Personal finance: How to manage money during the pandemic | Managing Your Finances During a Pandemic.
Times of crisis can bring uncertainty for many reasons, and the current coronavirus pandemic is no exception.
Whether you have experienced a change in your financial situation because of layoffs, reduced hours or wages or through increased medical expenses, it is important to take stock of where you are and make a plan to ensure financial success now and in the future.
Many organizations are offering support to those impacted by the coronavirus. Knowing where to go for help, what to ask, and how to document your situation is key to successfully managing your finances and recovering once the crisis is over.
Steps to help you manage your money during and after a pandemic.
1. Analyze Available Resources.
If there is one upside to the current situation, it’s that many programs are being offered to help consumers stay healthy, both physically and financially. Identify all available resources and take advantage of those that fit your needs. Beyond any savings you may have put aside for emergencies, community resources, like the ones below, could help you bridge a temporary income gap:
Military relief societies are offering grants or zero-interest loans for service members affected by coronavirus. Contact Army Emergency Relief, Air Force Aid Society, Navy-Marine Corps Relief Society, or Coast Guard Mutual Assistance for more information.
Depending on your situation, you may qualify for unemployment benefits. Check with the Department of Labor in your state for eligibility criteria.
Many banks and financial institutions are offering to help consumers impacted by the coronavirus. Contact your individual lenders to find out what is available to you.
Many school districts are providing free meals for children at school pick-up locations or bus stops. Contact your local school to find out whether this is an option where you live.
National and local service providers have a variety of assistance options, from payment plans to free services. Visit 211 from United Way and scroll down for available resources.
2. Create a Priority-Based Spending Plan.
Once you’ve identified resources you qualify for, evaluate your budget and create a priority-based spending plan. Consider all sources of available income and make a realistic list of your expected monthly expenses, prioritizing the "must-haves."
These are things like rent or mortgage, food, utilities, insurance, transportation and medication. Then, do the math. If your adjusted income adds up to less than your total monthly expenses, anything that is not a priority item will need to be deferred as much as possible until the crisis is over and your financial situation changes.
3. Contact Your Creditors.
If you cannot meet all of your financial obligations, contact your creditors to ask for assistance. Some programs are already in place to help stop evictions and foreclosures, so whether you are a renter or homeowner, contact your landlord or mortgage servicer right away to ask for help.
The same goes for providers of automobile, student and personal loans, including credit cards. Creditors might offer reduced payments and fees, deferred payments through forbearance, or other hardship plans.
When you talk with your creditors, be sure to take notes. Write down.
The date and time of your call.
The name of the representative you spoke with.
What you were offered.
How information will be reported to the credit bureaus.
The plan you ultimately agreed on.
Once you agree on a plan, put together a letter summarizing your discussion and mail it to the creditor. Then, monitor your monthly statements to be sure you are receiving the assistance you discussed.
4. Recover Strong.
Although it is difficult to think about future emergencies when you are in the middle of a crisis, consider making a financial recovery plan for once things get back to normal so that you are prepared to handle the next emergency that may arise.
Once you are back on your feet, revisit your monthly budget and commit to regular savings to build or rebuild your emergency fund. Start gradually and set a goal to save $1,000, then keep saving until you have three months of your living expenses put away to handle future emergencies.
If you have debt, consider implementing a rapid repayment plan to pay it down or consider talking with a credit counselor to see if a debt management plan is right for you.
And please remember, these are unprecedented times, and although you may feel alone, everyone is affected by the current pandemic. Take steps to safeguard your physical, emotional, and financial health, and reach out if you need assistance.
Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.
So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.
Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.
Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”
Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.
“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin
Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.
According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”
Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”
Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust, said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”
Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.
Bumps Along the Way
Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”
Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).
“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar
“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”
Cryptocurrency Risks.
Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.
For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.
Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.
The Way Ahead?
Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?
According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”
“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach
Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”
Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”
“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch
Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”
Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”
How the Blockchain Will Impact the Financial Sector.
Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.
So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.
Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.
Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”
Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.
“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin
Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.
According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”
Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”
Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust, said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”
Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.
Bumps Along the Way
Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”
Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).
“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar
“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”
Cryptocurrency Risks.
Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.
For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.
Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.
The Way Ahead?
Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?
According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”
“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach
Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”
Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”
“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch
Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”
Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”
Whether you're buying or selling a property, a quality real estate agent is vital to make the process run smoothly. Seek out an agent with excellent credentials and references. Meet with a handful of agents to make sure any Question : s you have are answered. Watch out for potential red flags. Agents who charge very low costs or only work part-time may not be reliable.
Part 1 Finding an Agent with the Right Credentials.
1. Look for someone who does at least 1 or 2 transactions every month. When reviewing an agent's credentials, look for someone who's been working in sales, negotiations, and contracts for at least five years, preferably in real estate or property management. Five years experience and a regular stream of transactions means an agent likely has a good feel for the process and can help find you the best deals.
Agents with less experience can still be a good choice if they know you and the area well, especially if they demonstrate a great work ethic and strong customer service skills.
2. Find someone who works in your area. The agent you work with should know the area in which you're looking to buy or sell. Agents who live and work in your area will be aware of the best neighborhoods and trends regarding prices. A local agent will also know small details, like where the best schools are, commute times, and so on.
3. Check the agent's license. Obviously, you want an agent who's properly licensed. Every state should have a list of licensed agents online. While making a list of agents to contact, check to ensure every agent you interview has a legal license to buy and sell real estate in your state. You can also see the continuing education classes they are taking which will help you to know what their focus is.
4. Look for awards and honors to help narrow your choices. Check a real estate's website and resume for awards, honors, and other signs of recognition. Things like a "Realtor of the Year" award can be a sign of a quality agent who's likely to exceed your personal needs. However, realize that it may also indicate a very busy Realtor who may not be the right choice if you'd like more individual attention and you may need to base your decision on other indicators.
5. Ask friends and family members for referrals. If you know someone who recently bought or sold a home, reach out to them. Friends and family members are likely to give you honest assessments of their experience with a particular agent.
However, be cautious about choosing an agent ONLY because a friend or family member recommended them. Your real estate needs and what you desire in a Realtor may be different so make sure you understand what exactly your friends or family's objectives were and what specifically they liked about their Realtor. Ask about any hesitations the person has recommending the agent as well. This way, you'll get a sense if the agent has any major flaws that would be a deal breaker for you.
Part 2 Interviewing Real Estate Agents.
1. Ask how long they've been in business. When interviewing a real estate agent, one of the first Question : s to ask is how long they've been handling sales, contracts and negotiations for clients. They should be able to answer the Question : quickly and accurately. Remember, while five years of experience is ideal, someone with less experience who otherwise meets your needs may still work if you've developed a good rapport with them.
Also, ask how long the agent's been working in your area. Even better, ask if they live near the area. An agent with extensive experience may not be the best choice if they are not familiar with your particular area.
2. Ask if they work alone or in a team. Agents who work alone are best if you want a lot of personal contact with the agent. Agents who work on a team are good if you like the idea of specialists for each step. The agent you hire may actually be a team leader who will then introduce you to a transaction coordinator, assistant, or buyer's agent who will handle those parts of the transaction.
Agents who work alone are more likely to walk you through each step themselves and more likely to reach out frequently by phone or even in person.
3. Ask about any planned vacations or other commitments. Real estate often requires quick action and response time. If a Realtor has a vacation planned soon or some other commitment that might interfere with their availability, you need to decide whether this will affect you buying or selling a property. Make sure they have someone to help you out if they will have an extended absence.
4. Ask about what other properties they've sold. In addition to looking at current properties online, have the agent show you some of the other properties they've sold. Make sure these properties are similar to what you're looking to buy or sell. It's vital to pick an agent who works with the right properties for your needs. If the agent is typically used to working at a higher, or lower, price point, they may not understand your particular transaction as well.
If you're selling a home, ask where the home will be featured. The main places you'll need to be is on the MLS and the big online sites (Realtor.com, Zillow, Trulia, etc...). Other sites, including the agent's personal website aren't as important. Also, beware of an agent who wants to keep your house off the MLS for any reason. Unless you are selling a luxury home, the MLS is where most buyers, and their agents, are. "Pocket" listings or similar are generally suggested when an agent wants to market your house first to their own investor clients or to others in their brokerage, but limiting the exposure is almost never a good option for you as a seller.
