Jeremy Fulton, Financial Wellness Coach

Author: Jeremy

  • Student Loans: A God-send or The Devil in Disguise?

    Student Loans: A God-send or The Devil in Disguise?

    A short time ago I read an article on FoxNews.com (click for that article) that got me thinking about student loans and the effect they have had on our nation (actually, I was a little angry after reading it).  Before I move into facts, figures, and suggestions, please let me rant a little.  If you don’t want to read my rant, click here to skip it.

    The article starts with a sad story (no sarcasm here) about a couple’s daughter that died at a young age about 4 years ago.  The parents co-signed their daughter’s $100k in private student loans for a nursing degree.  The parents lament that the debt, now around $200k, has devastated their financial standing with $2,000/month payments.  Yes, I agree that they are facing a very difficult situation caused by an even more difficult event, and I do sympathize with them.

    But the part of the article that caused the blood to start boiling was their blatant ‘passing of the buck’ of their responsibility that they signed up for and their failure as parents to prevent the debt in the first place (a new nurse can expect to earn about $42k/year; how do you repay $100k, raise a family, and enjoy life in that situation?!?).

    It’s extremely sad that these parents (who aren’t unique in this case) set up their daughter for failure by allowing her to go so far into debt when she was trying to start her life by co-signing the loans.  Parents have a responsibility to be parents, not friends, of their children and guide them towards success, not set them up for hardship and failure!

    The second thing that riled me up was that even though they knowingly signed as guarantor of the loan, they believe that they should be exempt from repaying the loan.  They took out private student loans, so the death forgiveness clause isn’t applicable, so as co-signer, they are required to repay the loans.  They are also upset that they can’t just walk away from their obligations by filing bankruptcy!  The father claims to be a minister, on top of it all!  I can’t imagine attending a church where the clergy don’t believe in personal responsibility.  He believes that private student loans should be regulated the same as Federal student loans.  Maybe he should have thought about that before signing his name?  Maybe he should have read the fine print?  Or maybe he should admit he made a big mistake and use this platform to warn others of the dangers?

    I think that there is a lesson to be learned here; while my heart goes out to this family for their pain, had the story ended differently, without tragedy, would this have been a happy ending?  Neither she nor her parents would have the freedom for her to choose her own path.  She would almost be forced to work, and work a lot, to make the payments, instead of having the option to work less, or not at all, to spend more time with her children.

    Ok, enough of that.  I needed to get that out, so thanks for indulging me.

    Talk to most students and their parents and they will tell you that “you can’t be a student without a student loan.”  Is that true?  Or just a popular excuse people use to justify a lack of planning and thought in school choice?

    I’m not going to bore you with facts and figures.  Instead, I’ll discuss a philosophy of college funding that gets almost no news coverage, is rarely recommended by ‘guidance’ counselors in schools, but is used by many people today (in fact, there is a book written on this subject that I HIGHLY recommend).

    What you may not be aware of is that many students actually pay for college as they go!  About 34% of college grads paid for their college without loans!  “How did they do it?” you might ask.  Each person is different, but you can point to a few things that made this possible for them:

    • Parents who planned ahead (college funds)
    • Scholarships (make it your job to apply for thousands of scholarships instead of [insert time waster here])
    • Work (many students spend almost 40hrs a week watching TV, playing video games, and doing other non-study activities)

    Lets look at college funds.  If you are a parent of a young child, start saving NOW!  Give your child the chance to pursue a higher education!  You can use a 529 or Coverdale Education Savings Account (ESA) to save with tax benefits (your friends and family can even contribute!).  If you have a child that you want to send to college, start saving now!

    Scholarships.  We all have heard of them, and heard that there is a lot of money out there up for grabs.  There is.  There are scholarships that are in the thousands, and others in the hundreds.  There are some specifically targeting certain groups, and others that are wider.  Chances are there are thousands of dollars of scholarships you can apply for.  Follow all the rules/requirements when applying and you have a better than average chance of being awarded some cash for college!  You might think that it’s not worth your time to apply, but consider this scenario: you spend a work-week (40 hrs) applying for a few hundred scholarships and are awarded a total of $2,000.  That’s $50/hr, equivalent to $100,000 a year!  You can’t make that much money at your part time job.  Spend time that you might otherwise spend playing video games, watching TV, or hanging out at the beach applying for scholarships and you could end up with a large chunk of your tuition paid for!

