financial

Fact checked by Suzanne Kvilhaug
Reviewed by Margaret James

While many people take a passing interest in the benefits of saving as much money as possible, saving money should take up a significant portion of the attention you give to your life. Money saved and generating interest or returns earns cash you don’t have to work for.

If you’re interested in saving, here are some of the top money wasting activities you could begin addressing.

Key Takeaways

• Convenience stores and cell phone plans can eat into your savings plan.
• You should make sure you bank at an institution with no fees, or at least the lowest fees you can find.
• Magazine subscriptions can save you money on occasional purchases if you enjoy reading them.
• If you have credit cards with annual fees, you should consider getting rid of them because you will likely never use the “perks” and can do just as well with a no-fee card.
• Eating out and paying for soft drinks can increase your annual expenses, so skipping soft drinks can help you save.

1. Convenience Stores

Many people don’t consider the markup they pay for convenience store items. Here’s a hint: it’s huge. This is because, unlike grocery stores, convenience stores don’t purchase food in large quantities, and also because they make you pay more for the convenience they provide. So, unless it’s an emergency, avoid shopping at convenience stores.

The premium you pay for convenience is not worth the assumed convenience you get. For example, a bottle of Coke at a convenience store might cost you about four dollars, while you can go to Walmart and buy a 12-pack for about $7. If you tend to pull over for a drink, buy a 12-pack and keep it in your car. If you visit convenience stores often, the annual savings of cutting out these visits can be tremendous.

2. Cell Phone Plans

Take the time to check your monthly cell phone bill–you may be paying more than you need to. If you use fewer minutes than your monthly plan allows, switch to a lower-rate plan. If you use more minutes than your monthly allotment, upgrade to a higher-minute plan.

Before making any changes to your plan, sit down with a list of your cell phone company’s offerings and compare and determine which plan provides the most value based on your needs. You should also scan through your cell phone plan for added features like text messaging and mobile internet. If you aren’t really using these features, get rid of them–they’re costing you money each month!

3. Soft Drinks

This one is a sneaky money waster. Not only does ordering beverages along with a restaurant meal boost your total expenses, but soft drinks also have one of the highest markups of any restaurant item, and thus provide lower value for your money.

Consider a typical family of four that eats out twice a week at fast-casual restaurants. Assuming an average price of $1.50 for a fountain soft drink, that totals $12 a week, $48 a month, $624 a year. Just cutting out this one item from your meal could mean significant savings that could go into something much more productive, such as a retirement savings plan. If you invest $624 at a 9% rate of return year every year, you would have almost $32,000 at the end of 20 years. So dine out, but opt for water!

4. Unnecessary Bank Fees

Many people unknowingly pay a lot to their banks in the form of fees. If you don’t know what fees your accounts are subject to, spend a few minutes finding out. Some banks charge ATM fees for using another bank’s ATM, for example. These can be as high as $3! This amounts to a 15% one-time fee for a $20 withdrawal. The key with this type of fee is simply knowing about it. You would be better off using a credit card to make the purchase and paying it off at the end of the month.

Go back and examine the rules governing your checking and savings accounts. Also consider consolidating bank accounts, as often one account with a larger minimum can eliminate numerous fees that might otherwise exist.

5. Magazines

If you’re the type of person who likes to occasionally pick up your favorite magazine from the local grocery store or newsstand, consider getting an annual subscription. Even if you don’t want the magazine every month, the cost of a couple of issues at the newsstand is enough to cover the entire annual subscription. 

6. Annual Credit Card Fees

Unless you have a poor credit history, there is no reason to pay annual credit card fees. A host of Visa, MasterCard and Discover cards have no annual fee, yet many people pay $100 or more a year for the privilege of holding a premium credit card. Unless you’re a wealthy holder of an elite-level credit card with exclusive perks, most people should not be paying annual credit card fees.

And speaking of credit cards, make sure you make a payment on time every month, even if it’s the minimum. Many credit cards charge high monthly late fees, charges which accrue interest along with your existing balance.

Be Proactive

Spend a couple of hours and go over these categories along with any other regular habits you may have accumulated over the years. The time will be well spent as it could mean hundreds of dollars of recurring annual savings.

How Do You Stop Spending Money Mindlessly?

Many people find success by creating a budget and tracking their expenses. Other methods are to consult an objective friend or loved one before making large purchases to avoid impulse buys, and avoid using credit.

What Are Big Money Wasters?

Food delivery via apps, subscriptions you’ve lost track of, grocery shopping without a list of needed items, and late payments on bills are some of the most common money wasters.

What Do Rich People Waste Money On?

“Wasting money” is a subjective term. One person might think someone is wasting money on one thing, while another might not. However, rich people might hire people to do things they could or should be doing themselves, buy unnecessary luxury items, and go out for expensive dining—all of which could be considered a waste of money by some.

The Bottom Line

Shopping at convenience stores, wasting money on magazines, and high credit card and bank fees are easy ways to waste money. Taking some time to go over your spending habits could be well worth your time.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

Decision trees are major components of finance, philosophy, and decision analysis in university classes. Yet, many students and graduates fail to understand their purpose, even though these statistical representations play an integral role in corporate finance and economic forecasting.

Key Takeaways

• Decision trees are essential tools in finance, helping analysts and investors visualize choices, risks, and potential outcomes.
• They are widely used in option pricing, real option analysis, and evaluating competing projects, often incorporating probability models.
• Binomial option pricing models rely on decision trees to estimate asset values, particularly for American and European options.
• Decision trees also assist in corporate analysis and financial forecasting but can become overly complex with many variables.
• While useful, decision trees have limitations, such as handling correlated variables and continuous financial data, making other models like neural networks sometimes more effective.

Decision Tree Basics

Decision trees are organized as follows: An individual makes a big decision, such as undertaking a capital project or choosing between two competing ventures. These decisions, which are often depicted with decision nodes, are based on the expected outcomes of undertaking particular courses of action. An example of such an outcome would be something like, “earnings are expected to increase by $5 million.” However, since the events indicated by end nodes are speculative in nature, chance nodes also specify the probability of a specific projection coming to fruition.

As the list of potential outcomes, which are contingent upon prior events, becomes more dynamic with complex decisions, Bayesian probability models must be implemented to determine priori probabilities.

Binomial Option Pricing in Decision Tree Analysis

Decision tree analysis is often applied to option pricing. For example, the binomial option pricing model uses discrete probabilities to determine the value of an option at expiration. The most basic binomial models assume that the value of the underlying asset will rise or fall based on calculated probabilities at the maturity date of the European option. 

However, the situation becomes more complex with American options, wherein the option can be exercised at any point until maturity. The binomial tree would factor in multiple paths that the underlying asset’s price can take over time. As the number of nodes in the binomial decision tree increases, the model eventually converges onto the Black-Scholes formula.

Although the Black-Scholes formula provides an easier alternative to option pricing over decision trees, computer software can create binomial option pricing models with “infinite” nodes. This type of calculation often provides more accurate pricing information, especially for Bermuda Options and dividend-paying stocks.

Using Decision Trees for Real Option Analysis

Valuing real options, such as expansion options and abandonment options, must be done with the use of decision trees, as their value cannot be determined via the Black-Scholes formula. Real options represent actual decisions a company may make, such as whether to expand or contract operations. For example, an oil and gas company can purchase a piece of land today, and if drilling operations are successful, it can cheaply buy additional lots of land. If drilling is unsuccessful, the company will not exercise the option and it will expire worthless. Since real options provide significant value to corporate projects, they are an integral part of capital budgeting decisions.

Individuals must decide whether or not to purchase the option prior to the project’s initiation. Fortunately, once the probabilities of successes and failures are determined, decision trees help clarify the expected value of potential capital budgeting decisions. Companies often accept what initially seems like negative net present value (NPV) projects, but once the real option value is considered, the NPV actually becomes positive. 

