Jeremy Fulton, Financial Wellness Coach

Category: Wealth Building

  • 10 things you need to know about money right now!

    10 things you need to know about money right now!

    There are many things you can learn about money.  Some are cool facts and trivia that you can use for small talk at parties.  Some things will make you feel better about yourself.  And others have the potential to change your life!

    So, without further ado, here they are:

    1. The amount of money is not fixed.
      There is no “pie” that you have a slice of.  If I increase my wealth, it does not mean that I prevented someone else from increasing theirs by that much.
    2. Money is created by work.
      As we work and create and build we create value which is how we get paid.  That is why the GDP of the world is always increasing!
    3. Giving 10% of your income to a cause you care about helps you succeed financially.
      Giving causes us to become more outward focused and generous.  People who are not self-focused are more likely to get the promotion, raise, and be presented opportunities.
    4. If you have money problems, your children will most likely have money problems.
      You know that your kids are impressionable.  They will see how you handle money and mimic your habits, good or bad.  If you don’t teach them proper money management, Visa will gladly do it for you!
    5. There is no such thing as “good debt.”
      How excited do you get about making payments?  This includes Student Loans.  Can you be 100% sure that you (or your child) will land a job you love that pays enough to cover the payments and your desired lifestyle as soon as you graduate from school?  If the student is a woman, what happens if she gets married, has a child, and wants to stay at home?  Can her family support the loss of income with the debt payment?  There isn’t anything that can’t be saved up for!
    6. Rich people avoid debt; they didn’t get rich using debt.
      80% of America’s millionaires are self-made millionaires, and they say the number one key to building wealth is avoiding debt!  When you don’t have debt, you can invest in the market or your own business much more!
    7. Money ≠ evil
      Money is amoral.  It’s like a brick.  A brick is not good or bad. I can throw it through a window or build an orphanage.  Money is the same way; in the hands of good people, a lot of good can be done.  Bad people will just do more bad.
    8. Your retirement fund is more important than your kids’ college fund.
      You will retire one day, either by choice or necessity.  Not everyone goes to college.  Also, do you want to rely on your children to take care of you when you are older and be a burden to them?
    9. Budgeting gives you freedom!
      I know that the word ‘budget’ is used to imply cheap, low-rent, inferior, etc.  But that doesn’t mean that living on a budget means you can’t spend money on things you want.  All a budget is a plan on how you WANT to spend YOUR money.  You plan out your spending for the next month, deciding what you want to spend the money you worked so hard for one, and then actually following through with the plan!  You are allowed to budget money for eating out, buying ‘toys’, and hitting the local Starbucks!  The biggest result to budgeting?  You will feel like you got a raise!
    10. Investing in a financial coach will pay off bigger than any stock!

    Yes, I know it seems self-serving to tell you to hire me, but to be honest, had I hired a financial coach way back when, I would have ended up with thousands more in my retirement fund, way more in my savings, and have not wasted so much money over those years!  A coach can help you pick the proper types/amounts of insurance (saving you on payments and loss), set and reach financial goals, find areas where you can save money in day-to-day expenses, help you beat debt (how much of your income goes to payments each month?), and even help you and your spouse agree on money issues (how expensive is a divorce?)!

    Maybe you have all the answers already and are doing pretty good; good for you!  If not, what are you waiting for?  Give me a call and set up a no-cost, no-obligation consultation to see if what I’m saying is true.  What do you have to lose?

    I can be reached at 860-469-2274 and jeremy.fulton@me.com

  • The Envelope System, or How To Stick To The Budget

    The Envelope System, or How To Stick To The Budget

    A little while ago I wrote about using Cash, in a post titled Cash Is King! (Sorry Elvis); and in that article I mentioned using the Envelope System as a way to control your spending and avoiding some budget busters.  I very briefly described how we use that system, but I’m not convinced that I taught you enough to fully implement that system with your own budget.

    Long before the invention of debit cards, people would pay for many things with physical cash.  They actually had physical money in their possession, esp. if they didn’t trust the banks (think post-depression).  One method people would use to control their spending would be to allocate their pay into separate envelopes, so they would have enough money for the rent, utility bills, and to save up for large purchases (most people didn’t borrow for ANY purchase, even home!).  As the check book, then plastic became more popular, the envelope system faded into history.

    Now, many financial gurus, such as Dave Ramsey (and myself), recommend using this old system to remove the risk of overspending certain categories of your budget.  I personally recommend (and use) envelopes for 3 categories.  I think that you should use at least these three, but feel free to add others that you have a history of overspending on:
    – Groceries
    – Eating out
    – Blow money (separate envelopes for me and the Mrs.)

    Using the Envelope System is VERY easy!  In fact, it’s easier than not using it when budgeting!  Here are the steps:

    1. Complete your monthly budget, determining how much from each pay check goes to which category.
    2. Have your budget committee meeting and come to an agreed upon budget.
    3. After the first paycheck is deposited, withdraw the amount for each envelope category from an ATM.
    4. Put the cash in the envelopes.
    5. Only spend on each category from that category’s envelope.
    6. Once that envelope is empty, you are done spending on that category.

    Simple, right?

    Don’t worry if it takes a few months to get it right; that’s normal!  Like any new skill, this takes some practice.  If you have any questions or need help, please ask in the comments or shoot me an email!

