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January 16, 2022

Dear Penny: I’m So Frugal I Make My Own Toothpaste, So Why Am I Always Broke?

Dear Penny,
So you need to ask yourself some tough questions. Would you rather work your dream job or a job that offers financial security? How important is it that your job actually uses your master’s degree?
College was a struggle for me. As a student with a learning disability, I struggled and school took longer. When I graduated with my master’s of arts in 2008, the economy collapsed, and we went into survival mode.
We are struggling to stay on a budget with three kids. With increasing prices for basics, we find ourselves back in that space of struggle, overdraft and panic. We’ve tried using budgeting apps and find them confusing or hard to keep up with.
You have two part-time jobs. But two part-time jobs often don’t add up to one full-time job in terms of compensation. You may not qualify for benefits like health insurance or a company 401(k) match when you’re not a full-time employee. Career advancement can also be hard when you’re a part-timer. That’s not to mention the brain drain that often comes with working two jobs.
Taking a hard look at your current jobs is going to be difficult. You finally found your dream job after a decade of struggles. You made significant sacrifices to earn your master’s degree, and you’re still paying for your education.
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Keep in mind that most people aren’t working their dream jobs. That doesn’t mean they don’t pursue their passions. It’s entirely possible to work a full-time job because it offers good pay and benefits, and then do what you love on the side. There are countless 9-to-5ers whose true passion is blogging, podcasting, volunteer work or playing in a band.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.
Source: thepennyhoarder.com

If you earned your master’s in a discipline like arts or social work, you may need to accept that a better-paying job may not take advantage of your degree. That’s not to say you’ll never use the skills you acquired from your education. But you may need to shift gears and look for jobs that don’t require your specific degree.
For example, you might have separate envelopes for groceries, clothing, gas and pet expenses. You put the amount of cash you’ve budgeted for each category in the envelope. If you run out of cash for that envelope, you’re done spending in that category for the month. Only in a true emergency do you turn to your debit or credit card.
Ready to stop worrying about money?
People don’t go broke from buying grocery store eggs and name-brand toothpaste. What you have isn’t a spending problem. You clearly have an income problem — meaning you aren’t bringing in enough income to pay for basic expenses and save for the future.
We have done everything we can to survive: We got our grocery budget down by eating a lot of rice and lentils, by getting eggs from a friend and milk from a local farmer. We use free apps and the library for streaming apps. We make our own toothpaste. We are thrift store champs for clothing.
-J.
There’s so much you’ve done right here. You’ve found creative ways to be frugal, while still providing for your family. You own a home. You’re making progress on your student loan. Now it’s time to take stock of how to maximize your income, even if that means your passion won’t be your full-time job.
There’s only so much you can cut from your variable expenses, i.e., the ones like groceries, clothing and entertainment that you have some control over on a daily basis. Your fixed expenses, like housing, transportation and student loans, tend to eat up a much bigger chunk of your budget, and they’re a lot harder to cut.
This approach can help you avoid overdrafting. Sometimes it helps people identify areas where they didn’t realize they were overspending. But I suspect that in your case, this method will highlight the difficult reality so many Americans are facing right now, which is that income is the problem.
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You don’t say what subject you earned your master’s degree in. But it sounds like it’s not in a particularly lucrative field.

Dear J.,

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After 10 years of struggle, I FINALLY found my dream job, which is part time. Now I have a second job that uses my master’s degree, but it’s only 10 hours a week. With family help, we were able to buy a house. With two jobs, I am finally able to start paying on student loans and not defer them.

January 12, 2022

Main Causes of Inflation

You may have heard that in November 2021, inflation reached the highest rate in 30 years, but what does that mean, and how does it impact you? Let’s start with the basics.

Inflation is an economic phenomenon where the value of goods and services in an economy increases over time. Have you ever heard someone talking about how, back in the ’60s, you could get a Coke for a nickel? The reason why a soda now costs $2 is because of inflation—the relative value of money has gone down compared to the price of goods.

In general, there are two main types of inflation that economists care about. In this post, we’ll explain those two causes, explain factors that influence inflation, explore ways experts suggest we counteract inflation, and what you can do about it. But first, we’ll dive into the current causes of inflation and how they’re impacting your current buying power.

4 Main Causes of Inflation in Our Current Economy

In the last few months, you may have noticed that prices have been rising on everything from grocery items to gas, with consumer prices up 6.8% compared to this time last year. That’s the power of inflation. But what’s currently causing inflation and this undesirable strain on your wallet?

With respect to the current economy, there are a few causes of inflation:

1. Increase in the Money Supply:

An increase in the money supply is meant to help stimulate the economy by helping to put more money in the hands of consumers. While this might sound like a positive shift, it can actually have negative influences on the economy, like contributing to inflation.

The Federal Reserve has printed trillions of dollars over the last two years, which has contributed to the devaluation of U.S. currency and the high inflation rate we’re currently experiencing—and is being speculated to continue.

Not only that, but the money supply has increased faster than the rate of production, which contributes to shortages. And, with more money in circulation, consumers have more to spend—which in turn is spurring greater consumer demand.

However, with demand outpacing production, there are many shortages across the country.

2. Supply Chain Disruption:

Whether you’re in the grocery store or waiting for something to ship from overseas, you’ve likely been having a hard time getting ahold of certain goods in recent months. There are a few factors that are playing into this current issue.

First, during the height of the pandemic, many companies decreased output because consumers weren’t spending. However, they are now and companies have been trying to play catch up.

Pair that with the shortages in an all-around shortage of supplies to make certain goods, and it’s become a compounding issue.

And we haven’t even gotten to the traffic jams at the various ports throughout the country that have led to a massive amount of goods being stuck for long periods of time, sometimes months. With goods stuck at these ports and unable to be unloaded, it means that many shelves will continue to sit empty.

3. Overnment-Sponsored Unemployment:

In response to the spike in job losses we saw in 2020, there were increases and expansions to existing unemployment programs both on the state and federal level. While this may have helped get many people back on their feet, with many people unwilling to go back to work for previous wages—combined with concerns over health and safety—we’re now seeing long-term impacts that are affecting the current inflation.

The gist of the issue is that government-sponsored unemployment benefits pay workers not to work, which causes a shortage of workers. Ultimately, this leads to businesses having to raise wages above the unemployment benefits.

As such, businesses are having to pivot and restructure their approach to compensation and employment. While some businesses will be able to adapt to the demand for higher wages in order to ensure they have the staff they need to support their operations, many small businesses will not.

4. Poor Government Policies:

Bad government policies can impact inflation—most specific to our current circumstances are those regarding fossil fuels. If you have a car, you’ve likely seen gas prices rising over the last year.

While these policies need to be addressed, this isn’t a quick fix. U.S. oil production and refining have been down this year due to several causes including Hurricane Ida, which impacted oil supply. Pair that with oil-exporting countries not providing enough, and there are supply constraints on both sides of the equation.

With supply constraints and the current increase in demand for gasoline, prices don’t look to be coming back down in the near future.

Now that we have a better idea of what factors are contributing to inflation most recently, let’s take a look at inflation causes through a more generalized lens.

What Are the General Causes of Inflation?

It’s important to take the time to dive deeper into inflation as a whole so you can better understand how and why inflation occurs and how that plays into the economic impact consumers experience.

There are two broad, general causes of inflation. Each is also its own type of inflation and requires its own unique response from policymakers. The two main causes of inflation are:

Demand-pull inflation: Demand-pull inflation occurs in a strong economy. Incomes are increasing, people are being paid more, more people are at work, and they are demanding more goods and services. This decreases the total number of goods and services available—more people can afford the limited supply of existing goods and services. This, in turn, raises prices. In general, some demand-pull inflation is a sign of a functioning economy, as people are working and earning enough money to demand everything that’s produced.
Cost-push inflation: Cost-push inflation is caused by an increase in the cost of goods due to causes on the supply end. For example, if the costs of raw materials go up significantly, and businesses cannot keep up production of manufactured goods, this causes the manufactured goods sold at the market to be more expensive. Natural disasters, pandemics, and rising oil prices may all result in cost-push inflation, for example. Many different economic conditions can result in cost-push inflation, and it’s something policymakers may worry about, as cost-push inflation can be difficult to rein in.