Decision Tree Applications for Competing Projects

Similarly, decision trees are also applicable to business operations. Companies are constantly making decisions regarding issues like product development, staffing, operations, and mergers and acquisitions. Organizing all considered alternatives with a decision tree allows for simultaneous systematic evaluation of these ideas.

This is not to suggest that decision trees should be used to contemplate every micro decision. But decision trees do provide general frameworks for determining solutions to problems, and for managing the realized consequences of major decisions. For example, a decision tree can help managers determine the expected financial impact of hiring an employee who fails to meet expectations and must be fired.

Pricing of Interest Rate Instruments With Binomial Trees

Although not strictly a decision tree, a binomial tree is constructed in a similar fashion and is used for the similar purpose of determining the impact of a fluctuating/uncertain variable. The upward and downward movement of interest rates has a significant impact on the price of fixed income securities and interest rate derivatives. Binomial trees let investors accurately evaluate bonds with embedded call and put provisions using uncertainty regarding future interest rates.

Because the Black-Scholes model is not applicable to valuing bonds and interest rate-based options, the binomial model is the ideal alternative. Corporate projects are often valued with decision trees that factor various possible alternative states of the economy. Likewise, the value of bonds, interest rate floors and caps, interest rate swaps, and other types of investment tools can be determined by analyzing the effects of different interest rate environments.

Decision Trees and Corporate Analysis

Decision trees let individuals explore the ranging elements that could materially impact their decisions. Prior to airing a multimillion-dollar Super Bowl commercial, a firm aims to determine the different possible outcomes of their marketing campaign. Various issues can influence the final success or failure of the expenditure, such as the appeal of the commercial, the economic outlook, the quality of the product, and competitors’ advertisements. Once the impact of these variables has been determined and the corresponding probabilities assigned, the company can formally decide whether or not to run the ad.

Limitations of Decision Trees

One major drawback is their tendency to become overly complex, especially when dealing with a large number of variables and possible outcomes. This is clearly the case with the ‘Corporate Analysis’ example above. As the number of branches increases, this can lead to what is known as the “curse of dimensionality”, meaning too much information may make a decision overly complex.

Another limitation is the reliance on subjective probability estimates. Many financial scenarios, such as predicting market movements or estimating default risk, involve assigning probabilities based on historical data or expert judgment. This may not only materialize or be a reliable function; for example, the causes of past recessions may not necessarily indicate the probability of a future recession.

Decision trees also struggle with handling correlated variables, which are common in finance. For example, things like interest rates, inflation, and stock prices often influence each other. Standard decision tree models do not inherently account for these interdependencies, potentially leading to oversimplified conclusions.

Finally, decision trees may not effectively capture continuous financial data or non-linear relationships between variables. Financial markets often exhibit complex patterns that are better modeled using advanced statistical methods or machine learning approaches like neural networks. For instance, when trying to assign credit risk, there may be too many interconnected variables all reliant on each other to be useful in a tree-analysis structure.

Note

Decision trees work well for structured financial decisions, whereas neural networks might be better in pattern recognition and forecasting.

Pruning Decision Trees For Financial Analysis

Pruning in a decision tree is a primary way to refine the model by removing branches that do not significantly contribute to decision-making. By pruning unnecessary branches, the decision tree becomes more streamlined, improving its ability to make accurate predictions in real-world scenarios.

There are two primary types of pruning: pre-pruning and post-pruning. Pre-pruning, also known as early stopping, involves setting constraints during the tree-building process. For instance, you could limit the maximum depth of the tree or require a minimum number of data points per split. This prevents the model from growing excessively large in the first place.

Post-pruning involves growing the tree fully and then systematically removing branches that do not add substantial predictive value. This is typically done using validation data to determine which branches can be eliminated while maintaining accuracy. Not that this post-pruning stage is where you’re at the most risk to overfit your data.

Software Tools Commonly Used for Decision Tree Analysis

Financial analysts can use different software tools to construct and analyze decision trees. Microsoft Excel is one of the most widely used tools, particularly for basic decision tree modeling. Analysts can manually build decision trees using Excel’s built-in functions or use add-ins like XLMiner for more advanced analysis.

For more sophisticated decision tree analysis, R is a popular choice. The rpart package in R allows you to build, prune, and optimize decision trees using machine learning techniques. R generally has a better ability to handle large datasets and perform more complex calculations. Python, particularly with the Scikit-learn library, is another option. Scikit-learn allows you to implement decision tree classifiers and regressors. It can also usually be integrated with other financial modeling tools.

In addition to general-purpose programming languages, specialized financial modeling software such as Palantir, SAS, and MATLAB also provide decision tree analysis capabilities. These types of tools might be better suited for institutions needing to not only do more robust analysis but having the analysis at the core of what the company does (i.e. corporate analysis or underwriting).

What Is a Decision Tree in Finance?

A decision tree is a graphical representation of possible choices, outcomes, and risks involved in a financial decision. It consists of nodes representing decision points, chance events, and possible outcomes, helping analysts visualize potential scenarios and optimize decision-making.

How Are Decision Trees Used in Investment Analysis?

Decision trees help investors evaluate various investment opportunities by mapping potential risks and rewards. By assigning probabilities and expected values to different outcomes, investors can compare options and choose the one with the highest expected return. Investors can also compare downside expectations and anticipated potential losses.

How Are Probabilities Assigned in Decision Trees?

Probabilities in decision trees are assigned based on historical data, expert judgment, or statistical models. The probabilities are at the core of how the decision tree works; experts often spend most of their time analyzing the chance of outcomes (i.e. a 40% chance of a recession), as that’s a primary driver of decision tree outcomes.

What Is the Expected Value in a Decision Tree?

The expected value is the weighted average of possible outcomes, factoring in their probabilities. It helps decision-makers compare options and select the one with the highest EV for optimal financial outcomes.

The Bottom Line

These examples provide an overview of a typical assessment, which can benefit from utilizing a decision tree. Once all of the important variables are determined, these decision trees become very complex. However, these instruments are often an essential tool in the investment analysis or management decision-making process.

Fact checked by Vikki Velasquez

High school and college students should be on the road to financial success by learning some basics and following some guiding principles. This ultimate checklist will guide them on their way. And most importantly, time is on their side.

“Young people have perhaps the biggest advantage compared to other investors: time. The earlier you learn and apply key financial skills, the greater your rewards will be over the long term,” says Phillip Durbin, a financial planner with Generational Wealth Development.

Key Takeaways

• You can build a lifetime’s worth of wealth by starting to invest in your 20s.
• By building an accurate budget, you can start finding smart ways to save.
• Compounding interest is your superpower when you’re young.

Financial Checklist for Young People

Young people can build financial success by following the tips on this checklist:

• Start by creating a realistic budget that takes into account wants and needs.
• Start saving and establish an emergency fund to cover unexpected expenses.
• Be smart about credit.
• Don’t be scared of investing in the stock market.

Learn How to Budget

Getting a handle on the money coming in and going out each month is the first step to building a solid financial foundation. So, tally up all bills and expenses as well as income each month and build a budget. Make note of monthly bills and monthly income. How much money is left over after paying bills? Rather than spending it all, this is a great opportunity to begin saving.

Understand Wants vs. Needs

As you build your budget, consider the difference between needs and wants. There are many ways people want to spend their money, but not all of them are essential—these are needs. Take care of needs first and then consider what wants will fit into the budget.

“Prioritize spending on things you need (housing, food, gas) before things you want (new phone, concert tickets, gas station junk). Budget for some fun, but learn to say no,” Durbin says.

Time to Start Saving

“The sooner you learn to budget for your life, the better off you’ll be. Once you control where your money is going, you can start controlling how much you save,” Durbin says. “Pay yourself first by saving a portion of any money you earn or receive before spending it.”

One way to achieve that is to set up automatic savings into a high-yield savings account or a brokerage account.