5. Contact their recent clients. Ask for a list of references after meeting with an agent. A quality agent will not hesitate to hand you a list of recent clients for you to call to ask about their experience. Call a few references for every agent you interview to make sure they have stellar reviews. Don't put too much stock in online reviews. Most people will give a 5 star review in exchange for a Starbucks gift card and a single bad review may not tell the whole story (ask the agent if you're concerned).
6. Make sure you get along with the agent. Chemistry is important in real estate. If you're working with someone who you don't get along with, this can cause unnecessary tension during an already stressful process. Make sure you click with the agent and feel comfortable in their presence.
Part 3 Watching for Red Flags.
1. Avoid agents who don't answer their phone or return calls. A good real estate agent considers their work a full-time job and knows that weekends and evenings can be the busiest times. In real estate, every day is a "business day" and if crucial items come up on evenings or weekends, you need an agent whom you can reach. An agent who isn't available throughout the day may not be your best option.
If an agent does not answer during "regular business hours," you may have an agent who is doing real estate on the side. Their "day job" may not allow them to give you the attention you deserve.
Conversely, an agent who doesn't answer evening or weekend calls, or worse yet, has a voicemail that states anything about "the next business day," may not be available when you need them.
2. Stay away from agents who don't know the area. If an agent does not work in your area, or cannot readily provide information about the area, this is a bad sign. A quality agent should be able to quickly rattle off things like neighborhoods, general price ranges, nearby businesses, and so on. If an agent cannot provide specific details about an area, you may want to find someone who knows it better.
3. Check that lower commissions don't mean fewer services. Typical commissions are usually between five and seven percent. When agent offers a lower commission, make sure they aren't offering you less service than higher commissioned agents. Before signing a contract, verify that all of their promises are in writing.
When buying, you don't usually have to worry about the commission because the seller generally pays both sides (buyer and seller) so focus instead on customer service and contract knowledge.
Community Q&A
Question : I'm looking for a great real estate agent in Bergen County, NJ. How do I find someone who is experienced with contingency, since we are selling and buying?
Answer : Your best option is to ask someone you know for a recommendation. Another option is to drive around your community to see which agents are listed on for sale signs so that you can contact them. You can also search for agents online. Ask your potential agents if they have experience working with buyers who are also selling a home. Finally, ask them for references from previous clients who've gone through the same process.
Question : I'm a first-time home buyer. What should I expect from a realtor, other than finding me a home?
Answer : First-time home buyers have some special benefits when buying a home. Your agent should spend time reviewing these, your needs and wants, and discussing your financial strength (down payment, deposit money, the closing cost, etc). On top of that, you have to consider property taxes and home insurance. Once you're comfortable, you'll be referred to a mortgage broker, if you don't already have one. Once you get pre-approval, the search for the home with the best fit for your finances and needs will begin.
Question : How do you tell an agent you do not want their services any longer?
Answer : Let them know over the phone you want to go with a different agent. Thank them for their time, but explain to them it's simply not working out.
Question : My realtor agent is being really pushy. How can I tell if they are only in it for the money?
Answer : A pushy agent is usually a bad sign. A good agent will want you to have a good experience renting from them and will be willing to give you time to think it over.
Question : How much does a real estate agent cost?
Answer : If you are listing your property then the listing agent charges a percentage commission to list, market and advertise, show, and negotiate through the process of selling your home. If you are a buyer looking for a home with a buyer's agent, you don't pay your real estate agent directly. The buyer's agent receives their commission through the seller's transaction for getting a buyer for their home which is based on the percentage set by the listing agent.
Question : How can I get a 3-month contract for selling my home? It is hard to find anyone willing to work hard enough to do this?
Question : Answer : The length of listing agreement is negotiable between you and the real estate brokerage. Since you are the owner and you are the one who is hiring and paying, it should be your decision as to how long you want to be in agreement. However, allow sufficient time to market your property and get you good price. If your realtor is not doing as agreed or if you are not satisfied (obviously some solid reasons for that), you can always cancel or terminate your listing. Some agents only suspend your listing, hoping to win back your listing. Insist for getting it terminated and find the right agent.