We’ll go into more detail below about the typical causes of cost-push and demand-pull inflation. For more about inflation, check out the definition of inflation and our free inflation calculator here.

Causes of Demand-Pull Inflation

Demand-pull inflation happens whenever there’s an increase in the amount of goods and services that people want to purchase. Some of the most common causes of demand-pull inflation include:

Economic growth: As economies grow, and people have more money, they feel more confident in their ability to buy goods and services. This causes the costs of goods and services to increase, as a greater number of people can now afford a larger amount of scarce products.

The expectation of inflation: Sometimes, if enough people, especially large companies, expect inflation to come, they increase their prices in anticipation of coming inflation. This expectation itself then causes its own inflation.

Government spending: Some people believe that excessive government spending may cause inflation. For example, enhanced social benefits programs that supply people with the money they need to purchase essential goods they need to live may slightly increase consumer purchasing power. Additionally, some monetary policies, like printing more money to fund spending, may also contribute to inflation.

Increased demand for exports: When the demand for exports increases, this creates a complicated situation where the currencies involved in the exchange may both experience some inflation.

Causes of Cost-Push Inflation

Cost-push inflation occurs whenever the supply end of the production chain experiences cost increases. That includes situations like:

Raw material costs: Sometimes, the price for raw materials increases. For example, there may be a shortage of a certain type of metal that a computer manufacturer needs to produce computer chips. This will increase the cost of the consumer item, the computer, as the company will likely have to spend more money to obtain the metal they need. Increased prices for oil are another common example—when gas is more expensive, companies have to pay more to ship their products around, so they raise their prices.

Labor costs increase: If the price of labor goes up, the cost of the goods the labor is used to produce is likely to go up as well. For example, if workers are being underpaid, goods and services may have artificially low prices. Then, if workers organize for a fair or living wage, and the cost of labor goes up, goods and services may begin to cost more than the artificially suppressed price, causing inflation.
Unforeseen production obstacles: The goods and services we buy often have parts from all over the world, and require massive amounts of travel to arrive at our local stores. If there’s a drought in a country that supplies a certain crop to an American manufacturer, or a hurricane near an important port, or a pandemic that makes it dangerous for workers to labor in close proximity to each other, companies may face steep increases in the cost of production.

In addition to these two broad types of inflation, there are also many factors that can influence inflation. We’ll go over those next.

Factors That Can Influence Inflation

When policymakers and other experts are concerned about inflation, the following are some of the most common factors that they monitor:

Cost of production

If the cost of production increases, it’s likely that companies will also increase the cost of goods and services. As noted above, this is one of the causes of cost-push inflation.

Prices of goods

When the prices of goods go up (whether because of cost-push or demand-pull inflation), this is a sign that general inflation across the economy may be looming.

Demand for goods

If the demand for goods is increasing—for example, because there is low unemployment—it’s likely that the cost for goods will increase too, at least before production can catch up. That may spur some inflation.

Skilled labor availability

The availability of skilled labor is another potential cause of inflation. If labor necessary to produce certain products is scarce, then it’s likely the cost of those products will increase.

New technology

New technologies often cause disruptions to sectors of the economy. Depending on the way this goes, it may increase demand for certain products, may increase supply, or may increase costs somewhere along the supply chain. All of these factors can affect inflation.

Current money supply

The amount of money currently in circulation can also have an effect on the state of inflation. When there is more money in the economy, it may make the relative value of a unit of currency (like $1) go down. This is why some economists believe that printing more money to pay for government spending could result in inflation.

Counteracting the Effects of Inflation

A little bit of inflation is normal in most economies, but rapid inflation can be detrimental to society, as people can no longer afford many of the goods and services that they rely on. This leads many economists and policy analysts to wonder what inflation’s causes are, and how its adverse effects can be stopped.

The ways that governments can counteract the effects of inflation vary depending on the type of inflation that’s occurring, and the factors that are causing it. Economists are also not in agreement about the best ways to approach inflation. It’s an area that still needs a lot more study.

That’s not particularly helpful when you’re facing high rates of inflation in the present moment. However, that doesn’t mean you’re a sitting duck completely at the mercy of the economy.

As an individual, there are steps you can take to ensure that your money isn’t being adversely affected by inflation:

Invest when you can. Money sitting in a savings account is, because of inflation, slowly losing purchasing power. If you start investing in the stock market, bonds, or other high-yield options, you can offset the effects of inflation (while also incurring other risks). Investing in property, like a home, can also be an effective way to offset inflation, as property often appreciates in value over time.

Ask for a raise. If you haven’t received a raise in months or years, it’s possible that your real rate of pay has decreased. That’s because, as inflation goes up, your monthly paycheck may not go as far. Working for and asking for raises to meet inflation is one way you can offset its effects.
Organize your workplace. If you and your coworkers have not received raises, it may be time to think about workplace organizing. By banding together with your coworkers and committing to deny your labor until your wages are increased, you can secure a higher wage and offset the effects of inflation.

According to the Joint Economic Committee, prices are increasing at a faster pace right now than they have in decades, which is increasing concerns over inflation. While there’s no real emergency, now’s as good a time as any to take proactive measures.

Plan for the Future with Mint

If you’re curious how your income, debts, investment tracking, and more are stacking up against inflation, there’s one way to keep track: Mint. The Mint app lets you plan for your future by aggregating all your different financial info into one convenient place. Sign up now and download the app for free today and get a bird’s eye view of your finances, so you can plan for whatever the future holds, inflation or not!

Sources: NPR | U.S. Bureau of Labor Statistics | Joint Economic Committee

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Source: mint.intuit.com

January 11, 2022

[Update] U.S. Bank Launches New Altitude Connect Card With 50,000 Point Bonus (Worth $500)

(Update 1/10/22: Spend requirement now lowered from $3,000 to $2,000. Same bonus. Hat tip to reader Brian)

After much delay U.S. Bank has finally launched the new Altitude Connect card with a 50,000 point bonus (worth $500). Let’s take a look at the basics of this card:

50,000 point bonus after $3,000 in spend within the first 120 days
Card has $95 annual fee, fee is waived the first year
No foreign transaction fees
Card earns the following rates:
- 4x on Travel and at Gas Stations
- 2x on Dining, Takeout, Groceries, and Streaming Services
- 1x everywhere else
$30 free month of streaming for annual streaming services. Annual streaming credit works as follows: after 11 months of consecutive streaming service charges, the 12th month will get the $30 credit.
- You can combine different services, e.g. if you were subscribed to Netflix for 8 months and then to Hulu for 3 months, the following month of streaming will be credited back.
- Amazon Music, Apple Music, AT&T TV Now, Disney+, Google Music, Hulu, Netflix, Pandora, SiriusXM, Slacker Radio, Sling TV, Spotify, Tidal, Vudu, YouTube Music and YouTube TV are all mentioned clearly to work.
Cell phone protection similar to the US Bank Platinum card; $600 coverage with $25 deductible.
Precheck or global entry credit.

Our Verdict

Card is worth considering for the 50,000 point sign up bonus (worth $500) especially as the annual fee is waived first year. Don’t think it makes sense to keep long term with that $95 annual fee and poor benefits but there might be some rare use cases for the 4x categories (other cards do earn at a higher rate on gas purchases though). Given that U.S. Bank credit cards can be difficult to get approved for, it might make more sense to apply for the U.S. Altitude Reserve depending on how much value you get out of the other benefits on that card. This is still a strong second (or first option depending on how you value the Reserve benefits) and will be added to our best credit card bonus page.

Source: doctorofcredit.com

January 11, 2022

What is APR: Hereâs how Annual Percentage Rate works

Source: thepennyhoarder.com
Credit cards also often have multiple APRs depending on the type of transaction. These different transactions also have different grace periods, a period between the account closing date and your due date where you can pay off your purchases without penalty (aka interest).

