finance

Reviewed by David Kindness

Theranos Inc. was a consumer healthcare technology startup that closed down in 2018, after the company, its CEO Elizabeth Holmes, and former president Ramesh Balwani were indicted by the SEC for scheming to defraud investors, doctors, and patients. At one time, the company, whose leadership claimed it would revolutionize the blood-testing industry, had been not just a unicorn—a term applied to start-ups valued at $1 billion—but a decacorn, thanks to having been valued at $10 billion.

The technological breakthrough that Holmes and Balwani touted was never demonstrated, and Holmes was accused of purposefully lying to investors and patients, as well as lying about the company’s profitability. Holmes’ and Balwani’s separate fraud trials resulted in their being convicted and sentenced to prison.

Key Takeaways

• Theranos Inc. was a consumer healthcare technology startup that claimed to revolutionize the blood-testing industry.
• Theranos reportedly raised roughly $724 million of capital from venture capitalists and private investors, ultimately attaining a valuation of $10 billion.
• Theranos CEO Elizabeth Holmes claimed that the company had developed a new technology to test blood, but these claims were later discovered to be fraudulent.
• In 2018, the SEC charged Theranos, Holmes, and former President Ramesh “Sunny” Balwani with fraud. Both Holmes and Balwani were eventually imprisoned for fraud.
• By June 2016, Elizabeth Holmes’ net worth reportedly dropped from $4.5 billion to nothing.

Theranos

Theranos was a privately held healthcare technology company founded by then 19-year-old Elizabeth Holmes in 2003.

Using a “nanotainer” (a small device designed to draw, retain, and analyze a droplet of blood from a patient’s fingertip) and its proprietary “Edison” testing technology, Theranos claimed the device could run a multitude of tests on a patient’s physiology within minutes and at a fraction of the cost of current technology.

After more than 10 years of fundraising and reaching a peak valuation of roughly $10 billion, the tide started to turn in 2015 thanks to skepticism from the press.

Doubt on Viability

A New Yorker profile termed Holmes’ explanations of Theranos’ technology “comically vague,” citing as one example Holmes’ statement that “a chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel.”

Important

On Jan. 3, 2022, Theranos founder Elizabeth Holmes was found guilty of four out of 11 fraud charges.

The Wall Street Journal then followed with a highly critical report on Theranos. Based on interviews with ex-employees, the newspaper alleged rampant management incompetence and claimed that Theranos had grossly exaggerated the capabilities of its proprietary technology.

One former senior employee stated that only a small fraction of all the tests were conducted on the “Edison machines,” and the majority of tests were handled on competitors’ equipment despite Theranos’s claims to the contrary. If true, this would have been a violation of the U.S. Food and Drug Administration (FDA) rules.

Investigations

The FDA then released two reports from its ongoing investigation into Theranos. They were less than favorable and claimed that Theranos had “uncleared medical device(s),” poor records, was mishandling complaints, and had failed to conduct audits and produce supplier qualifications. In regard to an unspecified medical device, an investigator noted: “The design was not validated under actual or simulated use conditions.” Further, Theranos failed to “ensure the device conforms to defined user needs and intended uses.”

At the beginning of 2016, a letter released by the Centers for Medicare & Medicaid Services (CMS) stated that a California-based lab used by Theranos posed “immediate jeopardy” to patient health and safety. CMS gave the company 10 days to correct the deficiencies or face daily fines and/or loss of CMS approval for Medicare payments.

Charges of Fraud

After a couple of years of settled lawsuits, dissolved relationships with big partners such as Walgreens, and broken deals with the likes of Safeway, the U.S. Securities and Exchange Commission (SEC) formally charged Theranos, Holmes, and former company president Ramesh “Sunny” Balwani with “massive fraud.”

The complaint alleged that the company raised more than $700 million by deceiving investors for years about the company’s performance.

Both Theranos and Holmes agreed to settle the fraud charges pending court approval. Holmes lost control of the company, returned millions of shares, and was barred from serving as an officer or director of a public company for 10 years.

Balwani and Holmes were both sued for multiple counts of fraud. In January 2022, Holmes was convicted of three charges to commit wire fraud, and one charge of conspiracy to commit wire fraud. Later that year, Balwani was convicted of six counts of defrauding investors, four counts of defrauding patients, and two counts of conspiring to commit fraud. Balwani was sentenced to 12 years and 11 months in federal prison, while Holmes received 11 years and three months.

Note

Several works are based on Theranos and Elizabeth Holmes including: John Carrreyrou’s 2018 nonfiction book titled “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” Alex Gibney’s 2019 documentary “The Inventor: Out for Blood in Silicon Valley,” and the Emmy-award winning 2022 mini-series “The Dropout,” starring Amanda Seyfried and Naveen Andrews.

A Timeline of Theranos’s Rise and Fall

2003: Nineteen-year-old Stanford chemical and electrical engineering drop-out Elizabeth Holmes founds Theranos with the aim of revolutionizing blood testing.

2004: Theranos raises $6.9 million in early funding gaining a $30 million valuation.

2007: The company’s valuation hits $197 million after it raises another $43.2 million in early-round funding.

2010: After further rounds of funding, Theranos is valued at $1 billion.

2013: After a decade of working “in the dark,” Holmes introduces Theranos to the world via press appearances and unveils a website.

2014: With over $400 million in funding, Theranos is valued at nearly $9 billion. Holmes effectively becomes a multi-billionaire thanks to her 50% stake.

December 2014: Despite her company’s hefty valuation, Holmes remains tight-lipped on how exactly Theranos’s technology works. It turns out that the technology has never been submitted for peer review in medical journals.

July 8, 2015: Capital BlueCross, a Pennsylvania insurer with 725,000 customers, chooses Theranos as its preferred lab work provider. Theranos is valued at $10 billion. 

Oct. 15, 2015: The Wall Street Journal runs a scathing article criticizing Theranos.

Holmes appears on “Mad Money” and other media outlets to do damage control. She is “shocked” by the Wall Street Journal article and claims that Theranos supplied over 1,000 pages of documentation to refute the allegations. The Wall Street Journal stands by its reporting.

Oct. 16, 2015: A follow-up article in the Wall Street Journal states that Theranos was forced to suspend the use of its unapproved nanotainer for all but one type of blood test.

Oct. 27, 2015: The FDA releases two partially redacted Form 483 reports from an ongoing investigation into Theranos.

Oct. 28, 2015: Fortune reports that Theranos sought to raise an additional $200 million in Series C-3 funding just days before the initial Wall Street Journal article was published.

Nov. 10, 2015: A $350 million deal with Safeway fizzles out after Theranos failed to meet key deadlines for rollouts and Safeway executives questioned the validity of the test results.

Dec. 27, 2015: The Wall Street Journal ran another article alleging management ineptitude at Theranos and test rigging to produce better results for its Edison machines.

