P.S: This is a perfect example of how interconnected the world economies are, a country that size can send ripples through the US economy.
Since the beginning of the blog the finance posts have been on the subject of how to maintain your personal budget, but today I will break from that and talk about Greece. Greece is a small European country on the Mediterranean Sea, with a population of around 10 million people. It is a member of the European Union (E.U.), which is an economic and monetary union of European Nations. You might ask yourself how this has an effect on my finances. Well if you own stock you might notice a drop in prices since Tuesday, which is when Greece defaulted on their loans to the E.U. and IMF (international monetary fund). This is the first time a major country has defaulted on their loans so there has been a lot of speculation on “what’s next” since this is uncharted territory. A few guesses have been: kicked out of the E.U., receive an additional loan, or accept the loan the EU had previously laid out. Greece is in a tough position, little room to play “hard ball” because everyone understands they are in a desperate state. The next few days will be very interesting as to if they stay in the E.U. and the future of the stock market.
P.S: This is a perfect example of how interconnected the world economies are, a country that size can send ripples through the US economy.
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I have noticed people are sometimes scared off from finance because of one simple word…. MATH. Although finance is nothing but numbers that should not be a deterrent in you not taking control of your money and understanding where it is going. The math involved for day to day financial literacy is basic algebra at the most, and the following are just a few items covered under “day to day”: Debt, Credit cards, calculating interest, making comparisons for shopping/buying, and creating a budget. If an individual can understand those items and be able to perform the simple math, they are well on their way to understand basic finance, below I will show just how simple it can be, and if all else fails there are plenty of finance calculators online to help. Things to know: P=Principal (amount starting), r = interest rate t=number of periods Now let’s begin…. Simple Interest Formula – Simple interest = P * r * t Uses: gives a rough estimate on how much you can earn over time, or how much the total cost of a credit card would be. This does not take into account the compound effect so notice I said ROUGH estimate. Cash Flow – Cash Flow = income-expenses Uses: to determine if there will be a shortage for the month or how much money will be remaining after all expenses are paid. Rule of 72 – rule of 72 = 72/r Uses: quick evaluation of how long it would take for an investment to double. Before I post this equation, do not be afraid of it, it is still very simple. Leverage Ratio: This will require a little explanation; Total Liabilities and Debt are things such as student loans, mortgage, car loans, pay day loans, loans from a friend, anything that you owe someone else will go in the numerator (top of equation). The bottom is total income which means ANYTHING coming into the household should be accounted for. The key to this equation is to keep this as low as possible, having the ratio less than one means you could pay it off in one period. Uses: Determining if taking out an additional loan is feasible or whether you should pay down additional debt before taking that step. As you can see, it does not take someone knowing calculus to be informed and make financial decisions using mathematics. We all have seen internet posts about the key to having financial freedom is to have multiple streams of income, and to an extent, they are correct for the average person (non-CEO, athlete, etc). The problem is those articles never post how you can make extra money or if they do, it requires you to pay something to begin. Terrible! Today I will help identify ways to help bring in more money, but remember when the extra money comes in, DO NOT spend it on things you want. Spend it to pay down bills that you owe. Let's begin...
1. A part time job- This might not be a popular option, but it seems many citizens are not working a full 40 hour week to begin with so a 2nd job will be a great way to make extra money. 10-15 hours per week will really add up over time. 2. Take online surveys - Everyone wants to know what the consumer thinks, buys, and the demographic of people buying their product so why not get paid for it? The price of the survey varies wildly depending on the company, product, and the website. 3. Tutoring - I would think we all have a skill that someone would find useful, so why not get paid to show someone else? I have been personally doing this for years and prices can vary if you do it personally or through an agency, but you could look to make around $8 - $45 per hour. The more complicated the subject matter, the higher you can charge. Some people are professional tutors so the money is there to be made. The above are just three ways to increase your earning potential and create some extra income, but it's summer, so an honorable mention must be given to cutting grass. Just remember the money is out here to be made, but make the money, don't let it make you! So, let's jump right to it. What's the difference between an asset and a liability? If taken for face value, the topic is easy to understand. An asset is something that can provide future economic benefit and liability is what is owed or must be performed. But the difficult part comes in when the lines begin to become blurred as to which category something belongs in. I will give a few examples that should help make the subject more black and white.
