Discover more from Fluent in Finance Newsletter by Andrew Lokenauth
💰Money Mastery & Financial Literacy [Issue #23: Week 37, September 2023]
😲 Roth vs. Traditional 401(k), Opportunity Cost, 5 High-Income Skills, 4 Home-Buying Tips, Travel Insurance, and more!
👋 Good afternoon future millionaires! I hope you’re enjoying your week so far! Thank-you for subscribing to our weekly personal finance newsletter — with the goal of helping you make better-informed financial decisions!
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🎉In this issue of Money Mastery & Financial Literacy, you’ll learn:
This Week's 5 Money Lessons: 1) Roth vs. Traditional 401(k): Which is Right for You? 2) Understanding Opportunity Cost 3) 5 High-Income Skills that will Stay in Demand 4) 4 Home-Buying Tips to Save You Money 5) Beginner's Guide to Travel Insurance This Week's Premium Insights: 6) Finance Book Club: Book of the Week 7) Financial Tip of the Week 8) Finance Quote of the Week (and its deeper meaning) 9) Top 3 Finance Charts this Week (and their importance) 10) Did You Know?
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1) Roth vs. Traditional 401(k): Which is Right for You?💰
The key factor in choosing between a Roth 401(k) versus a traditional 401(k) is estimating your tax bracket now versus retirement.
A Roth 401(k) is a retirement savings account that allows you to contribute money after-tax. Your contributions grow tax-free and withdrawals are also tax-free.
If you expect your tax bracket to be higher in retirement, then a Roth 401(k) is a good option. This is because you will pay taxes on your contributions now, when they are likely to be lower, and your withdrawals will be tax-free in retirement.
A traditional 401(k) is a retirement savings account that allows you to contribute money pre-tax. Your contributions grow tax-deferred and withdrawals are taxed as ordinary income.
If you expect your tax bracket to be lower in retirement, then a traditional 401(k) is a good option. This is because you will pay taxes on your contributions now, when they are likely to be higher, and your withdrawals will be taxed at a lower rate in retirement. This often applies to peak earners.
If you are not sure what your tax bracket will be in retirement, then a good option is to split your contributions between a Roth 401(k) and a traditional 401(k). This will give you more flexibility and allow you to make the best decision for your individual circumstances.
2) Understanding Opportunity Cost💰
Opportunity cost represents the potential benefits you miss out on when choosing one option over another. A simple way to view opportunity costs is as a trade-off. Trade-offs take place in any decision that requires forgoing one option for another.
Opportunity cost is a concept that is often used in economics and finance, but it can be applied to any decision-making process. Opportunity cost attempts to quantify the impact of choosing one investment over another. Here is the formula for calculating opportunity cost:
Opportunity cost = Value of best alternative forgone - Value of chosen alternative
For example, let's say you are deciding whether to buy a new car or take a vacation. The opportunity cost of buying the car would be the value of the vacation that you would have to give up.
Here is another example — Imagine you have $1,000 to invest. You're faced with a choice: Option A, which offers a conservative return, or Option B, a riskier investment with higher potential gains. If you choose Option A, the cost of not selecting Option B becomes your opportunity cost.
Let's say you invested in Company ABC, which returned 3%, while Company XYZ, the alternative you didn't choose, returned 8%. Your opportunity cost, in this case, would be 5% (8% - 3%).
Here is one last example — The opportunity cost of quitting work for a whole year to go back to school is the year’s worth of lost wages.
Opportunity cost can also be considered when deciding how to spend your time. For instance, if an attorney charges $400 per hour and decides to close his office one afternoon to paint the office himself, the opportunity cost is the lost wages of $1,600.
In the bigger picture, understanding opportunity cost is important because it helps make informed decisions.
3) 5 High-Income Skills that Will Stay in Demand💰
Traditional job security is no longer guaranteed. As technology advances, some career paths are at risk of automation. Acquiring high-income skills can be a great way to improve your career prospects and financial well-being. High-income skills not only promise financial well-being but also open doors to a more secure and prosperous future.
The top skills expected to remain in demand are data science, software engineering, sales, digital marketing, medicine, and law:
Data Science: Data scientists are in high demand because they can analyze large amounts of data to identify trends and patterns. This information can be used by businesses to make better decisions. Data scientists are highly sought after, with potential earnings exceeding $125,000 annually.
Software Engineering: Software engineers are responsible for designing, developing, and testing software applications. This is a critical skill in the digital age, as more and more businesses rely on software to operate. With the increasing reliance on technology, this skill offers potential earnings of $100,000 or more.
Sales: Salespeople are responsible for generating leads and closing deals. For top performers, the sky's the limit, with potential earnings exceeding $100,000.
Digital Marketing: Digital marketers use online channels to promote businesses. This is a rapidly growing field, as more and more businesses move their marketing efforts online. With experience and specialization, digital marketers can earn upwards of $90,000.
Medicine/Law: Medicine and law are two traditional careers that are still in high demand. These careers require extensive training, but they also offer high salaries and job security. Doctors and lawyers can potentially earn over $200,000.
4) 4 Home-Buying Tips to Save You Money💰
Run through all costs before starting the home-buying process:
Buying a home is a big financial decision, so it's important to be prepared. Make sure you factor in and budget for all the costs, including the down payment, closing costs, property taxes, insurance, and HOA fees. Hidden costs add up.