What Is APR?

APR (annual percentage rate) and APY (annual percentage yield) are easily confused with each other. Knowing the differences can earn you big financial dividends and save you from unexpected financial costs.
Because the APR takes into account some of the fees of a loan, APR is often a more accurate representation of the cost to borrow than the interest rate alone.
It’s important to understand how much a loan or outstanding balance on your credit card will actually cost you. Every bank has different margins and interest rates, but the overall concept is the same.
APR calculations often begin with an index rate that reflects the economic conditions at the time. Credit cards then add a fee on top of that called a margin for using their service. This margin depends greatly on the cardholder’s credit score. People with good credit scores are offered better APRs than those with bad credit scores. Because of this, it’s important to understand how to improve your credit score. There are a lot of ways to raise your score, but here is a list of the simplest and most common:

The Two Types of APR

Essentially, the higher the APR the higher cost to borrow and vice versa. While not all fees are included, APR is a good place to start comparing lines of credit.
While it is possible for this rate to change, the lender is required by the Consumer Financial Protection Bureau (CFPB) to notify you in writing.
This means that every day a balance is carried over, you are charged .0712%, which for 0 is approximately 50 cents a day. While that seems small, the interest quickly begins to build. If the card’s bill is assessed monthly, then take that rate and multiply it by the number of days in the month.
Both APR and APY are ways to demonstrate interest rates. As we’ve been over, APR is the annual percentage rate and demonstrates the combined yearly cost of interest and fees for a loan. APY is the annual percentage yield and similarly combines interest and fees but also takes into account the effects of compounding interest.
Variable APRs are tied to an index interest rate, such as the Prime Rate from the Wall Street Journal. This underlying rate fluctuates with economic conditions and, therefore, variable APRs fluctuate as well. Basically, when the index rate goes up, your variable APR goes up.
If you’re still thinking about APR, keep reading to see our answers to the most frequently asked questions.

The APR Terms You Need to Know

Balance transfer APR is the interest rate charged when you transfer a balance to your credit card. Some cards offer low promotional balance transfer APRs–just be aware that once the promotion is over you’ll be charged the regular balance transfer APR on the remaining balance.
25.99% ➗ 365 days = .0712%

Purchase APR

Contributor Whitney Hansen writes for The Penny Hoarder on personal finance topics including banking and investing.Writer Sarah Kutra contributed to this report.

Balance Transfer APR

Multiply this new monthly rate by the 0 balance being carried over and holding this balance will cost roughly .45 that month.

Cash Advance APR

Most credit cards use variable APRs and while you can find guidelines in the cardholder agreement as to when the APR can change, the lender is not required to inform you as to when the rate changes.

Penalty APR

If you’ve been researching new credit cards or looking at refinancing your home loan, you’ve probably noticed the term APR popping up everywhere. APR stands for the annual percentage rate and, in terms of need-to-know financial information, understanding APR is pretty high on our list.

Introductory APR

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The Difference Between APR and APY

Cash Advance APR is the interest rate charged for the privilege of borrowing cash from your credit card. Normally this APR is higher than the Purchase APR, and there is no grace period.
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Credit and loans are a part of modern life so APR isn’t going anywhere. While you might be the type of borrower who pays your credit bill in full every month, there may be times in your life when you can’t avoid paying interest completely. In these moments, understanding APR will help you be an informed borrower.
Before opening a new line of credit, it is worth it to do some simple math like this to understand the cost of that credit.
Introductory APRs are normally very low rates that apply for a set period of time. Just make sure that you know the timeline and what the APR will be after the promotional period has ended.

How to Calculate APR’s Cost to You?

Penalty APR is the interest rate charged when you violate the conditions of the cards like making a late payment. Not all cards have a Penalty APR, but if it does, it’s normally the highest APR.
APR stands for annual percentage rate. It represents the yearly interest and associated costs of a loan by including loan-specific fees like the loan origination fees or mortgage insurance. You’ll find APR listed for credit cards, auto loans, mortgage loans, personal loans, and most other lines of credit. In fact, lenders are required to disclose a loan’s APR to the borrower thanks to the Truth in Lending Act (TILA).
The important thing to know is that just because you’re seeing the APR doesn’t mean you’re free from the effects of compounding interest.
.0712% ✖ 31 days = 2.21%
In this article, we’ll go over the basics of APR–what it is, how to calculate it, and how to improve it — so that you can be an informed borrower.

There are two types of APR: fixed APR and variable APR.
And as you make those decisions, here’s the key takeaways to keep in mind:

What Determines the APR You’re Offered?

If you pay off your interest from your loan or credit card balance each billing period, then your APR will be an accurate representation of your costs. If you carry a balance, however, then the cost will be more than the APR represents because you will now pay interest on the interest you were charged — aka, compounding interest. That’s where APY, which already includes compounding interest, becomes more helpful.

Establish credit
Pay your bills on time
Keep the balance on your existing cards low

Purchase APR is the interest rate applied to the purchases made on the credit card. If you pay your statement in full each pay period, you’ll avoid this all together. Most credit cards have a grace period between the end of the billing period and the date your payment is due. During this period, you can pay off the purchase without incurring any interest. If you do hold a charge over the billing cycle, then the purchase APR is applied accordingly.

The Bottom Line

For example, say you’re carrying a balance of 0 on your credit card with 25.99% APR. Because the APR represents a yearly rate, you first need to find your daily interest rate by dividing the APR by 365 days.
For example, a mortgage loan may tout a low interest rate through discount points but then has higher fees, while another may have a higher advertised interest rate but lower fees. Interest rates alone may be misleading, so looking at the APR will allow you to more accurately compare the overall cost of these two loans.

APR represents the cost of borrowing credit, including interest and fees.
Fixed APRs have a set interest rate for the course of the loan while variable APRs rate can change without notice.
APY is different than APR in that it takes compounding interest into its calculations.
Improving your credit score can help you receive a lower–and therefore better–APR.

Frequently Asked Questions (FAQs) About APR

Over time, these small changes can improve your credit score and reduce the cost of borrowing overall.
Just like it sounds, fixed APRs don’t change. The rate that you locked in at onset of the loan stays with you for the term of the loan. Accordingly, fixed APRs are more predictable than a variable APR. The actual rate you’re offered is dependent on the market conditions (and your credit score) at the time of the loan/application. <!–

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January 10, 2022

American Option vs European Option: What is the Difference?

Two of the most popular types of options are American and European. American and European options have a lot in common, but there are some key differences that are important for investors to understand.

Options Basics

One of the reasons investors like options trading is that it provides the right, but not the obligation to the buyer, to buy (call) or sell (put) an asset. Making the choice to buy (call) or sell (put) is known as exercising the option.

Recommended: Call vs Put Option: The Differences

Like all derivatives, the value of options reflects the value of an underlying asset. The value of an option changes as its expiration approaches and according to the price of the underlying asset. Investors using a naked option trading strategy may not have the cash or assets set aside in their portfolio to meet the obligations of the contract.

If the value of the contract or the underlying asset doesn’t increase, the investor would choose to let it expire and they lose only the premium they paid to enter into the contract. Both put and call options contracts include a predetermined price to which the buyer and seller agree, and the contract is valid for a specified period of time.

After the contract ends on the expiration date, so does the option holder’s ability to buy or sell. There are many different options trading strategies that investors can use.

Recommended: What Is a Straddle in Options Trading?

What Are American Options?

America options are the most popular, with both retail investors and institutional investors using them. One of the reasons for their popularity is their flexibility. Traders can exercise their right to buy or sell the asset on any trading day during the term of the agreement.

Most often, American stock options contracts have an expiration period between three and twelve months.

American Option Example

Say an investor purchases an American call in March with a one-year expiry date. The contract states that the investor has the option to purchase stock in Company X for $25 per share. In options terminology, $25 would be known as the option’s strike price. As the price of the underlying stock asset changes, the value of the option also changes.