    Work.  It’s a four-letter word in the college context.  Many people think that if you work, your grades will suffer.  Many studies suggest that working a part time job (around 20-30 hrs a week) will actually help your grades!  Time management is one of the biggest skills learned while working in college, and it carries over into the workforce!  Since the average student spends only 15 hrs a week studying, 15-18 hrs in class, that leaves plenty of time to hold a job (working 8 hrs Fri, Sat & Sun = 24 hrs), even during the work week. [I worked 40 hrs a week for 4 years, graduated with a 3.4 GPA engineering degree, so it can be done!]  Working through the school year and working a lot in the summer can pay for an in-state degree!  Especially if the summer job is an internship in the student’s field!

    Maybe you are starting school this fall and your parent’s didn’t plan for your college and you don’t have any scholarship money coming, what can you do? I recommend paying as you go.  You may have to take a year or semester or two off in the process, but when you graduate debt free, you will not feel the pressure to take a less-than-ideal job offer just so you can pay your loan payments.  You can have the patience to pursue your calling!

    One more, very important, thing to consider when figuring out how to pay for college: college choice.  Unless you have a big, fat college fund, consider living at home and attending a local community college for the core classes then transferring to an in-state public school.  Is there any real benefit to crossing state lines?  Most likely not.  Pedigree schools (think IV League)?  There may be some very small benefit, but it rarely makes up for the extra you have to pay to attend!

    Parents, this is a bonus tip for you: remember that your 17 year old doesn’t have the experience, maturity, or common sense you have.  You are the parent, parent you children well and guide their college choice so that you are helping them, not hurting them, in the long run.

     

  • Re-blog: A Booby Trap in the Christian Budget

    Re-blog: A Booby Trap in the Christian Budget

    My wife discovered this blog post today on DesiringGod.org and thought I would be interested in it.  I read it and though it was well written and had a great message for those of us who are interested in being intentional with our finances and doing the most good we can (for us, our family, and friends) with our money.

    So, without further ado, here is the first section, and a link to read the entire post.  I welcome your comments and discussion on this write-up:

    “The Bible is clear that we will put our money where our hearts are, so it is important that we regularly test our treasure. There are lots of ways to lose our life over a love for money. We want our money to serve our greatest lasting good and happiness, not kill it. So I proposed four questions to keep close to your wallet:

    1. Is my spending marked by Christian generosity?
    2. What does my spending say about what makes me most happy?
    3. Does my spending suggest I’m collecting for this life?
    4. Is my spending explicitly supporting the spread of the gospel?

    Here, I’d like to add a fifth aimed at the frugal among us: Is my spending so cautious that it’s captured my heart and keeps me from loving those close to me well?….”

    A Booby Trap in the Christian Budget

  • Cash is King! (Sorry Elvis)

    Cash is King! (Sorry Elvis)

    Today I was sitting at my desk pondering what subject I should write about next.  I have a list of subjects to choose from, but none of them were jumping out at me.  As any of you who are writers know, if you don’t feel something about what you are writing about, it comes out flat and lifeless.  It seems that when I write, how I feel about the subject flows into the words I write; its as if the keyboard is an extension of my thoughts and emotions.

    So I decided to browse some news sites to see what was going on and look for inspiration. If you are an artist or writer you know that sometimes you need some external inspiration to start the creative juices flowing. (I am actually both: I write this blog and express my artistic side with my camera; feel free to see my other side at JeremyFultonPhotography.com)  I came across an article that mentioned the future of credit cards and started my thoughts on the differences in spending habits when we use credit cards verses when we use physical cash.

    I used to use credit cards for EVERY purchase; I was doing my best to collect all those reward points my credit card company was offering me!  It seemed like a great idea: pay off the cards every month and get free gift cards every 3-6 months.  What I didn’t account for was that between the points and lack of feeling associated with plastic spending is that I was spending a lot more that I realized.  I can recall, now, several months where I had to dip into savings to cover the card balance.  But those points were so ‘wonderful’ I didn’t even think long term about my spending habits.

