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I’ve spent nearly 15 years working in finance, and here are the 7 best pieces of advice I can give you about money

I’ve spent nearly 15 years working in finance, and here are the 7 best pieces of advice I can give you about money

After nearly 15 years working in finance at companies such as Blackstone and Morgan Stanley, I witnessed firsthand how companies can make (and lose) money.

The good news is that the financial lessons I learned are not just for the Wall Street elite, which is why I want to share them with you.

I founded Make Lemonade to simplify personal finance and to help people make smarter financial decisions.

Here is my advice on how to make the most of your money.

1. The unexpected does — and will — happen

Financial surprises unexpectedly can impact your financial well-being. They happen to everyone, so prepare for the worst.

Your big deal may fall apart at the 11th hour. Your sure-bet investment may miss earnings. You may get outbid on your dream house.

How you react to financial surprise can be one of your most profitable financial moves.

Buy insurance. Hedge your investments. Plan for Plan B. When you have a back-up plan, the unexpected seems less devastating because you have an alternative, viable path.

2. There are no dumb questions

When it comes to your money, the only dumb question is the one you don’t ask.

It’s a cliché phrase, but relatively few people take advantage of asking all their questions.

If you don’t fully understand the merits of a financial product or service, don’t be embarrassed. Get informed before parting with your money. You are the best protector of your financial house, and asking all your questions is the smartest way to guard against misinformed financial choices.

If you can’t afford to pay off your credit card bill every month, consider another method of payment for your daily costs.OrelPhoto / Shutterstock.com

3. Be careful with credit cards

Credit cards offer compelling travel and cash back rewards, not to mention convenience. But, they can be a financial disaster if you end up with credit card debt.

If you decide to get a credit card, pay off your full balance each month. If you can’t, then credit cards are not for you.

Think of it this way: The interest rate on your credit card is likely higher than the average investment return in the stock market. If you have credit card debt, that lost opportunity cost can significantly hurt your bottom line.

4. Pay yourself first

The best person to look out for your financial best interest is you.

Pay yourself first means that you maximize your retirement contributions through your 401(k) or IRA. If you are self-employed, then open a SEP-IRA. These tax-advantaged accounts will pay off many times over by the time that you retire.

You also don’t have to choose between saving for retirement and paying off debt. Do both. Always make your required monthly debt payment, and contribute at least enough to your 401(k) to receive an employer match. Apply any remaining funds to whichever is higher – your interest rate (pay down debt) or expected investment return (fund retirement).

5. Never stop learning

Learning doesn’t stop when you graduate school. The best investors hone their skills daily. Never consider yourself a true expert because there’s always something you don’t know.

When it comes to financial advice, reading is one of the easiest ways to learn. It can also be one of your best investments.

Also, you can learn from people you work for and people that work for you. Listen intently to others. The less you speak, the better.

A mortgage on an investment property that generates positive cash flow could be considered “good debt.”Shutterstock

6. Debt is not always a bad thing

The general stigma is that debt is bad and should be avoided. Well, not necessarily.

Think of debt in two categories: good debt and bad debt. Bad debt is unnecessary debt that is accumulated through poor financial decisions. Good debt, however, can make you more money, if borrowed and repaid responsibly. A mortgage on an investment property that generates positive cash flow, for example, can be a wise decision, whereas unpaid credit card debt is not.

When confronted with a debt choice, ask yourself whether the debt you are borrowing will make or cost you money. Will the after-tax financial return be greater than the interest cost? The answer should help dictate whether it’s worth the financial risk.

7. It doesn’t matter how much money you start with

Your starting point means much less than your ending point.

When it comes to financial success, it doesn’t really matter where you come from, where you went to school, or who you know. Yes, those things can help – but they don’t prohibit you from attaining financial freedom.

If you work hard, make sound investments, spend responsibly, and save for retirement, you’ll be in good financial shape for the long haul.

Also, getting a late start won’t prevent you from achieving financial success. Ray Kroc didn’t buy McDonald’s until he was age 52. Vera Wang didn’t become a designer until age 40. Samuel L. Jackson didn’t score his first major hit until he was age 43.

So, focus on where you’re going, not where you started. Your future is what counts, not your past.

Zack Friedman is the founder and CEO of Make Lemonade, a personal finance website with free tips, tools and reviews for student loans, personal loans, investing, credit cards, mortgages and more. Follow him on Twitter.

What Millennials Need To Know About The Equifax Credit Breach

What Millennials Need To Know About The Equifax Credit Breach

If you are a Millennial with a credit report, there’s a good chance that you are one of the 143 million Americans whose personal data has been compromised from Equifax, one of the nation’s three major credit bureaus.