Question : Is it advisable to use the same agent to sell your home as well as buy a home?
Answer : It can be a big benefit because your listing agent will have all of the necessary information to keep the buying side of the new home going along smoothly. A lot of agents who have a seller who is also buying with them will negotiate their commission differently since they will be getting paid on two sides.
Tips.
If the Realtor has an assistant, this could mean they'll have more time to focus on your needs rather than paperwork. However, make sure that the assistant won't be undertaking work that you expect to have done by your agent.
If you're interested in investing but don't want to go at it alone, you can join an investment club or even start one of your own. An investment club consists of members who study stocks, bonds and other investments. The goal is to have each member take an industry and report to the group why they think it is a great investment. Knowledge is power, and wisdom from many helps assure success. Many times they will pool their money together in order to make joint investment decisions. It's a great way to give and get wisdom. Working with others will help you and others make intelligent investment decisions.
Part 1 Getting Your Club Together.
1. Find potential members for your club. They can be local, so you can meet in person, or they can live far away, and you can meet online. Aim for a club with 10 to 15 members, but anything from six to 20 is workable. When you have fewer people you might have trouble getting enough funds together to invest (some investments favor the larger investor). However, with a large group, both maintaining high-quality discussions and finding a place to meet become concerns.
Spread the word. Tell family, friends, and co-workers about your club-in-the-making. Put together a flyer describing what you have in mind, and pass it out, post it on message boards, send it through e-mail, etc.
2. Hold a preliminary meeting. Get together with the people who are interested, provide snacks and refreshments, and discuss the formation of a club.
Define goals. Are people more interested in the club for its educational value, or for the financial returns? Are they interested in short-term or long-term investing? (Most investment clubs use a buy-and-hold strategy.) Will your members share a general investing philosophy and approach?
Determine how much each member can contribute financially.
If people make different contributions, their returns should be proportional.
You can either pool your investment funds and invest together (a common practice) or invest through individual accounts (self-directed).
Consider starting your club through BetterInvesting.org, an organization that can provide education, support, and online tools and resources for your club.
Determine if your club needs to register with the SEC. You can find more information on the U.S. Securities and Exchange Commission at: https://www.sec.gov/investor/pubs/invclub.htm
3. Gauge member interest level. In other words, decide whether you really want to invest with these people. An investment club will involve significant risk for those involved. The risks, and consequently the rewards, are shared among all members. This means that everyone involved should be equally interested and participate similarly. Be on the lookout for red flags among your potential members. For example, consider carefully members that might.
4. Hold an organizational meeting to iron out the details. Have another get-together with the people who are still interested to discuss and implement the club's policy and organization. The first step should be to decide on an official name for your group. Next you'll want to decide when and where to meet (a living room, library, church, or coffeehouse, depending on the size of the group). Meetings should last an hour or two. After defining these basic rules, consider also doing the following.
Defining and appointing roles within the club (president, secretary, treasurer, investor). What are their responsibilities? The terms should be one or two years, and the treasurer should have an assistant who can move up later.
Writing out how the club will manage payouts, divestiture (reducing assets or investments), or dissolution.
Laying out the policies on gaining new members and figuring out what happens when a member wants to leave the club.
5. File the necessary paperwork. In order to pool your money and invest together, you will need to incorporate your investment club into what is known as a general partnership. You will have to write out the rules of this partnership and its operation and have each member sign it once you all agree.
You should also write a club operating agreement. This would outline all the policies discussed in the previous meeting and should be signed by everyone in the group (as well as others who may join later). There are sample contracts and agreements available online and in books.
To pay taxes, you also have to apply with the IRS for an Employer Identification Number (EIN) and file a "Certificate of Conducting Business as Partners" form with a local jurisdiction (such as a Secretary of State office). Contact your local jurisdiction (city, county, or state) for more information.
Part 2 Investing with Your Club
1. Open a brokerage account or bank account. Most clubs start with both a checking and a brokerage account. Choose a broker who suits your needs (full-service, discount, or online). A full-service broker will provide advice and may attend a few meetings, while a discount or online broker will leave you to your own devices. Many investment clubs end up choosing the latter.