    It turns out I wasn’t alone.  It turns out that a lot of research has been done on spending habits over the years.  Carnegie Mellon actually conducted a study using an MRI machine to measure the pain centers of the brain when purchase decisions were made.  One conclusion of the study was that spending your own money (i.e. cash) activated the pain centers where delaying the payment (i.e. credit cards) did not.

    Spending with cash is painful!  Have you every noticed for yourself how you react emotionally when you are counting out actual greenbacks at the register?

    Even McDonalds knows that you will spend more if they take your plastic.  Remember back when you had to have cash at the drive through?  When McDonalds started taking credit cards, their average sale per transaction when up 40%!  Many businesses followed their example and now you can buy just about everything with credit!  They all know that we are less likely to worry about the cost of an item, and more about its features, status, and ‘quality.’

    In researching for this post I read many articles, interviews, and a couple of paper summaries; they all agree that we will spend more when using credit over using our own money (cash/debit) when making purchases of all sizes.

    “So,” you may be asking, “What do I do?”

    Cash.

    For your budget categories that you tend to be freer in your spending, cash is king!  My wife and I personally use cash for ‘blow money’, eating out, and groceries.  We use an old system called “the envelope system.”  We withdraw money from the ATM each pay period in the amount we budgeted for and put that cash into physical envelopes (you can get a modern system here).  When we go out to eat, we only use cash from that envelope; when it’s gone we eat in.  Same for groceries; when the envelope runs out it’s time for leftovers and goulash.

    It has really helped me reign in my spending habits, especial when going out to eat!  Back when I was on the “points system” I could easily spend over $400 a month on eating out!  Yet my retirement was hardly getting funded; how terrible is that?

    There are other benefits to using cash over other forms of payment beyond just keeping your spending in check.  When you pull out cash, it has immediacy; it tells someone you do have the money to spend.  The seller of a service/item knows that you are there and want to spend, and that you don’t need a credit check.  You can walk away. This gives you power. Power over price.

    Almost all prices are negotiable, to some extent (maybe not so much at Taco Bell), and that fact is more evident when you pull out a few Benjamins.  The vendor may give you a discount just for using cash (they pay 2-4% in fees to credit card companies).  You can also negotiate the actual price, esp. on large ticket items or dealing with individual sellers (like with Craigslist).  I know several people who have had success bargaining with cash, including a friend who paid half price for a hotel room just the other day!  This is a win-win deal for you; you are not going into debt to buy something, and spending less on the item/service!

    I’ll cover the myth that you need a credit card in a later post (I’ve traveled the US and visited Spain, France, Andorra, and Israel with my debit card).  So, what’s holding you back?  Why not try it for a month and see what happens?  You can always go back to using your credit card if I’m wrong!

    Let me know what experiences  you have had using cash in your life below:

  • The Rain Is Coming, Do You Have A Rainy Day Fund?

    The Rain Is Coming, Do You Have A Rainy Day Fund?

    I just read an article from The Wall Street Journal describing how few people actually have a ‘rainy day’, or emergency fund, and that most of those people who do have some savings, don’t have enough.

    Statistically speaking you are one of the 209 million people who don’t have sufficient savings.  Of those, 82 million have NO savings.  WOW!

    I would wager, if I were a betting man, that very few of those surveyed even know how much is sufficient.

    3-6 months of expenses is what the experts (myself included) recommend.  For most people that’s $15-25,000, sitting untouched in a savings account.

    “That’s a lot of money sitting around not making any interest to speak of, why not invest that money and just use a credit card or home equity line of credit (HELOC) when an emergency comes?” you might ask.

    That might work for you to cover an auto repair, or your auto insurance deductible, but what happens when the boss comes to you on Friday, letting you know that you are part of the rumored layoffs?  That ‘secure’ job you were going to use to pay back the credit cards is gone, and racking up debt while unemployed is never a good idea!

    Lets also consider the intangible benefits of having a fully funded emergency fund.  There is a sense of peace in your home when you know that you will be OK, no matter what happens.  Think back to the last time you had an emergency (had to fly last-minute to a funeral, your car broke down, the furnace broke one cold and snowy weekend night); was there any panic in your mind, wondering where you would get the money to pay for it, or pay off the card, in addition to the actual thing that happened?  When you have some cash sitting around for those kind of events, it turns them from emergencies to inconveniences.  The stress level drops to near zero.  Your spouse is relaxed, not having to worry about grocery or rent money being spend, and it becomes easier to focus on getting through the actual event.  Think about that.

