Archive for January, 2010:
Why I Didn’t Save a Penny from My First Job
In the summer of 2008, I was a newly licensed 16 old. With my independence, I applied for a job and was hired at a local putt-putt course. I only made minimum wage, but there were plenty of hours available so it worked out. For the first time in my life, I actually had real money that I had earned. Before this job, my main sources of income were just random odd jobs for my parents or grandparents and cash saved up from birthdays. Now, I had enough money to actually do stuff with. I could go out to the movies with friends every weekend, go to Chipotle 3 or 4 times a week, and buy an iPhone (and its data plan).
And I did.
To be honest, I was having a great time. The movies were entertaining, Chipotle was delicious, and my iPhone was a beacon of awesome. But I wasn’t planning ahead. I would “save” 20 bucks here and there, only to spend it a few weeks later on something I thought I wanted. College wasn’t on my radar and the thought of investing or retirement was laughable.
And so I spent and spent and spent. I didn’t even really stop to think that I should be saving until I found out in March 2009 that I wouldn’t be able to work again in the summer. I was spending everything I earned and realized my new spending habits wouldn’t last without a job.
Now, I’m doing better with my spending…sometimes. But looking back 18, I can see why it just wasn’t a priority.
1. Youth – There was (and still is many times) an overwhelming sense of “I’m young and can do what I want.” I was living in the moment non-stop and nothing in the future seemed real or important.
2. Excitement - there was just something exciting about being young and spending money. I felt like an adult. After all, adults spend lots of money don’t they?
3. No unwanted expenses. – the only expenses I had were the ones I wanted. Eating out; check, entertainment; check, technology; check. My dad paid for my car insurance and gasoline. The only things I paid for were the three listed above.
This arrangement was primarily out of necessity; I simply couldn’t have afforded to pay for gas and insurance. But there was no reason why I couldn’t have paid for say half my gas or part of the insurance. My dad simply wanted to give me every 16 old’s fantasy: a car and no responsibilities. Who was I to say no?
Without a doubt, I had fun that summer. I lived like I wanted to and bought what I thought I needed. But I also missed a huge opportunity to jump start my financial success.
Nowadays, I realize being young doesn’t mean I can’t start building the foundation of financial freedom and success. Even better, it doesn’t mean I can’t have fun or live like there’s no tomorrow.
A Simple Guide to Student Loans
courtesy of Omar Omar on Flickr!
As I receive college acceptance (no denials yet!) letters and plan my future studies, I can feel student loans creeping towards me. While I am applying for scholarships and already have the FASFA filled out, there’s a very good chance I’ll be taking out at least some loans. To learn more about them (yeah, there’s more than one type!), I thought I would write up this post detailing the typical student loans available.
Federal Stafford Loan
- These loans are administered or backed by the US government and you don’t have to pay anything on them while you’re still in school. The main benefit is a much lower interest rate than what you would pay on a private loan. There are 2 variations of Stafford loans.
- Federal Family Education Loan Program (FFELP)- is handled by typical lenders like Sallie Mae or Chase bank. The US government basically says “Hey there Sallie, we’ll guarantee this loan, so go ahead and give the kid a low interest rate.”
- Federal Direct Student Loan Program (FDSLP)- is handled directly by the federal government. You are in essence saying “Hey Uncle Sam, let me borrow money!” Uncle Sam replies “OK, fantastic!”
Not to make things more confusing, but there are two flavors of Stafford loans:
- Subsidized- while you are in school, the government pays your interest for you.
- Unsubsidized- you’re responsible for all interest, although you don’t have to pay it until you graduate
To receive a subsidized loan, you must show financial need. Most students whose parents make over $100,000 per year won’t receive one, although some do. If your parents make under $50,000, then you have a pretty good shot.
Luckily, all students are eligible for unsubsidized loans, regardless of their parents’ incomes.
Federal Perkins Loan
- administered by each university through funds the government provides. This loan is only provided to those with extreme financial need and each college has their own definition of needy. The main benefits:
- subsidized, so no interest will accumulate until you start repayment
- relatively low interest rate of 5%
- allows ten years for repayment
Parent PLUS Loan
– Like the name implies, this loan is actually in your parent’s name. You can agree to pay it off of course, but if you don’t, your parent will be responsible. Like Stafford loans, these are issued either directly by the government or by banks and credit unions. Other details: (the first one only applies to loans made after July 1st, 2008)
- Repayment begins either 60 days after you get the money or 6 months after you cease to be enrolled at a university on at least a part time basis.