Jan. 27, 2016: The Centers for Medicare & Medicaid Services releases its damming report on Theranos’ California-based lab.

Jan. 28, 2016: Following the CMS report, Walgreens Boots Alliance Inc. (WBA) decides to temporarily close the Theranos Wellness Center in its Palo Alto store and suspend its use of Theranos’s Newark, California lab.

May 1, 2017: Theranos settles a lawsuit with Partner Fund Management, one of its largest investors, after the hedge fund accused the company of securities fraud. Theranos had previously settled proceedings with the Centers for Medicare & Medicaid Services and the Arizona Attorney General.

March 14, 2018: The SEC charges Theranos, its founder and CEO Elizabeth Holmes, and its former President Ramesh “Sunny” Balwani with massive fraud.

$10 billion

Theranos’s valuation at its height in 2015. 

June 15, 2018: A federal grand jury indicts both Holmes and Balwani on nine counts of wire fraud and two counts of conspiracy to commit wire fraud.

The press release from the U.S. Attorney’s Office states that in order to promote Theranos, both Holmes and Balwani “engaged in a multi-million dollar scheme to defraud investors and a separate scheme to defraud doctors and patients.”

Holmes stepped down as Theranos CEO earlier in the day although she continues to be the chair of the company’s board.

September 2018: Theranos begins the process of dissolving as a company.

Jan. 3, 2022: Elizabeth Holmes is convicted on four out of 11 federal charges for conspiring to defraud investors. She is ultimately sentenced to 11 years and three months in prison.

July 7, 2022: Balwani is found guilty of all charges and ultimately sentenced to nearly 13 years in prison.

May 30, 2023: After several efforts to delay her sentence through appeals, Holmes finally reports to federal prison camp Bryan in southern Texas.

Feb. 24, 2025: Elizabeth Holmes loses her appeal in federal court to have her fraud conviction overturned.

Was Theranos Publicly Traded?

No. Theranos was a privately held corporation until it was shut down and liquidated in September 2018.

Is Theranos Still Open?

Theranos started shutting down its clinical labs and wellness centers in late 2016, finally ceasing operations in September 2018.

What Did Theranos Do Wrong?

Theranos claimed to have developed blood tests that required only small amounts of blood and devices that could quickly perform the tests. Based largely on those claims, Theranos reportedly raised roughly $724 million of capital from venture capitalists and private investors.

How Much Did Walgreens Invest in Theranos?

Walgreens reportedly invested $140 million in its partnership with Theranos.

Is Elizabeth Holmes Still Wealthy?

According to Forbes, by June 2016, Elizabeth Holmes’ net worth dropped from $4.5 billion to “nothing.” However, Holmes later married the millionaire hospitality heir Billy Evans, who went on to father her two children. Although Evans’ net worth is estimated at around $10 million, it is not clear if the couple shares their finances.

The Bottom Line

Theranos was a healthcare startup that claimed to revolutionize the blood-testing industry. However, CEO Elizabeth Holmes’ aggressive claims were later found to be fraudulent, and the company was actually fabricating results to deceive both investors and patients.

Holmes and her co-conspirator, Ramesh Balwani, were each convicted and sentenced to over a decade in federal prison. Their names, along with that of their company, have now become synonymous with fraud.

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

Think you can beat the Street? Have you spotted a company you just know is going to go through the roof? Got a gut feeling about a hot initial public offering?

Or maybe, you’re new to investing and trading and need an introduction to how buying and selling securities works—an exploratory deep dive that doesn’t involve real money.

Before you bet the farm, or any amount, for that matter, you can build your investing skills and test trade theories without risking any hard-earned funds.

Welcome to the world of stock market simulators.

Key Takeaways

• For beginning investors, stock market simulators are a great way to develop investing skills.
• You can see what happens to a stock purchase in different market environments.
• Users can become familiar with price movements, trends, indicators, and technical analysis.
• Experienced investors use simulators to evaluate trading strategies before trying them in the real world.
• A stock market simulation competition can test your skills against real opponents with fake money.

What Are Stock Market Simulators?

Stock market, or trading, simulators are online systems that allow investors to practice their stock-picking skills without investing real money.

Investors log on, set up an account, and get mock money with which to make simulated investments.

Some brokers require investors to open and fund an account to get a full-featured simulator. Others provide limited features without opening an account.

Review all your options to find a trading simulator that meets your needs and expectations.

The best simulators can support trading in equities, ETFs, options, and futures, with limit and stop orders, and short selling. They can also adjust for most corporate actions such as stock splits, dividends, and mergers.

They’re available at many online brokers and offer investors tools used by experienced traders, such as stock screens, charts, live data feeds, and technical analysis tools. They can also provide educational resources.

Investopedia offers a free stock market simulator that lets you paper trade without a deposit or other obligation.

Benefits of Stock Market Simulators

For Beginning Investors

For novice investors, a simulator can be a gateway to investing and the mechanics of trading. They can learn about basic investment concepts, reading stock tables, the impact of market volatility, and much more.

News features can provide insight into real-world events, such as corporate scandals, earnings forecasts, and the effects that upgrades or downgrades issued by Wall Street analysts have on stock prices.

They’re also a great introduction to investor research. Simulators generally offer a host of research tools, including historical prices, performance charts, price-earnings ratios for specific securities, and historical trading data for various industries and indexes.

For Experienced Investors

Trading simulators can be valuable tools for experienced investors, as well. They can use them to test-drive complex trading strategies in a safe environment.

Investors can analyze the results of a simulated trading strategy over time to see its advantages and pitfalls. They can refine investment concepts and skills before launching them in the real world.

Simulators offer experienced investors the tools to monitor IPOs, track trading volumes, and build customized screens based on technical and fundamental criteria.

Learn From Others

Some online sites run stock market simulation competitions that give players an opportunity to win real money. These competitions can be a great way to pit your strategies and skills against those of other investors.

Perhaps even more valuable, you can learn what works and what doesn’t in a more intense environment.

So, even if you don’t find your name at the top of the leader board at the end of the competition, you’ll still be able to observe and learn from the winning strategy.

Whether trading on your own or in a competition, simulators also can teach you about the importance of leaving your emotions out of trading and investing.

Your reactions to your simulated portfolio’s changing value can inform how you’ll deal with similar price movements when trading in a live market with real money.

Test What You Learn Elsewhere

With simulators, you can test your interpretation of investing information provided by others. If you already have a brokerage account, read the daily updates and the monthly or quarterly newsletters in which your broker offers outlooks on the markets, the economic environment, and government activities.

It may even recommend specific trades that you could simulate.

Stream the financial news to enhance your knowledge and to learn what stock-picking gurus recommend. Then, test out that information by placing trades for your simulated investment portfolio.