Learn the Power of Compound Interest

Depending on the account you put your savings into, it’s important to ensure you understand how that money grows. When interest gets applied not only to the principal amount you invest in an account but also to the interest accumulated previously, this is compound interest. And it’s a sort of superpower, particularly when you’re young.

“Take advantage of compound interest by contributing to a 401(k) or Roth IRA as soon as possible. Even small contributions in your 20s can grow significantly over time,” says Daniel Milks, a certified financial planner and founder of the Fiduciary Organization.

Build an Emergency Fund

Not everything that happens to you will fall into a neat budgeting bucket. An unexpected expense, such as a big car repair or getting laid off from a job, can happen to anyone. Be prepared by building a savings cushion to cover these expenses.

“Aim to save three to six months’ expenses in a high-yield savings account. This provides a financial cushion for unexpected expenses like medical bills or job loss,” Milks says.

Use Credit Wisely

Be smart about your credit. Your bank will likely make it easy to set up automatic bill pay to ensure your credit card bills (and other recurring bills) get paid on time. Keep your credit card balances low. And only borrow money for essentials you need. These can help you create a credit history. And a good credit rating can go a long way as you map out your future.

“Build a strong credit history by paying bills on time, keeping credit utilization low, and avoiding unnecessary debt. Good credit helps with securing loans, renting apartments, and even job applications,” Milks says.

Don’t Be Afraid of the Stock Market

Investing early and often when you are a young person is one of the best financial moves you can make. Time and the power of compound interest are on your side. So don’t hesitate to begin investing.

“The stock market can be this big, scary beast, but it doesn’t have to be. You have the biggest advantage of anyone: time,” Durbin says. “Spend the time learning about it now, so it can benefit you for the rest of your life. This knowledge could save you millions of dollars over your lifetime; isn’t that worth the time to learn it now?”

People younger than 18 can get an early start on investing through a custodial account, but you’ll need a parent or guardian’s help to set it up. In a custodial account, an adult controls investments on behalf of a minor until the minor reaches 18 or 21 years of age, depending on the state.

To start, you’ll need to educate yourself about investing. Then, set up your investment goals before selecting your specific investments. Finally, select the right brokerage account for you.

The Bottom Line

These financial tips will set young people on the path to a bright financial future. All are important, so make sure to incorporate all the tips as you build your financial life. Budget, be smart with your credit, save for a rainy day (because they happen to all of us), and understand the difference between a want and a need. The biggest takeaways are the importance of investing and understanding the power of compounding interest.

You can build a lifetime’s worth of wealth by starting to invest in your 20s. So don’t be frightened by the stock market and instead invest in your financial future.

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

Leveraged buyouts (LBOs) have probably had more bad publicity than good because they make great stories for the press. However, not all LBOs are regarded as predatory. They can have both positive and negative effects, depending on which side of the deal you’re on.

A leveraged buyout is a generic term for the use of leverage to buy out a company. The buyer can be the current management, the employees, or a private equity firm. It’s important to examine the scenarios that drive LBOs to understand their possible effects. Here, we look at four examples: the repackaging plan, the split-up, the portfolio plan, and the savior plan.

Key Takeaways

• A leveraged buyout is when one company is purchased through the use of leverage.
• There are four main leveraged buyout scenarios: the repackaging plan, the split-up, the portfolio plan, and the savior plan.
• The repackaging plan involves buying a public company through leveraged loans, making it private, repackaging it, and then selling its shares through an initial public offering (IPO).
• The split-up involves purchasing a company and then selling off its different units for an overall dismantling of the acquired company.
• The portfolio plan looks to acquire a competitor with the hopes of the new company being better than both through synergies.
• The savior plan is the purchase of a failing company by its management and employees.

The Repackaging Plan

The repackaging plan usually involves a private equity company using leveraged loans from the outside to take a currently public company private by buying all of its outstanding stock. The buying firm’s goal is to repackage the company and return it to the marketplace in an initial public offering (IPO).

The acquiring firm usually holds the company for a few years to avoid the watchful eyes of shareholders. This allows the acquiring company to make adjustments to repackage the acquired company behind closed doors.

Then, it offers the repackaged company back to the market as an IPO with some fanfare. When this is done on a larger scale, private firms buy many companies at once in an attempt to diversify their risk among various industries.

Important

Private equity firms typically borrow up to 80% to 90% of the purchase price of a company when enacting a leveraged buyout. The remainder is funded through their own equity.

Those who stand to benefit from a deal like this are the original shareholders (if the offer price is greater than the market price), the company’s employees (if the deal saves the company from failure), and the private equity firm that generates fees from the day the buyout process starts and holds a portion of the stock until it goes public again.

Unfortunately, if no major changes are made to the company, it can be a zero-sum game, and the new shareholders get the same financials the older version of the company had.

The Split-Up

The split-up is considered to be predatory by many and goes by several names, including “slash and burn” and “cut and run.” The underlying premise of this plan is that the company, as it stands, is worth more when broken up or with its parts valued separately.

This scenario is fairly common with conglomerates that have acquired various businesses in relatively unrelated industries over many years.

The buyer is considered an outsider and may use aggressive tactics. Often in this scenario, the firm dismantles the acquired company after purchasing it and sells its parts to the highest bidder. These deals usually involve massive layoffs as part of the restructuring process.

It may seem like the equity firm is the only party to benefit from this type of deal. However, the pieces of the company that are sold off have the potential to grow on their own and may have been stymied before by the chains of the corporate structure.

The Portfolio Plan

The portfolio plan has the potential to benefit all participants, including the buyer, the management, and the employees. Another name for this method is the leveraged build-up, and the concept is both defensive and aggressive in nature.

In a competitive marketplace, a company may use leverage to acquire one of its competitors (or any company where it could achieve synergies from the acquisition).

The plan is risky: The company needs to make sure the return on its invested capital exceeds its cost to acquire, or the plan can backfire. If successful, then the shareholders may receive a good price on their stock, current management can be retained, and the company may prosper in its new, larger form.

The Savior Plan

The savior plan is often drawn up with good intentions but frequently arrives too late. This scenario typically includes a plan involving management and employees borrowing money to save a failing company. The term “employee-owned” often comes to mind after one of these deals goes through.

While the concept is commendable, the likelihood of success is low if the same management team and tactics stay in place. Another risk is that the company may not be able to pay back the borrowed money quickly enough to offset high borrowing costs and see a return on the investment. On the other hand, if the company turns around after the buyout, then everyone benefits.

What Is a Leveraged Buyout?

A leveraged buyout is a method of buying a company primarily through debt financing. It is often employed by private equity firms when making acquisitions. The assets of the company being acquired usually serve as the collateral for the loan. The strategy is employed by PE firms as it requires little initial capital on their end. The goal is to purchase the company, make improvements, and then sell it for a profit or take it public.

What Are the Risks of a Leveraged Buyout?

Leverage buyouts are risky because they involve using borrowed money to acquire a business, with the goal of improving its operations and selling it for a profit. The business being acquired is responsible for the debt repayments via its cash flows.

If the business does not generate enough cash flow, it will struggle to meet debt obligations, which could lead to default and bankruptcy. For the private equity firm that makes the business acquisition, the main risk is not being able to improve the business’s value and sell it for a profit, which could result in a financial loss.

How Can I Invest in a Leveraged Buyout?

As an individual investor, it is extremely difficult to invest in leveraged buyouts (LBO) as they are executed by private equity (PE) firms that have a large financial base and access to financing. You could invest in private equity funds, however, the minimum requirements are extremely high.

Alternatively, you could buy shares of companies that make LBOs, such as Blackstone or KKR. Private equity exchange-traded funds (ETFs) exist whereby individual investors can gain access to the strategies PE firms specialize in. Generally speaking, however, it is unlikely for individual retail investors to be able to invest in leveraged buyouts.