    I can attest from personal experience how important it is to have an emergency fund.  I’ll give you to recent examples from my own life:
    1. On my honeymoon last year, while 2000 miles from home in the Black Hills, one of the tires on my car came close to having a blow out.  Instead of having to cancel the rest of the trip, or any of the fun stuff we had planned (and stressing out my new wife), I simply put on the spare, dropped off the car with a local mechanic, bought 4 new tires (the rest were due to be replaced, too), went on our tour, and picked up the car afterward.  We hardly skipped a beat in our day, and even were able to smile when we talked about it that evening over supper.
    2. At the end of January of this year, after almost 5 years at a very stable engineering company, I was let go.  I didn’t enjoy what I did (have you ever had a life-sucking J-O-B?) and would not wanted to go back to work as a cube-dwelling engineer for another company. Having a fully funded emergency fund has allowed me to start my own Financial Coaching business!  This is something I’ve been preparing to do (school, training, reading, etc) for a long time, and now I can!  My wife is not stressed out about the money situation, even as the company is slowly growing, because she knows that we can go many months w/o any income and be OK.

    “Ok, ok, I get it; I need to start saving more.  But I’m not sure I can.”  The key to this is using a monthly budget, paying off your debts, then living on less than you make until you’ve saved enough.  If you are still in debt, quickly save up $1,000 then attack your debt.  $1,000 is enough to cover most emergencies, but low enough that you should feel the urgency to become debt free quickly so you can build that rainy day fund.

    So, where do you stand?  Fully funded?  Almost there?  Ready to start saving?

  • No one gets out alive, or the case for Life Insurance

    No one gets out alive, or the case for Life Insurance

    “…but in this world nothing can be said to be certain, except death and taxes.”  Benjamin Franklin wrote this in 1789 after the US Constitution was written.

    Most people would agree that this is true.  We lament paying property, auto, sales, income, and every other tax that our elected officials exact from us.  We hire CPAs, buy TurboTax software, and read about how to minimize out tax burden.  But how many of us prepare for the other eventuality?

    You are going to die.

    There, I said it.  If you didn’t know, you know now; sorry to be the one to pop your bubble.

    Now that that’s over with, lets move on with preparing.  By preparing I mean setting up your loved ones that you will leave behind to handle your parting financially.  We all know of a family that lost it’s primary bread-winner and instead of having the ability to grieve for a while, had to put that aside and deal with a foreclosure, figuring out how to feed the kids, or watch as their cars were repossessed.

    You don’t want to be that guy or gal who leaves their family that way.

    One major way you can say “I love you” to your family is to prepare for your departure.  It may not happen till you are 106, but it could happen tomorrow.  It’s part of our responsibility as adults to face reality and prepare for it instead of thinking it can’t happen to us.

    “Ok,” you say, “I get it, I want to love my family well; what do I need to do?”  I’m glad you asked!

    Life Insurance.   You need it.

    Why?  Life insurance’s purpose is to replace you, financially, when you die.  It is to be invested such that it produces enough growth (think interest) to replace your net income perpetually.

    That’s it.  If you have people who depend on your income you need this.  If you are a stay-at-home parent, you need it to replace the economic value you provide (think child care, cook, maid, shopper, taxi driver, first aid provider, etc, etc).

    Ok, so you get it, you accept that this is something you need.  How do you navigate the hundreds of different policies and types of life insurance out there to properly care for your family without getting ripped off?

    Lets use the K.I.S.S. principle.  You need 10-12 times your income on your self (and $300-400,000 on the stay-at-home spouse) in 15-20 year Level Term Life Insurance.

    Simple math: if you make $50,000 a year, you need at least $500,000 in coverage.  Sounds like a lot, doesn’t it?  What your survivors will do is invest this money into decent mutual funds and live off of the growth. A large amount helps to keep their income steady as the market fluctuates.

    Sounds expensive, right?  Most people can get enough coverage for the cost of a couple of pizzas a month!  Do you love your spouse and kids enough to skip a few pizzas a month?  Don’t believe me, check out this site to get an instant quote: Zander Insurance.

    But what about Whole Life or Cash Value Life insurance policies?  Why only 15 or 20 years of coverage?