After the investor purchases the American call options, the value of the stock increases. Within a few months the price was $50. The investor decides to exercise their option to buy, purchasing 100 shares of the stock at the agreed upon strike price of $25/share, paying a total of $2,500. The investor then sells the shares at the current market price of $50/share, making a profit of $2,500 because their value had doubled, not including the premium paid.

Investors can also buy put options, which give them the right to sell instead of the right to buy. With put options the scenario is reversed in that the investor would exercise their right to sell if the asset decreased in value.

What Are European Options?

European options are similar to American options, but holders can only exercise them on the expiration date (not before), making them less flexible.

European Options Example

Let’s say an investor purchases a European call option for 100 shares of Company X with a strike price of $25 and an expiration date six months from the time of purchase. Three months after the contract starts, the price of the stock increases to $50/share. The investor can’t exercise the right to buy because the contract hasn’t reached the expiration date.

When the option holder is able to exercise three months later, the stock is down to $30/share. So the investor can still exercise the option and make a profit by purchasing 100 shares at $25 and selling them for $30. The investor would also need to subtract the upfront premium they made, so this scenario wouldn’t be nearly as profitable as the American option scenario.

This is why European options are not as valuable or popular as American options. Options pricing reflects this difference. The premium, or price to enter into a European option contract is lower. However, traders can sell their European options at any point during the contract period, so in the example above the trader could have sold the option for a profit when the stock price went up to $50/share.

American Style Options vs European Style

American and European options are similar in that they have a set strike price and expiration date. But there are several key differences between American and European options. These include:

Trading

One main difference between American and European options is traders typically buy and sell European options over-the-counter (OTC) and American options on exchanges.

Premiums

American options typically have higher premiums than European options since they offer more flexibility. If the investor doesn’t exercise their right to buy or sell before the contract expires, they lose the premium.

Settlement

European options tend to relate to indices, so they settle in cash. American options, on the other hand, typically relate to individual stocks or exchange-traded funds and can settle in stock or cash.

Settlement Prices

With American options, the settlement price is the last closing trade price, while with European options the settlement price is the opening price of index components.

Volume

American options typically have a much higher trading volume than European options.

Exercising Options

Traders can only exercise European options at the expiration date, while they can exercise American options at any point during the contract period. Traders can sell either type of option before its expiration date.

Pricing Models

A popular pricing model for options is called the Black-Scholes Model. The model is less accurate for American options because it can’t consider all possible trading dates prior to the expiration date.

Recommended: Black-Scholes Model Explained

Underlying Assets

The underlying assets of most American options are related to equities, European options are typically pegged to indices.

Risks of Americans and European Options

American options are riskier to an options seller because the holder can choose to exercise them at any time.

For buyers, it’s easier to create a hedging strategy with European options since the holder knows when they can exercise their right to buy or sell. Day traders and others who invest in options realize that there are risks involved with all investing strategies, along with potential reward.

The Takeaway

Options are one commonly traded type of investment, and many traders use them to execute a trading strategy. However, it’s possible to build a portfolio without trading options as well.

If you’re interested in a more straightforward approach to investing, one great way to get started is by opening a brokerage account on the SoFi Invest platform. The trading platform lets you research, track, buy and sell stocks, ETFs, and more right from your phone.

Photo credit: iStock/AleksandarNakic

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Source: sofi.com

January 9, 2022

What Is a Checking Account?

Ready to get banked? Find out checking account basics so you know exactly what to expect when you show up at your chosen financial institution.

Source: crediful.com

January 6, 2022

Dogs of the Dow 2022: 10 Dividend Stocks to Watch

The start of the new year means a fresh chance for yield-seeking investors to get in on one of the easiest market strategies in the book:

The Dogs of the Dow.

Investment manager Michael B. O’Higgins popularized the idea in his 1991 book Beating the Dow. And it doesn’t get much simpler: At the beginning of the year, buy the 10 highest-yielding Dow Jones Industrial Average components in equal amounts. Hold them until the end of the year. Rinse. Repeat.

While the Dogs of the Dow sounds like a dividend strategy, it has its roots in value. O’Higgins’ proposed that firms with high dividends relative to their stock price in the index would be near the bottom of their business cycle and represent bargains compared to components with lower dividend yields.

And why the DJIA? The Dow Jones has long been considered one of the leading stock-market gauges of America’s economy. While the S&P 500 has more components and is more diversified, the Dow still covers most sectors. Not to mention, its components are extremely liquid and there are reams of research available on all 30.

But buyer beware. While the Dogs of the Dow have posted a respectable 8.7% annual total return since 2000, the Dogs have trailed the DJIA in each of the past four years. Analysts have proposed that the shift to growth investing has hurt the strategy’s performance; but with value stocks predicted to regain their mojo, the Dogs could again have their day.

Without further ado, here are the 2022 Dogs of the Dow.

Data is as of Dec. 31, 2021, the date on which the Dogs of the Dow are identified. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in reverse order of yield.

1 of 10

Intel

Sector: Technology
Market value: $209.5 billion
Dividend yield: 2.7%

Oh, how the tables have turned.

A decade ago, Intel (INTC, $51.50) was the leading name in chips, while Advanced Micro Devices (AMD) and Nvidia (NVDA) were promising yet still relatively minor players – combined, the two were worth less than a tenth of Intel by market capitalization.

But Nvidia is now several times Nvidia’s size, and AMD isn’t too far behind Intel’s $210 billion market value. That’s because in recent years, Intel has missed the boat on a variety of fronts. From mobile computing and productions capabilities for faster/smaller chipsets, Intel has stumbled … and its rivals have eaten its lunch.

But while Intel might be down, it’s hardly not out.

Intel’s Alder Lake 12th-generation core processor chips have started to eat away from AMD’s high-end processors, and Intel recently announced the latest line of Alder Lake chips that include what the company says is “the fastest mobile processor. Ever.” The next two years should see its 13th-gen (Raptor Lake) and 14th-gen (Meteor Lake) chips come live.

Intel also could squeeze some value out of Mobileye, the autonomous vehicle-chip stock that it acquired back in 2017. INTC in December announced its intent to spin the company off in an initial public offering (IPO) while maintaining controlling interest – allowing Intel to enjoy both an immediate windfall while still realizing gains as Mobileye grows.

In keeping with the Dogs of the Dow’s value bent, Intel trades at just 14 times the coming year’s earnings estimates, significantly less than both the S&P 500 (21) and technology sector (28). INTC’s 2.7% yield is also much better than what you typically get out of tech shares.

2 of 10

Coca-Cola

Sector: Consumer staples
Market value: $255.8 billion
Dividend yield: 2.8%

In today’s low-carb and keto-friendly world, sugary soft drinks and sodas are practically verboten. And in recent years, that has largely muted the returns of giant Coca-Cola (KO, $59.21), which has produced roughly half the total returns (price plus dividends) of the S&P 500 over the past half-decade.

But KO is doing a better job of ensuring it has the goods to shift with consumer tastes.

Coca-Cola has spent a few years moving its portfolio into healthier options. That includes teas, milk and sparkling water, among others. It also unveiled new zero-sugar versions of soda brands such as Sprite and Coca-Cola, which fueled about 25% of the Coca-Cola brand’s growth in the third quarter.

KO is also looking toward athletics and fitness fanatics for growth. Back in November, Coca-Cola purchased sports beverage group BodyArmor – which it already had a 15% stake in – for $5.6 billion. This instantly gives it a meaningful presence in the industry. “BodyArmor is currently the #2 sports drink in the category in measured retail channels, growing at about 50% to drive more than $1.4 billion in retail sales,” the company says.

And you don’t get more dependable than Coca-Cola’s dividend, which has been growing uninterrupted for 59 consecutive years. That easily puts it among the longest-tenured Dividend Aristocrats.