The Bottom Line

While there are forms of LBOs that lead to massive layoffs and asset selloffs, some LBOs can be part of a long-term plan to save a company through leveraged acquisitions. Regardless of what they are called or how they are portrayed, they will always be a part of an economy as long as there are companies, potential buyers, and money to lend.

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

Financial advisory firms manage trillions of dollars and this connects them intimately to questions of wealth and equity. The U.S. Government Accountability Office (GAO) nonetheless found when it reviewed the industry in 2017 that less than 1% of those assets estimated at more than $70 trillion were managed by minority- or woman-owned firms.

There’s been growing investor interest in promoting diversity in firms, however. A study by the U.S. Securities and Exchange Commission (SEC) Asset Management Advisory Committee found that investors value DEI information when deciding to invest. The study has been characterized as the most detailed inspection of diversity, equity, and inclusion (DEI) in the industry to date.

Key Takeaways

• Financial advisory firms show a growing appetite for diversity, equity, and inclusion (DEI).
• Proponents argue that DEI increases innovation and revenue for businesses.
• Many projections suggest that increased DEI would significantly increase productivity for the U.S. economy as a whole.
• Many initiatives may not be evidence-led.
• Opinion about DEI is generally positive but the willingness of businesses to invest resources into promoting DEI goals may be unstable.

What Are DEI Initiatives?

Diversity, equity, and inclusion (DEI) refer to three separate though connected concepts.

• Diversity refers to including people with different demographic characteristics such as race, sex, sexual identity, or disability.
• Equity refers to businesses offering varying resources to account for privilege and power differences.
• Inclusion refers to whether people feel included and have a voice in decision-making.

These three concepts are used to evaluate a company’s progressiveness and innovation.

How Advisory Firms Can Do More in DEI

DEI for financial advisory firms can mean connecting consumers to a diverse set of qualified financial advisors or having a diverse staff. 

The retail wealth management group Lincoln Financial Network runs a network that connects consumers to Black and Latino/Latina financial professionals through a digital platform. The company argues that its platform will decrease isolation among these groups and will therefore stimulate financial well-being by expanding access to financial advice. The group has also held professional development sessions.

Internships such as the BLatinX (BLX) Internship Program are meant to encourage Black and Latino/Latina people to become certified financial planners.

Proponents suggest that there’s more work to do in the industry, however. It’s focused more on diversity than equity or inclusion, according to an interview given by Kevin Keller, CEO of the Certified Financial Planner Board of Standards, at their 2022 diversity summit. Other members present at the meeting called for more transparency in hiring practices.

The SEC’s Asset Management Advisory Committee report made recommendations to address what it argued was a lack of diversity and transparency around practices in the industry. It recommended that the agency require more detailed gender and race disclosures along with setting up a way to increase record keeping and further studies.

Important

It’s often been recommended that individual firms craft a mission unique to their firms and develop strategies and ways of measuring goals while getting employees and leadership to buy in.

Examples of DEI Initiatives

Investopedia surveyed the publicly available information for some of the largest firms and asked a few firms from its 100 Top Financial Advisors list to cite it. The biggest names in financial advice have issued DEI statements that include publishing regular reports about DEI initiatives that they’re pursuing.

• Vanguard also emphasized its attempts to attract and retain diverse staff. It published an overview of the race and ethnicity of its workforce.
• Fidelity advertises its associate-led community investment program and it claims that 43% of its new hires in 2022 were people of color. The company spent $350 million on “diverse suppliers.”

Make it your “why”

“As a majority female, Black-owned firm, we are redefining the traditional structure of mainstream RIAs (registered investment advisors) by leveraging our cultural competency skills, authentically engaging holistic financial planning advice, and creating a hospitable environment for our employees and clients alike,” wrote Lazetta Rainey Braxton, founder and CEO of Investopedia Top 100 Financial Advisory firm Lazetta & Associates.

She described diversity, equity, inclusion, and belonging as holding at the center of why the firm began when the country was becoming a “racial mosaic.”

“We celebrate weaving our ‘Why’ into our internal and external practices that span employee training, career paths, company handbook, team huddles, prospect introductions, client meetings, and company retreats,” Braxton wrote.

Work with diverse suppliers

“We make intentional efforts to include a diverse slate of candidates for job openings and we select employees through a fair and consistent hiring process,” wrote Peter Lazaroff, chief investment officer of Plancorp, an Investopedia Top 100 Financial Advisory firm.

Plancorp also seeks out women- and minority-owned businesses to be their suppliers, according to Lazaroff.

Don’t focus on “initiatives”

“I disagree with how most firms are looking at DEI,” Kirk Chisholm said in an email. Chisholm is the wealth manager and principal of Innovative Advisory Group, another Investopedia Top 100 Financial Advisory firm.

Chisholm’s firm avoids specific initiatives that he views as the wrong approach to increasing diversity.

“Pragmatically, people who are in underrepresented groups in the financial services industry should not be looked at as lacking opportunity,” he said. “They have a tremendous opportunity. Their lack of presence in the industry gives them a competitive advantage over others who are not from that represented group. People like associating with others who are like them. If people looked at the issue as an opportunity rather than a problem, more could be accomplished.”

Benefits of DEI in the Workplace

The reputed benefits of DEI include higher employee morale, lower turnover, and greater competitive advantage. Proponents often stress profitability in what’s known as the “business case.”

Several projections suggest that “diverse” corporations outproduce and out-earn non-diverse firms largely by encouraging innovation from traditionally underrepresented groups. The upside is said to spill over into the broader economy as well with prominent projections claiming that greater diversity could pull in trillions of extra dollars.

There’s been some skepticism over how genuine most DEI pledges are in general, however. Corporations are quick to talk about their commitment to diversity but many have been slow to make non-superficial changes, according to Salvador Ordorica, CEO of translation service The Spanish Group LLC. Ordorica indicated that corporations can take “a cynical approach” to diversity as a way to win plaudits for minor changes, sometimes referred to as “slacktivism.”

Large companies tend to justify DEI by stressing its usefulness in business performance rather than making a moral case that DEI encourages fairness within organizations. The business case for DEI may discourage inclusion, however, with one study finding that emphasizing profitability in this way makes the businesses appear less attractive to the underrepresented groups it may be trying to attract.

The evidence can be thin even for well-intentioned initiatives. Some research suggests that many of the DEI industry’s recommendations from unconscious bias training to workshops are limited in effectiveness at best and can cause backlash at worst. One meta-analysis of hundreds of “prejudice-reduction” interventions found that only “a small fraction” were effective.

Note

There are also concerns that some corporate investments may prove ultimately unstable. Several companies have laid off DEI professionals as the macroeconomic environment has become less favorable, including several big tech companies like X (formerly Twitter) and Amazon where DEI positions have shown much greater attrition rates than other jobs.

Measuring DEI in the Workplace

There have been calls to make DEI more data-led, a process that involves spelling out DEI goals and using metrics to track progress. This is partly a response to criticisms of DEI that suggest the industry isn’t evidence-backed but it also allows companies to track whether their policies are having the desired effect.

What Is DEI?

DEI stands for diversity, equity, and inclusion. These are a set of concepts that are intended to test how innovative a company is.

What Are the Benefits of Workplace Diversity?

Embracing DEI in the workplace is said to offer companies a competitive advantage, decreased employee turnover, and better employee morale.

Why Is DEI Important in Nonprofit Organizations?

Embracing DEI makes “space for positive outcomes to flourish,” according to the National Council of Nonprofits, an organization that provides resources for nonprofits.

The Bottom Line

Corporate interest in DEI has surged and popular opinion is mostly positive. But corporate pledges may not be stable and actual DEI recommendations aren’t necessarily backed by evidence. There’s nonetheless an appetite for well-crafted, measurable DEI initiatives in financial advising that proponents argue will help combat structural hurdles like the racial wealth gap.