    Simply put, you don’t need coverage for your entire life.  in 20 or so years, you will be debt free, the kids off to college, the house paid for, and have a healthy nest egg!  [If you need some help figuring out a plan to get there, click here and I’ll help you.]  With all that done, the need for insurance is gone! [Note: if that’s you, or you have no dependents, you have NO need for life insurance.]

    In addition, the cost for a whole life policy can be 10 times the cost for the same benefit as term insurance.  You could invest the difference and still be better off!  Oh, and that cash value that the salesman told you about?  They keep it when you die!  I bet he didn’t tell you that!

    So, what are you waiting for?  Apply for a policy today!!!

    Still have questions?  Post them below and I’ll answer any you have!

  • Reverse Mortgages – Good retirement option or scam?

    Reverse Mortgages – Good retirement option or scam?

    We’ve all seen the commercials, the 60’s Heart Throb on TV touting how safe and great a reverse mortgage is for those in their elder years.  And for those who are older and were hurt in the “Great Recession” this may look like a great option to have a little extra money for travel, fixing up the house, or just to pay medical bills.  After all, why not use some of the equity in your home while you are still around to enjoy it?

    Sound too good to be true?   Or do your Spidey senses tingle when you see those commercials, but you’re not sure why?  Then read on!  But I’m not eligible for one, you say, but your parents and/or grand parents are!  Wouldn’t it feel good to be able to steer them in the right direction?  Good answer!

    In case you have not heard of a reverse mortgage, or not fully sure what it is, it’s basically a series of cash advances secured by your home, capped by the value of the home, that you don’t have to pay back until you vacate the home (either by moving out or dying).  To qualify for one you must be at least 62 years old and have enough equity in the home to cover the amount to be borrowed.

    You might be thinking that this is a great idea; borrow money and never have to pay it back!  You could use the money to travel, boost your life style, or do some home repairs/upgrades, right?  Sounds too good to be true, and you know what they say about that?

    Did you know:

    • That if the mortgage isn’t done correctly, a surviving spouse may have to pay back the loan or face foreclosure?
    • That the closing costs can be several thousand dollars?
    • That if you become delinquent on your insurance or property tax that the lender could call the loan (demand repayment immediately)?  (if you couldn’t pay your taxes, you for sure can’t pay the loan and WILL loose it)
    • That the housing market is not always an upward trend, and that if the value of your home falls the lender could stop payments that you started to rely on?
    • That if the home value drops (while your equity is dropping faster) and you want to move, you may not be able to afford to sell your home due to being upside-down on the loan?
    • The reverse mortgage industry is full of scam artists, so it’s possible your trusting grandma may fall for one.

    Still sound like a good plan?

    “But,” you say, “I’ll stay in this house till I die, so will my spouse, I’ve got a good pension that will more than cover taxes and insurance, and I’ll just use ‘my equity’ for fun stuff and not rely on it for meeting my needs.” That may be true and you and your spouse may never have to deal with any of the big negatives; but what about your heirs?  Did you want to leave them the family home?  They may be forced to sell it to pay back your debt when you paid on it for years and years hoping to leave a legacy.

    They may not all be scams, but they are for sure not a good option!  If you are having trouble making ends meet, please talk with me, or any other financial coach, before making what could be a very costly mistake.

  • Identity Theft, or “I didn’t buy that!”

    How often have you hear or read in the news about a data breach (Target, the Veterans Administration, etc)? Probably so frequently that it seems like The Boy Who Cried Wolf. There have been at least 16 breeches made public in the last 30 days! As of the time I’m writing this, over 867 MILLION records have been breached since 2005!!

    I’m sure that by now with all the data breaches alone, not to mention the other opportunities identity thieves have that my identity has already been stolen, it’s just a matter of time for someone to start using the data to steal from me. I’m sure you know someone who’s had their ID stolen, in fact I was inspired and encouraged to write this blog post by my wife, who had her debit card data skimmed and used to make a fraudulent purchase.

    Ok, so you’ve heard of ID theft, but what is it, exactly? According to the Merriam-Webster dictionary ID theft is, “the illegal use of someone else’s personal information (such as a Social Security number) especially in order to obtain money or credit.”