3 of 10

3M

Sector: Industrials
Market value: 102.4 billion
Dividend yield: 3.3%

Unlike most of Wall Street, 3M (MMM, $177.63) was already getting crushed by the time the COVID bear market came around. The U.S.-China trade war and other difficulties were already weighing on the industrial name when COVID cramped demand for many of the company’s products (except its N95 masks and filtering division, of course).

But 2022 could be another year of recovery for 3M.

3M makes more than 60,000 products, from consumer products such as sponges and packing tape to industrial diamond-coated grinding disks and orthodontic supplies. In normal times, this wide product portfolio provides insulation from specific shocks to its various businesses. And it allows 3M to enjoy in numerous facets of a broad economic recovery.

The company grew third-quarter revenues 7.1% year-over-year and generated more than $1.5 billion in free cash flow. 3M is benefiting from continued cost cutting and development programs, as well as from selling chronically underperforming business lines.

3M’s forward P/E of 16 makes it one of the more expensive 2022 Dogs of the Dow, and yet it still trades for much cheaper than the S&P 500 and industrial sector (20) alike.

4 of 10

Amgen

Sector: Healthcare
Market value: $126.7 billion
Dividend yield: 3.5%

Patent expirations are a hurdle most pharmaceutical and biotechnology companies have to face, and that’s no different for established biotech Amgen (AMGN, $224.97). Top drugs such as Enbrel, Neulasta and Otezla will fall off the patent cliff in coming years.

The good news? The earliest drug in that cohort to fall off patent won’t do so until 2025. And often, U.S. drug manufacturers can kick the can down the road by making minor changes to drugs or adding more indications for the therapy. Not to mention, expirations go both ways – AbbVie’s (ABBV) blockbuster drug Humira is set to lose patent protection in the U.S. in 2023, and Amgen has already gained approval to sell Amjevita, a biosimilar form of the drug.

Another big reason AMGN shareholders shouldn’t panic is its potential-packed pipeline. The biotechnology firm has more than 20 drugs in Phase 2 or 3 trials. And recently, the FDA approved Amgen severe-asthma medication Tezspire, a potential blockbuster drug.

Nearer-term, another reason to like Amgen is its dividend. Namely, it’ll be 10% bigger in 2022, at $1.94 per share quarterly, the company announced in December.

5 of 10

Merck

Sector: Healthcare
Market value: $193.6 billion
Dividend yield: 3.6%

Merck (MRK, $76.64) has been doing a lot of evolving in recent years. It has gone on an impressive pipeline-buying spree, which continued in late November with its $11.5 billion buy of Acceleron. And Merck also recently spun off its legacy generic drug and off-patent medicines into a separate company, Organon (OGN).

The resulting Merck is one of the top growth-oriented drug producers in the world.

Sales of oncology blockbuster drug Keytruda jumped 22% year-over-year during Q3, to $4.5 billion. Some analysts believe Keytruda will soon be the world’s best-selling drug, overtaking AbbVie’s Humira. That’s in part because Merck intends to seek approval for other indications of the drug. But Merck has other major drugs in the tank, including Gardasil, whose sales grew 68% to $2 billion in Q3. And its pipeline includes dozens of products in Phase 2 and 3 trials.

A low forward P/E of around 10, and a yield well above 3%, make MRK a model example of the income and value found in the Dogs of the Dow.

6 of 10

Walgreens Boots Alliance

Sector: Consumer staples
Market value: $45.2 billion
Dividend yield: 3.7%

Walgreens Boots Alliance (WBA, $52.16) wasn’t the COVID winner you might have thought. COVID prompted a shift in the company’s sales mix to lower-margin items, and it dragged heavily on foot traffic in the company’s Boots U.K. stores.

So, like many other retailers, an escape from the pandemic should help Walgreens, which used COVID as an opportunity to cut nearly $2 billion in costs from its operations.

Partnerships will be essential too. For instance, Walgreens has been opening branded primary-care clinics with VillageMD, who staffs these locations with physicians, allowing them to cater to more than ear infections and sniffles. Walgreens plans to open 1,000 of these clinics at its stores by 2027.

Also in play is the potential divestiture of its Boots business; several reports in December said Walgreens was mulling the move.

With foot traffic on the rebound and new avenues for growth opening up, WBA could be a productive Dow Dog. A forward P/E of around 10 doesn’t hurt, either.

7 of 10

Chevron

Sector: Energy
Market value: $226.2 billion
Dividend yield: 4.6%

COVID was downright miserable for the energy sector – even integrated oil-and-gas giants such as Chevron (CVX, $117.35).

However, while numerous companies closed, and many more were forced to cut jobs, slash capital expenditures and pull back on their dividends, Chevron managed to keep its dividend running and even used an all-stock deal to acquire Noble Energy.

Chevron’s acquisition of Noble at fire-sale prices boosted its overall presence in low-cost fields in the Permian Basin, allowing the company to better leverage a rebound in energy prices, which came in spades in 2021.

Energy stocks of all sorts went bananas in 2021, making it the S&P 500’s top sector. Chevron returned 46% amid a complete rebound in its operations. For instance, its third quarter saw Chevron earn $6.1 billion versus the $207 million it lost in the year-ago quarter.

However, despite its massive 2021 move, CVX stock yet again finds itself among the Dogs of the Dow.

Chevron’s 4.6% current yield isn’t as generous as the 6% or so it offered at this same time last year, but it’s still one of the top yields in the Dow. Meanwhile, it’s value-priced at just 12 times earnings estimates.

8 of 10

International Business Machines

Sector: Technology
Market value: $119.9 billion
Dividend yield: 4.9%

International Business Machines (IBM, $133.66) has been nothing short of a disappointment in recent years.

Big Blue has struggled to remain relevant in the age of cloud computing while rivals chipped away market share. At one point, the firm recorded 22 consecutive quarters of declining revenue, then restarted that streak shortly after breaking it. Even including dividends, IBM shares returned just 1% between 2017 and 2021.

But IBM might finally be getting itself together.

Its 2019 purchases of open-source software firm Red Hat boosted the company’s operations. Fast-forward to 2021, and the company cut loose some dead weight, spinning off its legacy IT infrastructure services as Kyndryl (KD).

A now leaner, meaner IBM is focused once again on growth.

We saw signs of this in the company’s third quarter, where overall cloud revenues grew 14% year-over-year. It’ll still be a while before IBM can report its post-separation numbers, but analysts are generally expecting IBM to start heading in the right direction once again.

Better still: IBM didn’t give away any of the dividend game with Kyndryl. International Business Machines remains a Dividend Aristocrat whose 4.9% yield is among the best of 2022’s Dogs of the Dow.

9 of 10

Verizon Communications

Sector: Communication services
Market value: $215.1 billion
Dividend yield: 4.9%

Verizon (VZ, $51.96) spent the last few years trying to build out a communications and media empire. Wireless communication has become a commodity; there isn’t much difference between carriers, plans or offerings at this point. The U.S. market is saturated. The major carriers can’t rely on their legacy businesses for growth.

But Verizon’s ventures, which included buying Yahoo! And other media properties, simply didn’t pan out. Several write-offs later, and VZ is just getting back to basics: improving its giant network and providing services that utilize said network.

The 5G transformation is a major tailwind for Verizon. It’s not just consumer devices; smart vehicles, the Internet of Things and other applications will be a big driver for its network. Also, Verizon has started to transition toward more enterprise customers, which includes fleet management software and applications to data security. These should also provide a runway for growth.

A forward P/E under 10 and a nearly 5% dividend, meanwhile, provide some of the best features of the Dogs of the Dow.

10 of 10

Dow

Sector: Materials
Market value: $42.0 billion
Dividend yield: 4.9%

Dow has had a wild and transformative few years that saw it spin off assets before merging with rival DuPont (DD), then the chemical giant split into three separate firms. The remaining Dow contains the materials sciences chemicals, including adhesives, polyurethanes, silicones, resins and waxes, among others.

Like most other materials stocks, Dow struggled right alongside the broader economy during the COVID recession. For instance, during Q3 2020, the company lost 4 cents per share on $9.7 billion in sales. By Q3 2021, Dow had recovered considerably, posting $2.23 per share in earnings on $14.8 billion in revenues.