Simulators can even teach you about the importance of leaving emotions out of trading and investing. How you respond to positive and negative positions might give you a sense of how you will react to price movements in a real-life trades.

Important

As a beginning investor, you can easily recover from a bad decision in simulated trading. An actual financial loss in real trading may have a more serious effect. Whether with a simulator or by the careful study of stocks, markets, and the steps of trading, or both, solid preparation can make a big difference to your trading success.

The Limits of Simulation

There is no doubt that simulators are good tools, but even the best of them can’t fully replicate the the real thing. Generally, they offer fewer securities and more restricted trading parameters than the actual global financial markets.

A simulator may not allow trading in foreign stocks or penny stocks. There may be a time delay in the data feeds, which means your trade won’t be executed instantly, as in real life. For example, Investopedia’s free simulator has a 15-minute time delay.

Mistakes made in simulated trading might be easily forgotten. Try not to let that happen. You want to keep such mistakes in mind when you start trading live. They should be part of the learning experience that you’ll put to work throughout your investing years.

Are Trading Simulators Free?

Yes, trading simulators can be free, but they may require that you open an account at a brokerage, and even fund the account. In general, though, the idea behind the simulator is that an investor can practice trades without risking actual money. 

Who Uses Trading Simulators?

Trading simulators can be used by all kinds of traders and investors, but may be most useful for new, inexperienced, or younger investors. 

Can You Use a Simulator to Practice Day Trading?

Yes, an investor can practice day trading using a simulator. A simulator can be used by any investor.

The Bottom Line

Stock trading simulators are online systems offered by many brokers and some financial websites that give investors the opportunity to buy and sell securities without putting real money at risk.

Simulators can help users to learn the mechanics of trading, sharpen their trading skills, and test out investment strategies in a financially worry-free market environment.

Reviewed by Michael J Boyle

For all of the expensive subscriptions and analytics programs, a huge amount of the work that Wall Street analysts and managers do is done on the Excel software that you have on your own computer. With just a little bit of effort, you too can create a variety of financial and analytical models, and investing the additional time and energy to learn about macros can give you even more options.

Key Takeaways

• Financial models help make predictions about future company performance by organizing information but can only be as accurate as the data and assumptions inputted into the models.
• Investment analysts commonly use Microsoft Excel for financial modeling, which can also be used at home for personal stock selection.
• Valuation models are used for many purposes, such as determining a company’s worth, with discounted cash flow (DCF) being one of the most popular methods.
• DCF estimates future cash flows, applies a discount rate, and calculates present value, allowing investors to see if a stock is fairly priced.

Company Financial Models

The core of what every sell-side analyst (and many buy-side analysts) does is the creation of a company’s financial models. These are simply spreadsheets that hold (and help form) the analyst’s views on the likely financial results for the company in question.

They can be incredibly detailed and complex, or relatively simplistic, but the model will never be any better than the quality of the work that goes into forming the estimates. In other words, elaborate guesswork is still just guesswork.

Financial models are usually built with the x-axis serving as the time (quarters and full years) and the y-axis breaking down the results by line item (i.e., revenue, cost of goods sold, etc.)

It is not at all uncommon to have a separate sheet generating the revenue estimate; whether that is a per-segment basis for a large conglomerate like United Technologies or General Electric or a more simple units-sold-and-estimated selling price for a smaller, simpler company.

For these models, the model-builder needs to input estimates for certain items (i.e., revenue, COGS/gross margin, SG&A/sales) and then make sure that the mathematical formulas are correct.

From this base, it is also possible to build sophisticated and interconnected models for the income statement, balance sheet, and cash flow statement, as well as macros that allow investors to create “bull/bear/base” scenarios that can be changed with a click or two.

Although most would deny it, surprisingly few buy-side analysts actually build their own company models from scratch. Instead, they will essentially copy the models built by sell-side analysts and “stress test” them to see how the numbers respond to a variety of circumstances.

Valuation Models

Even if you don’t build your own company models, you should seriously consider building your own valuation models. Some investors are content with using simple metrics like price-earnings, price-earnings-growth, or EV/EBITDA, and if that works for you then there’s no reason to change. Investors who want a more rigorous approach, though, ought to consider a discounted cash flow model.

Note

Common financial models include the dividend discount model (DDM), residual income model, Monte Carlo simulation, and earnings power value (EPV).

Discounted Cash Flow (DCF)

DCF modeling is pretty much the gold standard for valuation and plenty of books have been written on how free cash flow (operating cash flow minus capital expenditures at its simplest level) is the best proxy for corporate financial performance. One row will serve to hold the year-by-year cash flow estimates, while rows/columns beneath can hold the growth estimates, discount rate, shares outstanding, and cash/debt balance.

There needs to be a starting estimate for “Year 1” and that can come from your own company financial model or sell-side analyst models. You can next estimate the growth rates by creating individual year-by-year estimates or using “bulk estimates” that apply the same growth rate for years two to five, six to 10, 10 to 15, and so on.

You then need to input a discount rate (a number that you can calculate with the CAPM model or another method) in a separate cell, as well as the shares outstanding and net cash/debt balance (all in separate cells).

Once this is done, use your spreadsheet’s NPV (net present value) function to process your cash flow estimates and discount rate into an estimated NPV, to which you can add/subtract the net cash/debt, and then divide by the shares outstanding. As part of this process, do not forget to calculate and include a terminal value (most analysts calculate explicit cash flows for 10 or 15 years and then apply a terminal value).

What Is Financial Modeling?

Financial modeling is a method of using math to predict a company’s future financial performance. It works on analyzing past data and incorporating assumptions to forecast potential future outcomes. It is often done by using spreadsheets, such as Excel, to project revenue, expenses, cash flow, and earnings. Financial modeling is widely used by businesses, investors, and analysts to make decisions, determine risks, and discover opportunities.

What Is the Difference Between LBO and DCF Models?

Leveraged buyout (LBO) and discounted cash flow (DCF) models are both used in valuing a company but are used for different purposes. LBO is commonly used in private equity and focuses on how much debt can be used to buy a company. It encompasses two main points: (1) the return for investors through debt repayment and (2) the exit value. DCF seeks to determine a company’s value based on its projected future cash flows, discounting them to the present value. DCF centers on intrinsic value whereas LBO centers on financial structuring.

What Is the Difference Between Financial Analysis and Financial Modeling?

Financial analysis centers on understanding a company’s financial statements as well as external factors, strengths, and weaknesses, focusing on past and present data to understand a company’s financial health. Financial modeling, on the other hand, is forward-looking, using math to forecast a company’s future financial performance, incorporating historical data and assumptions.

The Bottom Line

Investors must remember that detailed or sophisticated modeling is no substitute for judgment and discretion. All too often, analysts lean too heavily on their models and forget to do the occasional “reality check” regarding their core assumptions.