- Not subsidized, so interest is accruing (adding up) throughout your time in school
- If your parent has a bad credit history, they may be denied
- You can borrow whatever amount isn’t covered by other forms of financial aid (limitless basically)
Private Education Loan
- This type of loan is provided by private banks and credit unions. The interest rate is higher than what the federal government charges. Keep in mind:
- interest rates and fees will be determined by your credit score (or your cosigner)
- having a parent with good credit to cosign should lower your rate
- almost absolutely NO WAY to get rid of these loans, even through bankruptcy
- some allow up to 25 years for repayment
Just in case it isn’t clear, you should exhaust all other loan options before taking out a private student loan.
While student loans can provide the means necessary to achieve a degree, they are still a debt that must be repaid. Anytime you’re considering taking one out (even federal ones), always ask “Can I realistically expect to pay this back?” If the answer is no, then do not do it! This is my plan of attack and I’m hoping planning to exit college with minimal loans.
6 Ways to Prevent Financial Diaster
lightning strike by rooymans2000 on Flickr!
After reading dozens of personal finance blogs, I’ve heard many stories of utter desperation. Individuals who were on the verge of bankruptcy. People who were slaves to their jobs. Many of these people just wanted to start over.
Instead of ignoring their misfortunes, I thought it would be helpful to highlight some of the most common mistakes so you and I don’t make them.
1. Be careful with credit cards. Many of the authors I read have a history of enormous credit card debt. Think how you would feel right now if you were told you owe $35,000 at a 12% interest rate. Now imagine you have kids and a mortgage payment. Scary isn’t it? I’m not against credit cards, but you must think before you swipe! If you cannot pay for something in cash right this second, you cannot afford it. Period.
2. Learn the difference between a want and need. Even many adults fail to realize the line that separates the two. This often lends to crippling credit card debt that takes years to be repaid.
3. Start an emergency fund now! If you’re still in high school, you probably won’t be subject to many financial emergencies. Take advantage of this while you can. Then, when you move out of your house at 21 and your car’s radiator bites the dust, you can pay for it without freaking out. Don’t make this harder than it needs to be. Just set a reasonable and realistic goal. My goal is to save up $1000 in my emergency savings account by the end of the year. That’s “only” $2.74 a day.
4. Avoid student loans, especially private ones. You have to repay every cent you borrow, plus interest. You may not get a job when you graduate. These are facts I try to ignore when I’m looking at tuition rates, but they’re too huge to forget about. Loans must still be repaid even if you file for bankruptcy. There is, except under ridiculous circumstances, no way out! Work the sh*t out of scholarships and other financial aid.
5. Avoid flashy cars…unless you can pay for them in cash. Luxury cars and SUVs aren’t just expensive to purchase, they’re expensive to own. Instead, buy a reliable and safe vehicle and drive it for as long as possible. While a car loan might be necessary, use it to buy the vehicle that’s just right for you.
6. Save for retirement. Do you want to be forced to work your whole life? No? Good! Now you need to save up so you don’t have to. Whether you want to retire at 30 or 100, you need to have money stashed and ready to go. A Roth IRA can attain a huge balance with just small and regular deposits.
Even if you obey these “rules”, you’ll make mistakes. I know I do (and will). I’m still paying an iPhone bill every month that I shouldn’t have agreed to until I had a reliable income. But at the end of the day, we all live and learn. Not having the previous 6 things to worry about just makes it much easier.
Understanding the ACT and How to Hit It Outta the Park
pencil by D Sharon Pruitt
Tests in high school never seem to stop. It’s almost guaranteed that every week, at least one teacher will give a test or quiz. They’re boring and little fun, and often don’t seem to serve a purpose.
But if there’s one test that isn’t filled with bullshit during high school, it’s the ACT.
What is the ACT?
The ACT is a standardized test (meaning that a score from a student in California is comparable to the score of a kid in New York) that colleges use to gauge how well you can handle college level work. This doesn’t mean that you can’t go to college if you score low, but scoring high is definitely the goal. Basically, it shows whether or not you’re “college ready”. Scores range from 1-36 with 36 being the best.
Why is It Important?