Here is what you need to know and the steps that you can take following this material data breach:

1. What happened?

According to Equifax, the breach lasted from mid-May through July 2017.

Hackers accessed people’s names, Social Security numbers, birth dates, addresses and driver’s license numbers.

Equifax said hackers also stole credit card numbers for about 209,000 people and dispute documents with personal identifying information for about 182,000 people.

2. How can you check if your information was compromised?

You can learn more on Equifax’s website.

To determine whether your personal information was exposed, click on the “Potential Impact” tab and enter your last name and the last six digits of your Social Security number.

For your reference, you can contact Equifax by telephone available daily from 7 a.m. to 1 a.m. eastern time at 1-866-447-7559 (for dedicated data breach call center). You can also contact Equifax customer care at 1-866-640-2273.

3. Can you obtain free credit monitoring services?

Whether or not your information was exposed, U.S. consumers can get a year of free credit monitoring and other services through www.equifaxsecurity2017.com.

This Equifax website will provide you a date when you can enroll. Return to the website on that date and click “Enroll.”

Make sure to enroll by November 21, 2017.

4. Do you waive any rights by accepting a year of free credit monitoring services?

First, it is important to note that the breach can impact your credit profile for longer than one year.

Therefore, one year of credit monitoring services may help for the short-term, but may not be a long-term solution.

For example, a Social Security Number does not expire. Therefore, you need to protect yourself on an ongoing basis.

You may want to purchase ongoing credit monitoring services so that you can receive automatic updates regarding any changes to your credit report.

Second, whenever you sign up for a service (particularly following a data breach), make sure you understand the terms and conditions of the offering.

Initially, consumers who sought to accept the free one year of credit monitoring services from Equifax were reportedly not signing up for a “free” service.

How can this be?

Equifax’s credit monitoring agreement stated that in exchange for accepting the credit monitoring services, a consumer would waive his or her right to sue Equifax subsequently in any class action lawsuit.

After meeting with New York Attorney General Eric Schneiderman’s office, however, Equifax clarified that consumers can receive the free credit monitoring service and not give up their right to sue Equifax in the future as a result of the data breach.

5. Check your credit report

Under federal law, you are entitled to obtain a free copy of your credit report every 12 months from each credit reporting company, including Experian, Equifax and Transunion.

You can check your credit report for free at Annualcreditreport.com to ensure that your credit report is in good order.

If you find any errors on your credit report, contact each credit bureau directly to remedy the issues.

6. Monitor your credit cards and bank accounts

In addition to monitoring your credit reports, make sure to check your credit card and bank account statements to ensure the transactions are legitimate.

Report any suspicious activities such as unauthorized bank withdrawals or transfers.

7. What should you do if your identity has been stolen?

You can visit www.identytheft.gov for more information.

8. Why is credit important? What if you have bad credit?

Your credit score and credit reports are essential to your financial life.

That is why it is critical to start building credit as early as possible in your financial life.

Your credit score may determine whether you qualify for a student loan, mortgage, auto loan or credit card.

Your credit score also may be used when you apply for insurance, rent an apartment or purchase a cell phone.

Even if you have bad credit, it is important to take proactive steps to protect yourself against this data breach because your personal information can still be misappropriated.

9. File your taxes early

Tax identity theft occurs when someone uses your Social Security number to obtain a tax refund or get a job.

Therefore, file your taxes as early as possible – before someone else uses your identity to do so.

10. Is a blanket credit freeze a good idea?

It may seem logical that you would want to freeze all your accounts immediately so that any unauthorized individuals cannot access them.

However, in addition to the cost, there are several issues to consider before proceeding with a credit freeze.

First, while a credit freeze can make it more difficult for someone to open a new account in your name, a credit freeze does not prohibit an unauthorized individual from making charges to your existing accounts.

Second, you need to be thoughtful whether a blanket credit freeze makes sense for your personal financial situation.

A credit freeze would immediately freeze access to all your credit information.

If you have or plan to borrow student loans or a mortgage, or plan to refinance student loans or refinance your mortgage in the near-term, then a blanket credit freeze may not be your best move.

The same applies if you are buying a car or applying for a new job, both of which may require a credit check.

Therefore, you may want to consider carefully whether a blanket credit freeze makes financial and practical sense based on your personal circumstances.

11. Read the fine print

In times of crisis, it may seem logical to sign up for every possible credit protection service and program.

However, read the fine print.