Nevertheless, building your own models can teach you a lot about what a particular company must do to grow, what that growth is worth, and what the Street already expects from a particular company. Accordingly, the relatively modest amount of time it takes to build these models can often pay for itself many times over by leading you to better investment decisions.

Fact checked by Vikki Velasquez

By the time you hit your 60s, your 401(k) balance is more than a number you check. It will be an actual financial lifeline for your retirement.

Many people stop working completely in their 60s, so the money in their 401(k) accounts may be needed in their 60s and beyond. You might be surprised by the amount of money people in their 60s have tucked away for retirement—more than half a million dollars.

The 60s is also a great time to grow 401(k) balances. It is not too late to boost your contributions even more or to catch up on savings.

Key Takeaways

• In 2025, you can contribute as much as $23,500 to a 401(k) plan.
• If you are age 60 to 63, you can invest a catch-up contribution of $11,250.
• The average 401(k) balance for people in their 60s is $573,624.

The Surprising Average 401(k) Balance for People in Their 60s

According to Empower, the average 401(k) balance for people in their 60s is $573,624, and the median balance is $210,724.

Balances in 401(k) plans vary by age group.

Not surprisingly, the balances in 401(k) plans go down for people in their 70s and 80s. The average 401(k) balance for people in their 70s is $431,962 with a median balance of $106,654. And the average 401(k) balance for people in their 80s is $393,826 with a median balance of $86,301.

If you are in your 60s and your 401(k) balance is lower than you would like, consider making a catch-up contribution.

According to the Internal Revenue Service, the 401(k) contribution limit is $23,500 for 2025. The catch-up contribution for people 50 and older is $7,500. There is a higher catch-up contribution of $11,250 available for people ages 60, 61, 62 and 63.

Wondering how much you need to have saved for retirement by the time you reach your 60s? According to T. Rowe Price, by the age of 60, your retirement savings goal should be six to 11 times your salary. According to Fidelity, you should aim to have retirement savings of eight times your income by the age of 60. Both are good guidelines for saving.

The Bottom Line

Saving as much as six to 11 times your salary by the time you reach age 60 may seem like a daunting goal. But it is worth shooting for. Whatever you can put aside for your retirement savings in your 60s can help you provide for your non-working years, and that time is coming soon.

So contribute all that you can in a 401(k) plan, max out your contributions, utilize catch-up contributions, and with each dollar you invest, you’ll be closer to making your retirement dream a reality.

Fact checked by Vikki Velasquez

The children born from 2025 to 2039 will be known as Generation Beta, the kids of younger millennials and older Gen Zers. Many of these children will live into the 22nd century, navigating technologies and societal changes we can’t predict.

They’ll also grow up in a financial landscape that looks different from ours, with rising costs of housing, healthcare, and education. While it may be hard to plan for all of Gen Beta’s financial needs, there are small steps you can take now to help set your child up for future financial success.

Key Takeaways

• Generation Beta, born from 2025 to 2039, will grow up fully immersed in technology and a world facing environmental challenges.
• Parents can help set their children up with a solid financial foundation by opening up a 529 plan, creating a will, updating beneficiaries, and getting life insurance.
• Teaching kids about money and investing, such as in a custodial IRA, can help secure their financial future.

Who Is Gen Beta?

Generation Beta, born in 2025 and the following 14 years, will grow up in a world shaped by rapid technological advancements and an evolving climate landscape—possibly a deteriorating one.

Like Generation Alpha, Generation Beta will be fully immersed in digital technology from the day they are born, but even more so. Their childhood will include smart devices, automation, artificial intelligence, virtual learning, and perhaps even decentralized finance.

They will also be born in and inherit a planet facing extreme climate challenges, the outcome of which can be hard to predict by the time they are teens and young adults. These environmental challenges are likely to influence their financial decisions.

Given the evolving and unpredictable challenges they face, it’s important to get them started on the right financial foot. Here are some steps you can take today to help your child along their financial journey.

Open a 529 Plan (Even If They Won’t Attend College)

With the extremely high cost of college that is expected to continue rising, college may not be the best choice for everyone, especially given the numerous avenues people can learn from today. Still, opening a 529 is a good idea, as this tax-advantaged plan isn’t just for college anymore.

529 plans can be used for K–12 education, trade schools, and even student loan repayments. The earlier you start contributing, the better, as your contributions have time to grow, providing your child with a larger fund to use toward education.

According to CFP Hazel Secco, president and founder at Align Financial Solutions, whom we spoke to via email, “The tax-free growth and flexibility of a 529 make it a powerful planning strategy, not only for education but also for long-term financial success, as recent changes allow unused funds to be converted into a Roth IRA for the child’s future retirement savings.”

Make a Will and Update Beneficiaries

Making a will is one of the best ways to ensure your child is financially secure should something tragic happen to you. While it’s never easy thinking about worst-case scenarios, being prepared will benefit your loved ones.

Creating a will ensures your wishes are met and that your child is protected. In the will, you can specify who receives your assets upon your death or incapacitation. Stating that your home and other assets go to your child upon your death will ensure they’re financially taken care of.

One benefit of a well-crafted will is that it helps speed up the probate process, ensuring that assets are transferred directly to beneficiaries without court delays.

Secco says, “The probate process can be costly, time-consuming, and emotionally overwhelming for heirs … that’s why I encourage parents to establish a will and other essential estate planning documents, such as a healthcare proxy and power of attorney as soon as possible.”

In addition to setting up a will, check and update your beneficiaries for important financial accounts, such as life insurance and retirement plans. It’s always a good idea to revisit these after big life changes: marriage or the birth of a child.

Increase or Get Life Insurance

If you have dependents, life insurance is a smart way to take care of them financially after your death. Life insurance helps with mortgage or rent payments, funeral costs, future education expenses, and any other financial needs your family may have. This is particularly important if you are the primary earner in your family.

While there are many types of life insurance policies, term life insurance is a good way to get started. Term life is cost-friendly and straightforward, with the goal of replacing your income when you pass. Term life comes in coverage length brackets, such as 10, 20, or 30 years.

Many people choose coverage amounts that span their working years, ensuring their beneficiaries can cover financial expenses if they die suddenly.

Teach Your Child About Money

Financial literacy is imperative to achieving and maintaining a healthy financial profile. Most education systems for children don’t teach financial literacy, so it’s up to the parents to instill this knowledge.

Teaching your kids about saving, budgeting, jobs, and wants vs. needs at an early age can impart lessons they will carry with them throughout their lives. As they get older, you can teach them about investing and even retirement.

Studies show that children start forming money habits at 7 years old, so it’s never too early to teach your kids financial lessons they can use later in life.

Note

There are many engaging ways to teach children about personal finance, such as podcasts (such as “Million Bazillion” and “Money with Mak & G”) and games (such as Bankaroo).