1. Assets - will it eventually be worth more later than it is now, or what is the current value. Houses - usually these are considered assets because historically the value has increased every year, but ask people who have not recovered from 2008 housing crash what they think about this. Mutual funds/government bonds/stocks- even though there is no guarantee that they will be worth more now than later, they are considered assets because you own them and there is no chance you will ever owe money or services for them. There is the possibility of losing money that is invested, but there cannot be a negative balance. 2. Liability - An item that you owe money or services for. Student loans - a necessary evil in the case of a lot of people, but they are definitely a negative. They could possibly increase your lifetime earning potential of handled properly, but they can have high interest rates and expensive month-to-month payments (see recent post on how to handle if paying these becomes a problem). Car payment- I have spoken on these before, but buying a new car is definitely a liability. The car itself is an ASSET because it has a value, but the car payment is what you owe for that asset and in a lot of cases you owe more on the car than it's worth. The moment you take that new car off the lot it is now used and worth thousands less. These examples are just that, examples, and many more things can follow into the asset and liabilities list. But ALWAYS attempt to keep more assets than liabilities, that is how you build your net worth! How do you know if you are living beyond your means?
We all like to think that our budget keeps us within our means, but how do we know if we are really living like that? I will give you a few ways to know in no particular order. 1. Carrying a high credit card balance – If you carry a balance that cannot be paid off in the same month you are using your credit card as an emergency fund, terrible idea! 2. Not saving at least 5-10% - If you cannot save this minimum amount your budget is too tight and leaves no “wiggle room.” 3. No emergency fund – This plays directly into #2, if you cannot save 5-10%, how will you ever be able to create an emergency fund and pay off those credit cards? 4. No budget – If you have no budget and take spending day by day, there is a good chance you will overspend for that month which means… You are living beyond your means. 5. Swiping your credit card for day to day expenses – This could be a sign of trouble in your finances, BUT with the rewards credit cards are offering of 1.5% cashback and etc., this could be a good thing IF and ONLY IF the balance is paid off every month. These type of cards usually have a slightly higher interest rate to account for all the cash back. Bare with me, this might be kind of long but it's well worth the read... Since this is the season of college graduations, I will discuss a topic that a lot of people are not knowledgeable on; they simply sign on the dotted line! Yup-it's exactly what you're thinking.... that topic is student loans! Let’s be clear, we all hate student loans but for majority of students they are a necessary evil, and that evil begins usually six months after graduation. So your six months have passed and you have just received your first bill for repayment, and it is an amount that you cannot pay every month, so what do you do? Two common options are deferment and forbearance-I will go into detail about them both below, enjoy! We are beginning to reach the age where home ownership is important, so before you go out and start searching for that McMansion lets highlight a few fees that you might be unaware of, some are one time fees and others might exist for the duration of the home. These costs could take a house you could initially afford to now being unreachable.
1. Closing Costs – These can range from 2-6% of the home’s purchase price, if the home is $200,000 closing costs could be upward of $10,000, that’s a major burden if it has not been accounted for. One time fee 2. Moving fees – this one might come as a complete shock but the average cost of a full-service move is $12,000 which is a major amount of money that cannot be financed. Of course you can nickel and dime your way to lower costs but regardless this cost has to be accounted for. One time fee 3. Home owners Association Fees – If you lived in a planned community these are fees that what help maintain the playgrounds, pool, and other items that the entire community benefits from. It is usually money that is well spent (depending on who you ask) and you can see where it goes. Life of the home Fee 4. Home Improvements- The not so secret part of homeownership. The beauty of apartments are someone else has to worry about the maintenance not you but with owning a home everything falls into your lap. This cost could be very small ranging from a new $30 doorknob to a new $25,000 roof, this cost is just wildly unpredictable. Life of the home Fee Above are just a few costs associated with purchasing a home and must be accounted for before you take that leap of faith and get that mortgage. Overall I would consider homeownership a great benefit for long-term financial security, next week we discuss the steps to purchase your first home. People have grown accustomed to thinking all debt is bad, that is simply not true! We all desire to be debt free, but we should not go overboard in the desire. We must understand that all debt is not created equally. We will explore a few types of debt and classify them as good or bad.