Homeownership is possible if you rebuild your credit

Fact checked by Betsy Petrick

If you’ve gone through bankruptcy, you’re probably considering your new financial options and might be wondering whether homeownership is in the cards for you. Although it does take time and is difficult, it’s not impossible to buy a house after declaring bankruptcy. The exact steps you need to take depend on what type of bankruptcy you filed. We’ll walk you through the details and cover strategies that increase your chances of getting approved for a mortgage after bankruptcy.

Key Takeaways

• Bankruptcy is a legal process that helps people who cannot pay their debts by discharging their debts.
• Mortgage lenders see bankruptcy as a red flag and, as a result, might deny mortgage applications.
• By improving your credit score and personal finances, you can better your chances of getting a mortgage approval.

How Long After Bankruptcy Can You Buy a House?

The bankruptcy process itself can take months or years to resolve. Generally, there’s also a waiting period before you can purchase a house. The exact waiting period depends on whether you filed Chapter 7 or Chapter 13 and the type of home loan you’re seeking.

Chapter 7 Bankruptcy Waiting Periods

Chapter 7 bankruptcy is sometimes called liquidation bankruptcy because the person’s assets are sold to satisfy their creditors. Whatever debt remains is forgiven. If you’ve filed Chapter 7, your waiting period from the discharge date before buying a house varies by loan type.

• Conventional: Four years
• FHA or VA: Two years
• USDA: Three years

Chapter 13 Bankruptcy Waiting Periods

Chapter 13 bankruptcy doesn’t seize assets to pay creditors. Instead, the person filing makes monthly payments to a bankruptcy trustee over a period of three to five years. Since making these payments regularly and on time can prove financial responsibility, you typically don’t have to wait as long after filing bankruptcy to apply for a home loan.

• Conventional: Two years (or four years from dismissal)
• FHA or VA: One year
• USDA: One year

Waiting Periods for Multiple Bankruptcies

If you have multiple bankruptcies within the last seven years, you’ll generally have to wait five years from the last discharge or dismissal before applying for a mortgage. One bankruptcy is already a red flag to lenders, so in their eyes, having multiple bankruptcies is all the more reason not to extend you credit.

Note

If co-borrowers, such as a married couple, each have a bankruptcy on their credit report, the two bankruptcies won’t count as multiple bankruptcies to the lender.

Types of Mortgage Loans You Can Get After Bankruptcy

Once you’ve met the waiting period, you can apply for any kind of mortgage, such as a United States Department of Veterans Affairs (VA) loan, U.S. Department of Agriculture (USDA) loan, or conventional loan. That said, you might find it easiest to get a Federal Housing Administration (FHA) loan. Unlike conventional mortgages, FHA loans don’t have as strict credit requirements. So, if your credit score is still a little lower than you’d like, you may have a better chance of qualifying for an FHA loan.

FHA loans also have lower down payment requirements, which is useful if you’ve been trying to manage debt and don’t have a large down payment set aside. These loans are insured by the government and issued through approved banks or lenders. The goal of FHA loans is to help low- to moderate-income families become homeowners.

How to Apply for a Mortgage After Bankruptcy

When applying for a mortgage, there are a few additional steps that people with bankruptcies will likely need to take in order to get approved.

Step 1: Repair Your Credit

Building credit takes time, but the waiting period is a great opportunity to focus on your finances. Although bankruptcy will cause your credit score to drop, its effect on your score lessens over time. Before you start tackling your credit score, pull up your current credit report to check for errors and see where your score stands. If you spot mistakes, contact the credit bureaus to dispute them.

Your credit score could improve if you:

• Pay your bills on time every month
• Keep your credit utilization ratio low by not maxing out your credit cards
• Getting a secured credit card if you don’t qualify for a standard unsecured credit card

Step 2: Write a Bankruptcy Explanation Letter

Your lender might request a letter from you explaining the circumstances that led to you filing for bankruptcy. This can help the underwriting department consider your situation.

In the letter, describe what happened. Maybe you lost your job and didn’t have income for an extended period of time, your spouse passed away and you couldn’t manage your finances alone, or you had significant medical bills that caused you to fall behind on other debts.

Conclude your letter by describing everything you’ve done since filing for bankruptcy to improve your financial situation. This can help the underwriters see that you’re creditworthy.

Step 3: Get Pre-Approved

During the pre-approval process, you ask potential lenders to review your credit and income to determine if you qualify for a loan. If you do, the lender also will tell you how much of a loan the bank or issuer is willing to lend you.

To get pre-approval, reach out to a lender and provide your contact information, employment history, Social Security number (SSN), bank and investment details, and proof of income when prompted. You’ll also typically have to give tax documents like returns, W-2s, and 1099s.

Step 4: Respond to Lender Inquiries

Since underwriting processes vary by lender, a potential lender might ask for more information after you submit your mortgage application. They might need more details in order to come to an approval decision, so it’s in your best interest to respond to their request as quickly as possible. For example, a lender might ask you to send in an additional year of tax returns if you changed jobs or companies.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), or the U.S. Department of Housing and Urban Development (HUD).

How Long Does It Take To Rebuild Credit After Bankruptcy?

The answer depends on your specific financial situation, but be aware that bankruptcy can stay on your credit report for up to 10 years. However, even though your credit may initially drop after filing, you may see your score improve within months, especially if you take steps to rebuild your credit.

What Is the Waiting Period After Bankruptcy?

The waiting period is the amount of time you have to wait after a bankruptcy discharge or dismissal before you can apply for a mortgage. The waiting period depends on what type of bankruptcy you file and what type of mortgage you’re taking out.

What Is the Downside to an FHA Loan?

FHA loans face additional restrictions and regulations, which can slow down the homebuying process. Plus, if you’re unable to make a 10% down payment, you’re required to purchase mortgage insurance. Unlike a conventional loan, an FHA loan requires you to pay mortgage insurance for the life of the loan, so it can cost you more in the long run.

The Bottom Line

Bankruptcy is never a decision to take lightly. If you have to file, you might face extra challenges in qualifying for a mortgage down the line, but it’s still possible to buy a home. By using the required waiting time to improve your credit score, you can prove to lenders that you’re responsible with your finances. You may also qualify for better interest rates if you can greatly improve your score. To help you come up with a post-bankruptcy recovery plan, you may want to speak with a financial advisor or credit counselor.

Reviewed by David Kindness
Fact checked by Yarilet Perez

Who doesn’t want to avoid taxes? Judge Billings Learned Hand famously summed up the American tax situation, saying, “Anyone may arrange his affairs so that his taxes shall be as low as possible … for nobody owes any public duty to pay more than the law demands.”

Avoiding taxes is one thing, but income tax evasion is another. Tax evasion occurs when a person or business uses illegal means to escape paying taxes, whereas tax avoidance is the practice of using legal means in order to lower the amount of taxes owed.

These famous tax evaders found ingenious (and illegal) ways to avoid paying up. Find out how much they owed and how they were caught.

Key Takeaways

• Tax avoidance is legal, but tax evasion, which involves using illegal methods to not pay taxes, can come with serious consequences.
• Many individuals have tried to evade taxes, from gangsters like Al Capone to celebrities like Wesley Snipes.
• Cheating the tax system can result in fines and jail time so it’s smart to just pay your taxes, not to mention that it is legally required.

Walter Anderson

Anderson’s case is the largest tax evasion case in the history of the United States. This former telecommunications executive was accused of hiding his earnings through the use of aliases, offshore bank accounts, and shell companies.

In 2006, Anderson entered a guilty plea in which he admitted to hiding approximately $365 million worth of income. He was sentenced to nine years in prison and restitution of $200 million.

A typographical error in the amount of the federal government’s judgment against Anderson has prevented him from having to pay the majority of the taxes owed.

The IRS conceded taxes and penalties for three years included in Anderson’s case, however, Anderson is still responsible for $23 million owed to the government of the District of Columbia.