The omicron and future variants could throw more hurdles at the Dow recovery, but in general, a growing global economy should mean continued growth in demand for Dow’s products.

You can buy into that recovery on the cheap through Dow. Shares trade at a svelte nine times future earnings and yield nearly 5% at today’s prices. That’s roughly four times the income you’ll pull from the broader market, and at a much better valuation. A fair dividend payout ratio of 45% of earnings leaves Dow ample room to raise that payout further.

Aaron Levitt was long AMGN and MRK as of this writing.

Source: kiplinger.com

January 6, 2022

How To Make Changes to Your 401(k) Contributions

Whether you just set up your 401(k) plan or you established one long ago, you may want to change the amount of your contributions — or even how they’re invested. Fortunately, changing your 401(k) contributions is usually straightforward, and you may be able to change your 401(k) contributions at any time (depending on your plan).

After all, the point of a 401(k) plan is to help you save a substantial amount for your retirement. So it’s important to keep an eye on your account and your investments within the account, to insure that you’re saving and investing according to your goals.

To understand how to maximize this investment opportunity and grow your nest egg, it’s important to start with the basics.

Purpose of a 401(k)

A 401(k) is a retirement account that a company may offer to its employees. In some cases, enrollment in the employer’s 401(k) is automatic; in some cases it’s not. Be sure to check, so that you can take advantage of this savings opportunity.

Employees may contribute a portion of their paycheck to the company’s 401(k) account, and employers might also contribute to each employee’s account (again, depending on the plan).

The employer’s portion is called the company’s “match” or matching funds. Typically, an employer might match up to a certain percentage of what the employee saves. One common matching plan is when a company matches 50 cents for every dollar saved, up to 6% of the employee’s total contributions. Terms vary, so it’s best to ask your Human Resources representative what the match is (if there is one).

The money a participant contributes to their 401(k) plan is technically called an “elective salary deferral” because it’s optional, not required, and those deductions are not included in an employee’s taxable income. That’s why 401(k) and similar accounts (like 403b and most IRAs) are often called tax-deferred accounts: You don’t pay taxes on the money you’ve saved until you withdraw the money in retirement.

This tax benefit can be significant. Every dollar you save reduces your taxable income, which can result in a lower tax bill in some cases.

Can You Change Your 401(k) Contribution at Any Time?

While the opportunity to make changes to some employee benefits, like health insurance, are generally only offered once a year during so-called open enrollment periods, many plans allow participants to change the amount of their 401(k) contributions at any point. According to Department of Labor guidelines, an employer must allow plan participants to change investments at least quarterly (sometimes more often, if company stock or other high-risk investments are offered by the plan).

The reasons for making changes to your 401(k) contributions may vary.

The Ability to Save More

You may have gotten a raise, or experienced a change in your financial circumstances, and wish to increase the percentage of your savings. Contributions to these plans are typically expressed as a percentage of your annual salary. For example, if you earn $75,000 per year, and your contribution rate is 10%, you would save a total of $7,500 per year. If you got a raise to $80,000 and now wish to contribute 12%, you would save a total of $9,600 per year.

To Get the Match

As discussed above, some 401(k) plans offer a savings match from the employer. In most cases, the match is a set percentage of the employee’s contribution. If you set up your 401(k) at a point when you couldn’t get the full match, you may want to increase your contributions to get the full employer match.

Rebalancing Your Asset Allocation

If you’ve held the account for a while, say a year or more, the original allocation of your investments — i.e. the balance between equities, cash, and fixed income investments — may have shifted. Restoring the original balance of your investments may be a priority, if your strategy and risk tolerance haven’t changed.

Changing Your Asset Allocation

You also might want to shift the allocation because your financial strategy has become more aggressive (i.e. tilting toward stocks) or more conservative (tilting toward cash and fixed income).

Setting Up Automatic Increases

Some plans offer participants the option of automatically increasing their contribution rate every year, typically up to a certain percentage (e.g. 15%), and not to exceed the maximum contribution levels. While some plans have different rules, the basic contribution limit for 401(k) plans for 2022 is $20,500 for participants under age 50. For those 50 and older, you can save an extra $6,500 in “catch-up contributions”, for a total of $27,000.

Setting up automatic increases allows you to save more each year without having to think about it; this can be beneficial for overcoming the inertia common among many savers.

How to Change 401(k) Contributions: 3 Steps

Again, the 401(k) plan provider will be able to advise participants on how often they can make changes to their contributions, and what the process will look like. For employees unsure of the plan provider, the company’s human resource department can point them in the right direction.

In some cases, participants can change their contributions directly through their plan provider’s website. Generally, the process of making changes to a 401(k) looks like this:

Step 1:

A participant, i.e. the employee, contacts their 401(k) provider to discuss how to change contributions for their particular 401(k) plan.

Step 2:

The employee considers how much of their paycheck they want to contribute to their 401(k) moving forward, taking their company’s 401(k) match into consideration, and ideally contributing at least that much. The employee might also change their asset allocation, depending on plan rules.

Step 3:

The participant fills out any forms (online or via paperwork) to confirm their new contribution.
Often, these steps can take just a few minutes, using your plan sponsor’s website.

Why Contribute to a 401(k)? 3 Good Reasons

Contributing to a 401(k) plan is an important way to save for retirement. The funds in a 401(k) are invested, generally in mutual funds, exchange-traded funds (ETFs), or target date funds — which can offer the potential for growth over time. Typically there are about 12 investment options in most 401(k) plans.

But perhaps the three best reasons to contribute to a 401(k) plan are the opportunity to save automatically, via regular payroll deductions; the potentially lower tax bill; the ability to get “free money” from your employer match, if it’s offered.

Low-stress Saving

For many people, this type of investment is easy because you can choose how much of your salary to contribute each pay period, and deductions happen automatically. You don’t have to think about your savings, your contributions are taken directly from each paycheck, so it helps to build your nest egg over time.

Lower Taxable Income

Another benefit is the potential for savings during tax season. Since the contributions an employee makes to their 401(k) plan over the course of the year aren’t included in their taxable income, that can lower their overall taxable income. This, in turn, may result in an individual falling into a lower tax bracket and paying less income tax for that year.

And in the future, when they might likely be in a lower tax bracket due to retirement, they’ll pay lower taxes when they withdraw the money from their 401(k) account.

Note: Withdrawing money from a 401(k) account before retirement age may lead to early withdrawal penalties.

Another perk of enrolling in a 401(k) plan is the notion of “free money” from one’s employer. Some companies match a portion of their employees’ contributions—often around 50 cents to $1 for each dollar that an employee contributes.

Typically, an employer might set a maximum matching limit, such as 3% to 6% of the employee’s salary.

This matching contribution is often referred to as free money because the contribution effectively increases an employee’s income without increasing their current tax bill. It’s worth noting that an employer’s match generally vests over the course of three or four years—meaning that the employer-contributed money will accrue in the account, but an employee won’t be able to keep it if they switch jobs, unless they remain with the company for that set period of time.

Setting up Recurring Contributions

When it comes to setting up a 401(k), the process varies by workplace. Some companies offer automatic enrollment to employees, automatically reducing the employee’s wages by a certain amount and diverting that money to the employee’s 401(k) plan, unless the employee chooses not to have their wages contributed.

Or, an employee can choose to enroll, but to contribute a custom amount. This type of contribution is referred to as an elective deferral.

In companies that don’t offer automatic enrollment as an option, employees will need to work with their HR department and retirement plan provider to get their 401(k) set up.

Participants need to decide how much they want to contribute, may need to choose their investments, can opt to take advantage of autopilot settings, and can roll over a 401(k) from a past job into their new one.

How Much to Save for Retirement

The Department of Labor (DOL) outlined a few best practices for investing in order to save for retirement.