Not all services are created equally.

Be wary of email phishing and phone call scams that ask you to click on website links or request personal information.

Even if the email or caller claims to be from Equifax.

12. Where can you go for more information?

Both the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) regulate credit bureaus, including Experian.

You can check both their websites for the latest information and next proactive steps.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

 

5 Ways To Become A 401(k) Millionaire

5 Ways To Become A 401(k) Millionaire

The road to becoming a millionaire is closer than you think.

With a tax-advantaged retirement account and the power of compounding interest, you can become a 401(k) millionaire.

Here’s what you need to know.

1. Start investing early

Your company’s 401(k) should not be viewed as an optional benefit. Rather, your 401k is an essential wealth-building tool that can make you a millionaire.

Due to the power of compounding interest, the earlier you start investing, the better.

For some, that may be easier said than done.

However, if you haven’t started investing though a 401(k), it’s never too late to start.

Don’t use your past mistake as an excuse not to participate in the future.

Let’s take a look at an example to see the power of compounding interest.

We can use the Make Lemonade investment calculator to see how much a 25-year-old will have in a 401(k) plan at retirement based on annual contributions and investment rate of return.

If a 25-year-old investor invests $4,600 annually for 40 years in a 401(k) at a 7% annual return, that investor would have approximately $1.02 million at age 65.

In comparison, if a 35-year-old investor invests $10,000 annually for 30 years in a 401(k) at a 7% annual return, that investor would have approximately $1.02 million at age 65.

If you are older than 35, have not invested in a 401(k) and plan to retire at age 65, then you will need to invest more each year to try to hit the $1 million goal.

2. Contribute the maximum amount to your 401(k) annually

Pay yourself first.

Every dollar that you invest in your 401(k) is an investment in your future.

Each year, make sure to contribute the maximum amount to your 401(k).

Currently, you can contribute $18,000 per year to a 401(k).

In addition to your regular income, you can use bonuses and raises to help meet the 401(k) annual limit.

If you are 50 years-old or older, you can contribute $6,000 additional per year.

If you are not contributing the maximum amount each year, you should increase your contributions to reach your retirement goal of becoming a millionaire by the time you retire.

3. Take advantage of your employer match

If you work for an employer that offers a 401(k) employee match, this is a financial benefit that you cannot miss.

An employer match is free money.

What if you think you can’t contribute to your 401(k) because you have too many life expenses?

Answer: your expenses are too high.

Invest in your retirement first, then set your spending based on what you have left.

You also don’t have to choose between saving for retirement and paying off debt like a mortgage or student loan.

Do both.

Always make your required monthly debt payment, and contribute at least enough to your 401(k) to receive an employer match.

Apply any remaining funds to whichever is higher – your interest rate (pay down debt) or expected investment return (fund retirement).

4. Read the fine print

When you choose your 401(k) investments, don’t just throw darts at the board.

Read the fine print of each fund that is offered through your 401(k).

All funds are not created equally.

At a minimum, compare fund performance, management fees and expense ratio.

Index funds tend to have lower fees than actively-managed funds.

5. Leverage the power of compounding

The power of compounding is a powerful force that can propel you to 401(k) riches.

Here is an extreme example to show you how the power of compounding can help propel your portfolio.

What would you rather have:

    1. A penny that doubles in value every day for 30 days
  1. $5 million

Without blinking, most of us would choose $5 million.

However, you would rather have a penny that doubles in value every day for 30 days. Why?

After 30 days, your penny would have grown to $10.7 million.

Your portfolio won’t grow 100% each day for 30 periods, but this example demonstrates the positive impact that compounding can have on your retirement.

Final Thoughts: The Naysayers

Some people say that becoming a 401(k) millionaire is impossible or is a poor investment vehicle. Why?

“You can earn a higher return on other investments.”

“You won’t be with the same employer for 40 years.”

“You can’t access your money for 40 years.”

“Many employers do not offer an employer match.”

“It’s very hard to contribute the maximum amount to your 401(k) each year.”

All of these statements could be true based on your personal circumstances.

Besides a 401(k), there are plenty of other ways – and perhaps better ways – to become a millionaire, too.

For example, you can start a successful business or invest in venture capital deals.

Remember: a 401(k) is one way to become a millionaire. It’s not necessarily the only way, a guaranteed way or the best way.