2. Develop an educational agenda. In most cases, investment clubs are formed by people who are still learning about investing. Not everyone is on the same page in terms of his knowledge base. Ask each member what big Question : s they have about investing. Having them submit Question : s anonymously is a good option. Choose the topics you feel should be addressed as a group. Make a "syllabus" and decide who will be doing the research and presenting the topic to the group.
You may also wish to provide a list of good, reliable sources for research. In general, you should stick to reputable financial news services and online investing encyclopedias.
3. Research potential first investments. After a period of time, when contributions to the club have been made by group members, you're ready to start looking at first investments. Have each club member research potential asset purchases like stocks, mutual funds, or investment properties and defend her choices with research. Then, you can have the group vote on their favorite choices and determine how much money to allocate to each.
Remember to keep some of your initial money uninvested in case the market presents an opportunity.
4. Invest as a group. Finalize your choices for your first investment and take the plunge. As your club continues operating, evaluate new and old investments during your regular meetings. These will typically be held once a month, although market conditions may dictate more frequent gatherings. In these meetings you should also:
Review club finances (overall gains or losses, individual investment progress and cash balance available for investment).
Make sure you have designated a single, trustworthy member who has the authority to buy and sell on behalf of the club.
5. Have fun. Celebrate your victories and commiserate your losses. This is one of the biggest reasons people join investment clubs. You could even set aside some of your gains for group outings or events. The idea is to keep everyone entertained and involved in the group so that they keep contributing funds each month and don't get bored over time.
Community Q&A.
Question : Can a group of my friends start a club where we focus on trading Futures contracts?
Answer : Yes, you can focus on any sort of investment you like. Find a full-service broker who's very experienced in that area unless you know what you're doing, in which case you can use an online brokerage.
Question : I have an existing Investment Club of 20 years and now our broker is asking for an updated membership list. We have had numerous changes in membership that we have not made officially through our by-laws. What should we do?
Answer : It is not necessary for your by-laws to list your members by name. It's a good idea, however, to keep a current membership list. Let it include identifying information such as Social Security numbers. Share that list with your broker. He may be required by law to have that information on file. If your club has a secretary or treasurer, it can be that person's responsibility to keep your membership list current along with all individual contributions and earnings.
Question : Can whole life insurance be a viable investment tool for investment clubs?
Answer : No. Life insurance could potentially be a decent investment for an individual but not for a group.
Question : We are forming an investment club for stocks, real estate, etc. How do we register and what type of account do we need?
Answer : "Registration" is not necessary. You are simply private parties making private investments. If you'll be making group purchases, you'll want a checking account for the club, as well as trading accounts with one or more brokerages. (You don't have to work exclusively with one broker.)
Question : Why, when we leave the investment club, do we only get 95% of our money?
Answer : Read the by-laws of your club. There may be a provision stating that the club retains 5% of your money for maintenance purposes.
Question : In this era where investing in stocks is highly risky, what other investment windows would you advise?
Answer : Bonds are usually considered to be less risky than stocks. You can invest in certain mutual funds that own an array of bonds. Some mutual funds invest mainly in stocks, and that's a way of diversifying your stock investment and taking on less risk. Money-market instruments such as certificates of deposit (CDs) are safe investments, but they don't pay very much interest. Unfortunately, that's usually the case: the safer the investment, the less it's likely to pay you.
Question : There are six of us. We want to pull our funds together each month and ultimately invest it. Would we need to register our group as a limited partnership the state's secretary of state office?
Answer : Probably a general partnership. Re-read Part 1, Step 5 above.
Question : Are we limited as a group to investing in stocks, bonds and real estate? Can we also invest in things like buying and selling cars, boats, auctioned-off storage units, estate sales, etc.?
Answer : A club is free to choose its own investments without restrictions.
Question : How should the profits be shared among the club members?
Answer : Profits are commonly shared in direct proportion to the amount of each member's investment, but you can agree on other arrangements if you like, such as recognizing certain members' investing prowess or willingness to do administrative work on the club's behalf.
Tips.
Don't invest immediately. Give the group a couple of months to deposit money. This will weed out those who aren't really committed to the club or who can't afford it.
