Archive for category Introduction to finance
I can’t afford that
Posted by WoB in Credit Cards, Introduction to finance, Savings on July 8, 2009
It’s tough to know when to pass on something you want. Just about every day, I come up with something that I would like to buy and I obviously don’t make all of those purchases. Whether it’s the newest item in electronics or a new shirt, you need to know when to admit when you can’t afford it. One of the easiest ways to do this is with a budget. If it’s not in the budget, then it’s not for me. There is room in my budget for random purchases, but each of these purchases has to be weighed against each other to maximize my purchasing power.
Another deterrent that I use is to come up with a determined time value of my money. If it takes me an hour of work to take home $20, then it would cost me 10 hours to afford something that costs $200. Once I have that value, I would weigh it against the cost of the item in question. Would it be worth a quarter of a work week to have it?
When I was in college, I never said “I can’t afford it” and it took me 5 years to dig myself free of that. I ran up some serious debt. If people were going out to grab some dinner and drinks, or going to the movies, I would always go. I had the latest technology and made a lot of bad decisions. I had a lot of fun and wouldn’t trade it for anything, if only for the lessons that were learned. It sure took a lot of hard work to undo though and it was an expensive lesson.
I was on my way as soon as I realized that I couldn’t afford it all.
I was an early entrepreneur
Posted by WoB in Earning Money, Introduction to finance on June 25, 2009
When I was around 10, I was making around $2000 a summer. A business partner and I mowed lawns and did yard work for neighbors and they loved us for it. This was a great job for me at the time because I had spare time when I wasn’t playing manhunt, or biking around aimlessly. We would charge a different rate for each of our customers, given their vastly different yard sizes, but it would average $15 per yard. Each yard would take us about an hour, so we were earning about $7 per hour, given the gas and other expenses.
Along with having more money than I knew what to do with at the time, I learned a few valuable lessons. Make sure to keep your customers happy, go above and beyond, and always exceed their expectations. These lessons have served me well ever since.
Each of my customers would tell their friends and neighbors about their yard and the job that we did, and soon we had more customers than we had time to manage. We were able to be selective when choosing new customers. At the time, I didn’t fully grasp the concept of outsourcing, and I’m glad I didn’t because I would probably still be mowing lawns. Nothing against the profession, it just isn’t for me.
Mowing lawns in the summer turned into shoveling snow in the winter, and again, we had the same problem; too many prospective customers and not enough time. We would each make a profit of over $200 during big snowstorm and living where we did, there were about 10 serious snowstorms a year and a few small ones.
Thinking back on all of this money, I wonder where it all went. I don’t really remember making any big purchases but I do remember losing a lot of wallets. I never opened up a savings account during this time, and I really wish now that I had. I wasn’t a great budgeter, and I had no financial blogs to read at that time to get me started. I wish I had stumbled onto this post. Then I definitely would have started a savings account and watched my money grow. I could have invested it in a mutual fund, or jumped on the Roth bandwagon early. I could have bought Microsoft or AT&T.
If you have children about this age, have them read this post. It’ll either give them ideas about how to make money, or start them thinking about saving money the right way; not in a wallet.
Saving money the easy way
Posted by WoB in Banks, Introduction to finance, Savings on June 24, 2009
I’ve talked about this before, but it is really important. There are three ways to get money into a savings account:
> wait until the end of the month, and move any leftovers into savings
> budget in an amount to send over and hopefully stick to it
> deposit a portion of your paycheck directly into savings, or have it automatically taken out electronically
I have found that trying to save money by putting what is left after all of your other expenses never really work. Unless you really have a good budget, as really are able to stick to it, you won’t have much luck using the budgeting technique either.
The best method to really maximize your savings is to have it done for you before you have a chance to even see it hit your checking account. It is much easier to not have to manage you savings process. The more you have saved, the closer you are to financial security. It’s everyone’s goal to be secure financially. If you lose your income, you need a way to pay your bills without relying on credit cards. Your mortgage or rent needs to be paid, along with other monthly expenses. If you have liquid or relatively liquid assets that you can transfer into your checking account during any period of time that you don’t have income, this is where you want to be.