It’s estimated that most Americans will need 70% to 90% of their preretirement income saved by retirement, in order to maintain their current standard of living. Doing that math can give plan participants an idea of how much they should be contributing to their 401(k).

Participants might also consider a few basic investment principles, such as diversifying retirement investments to reduce risk and improve return. These investment choices may evolve overtime depending on someone’s age, goals, and financial situation.

The DOL recommends that employees contribute all they can to their employer-sponsored 401(k) plan to take advantage of benefits like lower taxes, company contributions, and tax deferrals.

Adding Alternative Investments to a 401(k)

Some savers may find themselves interested in pursuing alternative investments when saving for retirement. An alternative investment takes place outside of the traditional markets of stocks, fixed-income, and cash. This method may appeal to those looking for portfolio diversification. Popular examples of alternative investments are private equity, venture capital, hedge funds, real estate, and commodities.

Self-directed 401(k)s allow participants to add alternate investments to their 401(k) portfolio. With a self-directed 401(k), the investor chooses a custodian such as a brokerage or investment firm to hold the amount of assets and execute the purchase or sale of investments on the participant’s behalf. If an employer offers a self-directed 401(k), the custodian will likely be the plan administrator.

The Takeaway

For employees looking to change 401(k) contributions, the process is often as simple as reaching out to your plan provider and confirming that you’re allowed to make a change at this time.

Some companies have rules around when and how often employees can make changes to their contributions. Once you have the go-ahead to make the change, and have considered what works best for your current financial situation and your future goals, it’s generally straightforward.

A company-sponsored 401(k) plan offers many benefits — including the “free money” that comes with an employer-matching program (as long as you stay at the company until you’re fully vested; vesting schedules vary). But there are also other ways to save for retirement, including your own investment account, which you can set up today with SoFi Invest®. Investors can get started with as little as $1 and can trade stocks and ETFs with no SoFi management fees. And for those who want more guidance, SoFi can help you build a portfolio with the SoFi automated investing feature. Even better, SoFi Members have access to complimentary advice from professionals.

Learn more about how SoFi Invest makes investing flexible, easy, and affordable.

SOIN20182

Source: sofi.com

January 5, 2022

Discounted Cash Flow (DCF) Guide

Discounted cash flow is an income-based approach for valuing an asset. The discounted cash flow formula calculates what an asset is worth today using future cash flows as the basis.

In business settings, analysts may apply the DCF model to determine the value of another business. For example, a company that’s interested in an acquisition or merger may look at the discounted cash flows of comparable companies. But it’s also possible to use discounted cash flow analysis when making investment decisions inside a personal portfolio.

What is DCF?

Discounted cash flow is one of several valuation methods investors use to determine an asset’s value. The technical DCF model definition is: future cash flows multiplied by discount factors to obtain present values.

In simpler terms, discounted cash flow allows investors to estimate the value of something today based on its ability to generate cash flow in the future. This ties into the concept of the time value of money, which assumes that money is worth more now than it would be at some future date. This assumption reflects the possibility of increasing inflation rates or interest rate changes diminishing the value of money over time.

Here’s another way to think of discounted cash flow: It’s a way to predict or estimate future returns on a current investment, whether it’s a stock, a business purchase or something else. In other words, you can use the discounted cash flow formula to figure out if what you get out of an investment might equal or exceed what you put in.

How DCF Works and What It’s Used For

Discounted cash flow analysis provides an estimated value of an investment or asset, based on forecast cash flows to evaluate potential investment opportunities. Investors use DCF to calculate a rate of return and answer the question of how much money an investment can potentially generate, when adjusted for the time value of money.

DCF analysis can have several applications. Some of the scenarios where analysts use discounted as a predictive tool include when evaluating the potential returns on an investment:

• Calculating the value of a business

• Estimating the potential return on investment associated with the purchase of business assets

• Calculating the value of investments in stocks, bonds or other financial securities

Company’s often use DCF valuation when they are contemplating the acquisition of another company. In this scenario, discounted cash flow can give the acquiring company an idea of the value of the company they want to purchase.

Businesses can also use discounted cash flow analysis as a guide for making investments in equipment or other assets. If the investment requires the use of loans or financing to purchase the equipment, the DCF model can factor the interest rate into its calculations to estimate an accurate ROI.

DCF Formula

Discounted cash flow uses a specific formula for determining value. The formula looks like this:

(Cash flow for year 1/(1+r)1) + (Cash flow for year 2/(1+r)2) + (Cash flow for N year/(1+r)N) + (Cash flow for final year/(1+r)

You may also see it simplified like this: DCF = CF1 / (1 + r) 1 + CF2 / (1 + r) 2 + CFN / (1 + r)N + CFF/ (1+r)

Breaking down each element of the discounted cash flow formula can help with understanding how to use it.

Cash Flow

In the DCF valuation model, cash flow simply represents the flow of cash in and out of a business or investment. For example, a business’ incoming cash flow may revolve around sales of its products or services.

Outgoing cash flow would include expenses paid by the business, including payments to suppliers, utility bills, loan payments and taxes. Positive cash flow means the business has more money coming in than going out while negative cash flow means the opposite. A cash flow statement is a standard part of a company’s financial statements.

For a stock, the cash flow might be dividends paid, and for a bond it could be coupon payments.

Discount Rate

In the discounted cash flow formula, “r” represents the discount rate. The discount rate is the interest rate used to determine present value. When using the DCF model to determine business valuations, the discount rate can be applied as the weighted average cost of capital.

The discount rate is important because when used in discounted cash flow analysis calculations, it can tell you if the expected return from an investment is likely to be positive or negative.

Period Number

The final piece of the puzzle in discounted cash flow analysis is the period number, represented by N in the DCF formula. The period number simply means the period of time that you’re using for discounted cash flow analysis. So this might be five years, 10 years, 20 years, or longer, depending on the type of investment or asset you’re trying to find a valuation for.

When calculating discounted cash flow, you can also determine terminal value. This makes it possible to measure the growth rate or return on an investment for projected cash flows beyond the timeframe you’re using for your calculations. So to find this number, you’d multiply cash flow for the final year by (1+ long-term growth rate) and divided by (discount rate – minus long-term growth rate).

DCF Example

Having an example to follow can make it easier to understand discounted cash flow and how it works. So, assume an investor is considering a private equity investment. They plan to purchase a 10% stake in a private company growing at a rate of 5% each year.

Using the discounted cash flow formula, assume that the business generated $5 million in cash flow the previous year. A 10% investment stake would be worth $500,000. Using a 5% growth rate, the stake would generate $25,000 in cash flow the first year, $26,250 in the second year and $27,562.50 in the third year.

Now, say your target rate of return is 10%. Using the discounted cash flow formula with a discount rate of 0.10%, here’s how the numbers would align:

Year	Cash Flow	Discounted Cash Flow
1	$525,000	$477,273
2	$551,250	$501,136
3	$578,812.50	$526,193
Total	$1,655,062.50	$1,004,103

Looking at this chart, you can see what an investment would be worth to you today, based on anticipated cash flows. This can help you decide how much to invest and if the investment is worth it, based on the expected rate of return you might get from putting the money to work elsewhere.

Discounted Cash Flow vs Net Present Value

Discounted cash flow is one of several valuation methods used to determine value of a business or investment. Net present value or NPV is another. The net present value represents the present value of cash flows at the required rate of return relative to the initial investment. Net present value can be used to decide if an investment is worth making, based on the expected rate of return as measured by the value of money today.

So how is this different from discounted cash flow? With discounted cash flow analysis, you’re trying to determine how much projected cash flows are worth using the time value of money. When using DCF analysis, the internal rate of return represents a discount rate that makes the NPV of cash flows equal to zero.

Net present value, on the other hand, can help you determine the net return on an investment after factoring in the initial cost of that investment. To calculate net present value, you’d use the initial investment amount, the discount rate or target rate of return, and the time period for the investment.

Both DCF and NPV can help when making investment decisions. But net present value takes valuation calculations one step further by subtracting the cost of the investment from the discounted cash flow.