When an investment goes wrong, keep your pointing finger to yourself. Use the experience to learn what not to do. Go back to the drawing board and change things if need be.
Trust has to be established for the club to be effective.
Limit investments to cash with no leverage. If margin accounts are used, every partner may be liable for the full debt.
Warnings.
Make sure that everyone understands that they might not make money and could actually lose money. Not all investments are profitable. If they were, everyone would be doing it.
Proper planning, a supportive group, and an understanding leader are vital in promoting cohesion and optimism within the group
Some members may be tempted to embezzle funds. This is why having an operating agreement and ironing out the details is important. So is your choice of club officers.
Be ready for the fact that your group will experience emotional highs and lows in the course of investing their hard-earned money.
“Don’t put all your eggs in one basket” is sound advice in life as well as in finance. Diversifying an investment portfolio can help cushion the ups and downs of the market and the broader economy. You can diversify by investing simultaneously in different asset classes. These classes include stocks (or "equities”), bonds, the money market, commodities, precious metals, real estate, gemstones, fine art and any of several other valuable assets. Because most growth in wealth comes from owning stock, equities also represent the most risk in a portfolio, so you will want to diversify your stock holdings. The following article presents a number of commonly acknowledged steps in building wealth through a diversified investment portfolio.
Method 1 Diversifying in Stocks.
1. Invest in many different companies. When you buy stock, you buy a share of the ownership of a company. You can buy stock in individual companies by using an online broker, such as E-Trade, Charles Schwab or TD Ameritrade (among many others). Do not, however, commit a large portion of your money to any single company. If such a company were to get in trouble, you could lose most of your money.
For example, Snap Inc. received a lot of press when it went public in March 2017 with shares priced at $27. However, by the following August the stock price had fallen to $11 per share. That's a drop of about 60%, which would have really hurt someone who had invested a large amount of money at the opening price.
To avoid such a disaster, limit your investment in any one stock to 5% or (preferably) less of your total portfolio.
2. Invest in different sectors. Entire industries often rise and fall as a unit. If the price of oil surges, most oil-related stocks will rise as a group. When the price of oil dips, oil-company stocks tend to fall together. You can protect yourself against this risk by investing in several different industries or sectors of the economy.
Major sectors include technology, health care, financial services, energy, communication services, utilities and agriculture.
The industries or sectors you choose should have a low correlation to each other. That is, invest in various sectors whose stock prices tend to fall at different times. For example, technology and communication services might be too closely related. On the other hand, energy and health care are not closely related and might be expected to rise or fall separately.
3. Look at foreign stocks. As the economy in one country falters, the economy in other countries might be doing well. For this reason some experts recommend that you diversify by buying foreign stocks in addition to the domestic stocks you own.
Buying stock in multinational corporations automatically exposes you to international markets. For example, if you buy McDonald’s stock, you are already investing in foreign markets, since McDonald’s has expanded into more than 100 countries.
Method 2 Investing in Other Assets.
1. Diversify with bonds. When a company or government need to raise money, they may borrow it by issuing bonds to the public. A bond is a promise to repay borrowed money, accompanied by a certain amount of interest. Owning bonds is a good way to hedge against equity risks, because bond values tend to move in a direction opposite to stock values in general.
You can buy individual bonds or invest in a bond mutual fund. A bond fund holds a portfolio of many different corporate or government bonds. Research a fund to see how diversified its holdings are before buying shares. As with equities, bond diversification is very desirable.
Bonds are rated based on the issuer’s creditworthiness. Find bond ratings at Moody’s or Standard & Poor’s credit-rating services. A highly-rated bond will offer a lower interest rate but a higher likelihood of repayment. Choose bonds or bond funds that reflect your tolerance for risk. An aggressive investor (whose risk tolerance is high) might choose bonds with a higher interest rate but a lower safety rating.
2. Invest in U.S. Treasury bonds or bills for increased safety. U.S. Treasuries are the safest securities you can own. You lend money to the U.S. government and receive a promise for repayment. Treasury bonds often rise when the stock market falls, so they are a good way to diversify your portfolio.
3. Consider money market funds. Such a fund is similar to a savings account. The fund invests money in low-risk vehicles such as certificates of deposit and government securities. You can buy CDs and government bonds yourself, but a money market account can be more convenient, because it will do the investing for you at a nominal fee.