Without taking this test (or the SAT), almost no U.S. University will accept you. While colleges also take into account your GPA and essays, a standardized test puts everyone on equal footing. What do I mean by this? At my school, an A requires a 93 average. But at other schools, an A might only require a 90 average.
Another reason the test is so important is that it can determine how much money you receive in scholarships. Someone with a 30 will certainly receive more money than someone with a 25. And the best thing is that this type of aid is usually given automatically by the college once you’re accepted. I just got a letter in the mail from a university that said I’d been awarded a $1,500 scholarship for each year I attend. That’s huge!
So How Do I Kick Its Ass?
First, take a practice test. You can usually find these in your guidance counselor’s office. Go home, break out the kitchen timer and pretend like it’s the real thing. Do this and you know exactly what to expect. Plus, you can see what areas you need to work on. This is the one thing I didn’t do and wish I had.
Sleep. I hate being tired. I hate doing bad on a test because I’m tired. Yes, getting up on a Saturday to take an 8am test sucks. It really does. But it must be done. Don’t screw it up.
Wear a watch, digital if possible. Yes, there will probably be a clock in the room. Whether or not you can see it is another matter. A digital wristwatch let’s you easily see how many minutes you have remaining. I even started the stopwatch function. When you know you have 1 minute per question, you suddenly start moving a whole lot faster.
Read fast because you just don’t have the time to waste, sorry. I’m convinced that half the test is actually the time limit. You absolutely cannot expect to finish all the passages and questions by reading leisurely. Read slow enough to gather the information you need, but fast enough that you’re blazing through the questions.
Do not be afraid to guess. There is absolutely no penalty for guessing. Of course, see if you can narrow down the choices a bit beforehand. But if you absolutely no idea, just pick a letter and hope for the best. There’s a 25% chance that you got it right.
Be comfortable. You don’t know how warm or cool the testing room is going to be on a weekend. Wear layers.
Relax! This test is not the most important thing you’ll ever do in your life. Do the best you can. Don’t be anxious, you’ll just freak yourself out. Besides, you can retake it as many times as you’d like. Don’t let one bad score keep you down.
That’s the basic summary of the ACT. It’s a long (3 hours) test, but the rewards from performing well are enormous. Good Luck!
Don’t Waste Money on a Class Ring
Of all the crap my parents or I spent money on during high school (so far), I can’t think of anything more ridiculous than my class ring. And mine would be considered modest at a cost of “only” $200 (This is a rough estimate. I can’t honestly remember, but I know it wasn’t over 300.)
Once the novelty wears off after a few weeks, you have this ring that doesn’t do much except look nice. Engagement rings and wedding rings actually represent something: your love for another person that is supposed to last until death do you part. High school class rings represent what exactly? Your status as a high school student? Whoa. Sign me up.
At my school, class rings are ordered during the sophomore year so you get about 2.5 years worth of use out of your expense before you go to college and decide it isn’t cool anymore. Guess how much use I got. Two months. Yep, I lost my ring shortly after I got it and haven’t seen it since.
Boom! $200 just exploded in a cloud of fiery destruction.
Now, I could replace it for 60 bucks thanks to Josten’s “Ring Protection Plan”, but why give them more money for something I’m not going to wear?
You don’t have to buy one!
One of my best friends never ordered a ring and guess how much his life has changed. None. It’s a complete non-factor. I really don’t know how else to say this except for IT DOES NOT MATTER! If your friends say you must be “poor” or “cheap”, then you need some new friends.
The amount of money spent on class rings is ridiculous. One classmate of mine bragged about how his ring cost around $500 and had diamonds (which actually are not rare by the way. There are vaults filled literally with tons of diamonds!). This guy is a douchebag to say the least.
And the best reason why you shouldn’t waste money on a class ring: You could use it for something else! No, not an Xbox. (although you can use that a helluva lot more…) Seriously. Add the cash to your college fund. Buy some savings bonds. Use it to increase your car savings. Pretty much anything useful or an investment would be a step up from buying a class ring.
After all this, I will say you should totally get a class ring if:
- You’ve saved up for one and have savings in check for college and car (or other important things you’re interested in)
- Your parents are paying for it and won’t take no for any answer. (You could try to persuade them to save it for you.)
As for me, I wish I could have my (parents’) $250 back. I could use it for something I’d actually value.