Invest in Their Future

While most of the expenses on your kids will be clothes, toys, and child care, you can also invest in their future at an early age. It’s a way of thinking about what else might benefit them when they’re older.

For example, setting up a custodial IRA when they start earning income will help with their retirement. Doing this as early as possible will allow more time for their money to grow through compounding.

The Bottom Line

Raising a child comes with a lot of responsibilities, including setting them up for a secure financial future. Through a few straightforward and intentional steps taken today, you can lay the financial foundation for your child’s success.

Generation Beta will face a financial landscape we can’t yet fully predict, but by implementing the actions discussed above, you can prepare them early and equip them with the tools to navigate whatever their future may hold.

Reviewed by Khadija Khartit

Mutual funds are investment vehicles that purchase stocks with investor capital in the hopes of capital appreciation. They are considered equity securities because investors purchase mutual fund shares, which represent ownership in the fund, giving them access to equity securities.

Shareholders, however, do not own the underlying assets (the stocks) but just a piece of the fund’s overall portfolio. By participating in a mutual fund, investors benefit from diversification and professional management and are considered equity investors.

Key Takeaways

• Mutual funds allow investors to pool their capital and gain exposure to a mix of stocks, benefiting from diversification and professional management.
• Unlike buying individual stocks, mutual fund investors own shares of the fund, not the underlying asset; however, they are still considered equity investors.
• Mutual fund investors benefit from capital appreciation and dividend payouts just as investors holding individual stocks do.

Equity Securities

An equity security is any investment vehicle in which each investor is a part owner of the controlling company. If an individual investor purchases 10 out of a total of 100 shares in a given equity security, they own 10% of the venture and are entitled to 10% of its net profit in the event of liquidation.

Investing in equity securities also grants the investor various rights to participate in the running of the company and may generate regular income in the form of dividends.

The most commonly traded equity securities are ordinary shares of stock bought and sold daily on the stock market. When an investor purchases a share of a company’s stock, they own a small piece of the company.

Note

An alternative to mutual funds is exchange-traded funds (ETFs). ETFs offer equity exposure and are often easier to manage as they can be bought and sold daily on exchanges like traditional stocks.

Mutual Funds

The difference between investing in stocks and investing in mutual funds is like the difference between selling your car to make a couple of bucks and buying a car dealership with 10 of your closest friends.

If you simply buy and sell your own car, you get to keep all the proceeds for yourself. However, you may not turn much of a profit if you cannot afford to buy a high-end car in the first place.

If you buy a car dealership as a group, you can leverage the sum of all your funds to invest in something that can generate a much larger profit. Though you have to split the proceeds, you can use your collective investment to sell a broader range of products.

Similarly, mutual funds are simply companies that allow many investors to leverage their combined funds to produce greater gains all around. Individuals purchase shares of the fund, which uses that money to invest in a diverse range of stocks, bonds, Treasury bills, or other highly liquid assets.

Shareholders are entitled to a portion of the profits commensurate with their financial interest in the fund. However, shareholders must avoid wash sales and other unethical practices.

What Is the Difference Between a Mutual Fund and a Stock?

A stock represents ownership in a single company. When you buy a stock, you’re buying a part of that company and your share comes with some features, such as voting rights. A mutual fund is a collection of investments, such as stocks, bonds, or other assets. When you buy a mutual fund, you’re buying a share in the fund, not the underlying asset (stock, bond, etc.).

With a stock, you have exposure to that one company, with a mutual fund, your investment is spread out over multiple stocks (in an equity mutual fund), which increases diversification, reducing risk. Additionally, mutual funds are professionally managed and choose stocks based on a theme, removing the work that you’d have to do in picking a stock.

Is an ETF a Mutual Fund?

No, an exchange-traded fund (ETF) is not a mutual fund. While both an ETF and a mutual fund are investment vehicles where investors pool capital to invest in a variety of securities, there are significant differences. ETFs trade on an exchange like stocks, so you can buy and sell them throughout the day at market prices. Mutual funds do not trade on exchanges and their prices are determined at the end of the trading day.

Additionally, ETFs are usually more affordable than mutual funds because they generally have lower expense ratios. Mutual funds also often come with minimum investment amounts, whereas with ETFs you can buy as little as one share, making them a less capital-intensive investment.

What Is One Example of an Equity Security?

An equity security is simply equity ownership of a company, meaning you own a portion of a company. This most commonly translates to the stock of a company. When private companies need to raise money, they go public through an initial public offering (IPO), offering shares to the public. These shares represent ownership in that company. An investor can buy that share (stock) and they now have an equity security. For example, if you bought Apple stock, you would have an equity security.

The Bottom Line

Mutual funds allow investors an easy way to gain access to a broad swath of equity securities without having to analyze and choose each stock on its own.

While shareholders don’t own the underlying stocks, and thereby do not have some traditional shareholder privileges, such as voting rights, the benefits of diversification and professional management often outweigh some of the drawbacks.

Reviewed by Robert C. Kelly

In the first quarter of 2020, the People’s Republic of China recorded its first contraction in gross domestic product (GDP) since official records began in 1992. The National Bureau of Statistics of China reported a year-over-year GDP decline of 6.8% for the quarter.

However, bolstered by its efforts to contain the COVID-19 pandemic and reopen its factories, China experienced a GDP rebound, with the government reporting a 3.2% GDP increase in the second quarter of 2020. This was followed by a 4.9% GDP increase in the third quarter and a 6.5% GDP increase in the fourth quarter, along with a 2.3% GDP increase for all of 2020.

What impact did China’s swift ability to restart its economic engines have on the U.S. economy and the global economy? To answer these questions, you need to first assess the economic position of China within the world economy.

Key Takeaways

• The economies of the United States and China are intricately linked, due to the two nations sharing a large trading partnership of goods and services.
• In 2020, China started the year with a historic GDP decline of 6.8% caused by the impact of the COVID-19 pandemic.
• After reopening its factories, China’s growth rebounded dramatically; the International Monetary Fund (IMF) accurately predicted China would be the only major world economy to experience growth in 2020.
• China’s economic growth in 2020 was attributed to its ability to meet the world’s demand for medical equipment, electronics, and other items needed during the pandemic.

The Size of China’s Economy

The International Monetary Fund (IMF) predicted China would be the only major economy to grow in 2020, with projected real GDP growth of about 1.9% for the year. This was in stark contrast to the U.S. economy, which was expected to shrink by 4.3% in 2020. The IMF expected European nations to post negative growth numbers in 2020 as well, with the United Kingdom estimated to contract by 9.8%, Germany by 6%, and France by 9.8%.

How did the IMF’s predictions turn out? China’s real GDP growth was 2.2% for 2020, compared with -2.2% for the United States. As for European nations and their real GDP, France shrank by 7.6%, Germany by 4.1%, and the U.K. by 10.3%.