Al Capone

This infamous mobster’s name has been associated with a variety of illegal acts including bootlegging, prostitution, and murder. However, only one illegal act landed Al Capone in prison—income tax evasion. Under Capone’s watch as boss of the Chicago Outfit, the organization generated estimated revenues of $100 million per year.

Due to the removal of the word “lawful” from the 16th Amendment in 1916, even income earned via illegal activities is subject to tax.

This put criminals like Capone in a bind because they could either admit to breaking the law and file proper taxes (essentially confessing), or cheat on taxes and risk getting jailed for evasion. In addition to paying fines and the outstanding tax bill, Capone was sentenced to 11 years in prison.

Joe Francis

The “Girls Gone Wild” creator is no stranger to controversy. In 2007, he was charged with felony tax evasion for reportedly filing false corporate tax returns. Authorities accused Francis of filing over $20 million worth of false business expenses in order to keep from paying taxes. A guilty plea allowed him to escape the felony charge.

However, it appears Francis has not fully escaped his tax woes. In November 2009, the IRS filed a tax lien against Francis. The tab is a whopping $33.8 million.

Note

If you pay your taxes late, the IRS will charge you a penalty. The penalty is 0.5% of the unpaid taxes for each month they remain unpaid, but it won’t exceed 25% of the unpaid taxes.

Wesley Snipes

Federal prosecutors have accused the “Blade” star of many offenses. Snipes allegedly hid income in offshore accounts and did not file federal income tax returns for several years. The actor’s federal tax debt was estimated to be in the range of $12 million.

In 2008, Snipes was acquitted of felony tax fraud and conspiracy charges but was found guilty of misdemeanor charges.

Snipes was sentenced to three years in prison. His accountant, Douglas P. Rosile, and tax protester Eddie Ray Kahn were charged as co-defendants. Rosile was sentenced to four and a half years. Kahn was sentenced to 10 years.

Leona Helmsley

Dubbed the “Queen of Mean,” this hotel operator reportedly told a former housekeeper, “We don’t pay taxes. Only the little people pay taxes.” Helmsley and her husband, Harry, accumulated a multi-billion dollar real estate portfolio.

Despite their immense wealth, they were accused of billing millions of dollars in personal expenses to their business in order to escape taxes. In 1989, Helmsley was convicted on three counts of tax evasion. She served 18 months of federal prison time. Coincidentally, she was ordered to report to prison on income tax deadline day for that year, April 15, 1992.

What Is the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance and tax evasion are methods of reducing the taxes you pay; however, they are on opposite sides of the legal system. Tax avoidance is legal whereas tax evasion is illegal. Tax avoidance involves reducing your taxes through legal methods, such as deductions, credits, and loopholes to lower your tax bill. Tax evasion on the other hand involves lying, creating fraudulent documents, not correctly reporting income, and other means which are not legal.

How Can I Legally Reduce My Taxes?

There are a handful of ways to legally reduce your taxes. Contributing to tax-advantaged retirement accounts, such as 401(k)s and IRAs reduces your taxable income. If you’re self-employed, you can take advantage of deductions such as office supplies, car payments, gas payments, travel, and more. Other ways to reduce your taxes are through charitable donations and health savings accounts (HSAs). For investing, you can employ tax-loss harvesting to offset the tax you pay on gains.

Does the IRS Check Every Tax Return?

No, the IRS does not check every tax return; in fact, the amount of tax returns they check is very few as most are automatically processed. The IRS does employ various systems to detect anomalies that could be red flags. If red flags arise, they can take a deeper look and ask for more information.

The Bottom Line

Some people go to creative lengths to save money, but there is a clear line between creativity and breaking the law. Minimizing taxes through legal means is a smart tax strategy but tax evasion comes with tough consequences. As we can see from the troubles of these five people, what you may save now will not be worth what you have to pay later.

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

A 2024 survey from Investopedia and REAL SIMPLE found that 57% of women don’t hold any investments. Some who said they have retirement accounts don’t consider themselves to be investors. The two most common reasons women say they’re not investing are that they don’t know how to start or they don’t have enough money.

This data shows a need to reinforce two points: Women are investors and you don’t need hundreds or even thousands of extra dollars to get started. Shifting your mindset about investing can be the hardest part of starting your journey but it can pay off. 

Key Takeaways

• Experts say that shifting your mindset around investing can be the hardest part of getting started.
• Some things like fear, lack of knowledge, and lack of transparent peer-to-peer conversations hold women back from investing.
• Even investing a small amount of money now can be more valuable than investing a large amount of money years from now because of the power of compound interest.
• According to a Fidelity Women and Investing Study, women outperform their male counterparts in their investment portfolios by 40 basis points.

How Women Feel About Investing

Women have mixed feelings and participation rates when it comes to investing. The 2024 Her Money Mindset survey found that just 43% of respondents said they’re invested. Only 7% of women confidently said they know the most about investing compared to other financial topics.

The survey showcased the power and confidence that can be found in investing. Of the women who are invested, 61% said they’re proud of an investing decision they made. Here’s what some of the women-identifying survey respondents anonymously said when asked what financial decision or action they are most proud of.

• “Becoming more financially literate and learning about investing in something that can be used as a separate source of income. I have slowly but surely been investing in stocks and crypto when I have extra money.” Millennial, single, annual household income of less than $75,000.
• “I am most proud of myself for investing part of my savings into the stock market and learning about the everyday trends within the market.” Generation X, married or living with a partner, annual household income over $75,000.
• “Deciding right out of college to join my company’s 401k. If I didn’t do that, I would not be financially secure now.” Baby boomer, married or living with a partner, annual household income over $75,000.

These insights paired with data that shows that women are starting to invest at a higher rate than men are moves in the right direction. A lack of communication, knowledge gaps, and fear are still holding women back, however.

Changing the Mindset

Perhaps one of the most important ways to increase women’s awareness and participation in investing is talking about it but that’s not happening much.

The Her Money Mindset survey found that women get most of their financial information from the internet and family and friends. Seventy percent of women said they talk to their friends about money but only 34% of those talk about investing.

“As women, it is crucial for us to talk more about money and investing,” said Valerie Leonard, CEO and financial advisor at EverThrive Financial Group. “We must have empowering conversations with one another that will help bridge the gender gap and encourage our friends and the next generation to get smarter with money.”

It can be hard to trust what you don’t understand, too. A lack of information is the No. 1 reason women said they’re not investing.

Stephanie McCullough, founder and financial planner at Sofia Financial and host of the Take Back Retirement podcast, sees this often in her investment practice. She regularly tells women, “You don’t have to have all the answers. You just need to know what questions to ask and have the guts to ask them.” 

Note

The Her Money Mindset Survey found that investing is the No. 2 financial topic they want to learn more about, behind saving money.

The Truth: Women Are Investors—And Good Ones

Women outperformed their male counterparts in their investment portfolios by 40 basis points or 0.4 of a percentage point, according to a Fidelity Women and Investing Study.

The 2024 Her Money Mindset Survey reinforced that women who are investing are engaged with their portfolios and market happenings. This engagement may help drive portfolio performance.

Note

Thirty-one percent of invested women said they check the performance of their investments at least monthly and 29% check the performance of the stock market at least monthly, according to the 2024 Her Money Mindset Survey.

The research women are doing may be boosting confidence in their investing, too. One woman surveyed by Investopedia and Real Simple said that she focuses on “choosing to invest in stocks that pay dividends rather than focusing solely on performance and trends.” Another said her best investment strategy is “purchasing high-quality company stocks and holding them for the long term.”

Advice From Women, For Women

Our experts haven’t been shy about offering some advice. They focus on some key points.

Start now

Stephanie Tisdale, an avid investor and owner of Breakthrough Bookkeeping, said that learning to invest “was like drinking from a firehose.” There was so much information that she had a hard time distilling what was most important to her and her circumstances. This led to inaction for longer than she would have liked. She quickly realized the impact investing makes on reducing the distance between where she began at age 35 and where she wants to be.