Investing 101: Mutal Funds
Mutual funds can be another important part of your portfolio, but it helps to understand them first.
So What is a Mutual Fund?
A mutual fund is actually a collection of different stocks, bonds, and other types of securities (investments). The point of this is to lessen risk, while still reaping a decent reward. A mutual fund also pools many different investors’ money together to purchase these investments, with each investor getting part of the profits (or losses…)
What’s So Great About Mutual Funds?
The best thing about mutual funds is that your risk is spread among many different types of investments. If one company has a bad year, your investment won’t crash and burn. The other benefit for “normal” people is that the fund is managed by a professional so you don’t need to know the nitty gritty details of investing to start.
Mutual funds can also be an affordable way to start investing. Quite a few funds don’t have high minimum balances, so you can get started without a lot of money.
How Do Mutual Funds Make Me Money?
Similar to single shares of stock, you own shares of a mutual fund. You can usually sell these shares anytime you wish. Assuming you sell them for more than you bought them for, you make money.
Also similar to stocks, you can earn be paid dividends when the mutual fund performs well.
What’s Not So Great About Mutual Funds
Because mutual funds are managed by a professional advisor, there are fees and costs associated with buying into one. These fees are charged even if the fund doesn’t do well, so you might have to deal with a negative return along with a sales fee or purchase fee.
You have less control. With individual stocks and bonds, you can pick exactly what you want to invest in. So you aren’t likely to find a mutual fund with only the investments you want.
Overall
Mutual funds can definitely reduce some of the risks associated with investing. But you also have to deal with fees and a lack of control. From my own research and reading, I’m not too impressed with them since the fees seem to eat up a large portion of any return.
Investing 101: CDs
In the financial world, a CD refers to a certificate of deposit. Some might say that a CD isn’t an investment because they are insured by the FDIC (a US owned corporation which protects certain banking products), but I’m counting them here because they do provide a higher return than savings, but at a significant cost: time.
So What is a CD?
A certificate of deposit functions in many ways like a savings account. You open the the account and deposit a certain amount of money. Interest is earned on this deposit. Pretty much every bank in existence issues CDs. However, you do not just withdraw money every time Nintendo releases a new Wii game.
What’s So Great About a CD?
Mainly, the benefit is a higher interest rate. A secondary benefit, if you want to call it that, is it forces some self control. You can’t just take the money out whenever you feel like it or you’ll lose money.
What’s Not So Great about a CD?
In exchange for a higher interest rate, the bank locks up your money for a set amount of time. If you withdraw your money before this time period is up, you will pay a penalty. Banks can also set up a “withdraw window” where if you don’t collect your money before this period is up, the money will be rolled over into a new CD. If this happens, your money is once again tied up for a certain period of time.
Overall
If you have a lot of cash and know you might only need a portion of it, putting the rest in a CD, or across multiple CDs, can be a good way to get a better return than what a regular savings account would provide. On the other hand, you need to choose the length of CD carefully. The shortest are typically 3 months. If you have good reason to believe you’ll need the money before that, then look elsewhere to keep your money.
Investing 101: Bonds
Although stocks seem to get all the attention on the news, another type of investment, called a bond, is important too.
So What is a Bond?
A bond is like a loan between two parties. Typically, this loan is between a person (you or me) and a company or government. When you buy a bond, you’re loaning money to a company who will pay you back what you loaned plus interest. Bonds typically last 3-30 years, depending on who issues them.
What’s So Great About Bonds?
Bonds are known to be much safer than stock. Bonds are all but guaranteed to be paid back, especially if you own one from a stable government or company.
How Do I Buy One?
Bonds are sold through the same brokerages listed in the previous post. For United States bonds, you can purchase them through TreasuryDirect. There, everything is handled electronically and you don’t have to receive an actual piece of paper representing the bond.
How Do Bonds Make Me Money?
Bonds make you money in the same way a bank or credit card company makes money: through interest. Most bonds pay out interest twice a year. How much you receive will depend on the bond’s interest rate and the value of the bond.
Also, once the bond matures (meaning it’s full value is reached), you can cash it in, getting the original amount of money you paid back.
What’s Not So Great About Bonds
Bonds don’t return as much money as stocks typically do. There’s also always the chance that a company will go bankrupt and won’t be able to pay back the bond. Although bond holders get payment before stockholders if this were to happen. I don’t worry about U.S. government bonds not being repaid since if the United States is ever in the situation of not being able to pay me back, I think we’ll have much bigger problems to worry about.