Buy a home below your means:
Consider homes in the suburbs, not just the city. The commute may be worth the cost savings.
It's tempting to stretch your budget when you're buying a home. But it's important to be realistic and buy a home that you can afford. This will help you avoid financial problems in the future. A good rule of thumb is to spend no more than 28% of your gross monthly income on housing costs.
Get pre-approved for a mortgage before you start shopping:
Getting pre-approved for a mortgage will give you an idea of how much you can afford to spend on a home. This will also make you a more attractive buyer to sellers.
Inspect the home thoroughly and ask for reductions after inspection:
Even if you love a home, it's important to have it inspected by a qualified professional. This will help you identify any potential problems with the home. If the inspection finds any major issues, you can negotiate with the seller to reduce the purchase price. This can save you money and ensure that you're not stuck with unexpected repair costs.
5) Beginner's Guide to Travel Insurance💰
Travel insurance can be a valuable way to protect yourself from financial losses if something goes wrong during your trip. Travel insurance is a type of insurance that covers unforeseen events that can happen before or during your trip, such as trip cancellation, trip interruption, lost luggage, medical expenses, and more.
Did you know that when you use your credit card to pay for a trip, you may be entitled to basic travel insurance benefits? Many credit cards include basic travel insurance benefits as a perk when you purchase the trip with the card. Check your credit card for which travel protections are included.
The specific coverage that travel insurance provides varies from policy to policy, but most policies will cover the following:
Trip cancellation: This covers the cost of your non-refundable travel expenses if you have to cancel your trip for a covered reason, such as an illness, a natural disaster, or a job loss.
Trip interruption: This covers the cost of your non-refundable travel expenses if you have to interrupt your trip for a covered reason, such as a medical emergency or a flight cancellation.
Lost luggage: This covers the cost of replacing your lost or stolen luggage, up to a certain limit.
Medical expenses: This covers the cost of medical care you receive while you're traveling, up to a certain limit.
Emergency medical transportation: This covers the cost of transporting you to a medical facility if you become seriously ill or injured while you're traveling.
Trip delay: This covers the cost of your additional expenses if your trip is delayed for a covered reason, such as a flight cancellation or a natural disaster.
6) Finance Book of the Week📖
Eat That Frog! by Brian Tracy is a great book for anyone who struggles with procrastination. This book is important because procrastination is a huge productivity killer. We waste too much time on low-value activities.
Procrastination can have serious consequences for our personal and professional lives. Putting things off can lead to missed deadlines, increased stress, and decreased productivity. By learning how to overcome procrastination, we can become more efficient and effective in our work, and ultimately achieve greater success.
This book is based on the idea that the most important task of the day is the one that you are most likely to procrastinate on, and that by tackling this task first, you will be able to accomplish more and feel more productive. Here are some of the tips and actionable advice from the book that I found most helpful:
Identify your most important tasks and schedule them first thing in the morning. Don't get distracted by easier, low-value activities. Focus on high-value tasks.
Use the 80/20 rule - 80% of your results will come from 20% of your activities. Focus on the vital 20%.
Break down large tasks into smaller, more manageable steps.
Eliminate distractions and focus on one task at a time.
Reward yourself for completing tasks.
7) Financial Tip of the Week🎯
Tax refunds are essentially interest-free loans to the government. A tax refund is the money that the government returns to you after you have paid more taxes than you owe. This can happen if you have too many deductions or credits, or if you have made estimated tax payments throughout the year.
Rather than get a big refund, it's smarter to adjust your withholding and get that money throughout the year. While it may seem like a windfall at the end of the year, it's important to remember that this money could have been working for you throughout the year.
When you overpay taxes upfront and wait for a refund, you miss out on months of potential investment growth or debt repayment. That money could be working for you, not the IRS. The opportunity cost of not investing for your retirement or paying down high-interest debt is too high. By not making your money work for you, you're missing out on potential returns and paying unnecessary interest charges.
8) Finance Quote of the Week 🧠
“The only thing that overcomes hard luck is hard work.”
My take: If you are willing to work hard, you can overcome any obstacle. It can be easy to get discouraged when things are tough. However, if you keep working hard, you will eventually succeed.
Consistent effort compounds over time. Small daily efforts add up. Working diligently is something anyone can do to improve their finances and their life. There will always be challenges, but unyielding diligence can overcome them.
Whether you're working towards financial success or any other goal, it's important to stay focused and persevere through challenges. Hard work is not always easy, but it is always worth it. When you work hard, you are investing in your future and creating a better life for yourself.
9) Top Finance Charts this Week📊
The US is building 460,000+ new apartments in 2023 — the highest on record:
New apartment construction is on track to top a 50-year high — Here are the cities with the most new units:
10) Did You know? 🧠
Warren Buffett, arguably the greatest investor ever, created a free cartoon series to teach kids financial basics. It’s called “Secret Millionaires Club”, it’s free on Youtube, and it features Buffett voicing his own character and sharing money tips.
Over 26 episodes, kids learn core concepts like investing, personal finance, and entrepreneurship. The show makes complex topics fun and easy to grasp.
All parents should take advantage of this excellent free series. It's a fun way for families to build financial awareness. Kids need this education, and who better to deliver it than the greatest investor himself?
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