Leonard said women’s desire to invest is usually tied to their goals. Women aren’t jumping into investing simply for the love of the game. She finds that they’re motivated to invest because they want to put kids through college, buy a new home, or save for retirement.

Time is your best friend when it comes to investing. The sooner you start, the more time you have to benefit from compound interest. Identify a goal you’re passionate about and invest with that goal and timeline in mind.

Money isn’t shameful

McCullough specializes in working with women investors and supporting them in meeting their financial goals. She finds that a lot of women self-describe as “a mess” because of societal stereotypes about overspending and being “bad” with money. Many of McCullough’s clients have never been taught about money and they take on the stereotypes as truth about themselves even when they’re not true. And most of the time, they’re not.

McCullough wants women to know that it’s not a character flaw and the shame spiral won’t get you any closer to meeting your goals even if it’s true that you’re not “good” with money now.

Consider what you can gain

McCullough frequently sees women enter the market “when the pain of staying where you are is greater than the pain of change.” Many tell her that they can’t believe they waited as long as they did, however, when they take the plunge into investing.

Important

Research by Fidelity confirmed that seven out of 10 women wished they would have started investing sooner.

Start small

One of the biggest reasons women say they’re not investing is that they don’t think they have enough money left over at the end of the month, according to the 2024 Her Money Mindset Survey. It’s a huge misconception that you have to have a lot of money to invest.

A great place to start is participating in an employer-sponsored plan like a 401(k) especially if your employer is offering a contribution match. You can also put a few dollars a month into a target-date ETF and let dollar-cost averaging and compounding interest work for you.  

McCullough said she wants to remind all women, “You can start long before you feel you know everything.”

Make a Plan

The first thing you should do to get started in investing is figure out why you want to save. The journey of investing should always start with goals and a timeframe. Are you planning to buy a house in five years? How much money will you need to make a necessary down payment? 

You can build a roadmap with investment products to get you there when you’ve answered these questions.

Look into individual retirement accounts, both Roth and traditional, and find out if your employer offers a 401(k) plan and matches contributions if you’re prioritizing retirement savings. Look into 529 Plans and Coverdell accounts if you’re hoping to save for education expenses. Look into mutual or index funds if you’re saving for long-term goals like building a dream home in 10+ years.

And, of course, you can always contact a financial advisor in your area of interest. You can find someone to guide you on your wealth-building journey if you have even $50 a month to invest.

Do I Have to Have a Lot of Money to Start Investing?

You don’t have to have a lot of money to start investing. Even small amounts can grow significantly with the power of compounding interest.  A small amount invested early can be worth more than a greater amount invested later. 

What Is the First Thing I Should Do to Start Investing?

First, consider your goals and timeline. They’ll determine the best products for you to use. Long-term goals will allow you to take more risks with products like stocks. Shorter-term goals can best be achieved with safer options that offer less growth potential. 

How Do I Build Wealth As a Single Woman?

You should first participate in employer-sponsored retirement plans up to the matching amount if you are eligible. Focus on paying down any high-interest debt and saving for emergencies then prioritize investing for long-term goals.

The Bottom Line

Investing can be intimidating for many women but they can be capable and conscientious investors when they take the first step and get started. Education is key to overcoming the hesitations that keep women out of the investment markets whether it be with self-directed research, conversations with seasoned investment professionals, or even conversations with friends.   

Remember, women are investors. 

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.

Success is all about being prepared

Fact checked by Suzanne Kvilhaug
Reviewed by Andy Smith

Calling ahead to learn what kind of information a financial advisor would like you to supply before meeting for the first time is always a good idea. It will save you a lot of scrambling to collect the necessary paperwork at the last minute. An understanding of what to expect at the meeting can guide you as well.

Key Takeaways

• Your first meeting with a financial advisor can be an opportunity to get to know each other or an actual start of the process.
• Make sure the advisor understands your financial goals.
• Ask what the advisor charges and what you’ll get in return.
• Be prepared to round up documents including recent pay stubs, retirement plan account statements, investment accounts, and cash balances.

What to Expect

Your first in-person meeting may be little more than a meet-and-greet unless you’ve already had an introductory phone or Zoom conversation. It’s an opportunity for the two of you to decide whether you’re a good match.

“I usually tell potential clients they don’t need to bring anything. The point of the meeting is to get to know each other,” says Michael J. Garry, a certified financial planner (CFP) with Yardley Wealth Management in Yardley, Pennsylvania. “I start the meeting by asking what made them reach out to a financial advisor and what they’re hoping to get from the relationship. One exception to that is if in the initial call they express some need to make a financial decision that is pressing.”

Don’t be bashful about asking how much the advisor charges someone in your situation if you haven’t already worked it out beforehand. Some advisors charge by the hour. Others have flat fees for preparing a financial plan.

What Do You Need Help With?

The advisor you choose to work with may eventually want information regarding your income, investments, other assets, your current debts, insurance, and your tax situation. Your goals and expectations can be more important than any documents, however.

Why are you seeing the advisor? What do you hope to accomplish? Are you looking ahead to retirement and want to make sure you’ll have an adequate income to support you when the time comes? Are you thinking about how you might be able to provide for your heirs someday? Maybe you’re going through a major life change such as getting married or divorced, launching a new business, or facing the prospect of big college tuition bills.  

What to Take to Your First Meeting

You might want to have a few items handy for your first or perhaps second meeting.

• Most recent federal tax return
• Pay stubs
• Information on expected income such as a year-end bonus
• Latest Social Security statement
• A list of your investments and cash accounts
• Retirement plan statements
• Documentation of mortgage and property tax payments
• Documentation of outstanding debts
• Documentation of insurance policies

Many financial planners provide online portals where you can upload your documents in advance.

Important

Don’t forget to include any unusual sources of income such as a congratulatory bonus at work or an expected inheritance in your income total.

Your income 

Your most recent federal tax return or the last several years’ returns will tell the advisor a lot about your financial situation, particularly your income, investments, and deductions. Elizabeth Cox, a CFP with Merit Financial Partners in Westport, Connecticut, frequently works with divorced clients. Cox says that tax returns “often contain information that even the client isn’t aware of.” This can include investment accounts opened by their spouse.

You might want to collect some pay stubs if you work for an employer who provides you with them, especially if your income is higher or lower now than when you filed your taxes. Your pay stubs will also show how much you’re contributing to any at-work retirement plans.

Tell the advisor if your income is irregular. Make sure they know about if you usually get a big year-end bonus. Discuss how and why your income may wax and wane if you’re a self-employed freelancer.

A copy of your most recent Social Security statement will give the advisor an idea of how large a monthly benefit you can eventually expect even if retirement isn’t in your foreseeable future. Workers under aged 60 can get these on the Social Security website. Those age 60 and older also have the option of receiving paper statements annually.

Your investments and other assets

Make a list of any bank accounts, stocks, bonds, mutual funds, individual retirement accounts (IRAs), or other investments you own. The monthly or quarterly statements you receive from the financial institutions that hold them should show their current value.  

Gather the latest statements you’ve received from the plan administrator if you have a retirement plan at work whether it’s a traditional defined-benefit plan, a 401(k) or similar defined-contribution plan, or both. You should receive a statement at least once every three years in the case of defined-benefit plans and annually for defined-contribution plans.

Documentation of your mortgage payments if any and property taxes could be helpful if you own a home or other real estate. The lender should have provided you with a year-end statement if you have a mortgage, also known as Internal Revenue Service (IRS) Form 1098.  

Your debts

Make sure the advisor knows how much you owe to credit card issuers, auto lenders or leasing companies, and other creditors as well as the amounts of your monthly payments. The same goes for any student loans for which you’re personally on the hook, either yours or your child’s. The advisor can help you with budgeting if you’re having trouble keeping up with your bills.

