too much concentration risk in your portfolio.

Overexposure To One Stock Poses Concentration Risk

Take the example of Gur Huberman’s “Familiarity Breeds Investment” study in 2001, which involves ATT’s (“Ma Bell”)1984 breakup. When ATT split into the 7 Baby Bells, its shareholders received equal amounts in each new company.

Huberman found investors tended to retain a disproportionate amount of shares in their local Bell company. These individual investors held as much as $10K-$20K of a single stock, a higher concentration than the typical stock holding in a US household’s net worth.

Overexposure to one stock poses more significant risks to your portfolio that can sneak on you from slowing fundamentals. Investing in the company you work for is common for many people. However, if you have substantial ownership of shares where you work for and in your investment and retirement accounts, you have too many eggs in one basket. Instead, you need to diversify your portfolio with different stocks, industries, and asset classes.

2. Gluttony

Gluttony is the overconsumption of eating and drinking. We have all been there, gorging ourselves over an excellent meal, and feel our regrets afterward. Dante refers to this sin as “excessive love of pleasure.” We may be engaging in gluttony by overindulging our funds into less liquid investments without leaving a cash balance to buy stocks in a correction or pay off debt.

The recent excessive trading of GameStop shares by retail traders to shake up Wall Street seemed to be foolhardy, if not reckless. Sending that stock into the stratosphere caught everyone’s attention before coming back to earth but may have been costly.

Diversification, Asset Allocation, and Rebalancing

Alternatively, some people hoard their cash in a savings account, which generates little interest income, especially in this low rate environment. Investors need to be careful in allocating money into investments and having funds for emergencies, debt pay-offs, and retirement.

The antidote to gluttony is purposefully investing with strategies that embrace diversification, asset allocation, and periodic rebalancing.

3. Greed

“My name is Jordan Belfort. The year I turned 26, I made 49 million dollars, which really pissed me off because it was three million a week.”

The Wolf of Wall Street

“Greed is good…Greed, in all its forms, greed for life, for money, for love, knowledge, has marked the upward surge in mankind and greed.”

Gordon Gekko, Wall Street, the movie

Greed is not good, but it is very prevalent in the world of investing. The Wall Street (“the Street”) culture is all-consuming. It breeds greed and the need to make more than the person next to you. Not everyone working on the Street is greedy, or a criminal but temptations are there as they are everywhere.

The definition of greed as a sin is an intense and selfish desire for something of value, referring to wealth, material possessions, power, or food. Trendy investments are often collective greed that may become long term losers. Stock manias reflect “irrational exuberance,” a phrase used by then-Federal Reserve Chair Alan Greenspan when he commented on stock’s higher asset values than fundamentals warrant.

Bubble manias of the past–Dutch tulips, South Sea, Japan’s real estate and stocks, dot-coms, housing– should provide historical context to fear and greed in today’s markets. We hear about overbought markets but justify our purchases in SPACs, bitcoin, Tesla, Nio, so we aren’t left out of some of the apparent winners.

Lock-In Some Profits

How can we better deal with our greed, so we don’t become a casualty of fickle markets? No one gets hurt taking some profits off the table. I sell a small percentage of my gains regularly, usually, after a stock rises 20%-25%. This way, I may avoid my winners blowing up, an experience I have in my past.

Recognizing the need to be rational when investing is essential. It means doing your research, or if you feel you don’t have the time, are too emotional, or don’t have the inclination, you may be better off finding a financial professional to advise you in your best interests.

Take heed from another respected investor, Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” There is a Fear and Greed Index (FGI) that measures investor sentiment for those opposing emotions daily, weekly, monthly, and annually. Too much fear can send stocks down, while greed indication may push stocks up.

4. Sloth

Why do they have to pick on this cute animal known for moving slowly and spending most of its time upside down in trees? As a deadly sin, sloth translates to an absence of interest or not exerting oneself physically or mentally. Said another way, it is the avoidance of hard work and perseverance, or simply laziness.

We can usually spot sloths who are lazy about physical exercise. However, investing requires cognition or understanding of what you are doing with your money. 

Laziness can hurt you when you are jumping into stocks without rhyme or reason. A slothful investor may under-invest or spend too little time reviewing one’s portfolio. Investing is not a “set it and forget it” activity. Investors may mistake the buy and hold strategy as akin to that. The buy and hold strategy means that you have a long-term perspective, but you need to adjust your portfolio for new or changing information.

Be Aware of Biases At Work

Making investments requires research. Even if you are planning to use a financial advisor, research is necessary. You still need to find a person or team that works to understand your financial goals to work with you on your financial plan.

Slothful people may be prone to procrastinate over making decisions. The status quo bias occurs when someone may be resistant to change. The endowment effect is similar, but it occurs when someone places a higher value on what they already have. Shortly after my parents passed away,  I inherited stocks, such as ATT and IBM, conservative names appropriate for their portfolio but not necessarily mine. Yet, I held on to their stock picks as an example of an emotional bond that was irrational.

How To Avoid A Slothful Nature?

If you intend to monitor your portfolio, recognize the need to be proactive in having diversification, taking some profits, and making adjustments as warranted based on changing company fundamentals. There are many different kinds of low-cost index funds that have other purposes of fitting your investment strategies. For example, you may look at target-date index funds that may appropriately adjust holdings based on your age.


You can automate your paycheck by allocating a certain amount or percentage to go into retirement savings, so you don’t have to remember to contribute to this account regularly. It is essential to use your paycheck to make it easy to make investments, save money, and pay bills.

Consider talking to a financial planner to help you with your financial goals and make investments for you.

5. Wrath

“Heeere’s Johnny!”