The sheer size of China’s economy had a lot to do with its ability to regain positive momentum. China, the most populous country in the world, has the second-largest economy, ranked below the U.S. with a GDP of $17.79 trillion in 2023, the most recent data available. However, this high GDP did not necessarily indicate the wealth of the country. The country’s GDP per capita was only $24,569 as of 2023 compared to the U.S., which had a per capita GDP of $82,769.

Over the decades, many global manufacturing companies have located their manufacturing units in China, attracted by the nation’s low labor costs and cheap supply materials. This allowed companies to produce goods cheaply, and it explains why many of the products we use in our daily lives are made in China.

Relationship with the U.S. Economy

China is the third-largest trading partner (the first and second being Canada and Mexico, respectively) of the United States, with $582.4 billion in total goods traded in 2024. Of that amount, U.S. export goods to China accounted for $143.5 billion and U.S. import goods from China were $438.9 billion, bringing the U.S. trade deficit with China to $295.4 billion.

This deficit is financed partly by capital flows from China. China holds more U.S. Treasury securities than any other foreign country except Japan. According to the Treasury, China owns $759 billion in U.S. debt securities as of December 2024.

All of these statistics show the importance of the Chinese economy and why any developments in China, negative or positive, can influence the world’s largest economy, the United States.

24%

The total of all U.S. bulk agricultural commodity exports that were sent to China in 2024. That narrowly made China the largest destination for such exports, which include corn, cotton, rice, sorghum, soybeans, and wheat.

The Chinese Slowdown

Starting in 2010, China’s economic growth rate began a decade of decline. The GDP growth rate dropped from 9.6% in 2011 to 7.4% in 2014 (see graph below). The rate continued its decline to 6% in 2019 and 2.2% in 2020. The 2020 GDP growth was impacted by the coronavirus pandemic.

The trend reversed in 2021, as China’s GDP grew 8.4%. It declined again in 2022, growing only 3%, before resurging in 2023 (the most recent data available), growing 5.2%.

Economists have raised concerns that a slowdown in the Chinese economy like that of 2010–20 would have negative impacts on the markets that are closely related to this economy, such as the United States.

China’s Silver Lining in 2020

China’s role as “the world’s factory” was a key factor in its ability to quickly rebound in 2020. The nation is well-known for its abundance of lower-wage workers, a strong network of suppliers, lower tax rates that keep the cost of production low, competitive currency practices, and government support that reduces regulatory hurdles.

While the rest of the world struggled to regain its economic footing, China’s ability to reopen its factories and post impressive GDP numbers in the second through fourth quarters of 2020 proved that the nation’s economy was still growing.

If anything, the COVID-19 pandemic cemented China’s importance in the global supply chain. Much of China’s 2020 growth was attributed to its factories meeting the world’s demand for personal protective equipment (PPE), medical equipment, electronics (such as laptops), and other items that were in short supply as the rest of the world shuttered its factories while complying with mandatory stay-at-home orders.

What Is the Status of U.S.-China Trade Relations?

On Feb. 1, 2025, President Donald Trump ordered 10% tariffs on China. The tariffs took effect three days later, when China retaliated with duties on the imports of some U.S. goods and an antitrust probe of Google.

What Form Does the Chinese Economy Take?

China has a unique socialist open-market economy, with both tight government control and free-market elements. As a manufacturing and export-driven economy, the Chinese currency forex rates also significantly impact money supply.

What Would Be One Possible U.S. Impact of a Slowdown in the Chinese Economy?

U.S. companies that generate an important portion of their revenues from China are likely to be negatively affected by lower domestic demand in China. This would be bad news for both shareholders and employees of such companies. When cost-cutting is necessary to remain profitable, layoffs are usually one of the first options to consider, which increases the unemployment rate.

The Bottom Line

China, with its giant economy, has a huge influence on world economies. In 2020, the nation proved its resilience and was able to reopen its factories relatively early in the year, supplying the U.S. and other global economies with much-needed exports.

However, one of the biggest long-term risks to China’s economy could come in the form of economic decoupling. Tensions between the United States and China have escalated over a number of issues, including Hong Kong, the prolonged trade war, and increased tech rivalry. An economic decoupling could mean a reduction or severance of ties between the world’s two largest economies. China, for its part, has taken steps to reduce its dependence on the U.S. economy, building partnerships with other nations through its One Belt One Road (OBOR) initiatives.

Discover which forces pose the biggest threat to Delta

Fact checked by Timothy Li
Reviewed by Chip Stapleton

As one of the largest airline carriers in the world, Delta Air Lines faces competitive challenges and threats that can impact its performance and profitability. However, the shrewdest investors will go beyond looking at Delta’s financial position and will study the potential effects of external forces on the company’s health. One of the most effective tools for this is Porter’s Five Forces.

Key Takeaways

• Porter’s Five Forces is an analytical framework that helps investors evaluate a company based on its position within an industry and the kinds of horizontal and vertical threats it might face in the future.
• A horizontal threat is a competitive threat, such as a new company entering the marketplace and gaining market share.
• A vertical threat puts a company at a competitive disadvantage, such as buyers or suppliers gaining bargaining power.
• In the airline industry, buyers have tremendous bargaining power because they can quickly and easily switch from one carrier to another using third-party trip-booking websites and apps.

Overview of Porter’s Five Forces Method

Porter’s Five Forces is an analytical framework developed in 1979 by Harvard Business School professor, Michael E. Porter. Porter’s goal was to develop a thorough system for evaluating a company’s position within its industry and to consider the types of horizontal and vertical threats the company might face in the future.

Horizontal Threats and Vertical Threats

A horizontal threat is a competitive threat, such as customers switching to a substitute product or service, or a new company entering the marketplace and appropriating market share. A vertical threat is a threat along the supply chain, such as buyers or suppliers gaining bargaining power, that can put a company at a competitive disadvantage.

The Five Forces model evaluates three potential horizontal threats and two vertical threats. Industry competition, the threat of new entrants, and the threat of substitutes represent the horizontal threats. The vertical threats come from the increased bargaining power of suppliers and the increased bargaining power of buyers. Using the Five Forces framework, investors can determine the most viable threats to a company. With this information, they can evaluate whether the company has the resources and protocol in place to respond to likely challenges.

An Overview of Delta Air Lines

Delta Air Lines, Inc. (DAL) is the oldest airline still in operation in the United States. The company was founded in 1928 and has its headquarters in Atlanta, Georgia. From December 2023 to November 2024, Delta ranked first in domestic market share for U.S. airlines at 17.8%. Delta’s sheer size and status as a longtime leader in the airline industry have helped ensure its continued success.

Industry Competition

The level of competition in the airline industry is high. The big airlines essentially fly to the same places out of the same airports for about the same prices. The amenities, or lack of amenities, they offer are similar, and the seats in coach are just as cramped no matter which airline you choose. Delta’s traditional rivals include United and American, but the company also faces major competition from the growing popularity of value carriers, most notably Southwest, but also JetBlue and Spirit.