    Other than data breaches, you ID can be stolen by:
    * Skimming: where someone copies the data off of the magnetic strip of your debit/credit card
    * Phishing: scammers pretend to be a legitimate financial institution or company and ask for your info
    * Stealing: thieves can raid your mailbox, steal your wallet or purse, or bribe people who have access to your info
    * Change of address: a thief can submit a change of address form and direct your statements to another location

    Some of the things they will do with your ID are:

    • Open new accounts, loans, credit cards
    • Set up utilities in your name
    • Empty your bank account
    • Obtain a government ID and/or government benefits
    • Give your info when they are arrested

    This all sounds pretty bad, but there is a bright(ish) side: You are not responsible for any acts committed by those who steel/use your ID without your permission. However, you are left with a mess to clean up. It can take hundreds of hours of your time to deal with everyone necessary to clean up your ID.

    So, what can you do? Unfortunately, you can’t prevent ID theft, but you can take steps to reduce the chance of having your ID stolen or minimize the damage, such as:

    • Checking medical insurance benefit statements and bills for inaccuracies/fraud
    • Only give out personal info to people/organizations you know or have contacted first
    • Don’t put your social security number on any ID cards in your wallet/purse or on your checks
    • Check your bank statements and annual earnings statement from Social Security for accuracy
    • Check your credit report at least annually, from each of the credit bureaus; you can do this for free
    • Choose complex passwords for all your online accounts

    But when all that doesn’t stop a thief, what can a person do? You should purchase an ID Theft Protection plan. It’s what I have done. For a few dollars a month I know that when my ID is stolen and used, all I have to do is contact my protection provider and they will do ALL the work to restore everything back to the way it was. I don’t have to spend my precious free time on the phone or sending certified letters to everyone. I personally use Zander Insurance’s ID Theft Protection Plan. I am not sponsored by them (or anyone) and would not recommend something I don’t personally use, but do your own research and see if this is the best product for you and your family. I know I have not found a better plan out there!

    So, how did it turn out with my wife’s stolen debit card info? We noticed an unfamiliar transaction on my bank statement the day it occurred. I called my bank’s fraud division and they credited the account, canceled my wife’s old card and issued her a new one. One thing of note, she had only used it a few times and still had it skimmed, while I use mine all the time and have not had it happen. So keep that in mind when you think you may need ID Theft Protection.

     

  • What is a Bond?

    Last week we answered the question, “What is a Stock”.  This week lets look at Bonds.  You’ve heard of them, I’m sure as an investment, “stocks and bonds.”  But what is it?

    A bond is considered a “debt investment.”  When you purchase a bond, you are loaning a company (issuer) your money.  It’s the opposite of your mortgage or auto loan; you make money off of them.  Though bonds rarely pay the same interest rate that you pay on your debt.

    Because a bond is a loan, it pays a fixed interest rate (coupon), usually every 6 months, and after the loaned money is paid back (on the maturity date).  Because they pay a fixed rate, they are also referred to as a type of fixed income security.

    Also because the payment is fixed/predicable, they are considered a lower risk investment than stocks (we’ve all heard stories of people loosing money in stocks).

    This lower risk comes at a price, though.  Bonds rarely have the earning potential of stocks or mutual funds (we’ll learn about mutual funds in a future post), and as such, having any significant amount of them in a portfolio can limit your ability to grow it for retirement (this is contrary to most financial advisors’ recommendations).

    The bond’s coupon is a function of credit quality of the company and the duration of the maturity.  You’ve probably heard of “junk” or high-yield bonds; when you invest in those, you are loaning a company money that may not be around long enough to pay you back, and as such, they pay the highest rates, whereas companies such as GE pay very low rates.

    It is possible to sell a bond before it’s maturity date; in fact, the first exchanges (think NYSE) were to buy/sell bonds!  The Venetians were exchanging them as far back as the 1300s!  In 1531 the first exchange was started in Antwerp, The Netherlands, long before stocks existed.

    An interesting fact you may not have thought about is that Savings Bonds are debt instruments of the US Government.  The national debt is nothing more than our government issuing bonds to pay for things that tax revenue doesn’t cover.  If you want to read a little bit more on bonds and bond markets, check out Investopedia .

    Well, what did you think of this article?  Do you have any questions or comments?  I’ll answer and address anything you post in the comments below:

  • What is a Stock?