Your insurance 

Your advisor will probably want to know how much insurance you have. They can tell you whether you have an adequate amount of life insurance depending on your stage of life. People with young children or other dependents may need a lot but those with no dependents may need little or none. Make sure the advisor knows how much insurance your employer provides, if any, in addition to any policies you’ve bought on your own.

The advisor might want to make sure you have sufficient liability coverage on your auto, homeowners, and optional umbrella policies as well in case you’re ever sued.

What If You Don’t Have These Documents?

You can usually retrieve these documents fairly quickly if you haven’t saved them or can’t easily locate them.

Your income

You should ideally hang on to your tax returns for at least three years but you can get copies from your tax preparer if you don’t have your most recent ones or from the Internal Revenue Service (IRS).

Cox notes that you can also request tax transcripts from the IRS. They contain much the same information as your tax returns and they’re free. Copies of tax returns were $43 each as of October 2024.

Your employer’s human resources department should be able to provide you with all the information on your pay stubs. 

Investments and other assets

The details regarding all your financial accounts should be readily available online. Your employer or plan administrator can provide information on your retirement accounts. Information on your mortgage and property taxes should also be available online, especially if you pay your taxes through an escrow account maintained by the lender.

You may otherwise have to consult your local tax authority or check your payment records such as canceled checks. 

Your debts

Information on your debts should be available online at your various creditors’ websites. You can also find your monthly payment amounts there or on your bank statements if you pay these bills through a bank account.

Your insurance

This information is often available online as well. Your agent should be able to help, too, if you purchased your policy through one.

Questions to Ask Your Financial Advisor

You shouldn’t hesitate to ask some questions either at your first meeting or even before then.

How are you paid?

Some financial advisors receive commissions on the products they recommend in addition to whatever they charge you. You might choose to go with a fee-only financial advisor to avoid this potential conflict of interest. They’ll be working only for you, at least theoretically.

What are your qualifications?

You can usually get this information from the advisor’s website but they shouldn’t be insulted if you ask them directly. Anyone can call themselves a financial advisor or financial planner but individuals who have gone through rigorous training and testing and have the credentials to prove it are usually proud of the fact.

Don’t be unduly impressed by a long string of letters after the advisor’s name. Some of those credentials are meaningful but others are of dubious value. Among the more highly regarded ones are the CFP held by both Cox and Garry and chartered financial consultant (ChFC). Fee-only financial planners will often indicate that they’re members of The National Association of Personal Financial Advisors (NAPFA). Some advisors also have credentials as certified public accountants (CPAs).

Will I be working directly with you?

Some financial advisors are one-person shops. Others have teams of associates. A junior person at the firm may be just fine for your needs but you’ll want to make sure you aren’t shuffled off to someone who isn’t right for you.

How Can I Find a Good Financial Advisor?

Ask trusted friends and co-workers for recommendations based on their own experiences. You can also ask an accountant or a lawyer. Don’t stop there, however, or you could inadvertently become the victim of an affinity scam. Check out the advisor with other independent sources.

How Can I Check Out a Financial Advisor?

You can use a variety of online resources to check out financial advisors depending on what sort of credentials they have or claim to have. You can find out whether someone is a CFP and if they’ve had disciplinary actions against them by using a search tool on the Certified Financial Planner Board of Standards website. The National Association of Personal Financial Advisors (NAPFA) has a similar search tool on its website.

What Is a Robo-Advisor and What Can It Do for Me?

Robo-advisors are online platforms that are typically offered by investment companies to help small investors build and manage their portfolios. They’re often available at a very modest cost. Human financial advisors sometimes work in conjunction with robo-advisors.

The Bottom Line

A financial advisor can help you with a lot of things but you’ll have to do some of the work yourself. Be prepared to clearly articulate the kind of help you need and round up whatever information the advisor requires to help them understand your situation and make useful recommendations.

Fact checked by Vikki Velasquez

Many Americans approach filing taxes with trepidation. In fact, 64% of Americans report feeling stressed about tax season. The best way to alleviate tax-related stress is to take a deep breath and file your return early, however. You’ll lower your stress level and get your tax refund back faster if you get your return in well in advance of the April 15 deadline.

“Filing your taxes as soon as your documents are ready offers both financial and mental benefits. While many Americans procrastinate, taxes are inevitable so why hold on to unnecessary stress and mental fatigue? Filing early lifts that burden off your shoulders while also unlocking key tangible benefits,” says Zack Gutches, a certified public accountant and lead financial planner at True Riches Financial Planning.

Key Takeaways

• You’ll get a quicker refund if you file your tax return early.
• You’ll have more time to plan how you’ll pay your taxes if you prepare your taxes early.
• Early tax preparers have more time to fix mistakes and they may save on tax preparation costs.
• Filing early will help you avoid penalties and reduce stress.

Get Your Refund Faster

A big advantage of filing your taxes early is that you’ll get your tax refund more quickly if you’re due one.

“The IRS processes returns on a first-in, first-out (FIFO) basis, meaning the earlier you file, the sooner you’ll receive your refund,” Gutches says. “Instead of giving the government an interest-free loan, you can put your money to work sooner, whether that’s earning 4%+ in a high-yield savings account, investing in a money market fund, or allocating funds toward debt repayment, retirement savings, or college funding,”

Important

There have been some concerns that tax refunds could be delayed in 2025 due to pending IRS budget and staff cuts, but the New York Times reported in February that any effect shouldn’t be significant if you e-file your return and it’s not flagged for errors. And it’s another good reason to file as early as possible in case the cuts do take effect.

More Time to Plan If You Owe

Nobody likes a tax bill but you’ll have more time to consider your options for paying if you prepare your taxes early.

“Even if you owe taxes, you don’t have to pay until April 15. Filing early gives you extra time to plan how you’ll cover the payment, whether that’s adjusting your budget, shifting funds, or identifying missed deductions, credits, or pre-tax retirement contributions to lower your tax bill,” Gutches says.

Protect Against Identity Theft

Another advantage to preparing your tax return early is that it helps to guard against identity theft.

“Tax-related identity theft is a growing issue,” Gutches says. “Fraudsters will attempt to file a return using your Social Security number before you do, claiming a refund in your name. Filing early helps block identity thieves from beating you to the punch.”

More Time for Corrections

You’ll give yourself time to catch and fix mistakes if you prepare your tax return well ahead of the April 15 deadline.

“Filing early allows extra time to catch any mistakes or omissions. If you spot any errors on the return, taxpayers can fix them and finalize without the added stress of a looming deadline,” says Prudence Zhu, a certified public accountant and founder of Enso Financial.

You can submit an amended tax return to the IRS if you catch a mistake after you’ve filed your return.

Reduced Costs

You may catch a break on your tax prep costs by preparing your return early.

“Some preparers offer discounts for clients who submit their documents early, and tax software companies often provide promotional codes early in the filing season,” Zhu says. “On the other hand, if you file last minute, expect higher prices and limited service options. Tax preparers’ schedules fill up fast during tax season.”

Maximize Tax Benefits

Early tax preparers have more time to explore tax-saving benefits.

“By filing early, taxpayers have more time to strategize tax-saving opportunities such as making last-minute contributions to tax-advantaged accounts like IRAs or HSAs, which can lower taxable income. It also gives you time to explore any potential deductions or credits you might have missed,” Zhu says.

You can also submit an amended return to the IRS if you realize after you’ve filed that you’re eligible for a tax credit or deduction that you didn’t claim.

Avoid Penalties

File early and you won’t have to worry about late filing penalties.

“Filing early allows more time to prepare for payment, minimizing the risk of penalties and interest for late filing,” Zhu says.

The Bottom Line

Preparing taxes early saves you stress and money. File an early return, and you’ll receive your tax refund more quickly. You’ll give yourself more time to plan how you’ll pay the tax bill if you owe one, more time to explore tax benefits, and more time to correct errors. You’ll be able to avoid penalties for late filing by not leaving your return to the last minute and you may save money on tax prep costs.