70 million

Delta reported 141.75 billion billions of “domestic revenue passenger miles”.

Because the air travel experience for customers is remarkably similar no matter which airline they take, airlines are constantly threatened by the prospect of losing passengers to competitors. Delta is no exception. If a customer is planning to book a flight from Houston to Phoenix on Delta but a third-party price aggregator, such as Priceline, reveals a better deal from United, the customer can make the switch with a simple click of the mouse. Delta manages these competitive threats with extensive marketing campaigns that focus on brand awareness and the company’s longstanding reputation.

Bargaining Power of Buyers

Buyers have some bargaining power over airlines because the cost and effort required to switch from one carrier to another is often minimal, and there are several airlines to choose from. The popularity of third-party trip-booking websites and smartphone apps exacerbates this issue for the airlines. Most travelers do not contact an airline, such as Delta, directly to book a flight. They access sites or apps that compare rates across all carriers, enter their trip itineraries, and then choose the least expensive deal that accommodates their schedules.

However, there are millions of consumers and a limited number of airlines, which gives those airlines more power. While consumer choice can force airlines to maintain competitive pricing, consumers do not actually have the power to set air travel prices. Moreover, if Delta is one of the only airlines offering flights on a particular route, that further limits the bargaining power of buyers, who may have no choice but to take the Delta flight that gets them to their destination—no matter the price.

In response to the challenge of consumer choice and the emergence of third-party travel websites, Delta can conduct market research and offer more direct flights at low prices to the destinations fliers search for most frequently on third-party platforms. Additionally, the company could strengthen relationships with credit card companies and strive to offer the best reward programs; customers may be less likely to switch carriers when they have accumulated what they view as “free” miles with a particular airline.

The Threat of New Entrants

Potential new entrants to the marketplace represent a minimal threat to Delta. The barriers to entry in the airline industry are remarkably high. The operating costs are massive, and the government regulations a company must navigate are numerous and exceedingly complex. JetBlue, founded in 1998, represents a newer airline to make a dent in the industry, and the company’s market share is still less than one-third of Delta’s.

Bargaining Power of Suppliers

The list of airline suppliers is actually quite long. The list of airlines for suppliers to sell to, however, is short. This asymmetry places the bargaining power directly in the hands of the airlines. Bargaining power is particularly strong for Delta, given its position as the world’s largest airline by passenger revenue. Put simply, Delta’s suppliers have a strong incentive to keep the relationship on good terms. Delta can likely find a replacement supplier without a problem if the relationship goes bad. The supplier, by contrast, is unlikely to find another buyer capable of replacing the sales volume represented by Delta.

Threat of Substitutes

A substitute, as defined by the Five Forces model, is not a product or service that competes directly with the company’s offerings but acts as a substitute for it. Thus, a United flight from New York to Los Angeles is not considered a substitute for a Delta flight with the same start and endpoints. Examples of substitutes are making the trip by train, car, or bus. Unless a trip is very short, such as traveling from Los Angeles to Las Vegas, no methods of travel rate as viable substitutes for air travel. New York to Los Angeles is a 6.5-hour flight. The trip takes 41 hours by car or bus, and a train cannot get you there much faster. Until a new technology comes along that supplants air travel as the fastest and most convenient way to travel long distances, Delta faces little threat from substitute methods of travel.

What Is Porter’s Five Forces Model?

Porter’s Five Forces is a framework developed by Michael Porter to analyze industry competition. It examines five key forces that shape profitability: competitive rivalry, the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, and the threat of substitutes. This model helps companies assess their strategic position and identify factors that could impact their profitability and market standing.

How Does Porter’s Five Forces Apply to Delta Airlines?

Delta Airlines, as part of the airline industry, faces intense competition, high operational costs, and external pressures that shape its profitability. The airline’s ability to manage these forces—such as negotiating with powerful aircraft manufacturers and dealing with price-sensitive customers—determines its competitive advantage.

What Is Competitive Rivalry Like in the Airline Industry?

The airline industry is highly competitive, with major players like American Airlines, United Airlines, and Southwest Airlines competing on routes, pricing, and service. Since air travel is a largely standardized service, price wars and loyalty programs are common. These types of airlines have to differentiate themselves with quality of service and operational efficiency.

Do Customers Have High Bargaining Power in the Airline Industry?

Yes, customers have considerable bargaining power due to the availability of online price comparison tools and the relatively low switching costs between airlines. Price-sensitive travelers often choose the cheapest available option, making customer loyalty difficult to maintain.

The Bottom Line

Delta Airlines faces intense competitive rivalry, with major airlines competing on pricing, routes, and customer loyalty programs. The bargaining power of suppliers is high due to reliance on a few aircraft manufacturers and fuel providers. Buyer power is also strong since customers can easily compare prices and switch airlines. There are high barriers to entry that limit new competition, but the threat of substitutes poses a challenge for Delta.

Reviewed by David Kindness
Fact checked by Jiwon Ma

Variable Costs vs. Fixed Costs: An Overview

Fixed costs are expenses that remain the same no matter how much a company produces, such as rent, property tax, insurance, and depreciation. Variable costs are any expenses that change based on how much a company produces and sells, such as labor, utility expenses, commissions, and raw materials.

Fixed costs are normally independent of a company’s specific business activities. Variable costs increase as production rises and decrease as production falls. Understanding the difference between these costs can help a company ensure its fiscal solvency.

Key Takeaways

• Companies incur two types of production costs: variable and fixed costs.
• Variable costs change based on the amount of output produced.
• Variable costs may include labor, commissions, and raw materials.
• Fixed costs remain the same regardless of production output.
• Fixed costs may include lease and rental payments, insurance, and interest payments.

Variable Costs

Variable costs are any costs that a company incurs that are associated with the number of goods or services it produces. A company’s variable costs increase and decrease with its production volume. When production volume goes up, the variable costs increase.

But if the volume goes down, the variable costs follow suit. If a company has a product line that is underperforming or outdated, it may choose to stop production of that line. The costs associated with this product are considered avoidable costs.

Examples of variable costs generally include:

• Labor
• Commissions
• Packaging
• Utility expenses
• Raw materials for production

Calculating variable costs can be done by multiplying the quantity of output by the variable cost per unit of output. Suppose ABC Company produces ceramic mugs for a cost of $2 per mug. If the company produces 500 units, its variable cost will be $1,000.

However, if the company doesn’t produce any units, it won’t have any variable costs for producing the mugs. Similarly, if the company produces 1,000 units, the cost will rise to $2,000.

One important point to note about variable costs is that they differ between industries, so it’s not at all useful to compare the variable costs of a car manufacturer and an appliance manufacturer. That’s because their product output isn’t comparable.