Jack Torrance, off-season caretaker in The Shining

There are many images of wrath, but Jack Nicholson’s character comes to mind. Wrath is defined as uncontrolled feelings of anger, rage, vengeful, and even hatred. Jim Cramer’s very rational rant in 2007 (and transcript) as the financial crisis was unfolding, but the Fed Chair was not yet cutting the fed funds rate or adding liquidity to the markets.

When the stock market becomes volatile as it did during 2007-2009 and in March 2020, we have wrathful states that pose dangers for any investor. We become angry at bad decisions for keeping stocks too long or selling them too fast as many jumped to do as the stocks sold off in March in the shortest bear market in memory.

GameStop As An Example of Irrational Buying

Retail traders who may lack experience may seek greater risk than they can handle and make irrational buying decisions.  We saw some recklessness as buyers were bidding GameStop shares up to crazy prices beyond their poor fundamentals.

It seemed as though traders were trying to punish short-sellers such as hedge funds by engaging in combat. Stories of young investors who took out costly loans to buy shares at exorbitant prices are heartbreaking. We wrote a letter to young investors you can read here.

Studies suggest that anger may increase our risk-taking. Don’t be reckless and engage in using leverage like margin trading.

Avoid anger and other emotions when making investments. The market doesn’t hold grudges, know how to be vindictive, or have a memory from day-to-day.  Investors need to make adjustments for changing circumstances.

Learn From Mistakes And Use Discipline

Learn from your mistakes to not sell as the market is plummeting unless you need liquidity. Stay rational by not impulsively trading or investing. Give yourself some discipline by selling a losing stock after it drops 7%-8% to avoid a more significant loss. Consider taking some profits off the table to lock in those gains.

6. Envy

Have you ever felt envious? Of course, you have. Envy is a feeling of resentful longing often brought on by someone else’s possessions, better standing, or luck. Envy often leads to conspicuous consumption to match those around them at work or in the neighborhood. The phrase “keeping up with the Jones” may mean buying a new car or a boat to fit in with other people around you.

Investing circles may envy those who are “killing in the market” when they share their wins in the most trendy stocks or funds. What they may not be telling you is about the mistakes they have made in the past. At one time, people envied Bernie Madoff’s clients for above-average returns, and we know how that movie ended.

Herd Mentality Bias

Merrill Lynch may still refer to its financial advisors as its “thundering herd,” but following or copying the herd is a negative sentiment. In behavioral finance, herd mentality bias refers to the investors’ tendency to follow what other investors are doing in the market.

Think of dot-coms, GameStop, or popular acronyms for groups of stocks such as “FAANG,” standing for Facebook, Amazon, Apple, Netflix, and Google, before it changed its name to Alphabet.

It is not always the wrong move for individual investors to buy rising stocks that reflect heavy trading volume. Sometimes that is a healthy indicator of institutional buying, and it is painful to go against the smart money crowd. However, it will financially hurt when large investors start shedding stocks in their portfolios.

Don’t Chase Hot IPOs

Individual investors, who typically do not have access to new issues, often seek the hot IPOs after pricing in the primary market. The average first-day pop in the post-IPO stock is 20%, but hot names have shot up 80%-100% or more. Six months later, many of these stocks have fallen below their IPO price as the aura on these stocks is gone, a casualty to weaker fundamentals than expected.

Instead of being envious, learn about investing, risks, and develop strategies that work for you. Remember that Madoff’s returns were fictitious. It is in our nature to compare ourselves with others. However, you cannot be sure that you are looking at anyone’s full picture. Don’t waste your energy on envy.

7. Pride

“Details of your incompetence do not interest me.”

Miranda Priestly, The Devil Wears Prada

Pride or extreme pride is hubris, a Greek cousin to pride. Hubris means self-confidence, arrogance, and corrupt selfishness. One who has hubris irrationally believes they are better, superior and has excessive admiration of their self-image. Having this kind of pride is a self-destructive vice, especially harmful when you are an investor.

It is hard to work for someone like Meryl Streep’s Miranda Priestly, who always desires to be right. As an investor, the need to be right can hurt your ability to make money.

You may hold on to a losing stock and an unrealized loss rather than admit you are wrong. The justification for holding on to the stock is that it is only a loss on paper until you sell it. However, a 10% unrealized loss can widen if fundamentals warrant it. Loss aversion bias is the tendency to prefer avoiding losses to acquiring gains.

Overconfidence Bias

Another bias is overconfidence, which means having an egotistical belief in your investing acumen. It is challenging to perform better than the market averages, but those who are overconfident tend to operate with the false comfort they can perform well.

Instead, having a fear of being wrong in many investing situations can help you stay on your toes. The best investors avoid overconfidence and consider worst-case scenarios as medicine to remain aware of downsides in the market. They recognize that there is much that you cannot control about the market.

Avoiding The 7 Deadly Sins With These Investing Rules

To recap some of the ways you can avoid the investing pitfalls associated with the seven deadly sins:

Avoid concentration risk by diversifying your portfolio and do asset rebalancing.

Be aware of the emotions and behavioral biases that impact our decisions.

Don’t dump stocks during times of market turbulence.

Buying hot IPOs post-pricing is not a good idea, as there will be a better time and price to do so. 

No one gets hurt taking profits off the table to lock in gains.

Don’t engage in reckless strategies such as short-selling or using leverage to buy stocks.

Use automation to move money more quickly from your paycheck to contribute to your savings, retirement, and investment.


Final Thoughts

When investing, you may have run into the seven deadly sins that can impact your performance. Counter each sin, often wrapped in emotion or biases, with purposeful investing to avoid common mistakes.

Thank you for reading! If you found some value in this article, please share it with others. Consider joining The Cents of Money community by subscribing and getting our weekly newsletter.




Pin It on Pinterest