1. Mortgage – This is probably the best debt you can have, especially in today’s market. Houses are appreciating values, meaning their value (on average) goes up every year, and with historical interest rate lows, why rush to pay it off? The S&P 500 has averaged ~7-8% ROI since the 1950s and interest rates on houses are hovering around 4% right now. So let’s say you invest in the stock market instead of paying the house off early, there is almost a GUARANTEE you will make more money on average from the stock market than the house. Also, the money in the market will compound, the house won't and it is not a liquid asset. 2. Car debt - I personally think this is the worst debt to acquire, but it is a necessary evil. The moment you drive your beautiful new car off the lot, it is now a used good and has lost a good 25-30% of its value. No matter how you THINK the value of your car is, honestly it’s just not worth as much. Every mile you add on the odometer is like watching money fly out the window, the car is a depreciating asset so no matter how much you care for it, value will be lost. 3. Student Loans - Now this a tricky topic, but this debt can be good or bad depending on your area of study. If the degree is for a STEM major, it will usually end up being a good debt, a liberal arts degree might not be if you spent $100k to obtain it. Overall though, I would classify this as a good debt because it will (should) increase the overall life earnings of someone who has obtained the degree and is applying it. It seems like the demographics of the readers will appreciate this topic, wedding and ring prices! It's ok fellas we can discuss it in an open forum..this is the cave!!! So let's get to it...
Wedding - So for 2014 the AVERAGE wedding price was $30k, yes that's $30,000! Considering that's around the average income for a single person that's a major expense! Tradition says the parents of the bride are suppose to foot the bill, but in today's economic climate that is usually not how it goes. Before proposing I would seriously consider seeing where the potential fiancee thinks about small weddings, how many Disney princess movies she watched, and if she has "her" whole wedding planned in her head, if she does..... Run!! No seriously run and never turn around! If the wedding is pre-planned it is sure to be an expensive occasion and lead to many budget arguments. quick FYI: 25% of engaged couples don't make it to the alter. It seems a lot of people fail to realize a wedding is one day for a few hours and blowing your annual salary is just not worth it( to me). That money could be better put to use laying down debt and helping make a better future, starting off a marriage heavily burden with debt is just not smart considering that's the reason major reason a lot of marriages fail. The wedding day should be about you and your future wife, not trying to compete with the next couple, hour financial situation is different from theirs. Engagement rings - the ring she is going to enjoy showing off and in the hyper materialistic mind of women today it shows how much you love her... Flawed woman logic! Well woman logic doesn't exist but you get the point. So there is a good chance you know nothing about rings and are going in blind per normal I would say find a price you will be comfortable with spending and go from there. I wouldn't say it all has to be paid at once there are plenty deals that allow for 12-24 months no interest, great option! The traditional rule was 3 months salary, I have read that comes from old tradition of having to prove to her father that you could save and maintain a household, it's 2015 forget him! Assuming you make 45k pre-tax the "rule" would say you have to spend over $11,000, pure ignorance! It seems common now that people are spending around 1 months salary +/- a few weeks, much more obtainable. There are plenty nice run the out that in your price range once you understand the 4Cs, which are cut, clarity, color, and carat, pretty straight forward and easy to understand with a little research. The best advice I can give is, know hour woman! If she materialistic you might want to drop that $11k or she might not accept the engagement which would save you from possibly a very expensive mistake. Financing a car, yes previously I stated this was bad debt, BUT we must remain mobile and sometimes public transportation is not always an option. A lot of people wait until their car is ready for the bone yard before they start searching and planning, this is a mistake! If you wait until the last minute, you will be forced to take what you can get, which is never a good thing. Here are three steps on how to limit money spent on financing a car: |
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