However, these factors can increase your chance to become a 401(k) millionaire:

  1. Investment Amount: the more capital you invest, the more potential for growth (in a rising market environment)
  2. Time Horizon: the longer your time period, the more opportunity for growth
  3. Investment Return: the higher your investment return, the faster you can achieve meaningful wealth

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

Amazon Banks On Its $3 Billion Loan Club

Amazon Banks On Its $3 Billion Loan Club

Over the past year, in particular, it seems that Amazon is untouchable.

Credit cards. Prime Day. Cloud computing. TV shows. Bookstores.

Now, as Wall Street focuses on Amazon’s announced acquisition of Whole Foods, there is another component of the Amazon empire that may start to garner more attention.

Amazon’s lending business.

Over the past year, Amazon Lending has made more than $1 billion in small business loans to sellers on its marketplace.

Since 2011, when Amazon launched its lending business, Amazon has made more than $3 billion in small business loans to more then 20,000 Amazon sellers in the U.S., United Kingdom and Japan.

“We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success,” said Peeyush Nahar, vice president for Amazon Marketplace, in a statement. “Small businesses are in our DNA. Amazon is providing capital to small businesses to help them expand inventory and operations at a critical period of their growth. We understand that a small loan can go a long way.”

How Amazon Lending Works

On an invitation-only basis, Amazon offers short-term business loans from $1,000 – $750,000 to micro, small and medium-sized businesses that sell products on the Amazon platform. Amazon does not disclose interest rates, but they tend to be lower than credit cards.

Merchants can be approved for a loan within 24 hours, and tend to use the loan proceeds for inventory financing and business expansion.

Unlike traditional lenders that may have lengthy loan applications that require all types of documents, Amazon uses internal algorithms to invite sellers to the program based on the popularity of their products, inventory cycles and other factors.

Loans are typically repayable in less than one year, and borrowers use sales generated on the marketplace to repay Amazon in fixed monthly payments, which are deducted from the borrower’s Amazon account. There are no origination fees or prepayment penalties.

According to Amazon, more than 50 percent of the small businesses that Amazon lends to take a second loan from Amazon.

Amazing Lending: How Amazon Benefits

Among others, this business provides several benefits to Amazon:

  • Amazon earns interest income from lending to merchants
  • Third party sellers can sell more products, which adds to more commissions for Amazon (since Amazon takes a portion of merchant sales)
  • Amazon earns extra revenue by charging sellers who want Amazon to provide storage, packing and delivery services
  • Amazon can mitigate credit risk by accessing its own real-time data on seller businesses and customer reviews

Will Amazon Look More Like A Bank?

Although a relatively smart part of its business today, will Amazon scale its credit business and look more like a bank?

According to a survey of 32,715 people in 18 countries conducted by consulting firm Accenture, 31% of respondents would switch to Google, Amazon or Facebook for banking, if these companies offered financial services.

In a separate report, CB Insights found that Amazon has 86 percent customer satisfaction. This compared to Citi (82 percent), Capital One (80 percent), “all banks” (80 percent), TD Bank (79 percent) and Bank of America and Chase (each 75 percent).

The financial crisis led many traditional banks to curtail small business lending, which gave rise to alternative sources of capital from both FinTech and marketplace lenders such as OnDeck, Kabbage, Lending Club and Prosper.

Companies such as PayPal and Square use data from their payment businesses to offer credit options to merchants who may not have access to traditional forms of lending. Collectively, Square and PayPal have loaned billion of dollars to merchants on their respective platforms.

Issues For Consideration: Expansion Into Banking

The potential for further expansion into financial services raises several questions, among others:

  • The banking business is high touch. Can Amazon continue to replicate its business model built on “customer obsession” in financial services?
  • Whole Foods will represent a major entry into a bricks and mortar business. If Amazon expands its lending business to other financial products, would Amazon consider bricks and mortar bank branches?
  • Do Amazon merchants want to diversify their dependence on Amazon and seek alternative sources of financing, or do they prefer a one-stop shop for selling, lending, inventory management, packing and delivery?

Keep an eye on Amazon Lending. This synergistic business may play an increasing role for Amazon in years to come.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

Richard Branson Shares His Best Business Advice In 4 Letters

Richard Branson Shares His Best Business Advice In 4 Letters

Richard Branson loves a good challenge.

That’s why in celebration of his 65th birthday in 2015, the Virgin founder and visionary entrepreneur announced that he would complete 65 challenges – as part of the #ChallengeRichard campaign – during the coming year.

Four of the 65 challenges involved Branson writing a letter to the 10, 25, 50 and 65-year-old versions of himself.

This was the result.

Richard Branson’s Letter To His 10-Year-Old Self

Evan Agostini/Invision/AP

In My Letter To 10 Year-Old Me, Branson encouraged young Ricky to embrace the spirit of adventure and to never stop dreaming.