    Objections I’ve heard:

    • I might get robbed if I carry cash!
      • no one knows you carry cash, so why would you be any more of a target than if you didn’t?
    • What if I loose my envelope?
      • I don’t carry envelopes around unless I plan on wanting to shop in that category.  The amount of cash carried is minimized.  Also, be careful, as you would with your debit card.
    • It’s a hassel to pull out money every week/2 weeks!
      • It’s worse to overspend at a restaurant and overdraft on the electric payment!  Most banks have a drive-up ATM/teller; we don’t think it’s a hassle to hit the Starbucks drive through!
    • I might run out of money and not be able to buy what I want at the grocery store!
      • That’s the point! Put back the ice cream and sugar cereal and buy pop-corn and oatmeal instead; next time you will plan out how you spend your grocery money better.

    What other objections do you have?  Post in the comments below

    If you are ready to start, you can buy a nice envelope system here, or check out the web for ideas on making one that fits your style and needs!

     

     

  • The Reluctant Spouse, or “He keeps messing up my budget!”

    The Reluctant Spouse, or “He keeps messing up my budget!”

    If you are reading this, you are probably the money nerd of your family.  You like to know where your money goes.  You like to watch your nest egg grow each month (or cringe when the market is down).  You know the value and power of budgeting.  You probably even enjoy working in Excel (I know I do!).

    Then there is your spouse.

    •  He won’t join you for your monthly Budget Committee Meeting
    • She says, “Whatever you say, dear!” and then comes home with several bags from the mall.
    • Believes that budgets are a punishment.
    • Isn’t willing to give up her lattes or his green fees because she/he “works hard and deserves it.”

    You’ve begged, pleaded, nagged, and maybe even raised your voice, but to no avail.  You can’t seem to convince your spouse that you need to cut back, pay off the debt, and start putting money aside for “a rainy day.”  You are tired of trying your best only to have your hard work wasted by the arrival of a large package from Amazon.

    It would be hard to NOT to be frustrated with him or her for the lack of willingness to participate in this part of family responsibility.  But may I risk pointing out that you may have some fault in this??

    Hold on a minute!  Put down the pitch forks & torches and give me a second to explain!!

    I’m not excusing their behavior, but suggesting that your approach in bringing your spouse alongside needs some adjustment.

    Ask yourself these questions:

    • Am I nagging my spouse?
    • Does my spouse see the budget as a restriction?
    • Do I constantly talk about “what” she needs to do?
    • Have I used the phrase, “Dave Ramsey says. . .”?
    • Has my spouse ever been ‘abused’ by budgets in the past?
    • What is it about budgeting that causes my spouse to disconnect?

    I’ll give you a minute.

    Your intentions were good and noble, there is no doubt!  And since we can’t change the past, lets talk about today and your future.  Lets look at an approach that will help your spouse truly come onboard; let’s help him understand and embrace the why!

    You know the why; you instantly saw in your mind what life will be like when you have no debt, a huge emergency fund, and have a plan to accomplish your family goals.

    Your spouse doesn’t.

    You need to help her see and embrace a why of their own.

    Here is one strategy that should work for just about any reluctant spouse.

    Step 1: Forget the past, both their misbehavior and any nagging/mistakes you’ve made.

    Step 2: If you were harsh on your spouse, ask for forgiveness for how you approached the subject.  As hard as it is, it can be a crucial step in getting your spouse’s attention.  You can say something like, “Honey, I need to ask your forgiveness.  I’ve been harsh with you about our family’s spending habits and I’m sorry.  I don’t want money to come between us.  I want us to work together as a team in this marriage; not me as your boss.  Will you forgive me?”  Feel free to adapt that to your style, but be sincere!

    Step 3: Dream Date.  It’s not what you think; it’s better!  Hire a sitter (or barter kid watching time w/ another parent), if you have kids, and have a nice dinner date.  If you are staying in for this date, set the atmosphere by turing off all phones & the TV, put on some soft music, light candles, etc.  With your spouse’s full attention, start dreaming together.  Ask, “if money was no issue, where would you like to go/what would you like to do?” “What does the ideal retirement look like to you?”  “Where would you want to live/work if money didn’t matter?”  Get the idea?  Make sure you share you own version, too!  Once you have spend some time dreaming, and your spouse is sharing, express that these dreams are reachable, that you two can work together to get to a place, financially, to make them come true!  He or she may not believe you at first, but the next step will help.

    Step 4: Express to your spouse that as a team, you can do anything.  You don’t expect him or her to handle the day-to-day finances or even craft the monthly budget; just that he give his input, come to an agreement (yes, your spouse gets an EQUAL say in the budget!), and stick to the agreement!  Ask him or her to try it for a couple months; if budgeting ends up not helping to accomplish goals, then you can quit! (Hint, it’s a trick: budgeting always works!)

    Step 5: Time for some work for you.  Craft a workable budget, calculate how long it will take to reach some goals/dreams, and present it in a simple format.  I would discourage you from using your 5 sheet, cross-linked spreadsheet for the next step; instead, use this form (or similar).  But fill it out in pencil, not pen.

    Step 6: Budget Committee Meeting.  You sit down with your spouse, eliminate all distractions (put the kids to bed, turn off TV/phones, etc), and slide the budget, along with a pencil and eraser, across the table.  Insist your spouse change at least one item! (Hint: this is how you get him/her to take ownership and not feel dictated to).  Now be silent and let him look and make some changes.  Once both of you agree on it, sign the bottom as a contract (if you feel inclined).

    Step 7: Show lots of gratitude and respect for his/her participation (back rub, do the dishes, etc).

    So, what are you waiting for?  Start tonight!

    Please let me know how this works for you, or how you handled your reluctant spouse in the comments below.  Or, if you were the reluctant spouse, what did it take to get you onboard?

  • 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.

  • 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!