If you’re going to compare the variable costs between two businesses, make sure you choose companies that operate in the same industry.

Important

Companies may also have semi-variable costs. These costs are a mixture of both variable and fixed costs.

Fixed Costs

Fixed costs remain the same regardless of whether goods or services are produced or not. Thus, a company cannot avoid fixed costs. As such, a company’s fixed costs don’t vary with the volume of production and are indirect, meaning they generally don’t apply to the production process—unlike variable costs.

The most common examples of fixed costs include lease and rent payments, property tax, certain salaries, insurance, depreciation, and interest payments.

To demonstrate, let’s use the same example from above. In this case, suppose Company ABC has a fixed cost of $10,000 per month to rent the machine it uses to produce mugs. If the company does not produce any mugs for the month, it still needs to pay $10,000 to rent the machine.

But even if it produces one million mugs, its fixed cost remains the same. The variable costs change from zero to $2 million in this example.

Note

A company’s net profit is affected by changes in sales volumes. That’s because as the number of sales increases, so too does the variable costs it incurs.

Special Considerations

The more fixed costs a company has, the more revenue a company needs to generate to be able to break even, which means it needs to work harder to produce and sell its products. That’s because these costs occur regularly and rarely change over time.

While variable costs tend to remain flat, the impact of fixed costs on a company’s bottom line can change based on the number of products it produces. So, when production increases, the fixed costs drop. The price of a greater amount of goods can be spread over the same amount of a fixed cost. In this way, a company may achieve economies of scale by increasing production and lowering costs.

For example, let’s say that Company ABC has a lease of $10,000 a month on its production facility and produces 1,000 mugs per month. As such, it may spread the fixed cost of the lease at $10 per mug. If it produces 10,000 mugs a month, the fixed cost of the lease goes down to the tune of $1 per mug.

Is Marginal Cost the Same as Variable Cost?

The term marginal cost refers to any business expense that is associated with the production of an additional unit of output or by serving an additional customer. A marginal cost is the same as an incremental cost because it increases incrementally in order to produce one more product.

Marginal costs can include variable costs because they are part of the production process and expense. Variable costs change based on the level of production, which means there is also a marginal cost in the total cost of production.

Are Fixed Costs Treated As Sunk Costs?

The term sunk cost refers to money that has already been spent and can’t be recovered. While sunk costs may be considered fixed costs, not all fixed costs are considered sunk. For instance, a fixed cost isn’t sunk if a piece of machinery that a company purchases can be sold to someone else for the original purchase price.

How Do Semi-Variable Costs Separate Fixed and Variable Costs?

Semi-variable costs are also called semi-fixed or mixed costs. These types of expenses are composed of both fixed and variable components. They are fixed up to a certain production level, after which they become variable. Costs remain fixed even if no production occurs. It’s easy to separate the two, as fixed costs occur regularly while variable ones change as a result of production output and the overall volume of activity that takes place.

How Can a Business Reduce Variable Costs?

There are many ways that a business can reduce its variable costs. For instance, increasing output using the same amount of material can dramatically cut down costs, provided the quality of goods isn’t impacted.

Developing a new production process can help cut down on variable costs, which may include adopting new or improved technological processes or machinery. If this isn’t possible, management may consider analyzing the process to spot opportunities for efficiencies and improvement, which can bring down certain variable costs like utilities and labor.

The Bottom Line

Businesses incur all sorts of costs. Some of these remain static regardless of output, while others will fluctuate. Understanding the differences between fixed and variable costs will allow businesses to better manage their operations, margins, and overall strategy.

Legendary investor Warren Buffett has smart estate-planning advice for all parents, regardless of their wealth level: Let your adult children read your will before you sign it.

In a revealing November 2024 letter to shareholders, the Berkshire Hathaway (BRK.A) CEO explained that this simple act could prevent family conflicts and strengthen relationships after a parent’s death.

“Over the years, I have had questions or commentary from all three of my children and have
often adopted their suggestions,” Buffett wrote. “There is nothing wrong with my having to defend my thoughts. My dad did the same with me.”

Key Takeaways

• Warren Buffett recommends letting adult children review your will before signing it to ensure they understand your decisions and their future responsibilities.
• Buffett said he takes questions and comments from his three children and has often adopted their suggestions when updating his will.
• Open discussions about inheritance plans can prevent family conflicts and jealousies that often arise after a parent’s death.

Why Sharing Your Will Matters

Buffett’s advice stems from decades of observing families torn apart by unexpected or confusing inheritance decisions. When children discover the contents of a will only after their parent’s death, questions about fairness and childhood memories of favoritism can surface, potentially damaging sibling relationships forever.

“While it’s important to have well-written estate documents, we see most estate planning go awry because of emotional issues,” Mitchell Kraus, a certified financial planner at Capital Intelligence Associates, told Investopedia. “For most families, the best way to make sure there aren’t fights after death is to have cross-generational conversations.”

Buffett said parents should be prepared to defend their choices and listen to their children’s input while they are still alive—just as his father did with him.

Note

Buffett has been candid about his views on limiting generational wealth transfers through inheritance. “I’ve never wished to create a dynasty or pursue any plan that extended beyond the children,” he wrote in the November 2024 letter, explaining his “belief that hugely wealthy parents should leave their children enough so they can do anything but not enough that they can do nothing.”

Making Changes and Taking Feedback

The “Oracle of Omaha” practices what he preaches. He said he updates his will every couple of years, sometimes making minor adjustments based on conversations with his three children. He said this has helped his family maintain strong relationships while managing the responsibilities that come with inheriting significant wealth. Indeed, Buffett believes that discussing inheritance plans openly can help families grow closer rather than drift apart.

“Be sure each child understands both the logic for your decisions and the responsibilities they will encounter upon your death,” Buffett wrote. “If any have questions or suggestions, listen carefully and adopt those found sensible. You don’t want your children asking ‘Why?’ in respect to testamentary decisions when you are no longer able to respond.”

Note

Up to 3% of wills are contested in the United States. Will contests can be emotionally devastating and financially draining for families. Legal battles over inheritances can take years to resolve in probate court and can cost thousands of dollars in legal fees.

The Bottom Line

“The biggest stumbling block is often older generations not wanting to address that there might be problems,” Kraus said. Buffett suggests that parents disclose their wills to their children before finalizing them to prevent future family conflict. This reflects his broader beliefs about inheritance management and family communication: Parents who openly discuss such decisions and solicit input from their adult children can avoid misunderstandings and build stronger family connections while ensuring their wishes are well understood.

Buffett’s estate planning strategy can be a chance for meaningful family discussions instead of potential discord. But what if your family relations are already pretty heated? The professionals have a way to deal with that, too. “For more dysfunctional families,” Kraus said, “we recommend professionals who will run family meetings and make sure things do not get out of control.”