Open a savings account at an online bank (www.ingdirect.com or www.hsbc.com) and have your employer deposit a good chunk of money from each paycheck. If your employer doesn’t offer this, use you online account to set up an auto withdrawal the day after each paycheck clears. As you start to see the money pile up in this account, you will notice a weight being lifted. It has an amazing effect.
Why should I worry about my credit score?
Posted by WoB in Introduction to finance on June 18, 2009
Your credit score is basically a measure of your personal responsibility. Keeping your credit in the 700s could save you hundreds of thousands of dollars in your lifetime. Yes, I said hundreds of thousands. You could pay well over a hundred thousand more on a mortgage over 30 years.
You’ve all seen those “everybody is approved” or “you’ve got a job, then you’ve got credit” car commercials. Sure, they’ll give you a car no problem. The overcharge you for the car, hike up the interest charges, and stretch out the payments.
You could even miss out on a dream job, because many employers check potential employees credit scores.
So how do you keep your score high? There are many things that go into your credit score. Paying bills on time is an obvious one, but closing a credit card account could harm your credit. This seems counter intuitive, but think about it like this; they measure the percentage of credit used divided by your available credit. Never cancel your oldest card or account.
You don’t know when they take the measurement, so if your balance is $1000 just before you pay it off, and you just closed one of your two accounts with an available balance of $5000, the percentage of credit used would be 20% now instead of 10%.
Applying for new cards or accounts gives you credit a ding too.
How is my credit score calculated? It’s a secret formula, but the components go like this.
35% is your payment history (On time and in full ideally)
30% is the amount you currently owe lenders (Some debt is good, keep a relatively small amount)
15% is the length of your credit history (Get your 16 year old a credit card)
10% is the number of new credit accounts you’ve opened or applied for (Don’t apply for a new Amex card when you’re applying for a mortgage)
10% is the mix of credit accounts you have (car loans, mortgages, and credit cards – have a nice mix)
You do have to pay money to view your credit score, but you can see your 3 credit reports for free at annualcreditreport.com. This is the government mandated site that allows a look at each of the bureaus report’s once a year. If you have the time, you might want to get one report every 4 months so that you can keep tabs more often than just once a year.
So, to keep your credit score up, always pay your bills on time and in full and never close old accounts unless you have way too many.
Inflation is your retirement’s enemy
Posted by WoB in Introduction to finance, Retirement Planning on June 10, 2009
It is the central banks goal to keep inflation between a 2% and 3% increase per year. If this is an average, then you are losing about 2.5% of your purchasing power per year. The only way to counteract this is to make sure your savings is earning around that amount or more. If, in 1980, you had a million dollars sitting somewhere earning just inflation, you’d have over $2.5 million in 2008. With this same example, in 1980 you could have bought the same goods that are worth a million dollars today with only about $350 thousand.
This is a frightening thought. If you are in your 20s or 30s your parents probably thought that having a million dollars would be enough to retire comfortably and they might be right. Now you are probably going to need to have at least 2, and depending on where you live, maybe more like 4 or 5. Keep in mind that as inflation goes up, generally so do wages.
If you are living comfortably on $4000 a month, in just over 25 years, this number will double. This means no change in lifestyle, just purchasing the same goods you were back then. Keep in mind that inflation is basically measured by a “market basket” of goods. It includes any items that normal people purchase in a given period. If you retire at 65 and live until 90, it would be safe to say that your cost of living will probably double.
So for those of you with money saved up in your mattress, this is your call to action. Stop that money from losing value and get it into an account that pays interest. I recommend INGDirect.com because of its ease of use and that it doesn’t charge fees for almost anything.
This should also get you thinking about the last 2.5% annual raise you got last year. The last 12 months have been abnormal because inflation has actually been going down, but we are due for a spike sooner or later.
This post is not meant to scare you, it is just a wake up call to get you thinking forward.