As an added benefit, some money market accounts let you write checks (or use a debit card) on the account. However, you will be limited in the number of withdrawals you can make per year.
4. Forget commodities. Some experts recommend diversifying by buying commodities such as oil, wheat, gold, and livestock. These commodities have no correlation to the stock market, so the value of these commodities should be unaffected if the stock market collapses. However, commodities are a poor bet if you are looking to buy and hold investments. Commodities are meant to be traded regularly and are therefore considered speculation (gambling) rather than investment.
5. Invest in real estate. One way to do this is to buy an apartment building and rent it to tenants. However, you may not have the time or energy to involve yourself in what can be a complicated endeavor. Instead you might invest in REITs, real estate investment trusts. With this option you invest in companies that own real estate. In exchange for your investment, you receive a share of the companies' income.
Many REITs charge very high fees, so they might not be the best way to diversify your portfolio.
Another option is to invest in a mutual fund that invests in REITs. This can save you a lot of research time by letting the fund managers do the research for you. You do pay for that service, of course, but it may be worth it to you if you value your time.
Method 3 Investing in Mutual and Other Funds for Diversity.
1. Diversify easily with mutual funds. A mutual fund is a portfolio operated by a fund manager. Buying into a mutual fund is a great way to diversify because each portfolio can hold multiple equities and other assets. For example, a mutual fund might hold stocks and/or bonds from 40 companies in various sectors. By buying into a fund, you can get instant diversification.
However, mutual funds are not automatically diversified. Everything depends on the assets held in the portfolio. Carefully analyze the individual holdings in the portfolio. Some mutual funds will be better diversified than others.
If you invest through an employer-sponsored plan (such as a 401k or an IRA), chances are you are investing in mutual funds.
2. Invest in an exchange traded fund (ETF). An ETF is like a mutual fund, except you buy it on a stock exchange, not from a fund. ETFs generally have lower fees than mutual funds, so they are a good option for investors.
As with mutual funds, an ETF is not automatically diversified. For example, you might buy an oil ETF, which is concentrated in one industry. Carefully analyze the underlying investments to make sure the ETF has the necessary diversity.
3. Consider an index fund. An index fund is a mutual fund designed to track an index, such as the Standard & Poor’s 500 Index or the DJ Wilshire 5000, which tracks the entire U.S. stock market. It is an easy way to get broad market exposure and thus diversify.
Remember that you want to diversify across asset classes. Don't forget bonds, Treasuries and the money market. Some funds do invest in these other assets.
Remember, too, that all mutual funds and ETFs charge fees for their service. Investigate the size of those fees before committing money. There are many good funds that charge total fees of less than 1% of your account balance, so there is no valid reason to pay more than that. If you do your research, you should be able to find funds that are properly diversified.
With respect to equities, aim to hold at least 20 stocks spread across various sectors. You can invest by picking individual stocks, or you can more easily diversify by investing in a fund that contains hundreds of stocks and/or bonds.
4. Get expert advice. Every person’s situation is different, and there’s no one right diversification approach for everyone. Instead, you should meet with a "fee-only" financial advisor who can help you analyze your situation. Look for an advisor who is a certified financial planner (CFP). To earn this designation, candidates must meet certain experience, education, and ethics standards. The advisor should also be a fiduciary, someone legally bound to work primarily in your best interests. (Just ask, "Are you a fiduciary?" If you don't get an immediate "yes" for an answer, find another advisor.)
You can find a fee-only financial advisor through the National Association of Personal Financial Advisors. A fee-only advisor is one who does not earn a commission by recommending the purchase of specific financial products.
Discuss your investment goals with your advisor. Many people invest for retirement, and what qualifies as a well constructed portfolio will change over time. As an investor gets older, they will want to increase the ratio of bonds to stocks in their portfolio in order to diminish risk. (Some mutual funds can do that for you automatically.)
Method 4 Buying and Selling Intelligently.
1. Analyze your risk tolerance. How comfortable are you in taking financial risks? The more aggressive an investor is (the larger the rewards they hope to achieve), the larger the stock portion of their portfolio -- and the greater their risk tolerance -- will have to be.