Overall
While bonds are considered “safe” investments and provide a predictable return, you pay a price for this decreased risk: less money. Holding bonds is fine at any age of course, but it’s definitely wise for those middle aged or nearing retirement to transition from stocks to bonds.
Investing 101: Stock
Arguably the most common thing people think of when the word “investing” comes into their minds is stock.
So What is Stock?
Stock is like your own little piece of a company. You buy stock in units called shares. When you buy a share, you give money to the company which can then use it to finance new products or services. When companies sell stock for the first time, it’s called “going public”. This event is a called an IPO or Initial Public Offering. Companies typically only do this once they reach a certain size.
Two Different Types
There are 2 major types of stock: common and preferred.
Common stock allows the shareholder to vote at company meetings, meaning they get a say in how the corporation is run. Common stock holders may also receive payments called dividends. (More on these later)
Preferred stock also allows shareholders to receive dividends, but they do not receive voting rights. The advantage of preferred stock is that they have priority in the event a company goes bankrupt. Common stock holders won’t receive dividends or other payments until after all the preferred stock holders have.
What’s So Great About Stock?
Stock often has one of the best returns of any investment. It’s one of the best places to invest money over long periods of time. Besides the financial benefits, stock allows you to choose which companies to support. You might purchase stock in a company that makes solar panels, but not in one that sells oil, if you believe strongly in green technology.
Where is It Bought and Sold?
Stock wouldn’t make much sense if it was hard to purchase. To solve this problem, something called a stock exchange was created. These organizations bring buyers and sellers together, somewhat like eBay, to create a marketplace. The largest one in the world is called the New York Stock Exchange, commonly abbreviated to NYSE. Others exist such as the NASDAQ, London Stock Exchange, Tokyo Stock Exchange, and many more.
How Do I Buy and Sell Stock?
Although stock is traded in places like New York, (On Wall Street to be specific.) that doesn’t mean you actually have to travel to buy a few shares. That would be really inconvenient, especially back in the day before cars and airplanes.
Instead, stock can be bought and sold through a broker. A broker is a person or company that represents you on the exchange floor. These days, your broker is often just a computer who buys and sells as you click.
Popular Brokers:
How Does Stock Make Me Money?
Stock can make you money in the simple form of buying and selling shares. For example, you could buy a share of Apple for $100 and then sell it at a later date when the price goes up, for say $110. Boom, you just made ten dollars!
Note: This is a vastly simplified explanation of what buying and selling shares is like. Constantly buying and selling shares is a tricky business, one best left to the pros. And even they can lose money!
Dividends- when a company makes a profit, they have the option of putting the money back into the business or making payments to shareholders called dividends. A business might say that they’ll pay a dividend of 25 cents per share. If you owned 100 shares, you’d receive $25.00.
These payments are usually made 4 times a year, once every quarter.
What’s Not So Great About Stock
Stock can be very risky. There’s absolutely no guarantee that you’ll make money. There’s actually a chance you’ll lose everything. Stock is something you buy and hold onto for a long time. Over the long term (10 years or more), the stock market usually returns 8%-10%, but over the short term, the return can be much much less.
Overall
Stock is a vital piece of almost any investor’s portfolio (all of the different investments one holds). This is even more true for young people, since we have the most time to gain from good years and plenty of time to make back what we lose in the bad years.
Investing 101: The Basics of Stocks, Bonds, CDs, and Mutual Funds
Of all of the personal finance concepts that people should know, I think investments are one of most misunderstood concepts out there. This is backed up by the fact that “just 17 percent of students knew that investing in stocks are likely to produce higher returns over the next 18 years than savings bonds, savings accounts and checking accounts.” With that sad fact out of the way, I thought it would be a good idea to do a simple introduction to investing over the next week.
The definition of investment is something that grows in value over time. But there isn’t just one type of investment. There are stocks, bonds, mutual funds, index funds, exchange traded funds, and more. This can all get really confusing.
In this series at The Financial Student, we’ll look at the different types of investments. What they are, what’s unique about them, their risks and rewards, and everything else.
By learning what types of investments are out there, you’ll understand how you can earn money while managing risk and not lose sleep every night.