Limitations of DCF

Discounted cash flow modeling is not an exact science. DCF analysis requires you to estimate cash flows and the discount rate, so if you estimate either one inaccurately you could end up with valuation calculations that are too high or too low. This can make it difficult to realistically judge the viability of an investment.

It’s also important to remember that valuations can be very sensitive to external factors, such as changing market volatility. It’s difficult to precisely forecast how an investment or business will react to increased volatility or other changes to market conditions. For that reason, discounted cash flow works best as a guide for estimating potential returns, rather than an absolute predictor of outcomes.

How Can DCF Help Investors?

DCF can tell investors if an investment is worth making, based on the anticipated returns.

So, say you want to buy a stock that looks promising. If you have all the appropriate numbers to plug into the discounted cash flow formula, you could reasonably estimate how much of a return you’re likely to see on your investment. Or if you’re considering purchasing a home to use as a rental property, discounted cash flow could tell you what level of returns you’re likely to see on your investment.

Again, it’s important to remember that discounted cash flow is not a 100% accurate way to measure estimated return on investment. But it can be a useful guide for determining whether an investment makes sense for your portfolio, based on your goals, risk tolerance and time horizon.

The Takeaway

Investing is central to growing wealth over the long term and getting started can be easier than you might think. Understanding the basics of discounted cash flow is important when choosing stocks, bonds, or other securities for your portfolio. If you’re investing via a brokerage account or an Individal Retirement Account (IRA), where you choose to invest also matters.

By opening an online brokerage account on the SoFi Invest trading platform, you can start investing with as little as $5. It’s easy and convenient to begin building a portfolio from scratch. If you prefer a hands-off approach, automated portfolios offer diversification.

Photo credit: iStock/AsiaVision

Source: sofi.com

January 4, 2022

How to Get a New Job in 2022: 5 Tips Youâll Need to Know

Maybe you were part of the Great Resignation of 2021 and you’re looking for a different job in 2022. You might be a parent ready to return to work after helping your kids with virtual schooling. Or you’re just ready to move on to something new.

Whatever the reason, now is the time to polish your resume, think about your transferable skills and, yes, learn how to interview with a robot.

Here are five tips for landing that next job in the new year.

1. Create the Best Resume

There’s a fine line between making your resume stand out and conforming to norms employers expect that simplify the hiring process for them.

Your Resume’s Format

Here are a few basics for a resume format:

Keep it to a page or a page and half max, with a lot of white space.
An online resume can include hyperlinks to your portfolio or other examples of your work.
Always send it as a PDF.
Avoid novelty fonts and stick with Ariel, Times Roman or Cambria.

Your Resume’s Content

Along with the basic contact info, education and work experience, be sure to include the following:

Use keywords on your resume, typically in the job description within your work experience. But only use words that fit logically. Don’t pepper every possible keyword into your resume.
Academic or professional honors.
Additional software skills, certifications or other training.
Interesting hobbies, volunteer work or organizations.

The final, and most important tip: Proofread. Proofread. Proofread. Get a friend to proofread. Get another friend to proofread. Then proofread again.

For more detailed information on writing a resume, check out this post on how to write a resume.

2. Write a Great Cover Letter

Ugh. You finish the resume and then there’s that dreaded cover letter.

It has to say why you are the best person for the job without sounding like you are full of yourself and spewing all the usual accolades. Here are some basic tips for how to write a cover letter.

Never write “Dear Sir or Madam.” Try to find the hiring manager’s name or open with “Dear human resources team.”
Keep it all to one page — or less.
Offer specifics about what you like about the company and the position. Read up on the employer to find something distinctive.
Tout your experience and skills without sounding like a bragger. This is a fine line but it’s very doable. Instead of, “I know more about X than anyone around,” try, “I know my three years of experience in X give me the background to be an important part of your team.”
Find a value or past experience you have that aligns with this company’s growth or philosophy.
Talk about next steps such as following up with a call or email, scheduling an interview or attending an open house.

3. Master an Interview With a Webcam

In the era of remote work, the interview process is more and more remote, too.

Sometimes a live interviewer doesn’t even enter the process until the second round. Sadly, employers have discovered that they can review 20, 30 or 50 applicants without dedicating a live person to the task.

So you’ll need some video interview tips for your meeting with a robot. Using artificial intelligence, it will assess your body language and eye contact along with responses to written or oral questions.

Make a list beforehand of phrases such as “team player” or skills used in the job posting, and be sure to use them in your responses. Example: If the job requires three years experience, use the phrase “three years” or “more than three years” in your responses.

4. Remember to Say Thank You

It’s not sucking up, it’s a common courtesy that employers not only notice, they pretty much expect. If you meet with an actual person online or in person, be sure to get their email address so you can send a thank you email for their time and consideration.

This is another opportunity to set yourself apart from the others.

Reiterate points you made in your interview that you can tell went over well with: “As we discussed, I would add X to your team” or “I have a great interest in and experience with your latest endeavor, X.”

You can also include one more examples of your work that you hadn’t sent before but realized during the interview would be helpful.

5. Continue Following Up

Yes, you might risk feeling like a stalker, but it’s perfectly acceptable to check in on the hiring process after your thank-you email.

Be sure to ask about the hiring timeframe during your interview, so you can reference it when you follow up. Most employers take longer than they expect, so chances are you won’t hear about the job within their projected time. And, sadly, fewer and fewer companies let you know if they’ve filled the job with someone who isn’t you.

So a couple weeks after your interview, it’s fine to send a casual email checking in to see if there are any updates.

When deciding how to follow up after an interview, remember to keep things casual, non-demanding, respectful and self-confident. No one wants to hire a candidate who sounds impatient, desperate or passive-aggressive.

Veteran journalist Katherine Snow Smith is a former staff writer at The Penny Hoarder. She covers ways to make money, save money and other topics. Her work as appeared in the Tampa Bay Times, Charlotte Business Journal and Greenville (S.C.) News. She is the author of “Rules for the Southern Rulebreaker.”

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Source: thepennyhoarder.com

4 Main Causes of Inflation in Our Current Economy

1. Increase in the Money Supply:

2. Supply Chain Disruption:

3. Overnment-Sponsored Unemployment:

4. Poor Government Policies:

What Are the General Causes of Inflation?

Causes of Demand-Pull Inflation

Causes of Cost-Push Inflation

Factors That Can Influence Inflation

Cost of production

Prices of goods

Demand for goods

Skilled labor availability

New technology

Current money supply

Counteracting the Effects of Inflation

Plan for the Future with Mint

Our Verdict

What Is APR?

The Two Types of APR

The APR Terms You Need to Know

Purchase APR

Balance Transfer APR

Cash Advance APR

Penalty APR

Introductory APR

The Difference Between APR and APY

How to Calculate APR’s Cost to You?

What Determines the APR You’re Offered?

The Bottom Line

Frequently Asked Questions (FAQs) About APR

Options Basics

What Are American Options?

American Option Example

What Are European Options?

European Options Example

American Style Options vs European Style

Trading

Premiums

Settlement

Settlement Prices

Volume

Exercising Options

Pricing Models

Underlying Assets

Risks of Americans and European Options

The Takeaway

Intel

Coca-Cola

3M

Amgen

Merck

Walgreens Boots Alliance

Chevron

International Business Machines

Verizon Communications

Dow

Purpose of a 401(k)

Can You Change Your 401(k) Contribution at Any Time?

The Ability to Save More

To Get the Match

Rebalancing Your Asset Allocation

Changing Your Asset Allocation

Setting Up Automatic Increases

How to Change 401(k) Contributions: 3 Steps

Step 1:

Step 2:

Step 3:

Why Contribute to a 401(k)? 3 Good Reasons

Low-stress Saving

Lower Taxable Income

Setting up Recurring Contributions

How Much to Save for Retirement

Adding Alternative Investments to a 401(k)

The Takeaway

What is DCF?

How DCF Works and What It’s Used For

DCF Formula

Cash Flow

Discount Rate