He told his younger self that he will face challenges – everyone does – and to not let that get in the way of achieving his dreams.

Here is some of his best advice:

  1. The spirit of adventure will keep you curious; open your mind to great opportunities; and steer you on a lifelong quest to prove that impossible is just a word.”
  2. “Never stop dreaming and creating.”
  3. Don’t ever let anyone prevent you from going after your dreams.
  4. You will face many challenges, and often feel like you don’t fit in and that you can’t always keep up. Don’t let this hold you back. Use your imagination to find inventive ways around it.”
  5. “You will make a lot of mistakes and fail time and time again. But don’t let this discourage you. Failure teaches us life’s greatest lessons, and often shows us a better way of doing things.”
  6. Above all, always remember to have fun.”
  7. As you grow older you will realise just how important it is to do what you love and love what you do. Don’t waste your time doing things that don’t excite you.”

Richard Branson’s Letter To His 25-Year-Old Self

Alex Wong/Getty Images

In My Letter To 25 Year-Old Me, Branson encouraged his younger self to stick with his new company, Virgin. He warned himself about the bumps ahead, but to focus on his goals – even in the face of adversity.

Branson also wrote about the importance of learning from mistakes, and transforming challenges into opportunities.

Here is some of his best advice:

  1. “The road ahead is pock-marked with many bumps, chasms and forks. There will be times where you want to give up and throw everything in. Don’t. By turning challenges into opportunities, you will find success you never realised you were capable of achieving.”
  2. But you won’t always succeed. In fact, you will fail time and time again. That’s ok though, because failure is an inevitable part of every personal and entrepreneurial journey.”
  3. It’s important to pick yourself up, retrace your steps, look at what went wrong, and learn from your mistakes.
  4. “Continue to take chances. In the future how ‘lucky’ you are in business will be determined by how willing you are to take calculated risks.”
  5. “Don’t let the naysayers deter you.
  6. Don’t be afraid to delegate responsibility.
  7. Your ability to take calculated risks and your incurable optimism will lead to great heights – both in business and in life.

Richard Branson’s Letter To His 50-Year-Old Self

AP Photo/Ted S. Warren

In My Letter To 50 Year-Old Me, Branson – who is known among some Virgin staffers as Dr. Yes (due to his proclivity to say “yes” almost automatically to good ideas) advised his younger self to make a greater social impact and a positive difference in people’s lives.

Here is some of his best advice:

    1. You’ve never gone into business to make money, but instead always wanted to make a positive difference in people’s lives.
    1. It’s up to all of us to create the world we want to live in, and we can if governments, businesses and individuals work together.
    2. If you need more incentive to act, think about your children.
    3. Passionate people are happy people. The future needs passionate, happy and confident young leaders, willing to challenge the status quo and stand up for their convictions.
    4. Plus life is more fun when you work with your family and friends.
  1. “…the sky is no longer the limit and the future will be so bright, if you continue to look for opportunities where others see challenges.
  2. Just remember, whatever you do and wherever you go, make sure you place purpose at the heart of your words and actions.

Richard Branson’s Letter To His 65-Year-Old Self

AP Photo/Abraham Caro Marin

In My Letter To 65-Year-Old Me, Branson tells his present-day self that it’s a great time to be alive.

The self-described “Tie-loathing adventurer, philanthropist & troublemaker” believes strongly that business can be a force for good.

Branson writes specifically about the world he wants to live in, but recognizes that there is much more to do.

Here is some of his best advice:

  1. Yes, the human race is currently facing so many challenges, but the spirit of entrepreneurship is flourishing, and doing great things to work towards creating a world where all people and the planet thrive.
  2. “Keep having fun, taking risks and looking for the best in people.
  3. “Keep dreaming big and saying yes to your heart’s desires.”
  4. “Keep looking at the world with wide-eyed enthusiasm, and believing that together we are more powerful than the problems that confront us.”
  5. “Keep your zest for life, passion and the fire in your belly – always remembering Steve Jobs’ words: ‘The people who are crazy enough to think they can change the world are the ones who do.’”
  6. Most importantly, keep immersing yourself in the world – it will always be the best way to learn and look forward.
  7. Now is no time to slow down; your best years are still yet to come – so keep your body and mind active, and love in your heart.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

What To Do If You Win The Lottery

What To Do If You Win The Lottery

If you win the next Powerball drawing, you could walk away with $650 million.

It’s easy to imagine how you might spend all that money.