    Stocks, bonds, Wall Street, investing, stock brokers, mutual funds, commodities, futures, options, and hedge funds; words we’ve all heard on the nightly news, TV shows, movies, and radio talk shows.  Do you really understand what they all mean, not just what popular culture says they are?  If not, you are in the majority of Americans.  Most people have never been taught much, if anything about them, and are content to grab bits and pieces of info from the news and political pundits, or maybe they just watched the movie “Wall Street.”

    But that’s not you; you are here trying to learn something, to expand your understanding of all things relating to Personal Finance.  Today I’ll do my best to explain a bit about Stocks.

    A stock is a share of ownership in a corporation.  The owner of a share of stock is a part owner of a company.  Yes, you can own (part of) Home Depot!  If a company has 100,000 shares of stock, each share represents 1/100,000 ownership of that company.  Most major corporations that are household names have many more than 100,000 shares; Home Depot has about 1.38 Billion!

    Because the stock represents ownership of a company, its value is based on the value of the company (I won’t go into stock valuation techniques here, it’s complicated enough to take a semester long college course to teach).  As the market values the company more or less (usually due to the company’s performance), the value of the stock increases or decreases, respectively.

    One way stock investors earn money is by the rise of the value of the stock (it’s ‘return’).  Another way is through dividends.  When a company makes a profit and decides to share it with it’s owners (stock owners), it pays out dividends.  The amount an investor receives is based on the number of shares he or she owns.

    That is basically what a stock is, pretty simple, right?  If you want to know a basic history of the stocks and the stock market, and what a stock market is, this short article on Investopedia.com  is written without a lot of industry jargon.

    Please let me know what you think of this post: was it too long, too short, too basic, too in-depth, etc.  Also, if you have any questions, post them below and I’ll respond with the answer!

  • Start Saving NOW! A story about Compound Interest

    You may think that you have plenty of time to save for retirement; after all, you are young and won’t retire for many decades!  Maybe you haven’t even given any thought to retirement and figure that you’ll worry about it later, maybe when you make more.  Or perhaps you are older and think it’s too late to save for the future, since it’s so close.

    What if I told you that money invested now is MUCH more valuable than money invested “later,” would you believe me?

    Let me introduce you to the term “Compound Interest.”  According to dictionary.com, compound interest is defined as, “interest paid on both the principal and on accrued interest.”  In simple terms it means that the money you earn on your investment (or savings) earns it’s own money.  Let’s use a simple example to illustrate:

    Suppose that our friend Bob has $100 to save.  He does his research and finds a savings account that pays 10% (yes, I know this isn’t a realistic number, but it makes the math easy, so bear with me).  He opens an account and deposits the $100.

    One year later, Bob opens his statement and sees that he now has $110 in his account!  His initial deposit earned $10. [$100×1.10=110]  Bob decides to leave his initial deposit and the earned interest alone for another year.

    The next year when he opens his statement, what does it say?  Does it say $120?  Nope!  It reads $121!  That extra dollar is due to compound interest; that $10 of interest he earned last year earned 10%, too. [$110×1.10=121]

    This happens year after year after year, each year’s interest earning interest during the following year.  If Bob left the $100, and it’s interest, alone for 40 years (i.e. age 30 to 70) he would have $4,525.93!  If he instead pulled out the $10 interest payment each year and put it in a cookie jar, he would have only $400 in that jar, to go with his $100 in the bank.  Pretty incredible, right?

    So now you are thinking, great example, but how do I apply this to my situation?  Great question, I’m glad you asked!

    Once you are out of debt and have an emergency fund saved up, start saving for retirement!  Some day you will retire, either by choice or due to health or a layoff.  Social Security will probably not pay enough (assuming it’s still there) to support you in your current lifestyle.  If you are young and start now, you should be able to retire comfortably.  If you are not so young, you need to start now so you have something to help you out.  Even a little bit invested now will help you out later.

    Now for your financial nerds out there, I know that savings accounts don’t earn anywhere near 10%; this a very basic example of how compound interest works.  Also, investments (stocks, bonds, mutual funds) don’t earn ‘interest’ but have a rate of return, which I’ll go into in much more detail in a later post, but the idea that any growth in your fund grows with the original investment still holds true.

    So, are you ready to start saving?