A conservative portfolio might have only 20% in equities, 70% in bonds and 10% in cash and cash equivalents (including certificates of deposit, banker's acceptances, treasury bills and other money-market instruments).
A person more tolerant of risk might invest 70% in equities, 20% in bonds, and 10% in cash or cash equivalents.
2. Invest on a periodic basis. Let’s say you have $6,000 to invest in a year. If you invest all of that money at once, you might inadvertently buy into the market at a moment when equities are priced relatively high. A better option is to invest $500 a month. You would invest the same amount of money in a year's time, but as prices rise and fall, it's likely you would acquire a larger number of shares by year's end.
This type of investing is called “dollar-cost averaging,” and it allows you to take advantage of the inevitable price dips that regularly occur in the market.
3. Avoid market timing. You might dream of getting into the stock market at a price bottom and then selling at a peak. Many people who try to "time" the market in this way end up losing money, because recognizing a market peak or bottom isn't possible until after the fact.
4. Choose appropriate assets based on when you plan to withdraw investment income. For example, if you have 40 years before you plan on retiring, you can ride out peaks and valleys in the stock market. There’s less reason to worry if the market falls when you are in your 30s, because you have plenty of time to recoup your losses. A younger person can afford to be more aggressive in their investing than an older person.
5. Rebalance your portfolio when necessary. Building a diverse portfolio is not a one-time event. Instead, you may need to rebalance your portfolio periodically. Review your investments once a year, and see if they still align with your investment goals.
You might need to rebalance if some assets outperform others. For example, your equities might be on a hot streak for six years. Although they were 50% of your portfolio when you started investing, they now make up 70% through price appreciation. Assuming you still want stocks to form 50% of your portfolio, you’ll need to sell some stocks and replace them with bonds or other assets in order to maintain your preferred ratio.
Rebalancing might trigger tax consequences or transaction fees. Carefully analyze the process with your financial advisor before going ahead.
If you invest through a "balanced" mutual fund, they will typically do this rebalancing for you automatically. (A "balanced" fund invests in both stocks and bonds.)
Warnings.
Diversification can manage risk, but it cannot completely eliminate it. Diversification won’t save you if the entire market goes into a tailspin, as it did in 2008 and 2009. Nonetheless, diversifying is a critically important tool for all investors
Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.
Method 1 Arranging for a Loan.
1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.
Equity capital is the current market value of everything the company owns less any liabilities owed by the company.
Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.
2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.
To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.
Annual reviews are required to maintain your line of credit.
3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.
Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.
Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.
Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.
Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.
4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.
Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.
5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.
SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.
SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.
Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.
Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.
Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).
6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.
Each agency has its own application process. However many require the same basic documentation. Gather the following information.
A loan application form that details why you are applying for the loan and how you will use the money.
Your resume gives lenders information about your expertise in the field.
All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.
Your business credit report gives lenders information about your credit worthiness.
Be prepared to submit your business and personal tax returns for the past three years.
Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.
Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.
You may need to put up collateral, especially if you cannot provide strong financial statements.
Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.
7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.
Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.
Method 2 Applying for Grants.
1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.
2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.
SBA grants for non-profits are announced on grants.gov.
Businesses qualifying for specific initiative grants authorized by Congress will be notified.
U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.
3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.
4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.
Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.
Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.
Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.
Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.
Method 3 Finding Investors.
1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.
2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.
Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.
Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).
3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.
According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).
Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.
Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.
Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.
4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.
Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.
Method 1 Taking Payments and Paying Expenses.
1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.
Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.
Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.
2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.
Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.
3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.
Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.
If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.
4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.
Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.
Method 2 Tracking Overall Cash Flow.
1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.
For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.
Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.
2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.
If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.
When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.
3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.
When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.
These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.
4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.
Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.
If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.
Method 3 Generating Financial Reports.
1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.
Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.
Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.
2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.
Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.
Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.
P&L reports are especially important if you anticipate needing small business loans or other outside funding.
3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.
Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).
The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.
4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.
Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.
Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.
Method 4 Filing Business Taxes.
1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.
If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.
In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.
2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.
Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.
3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.
Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.
Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.
4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.
The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.
If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.
5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.
Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.
Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.
6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.
Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.
7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.
Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.
8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.
As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.