Before you start spending your impending fortune, however, it’s important to ask yourself one question.

What do you actually do if you win the lottery?

Here’s what you need to know and how to execute your lottery financial game plan:

1. Sign the back of your lottery ticket

It sounds so simple, but it is the easiest step to take for granted.

Despite the advent of technology, you still need to sign the back of a winning lottery ticket.

Why? Like a check, a lottery ticket is considered a bearer instrument.

Whoever signs the winning lottery ticket and presents a valid photo ID can claim the lottery prize.

So, sign your ticket right after you purchase it so you protect yourself in case you lose your winning ticket.

2. Choose a one-time, lump-sum payment or installment payments

You have 60 days from the day you present your winning ticket to determine how you want to receive your prize.

You have two choices when you win the lottery: you can receive a one-time, lump-sum payment or 30 installments over 29 years.

If you choose the lump-sum payment, you will receive your prize winnings upfront, and immediately will owe income tax on the full amount.

If you choose the installment plan in the form of an annuity, each installment payment will be taxed.

Which should you choose?

It depends in your personal preference.

Financially, a dollar today is worth more than a dollar tomorrow. If you choose the lump-sum payment, you have the peace of mind of receiving all the funds today and can invest the proceeds to earn a financial return.

However, if you prefer to set an allowance for yourself to help control spending, an annuity payment plan can help instill fiscal discipline.

You should compare the after-tax proceeds and your intended investment return (lump-sum payment) with the after-tax annuity payments and intended investment return (installment payments).

Overall, you will want to consider the time value of money — that is, how much you can earn under each scenario comparing the timing of the payments that you receive.

3. Assemble your financial and legal wolfpack

If you win the lottery, you may need help managing your new fortune.

It is critical to have a team of trusted advisors to help you manage an array of investment, accounting, tax and legal issues.

Expect to be approached by just about every type of advisor who wants to lend a helping hand.

Invest the time to make careful selections about who you want in your inner circle. Not all advisors are created equally, so you will want to vet personally each new advisor you retain.

Don’t outsource this function. It’s your money, and you need to protect it.

You should interview each prospective candidate, and make sure he or she understands your goals.

Make sure to check their credentials to ensure they are properly licensed.

Advice is not always free so make sure to understand their fee arrangements before you retain them.

Most importantly, hire a team that tells you “no.”

The last thing you want is a team that says “yes” to every time you want to spend money on large purposes.

It’s your call how you spend your money, but it’s helpful to have a team that gives you honest advice even if it’s not what you want to hear.

4. Don’t abandon your budget

Wait, you just won hundreds of million of dollars. Why would you still need a budget?

Financial discipline doesn’t go away when you become a millionaire.

You may have more money, but that doesn’t mean the same principles of personal finance do not apply.

With more financial resources, there may be more things to purchase.

That’s why budgeting is even more essential.

Develop an action plan that accounts for your monthly and annual spending. Categorize your major expenses. Understand your income sources.

One strategy to instill financial discipline is to live off your income, not your prize winnings.

Therefore, you can preserve principal.

5. Take care of your heirs with an estate plan

If you have an existing estate plan, now is the time to update it.

If you have never put one together, now is the time to create one.

When you win the lottery, or have any major life change, it’s essential to ensure that your estate plan reflects your new reality.

With an estate plan, you will want to protect your estate, institute tax planning and consider how to provide for your heirs.

6. Say goodbye to your debt

It’s time to go debt-free.

If you want complete peace of mind, pay off your mortgage, student loans, credit cards, personal loans and anyone else to whom you owe money.

That’s the easiest path to financial freedom.

But before you do that, evaluate your current financial obligations and future needs.

Not all debt is bad, however.

For example, you may have a low interest rate loan that makes financial sense if you can invest other assets in higher yielding investments.

Therefore, consider your debt in light of your larger financial plan.

7. Choose charities that are important to you

The lottery can help change your life.

You also have the power to change the life of others.

There are countless charitable causes in which you can have a meaningful impact.

Choose the charitable causes that are most important to you, and work with your advisors to choose the most reputable charities to support.

Your advisors can also help you develop a charitable trust or other tax-efficient vehicle to give back.

Powerball Lottery Q&A

How do you play Powerball?

Choose five numbers from 1 to 69 and one Powerball number from 1 to 26. You can also select Quik Pik and the numbers will be selected automatically for you.

Where can I play Powerball?

The Multi-State Lottery Association administers Powerball across 44 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands

How much does it cost to play Powerball?

Each ticket costs $2.

Is there a limit to the number of tickets I can purchase?

No.

What are the odds on winning the Powerball jackpot?

The odds of winning the Powerball jackpot are about 1 in 292 million.

What are the odds of being struck by lightening?

About 1 in 700,000.

If there is no winner and the jackpot increases, what are the odds of winning the next Powerball jackpot?

The odds always remain the same at about 1 in 292 million, and do not change based on the dollar size of the Powerball jackpot.

Is this the largest Powerball jackpot in U.S. history?

No, this is the second largest Powerball jackpot in U.S. history. The largest Powerball jackpot in U.S. history was about $1.6 billion in January 2016, which was split among three winning tickets.

Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.

5 Investment Strategies To Win Like Soros and Icahn

5 Investment Strategies To Win Like Soros and Icahn

George Soros. Carl Icahn. Dan Loeb. Steve Cohen. Stan Druckenmiller.

Titans of the hedge fund investment world.

Soros brought down the Bank of England. Icahn won big on Herbalife. Dan Loeb forced change at Yahoo.

The secret to their success?

Here are five investment lessons from these legendary hedge fund investors that you can apply to your investment portfolio today:

1. Develop an investment thesis

An investment thesis is the underlying reason why you are investing in a stock. With the exception of momentum traders and quants, most hedge fund investors develop an investment thesis before they deploy capital. For example, the investment thesis can mean the stock is undervalued and underappreciated by investors or there may be a catalyst such as a potential take-out acquisition on the horizon.

Hedge fund investors conduct rigorous fundamental research, build financial models and identify catalysts that will propel the current share price toward their target share price. They don’t invest blindly based on stock tips from a broker or a news article. Rather, they invest in sectors and companies they understand and where they have done their homework.

Warren Buffett, although not a hedge fund investor, only invests in companies he understands. If he can’t understand the business model, he passes on the investment opportunity.

Key Takeaway: Only invest in companies you understand. Develop a thesis of why you are investing. Do your homework and understand the numbers behind the company’s products and services. 

2. Risk-Reward

In a bull market, it’s easy to expect that a company’s share price will rise 10%. However, hedge fund investors don’t think of investments as a unidirectional bet. Rather, each investment has a risk-reward ratio. If an investor is long a stock, the reward is the probability that the share price will rise, and the risk is the probability that the share price will fall. Share prices rise and fall for several reasons, including financial performance, company or industry news, competitor dynamics, analyst ratings and other factors.

Before you invest, assess the probability of the risk-reward of each investment. You can develop the reward-risk ratio by reading analyst research, reviewing the company’s public filings and management presentations, or developing your own financial projections.

For example, if you think that there is a 50% probability that a share price could rise or fall, that’s probably a poor investment choice. Since the reward-risk ratio is 1:1, it’s no different than flipping a coin.

Key Takeaway:  Look for investment opportunities where the reward-risk ratio is at least 3:1, meaning the upside potential is three times greater than the downside potential of the company’s share price.

 

Chairman of Icahn Enterprises Carl Icahn participates in a panel discussion at the New York Times 2015 DealBook Conference at the Whitney Museum of American Art on November 3, 2015 in New York City. (Photo by Neilson Barnard/Getty Images for New York Times)

3. Concentrated Bets

You’ve probably  been advised repeatedly that you should maintain a diversified portfolio to protect against one company adversely impacting the rest of your investments. For many investors, particularly those who are risk adverse, investment diversification is their best bet. An index fund or ETF that invests in the broader stock market, such as the S&P 500, can provide ample diversification.

While it depends on the hedge fund, some hedge fund investors maintain a concentrated portfolio of 10-15 stocks. Why? These investors have strong conviction in their investments, supported by financial analysis and independent research.

Key Takeaway: Understand and assess your risk tolerance. Concentrated bets have the potential for outsized investment returns – up or down.

4. Hedge your bets

Like its name suggests, hedge funds typically are not 100% long the stock market. Rather, they employ some form of financial protection to guard against share price declines due to market or company-specific events. Depending on market factors, some hedge funds are 80% long (and 20% short) while other hedge funds are market neutral (meaning they are neither market long or market short).

Hedge funds use all types of hedging strategies. Some include:

  • Buying a put option to protect against a long position
  • Shorting a competitor of the stock they are long
  • Longing an industry leader and shorting an industry laggard
  • Longing an undervalued stock and shorting an overvalued stock

Key Takeaway: Protect your investments with some form of a hedge. Before shorting a stock or using options, however, check with your investment advisor and be sure you understand all the inherent risks associated with these strategies.

5. Cut Investment Losses

No investor is perfect. The best investors are often wrong, despite all the research and financial analysis. However, when they are wrong, they know when to cut their losses. Yes, you may sell the stock and the share price could then rebound. But instituting discipline in your investment process will save you money in the long-run.

Key Takeaway: Develop your own threshold to sell a stock when its share price falls. One rule of thumb is a 10%-15% decline below your purchase price. You may have a threshold that is higher or lower, but choose a loss rate that works best for your investment needs and stick with it.

 Zack Friedman is a former hedge fund investor and the founder of Make Lemonade, a personal finance platform which also offers free and unbiased advice to over 40 million borrowers to manage, repay and save money on their student loans. Follow Zack on Twitter and read his columns in Forbes.

How Warren Buffett Made $12 Billion In One Year

How Warren Buffett Made $12 Billion In One Year

Warren Buffett made $12 billion in 2016 and reclaimed his position as the second richest person in the world, according to Forbes’ billionaire rankings.

How did he do it?

There are three primary reasons behind his investment performance, which helped increase his net worth to $74 billion.

1. The Election

Although Buffett supported Hillary Clinton during the 2016 election, and even provided free trolley rides for voters to travel to the precincts, it was Donald Trump’s victory that helped propel a broad stock market rally. Buffett’s Berkshire Hathaway, which has gained 11.5% since election day on November 8, captured nearly half its share price increase in the two days after the election.

But, the broader stock market rally doesn’t explain the whole story. Buffett’s underlying stock picks may provide guidance for your investment portfolio selections heading into 2017.

2. Bank Stocks

Buffett has been a long-time fan of banks and other financial services companies, including Wells Fargo, American Express, Bank of America, Goldman Sachs and others. Let’s look at Bank of America as an example. In 2011, Buffett invested $5 billion in Bank of America in exchange for $5 billion of preferred stock and warrants to purchase 700 million shares of Bank of America stock at an exercise price of $7.14 per share. At the time, Bank of America traded at about a 50% discount to tangible book value. Today, Bank of America’s share price is $22.45 and trades at about a 30% premium to tangible book.

Why have financial stocks as a sector risen almost 17% since the election?

 

President-elect Trump’s agenda to deregulate the banking industry, lower taxes and increase infrastructure spending are all positives for bank stocks. Further, if the Federal Reserve continues to raise interest rates in 2017 (following its rate increase this month), banks will earn more net interest income, which increases earnings. Since the financial crisis, banks have been focused on expense reduction and maintaining adequate regulatory capital. This led to a curtailment of certain lending activities and a retraction in risk taking. Under a pro-growth Trump presidency, particularly one with less regulation, banks could look to redeploy excess capital and augment lending.

Heading into 2017, per the latest public filings as of September 30, 2016, Buffett’s top 5 bank and financial services holdings include: Wells Fargo, American Express, U.S. Bancorp, Moody’s and Goldman Sachs.

3. Airline Stocks

Buffett also disclosed this quarter that Berkshire invested in three airlines: American Airlines, Delta Airlines and United Continental Holdings. CNBC confirmed in November that Berkshire also holds a position in Southwest Airlines.

An investment in the airline sector is a rarity for Buffett, who has historically shunned airline stocks due to significant capital requirements and low investment returns. Not to mention that since 2000, dozens of airlines have filed for bankruptcy protection, including American, Delta and United. Buffett initially lost money in a $358 million preferred investment in USAir in 1989 (the value dropped to $89.5 million by 1995), although his investment later recovered and proved profitable.

That said, Berkshire has invested in the aviation sector, including holdings in NetJets (which sells fractional ownership in private jets), Precision Castparts (an aerospace parts manufacturer) and FlightSafety (a pilot training company).

A bet on airlines may signal Buffett’s belief that airlines stocks are poised for a performance turnaround in 2017 after a relatively flat 2016 before rising about 15% post-election.

The consolidation in the airlines sector – United and Continental, American and U.S. Airways and Delta and Northwestern – has reduced the number of carriers and helped bring more financial stability to the sector. Consolidation has also helped mute airline capacity expansion, which historically hurt airline profits.

If Buffett believes that economic growth will outpace airline capacity, airlines may stand to benefit.

To learn more about investing, Make Lemonade offers investing tips, tools and hacks to improve your bottom line.

Zack Friedman is the founder of Make Lemonade , a personal finance platform which offers free and unbiased advice to over 40 million borrowers to manage, repay and save money on their student loans. Follow Zack on Twitter and read his colu mns in Forbes.