November 30, 2008
In life, things come up. Your car breaks down. You need a new furnace. Things happen. Are you prepared to deal with those issues if they come up today? Many people do not have cash put aside to deal with emergency situations. It is time you do.
I have a savings account at ING Direct that all extra cash goes into at the end of the month. Some people are not as disciplined and use an auto-deposit. Many finance bloggers have a fund like this. Some call it the Freedom Fund (Well Heeled). Some call it simply an emergency fund (Fabulously Broke). I don’t have a name for mine beyond ING Direct savings.
The point is that you need to save. What if? That is the big question here. What if something goes wrong? You have to be ready. Today is the day to start that fund. Commit to save.
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November 29, 2008
I have talked about my car loan a few times on this blog, and I just wanted to update you on something interesting I just discovered.
I am a big advocate of paying your loans twice per month. If your loan payment is $250, for example, you should pay $125 each payday rather than the $250 once per month. Why, you ask? The dollars you pay are, indeed the same.
I started doing this a few months ago, and I can now pull an average of what I pay in interest.
Paying once per month: $40 per month in interest (average).
Paying twice per month: $30 per month in interest!
That is 25% interest savings per month. That $10 per month is considered an extra principle payment that helps pay my loan faster and saves me money on my monthly and total interest paid to the bank.
It is a little trick with big results.
November 28, 2008
We take a lot of time on this blog to discuss “me” and “I”, but not a whole lot of time to discuss others.
Today is Black Friday, the biggest shopping day of the year in the United States. While avoiding your holiday spending hangover, take time to think about giving to others.
I grew up a big advocate of giving my time rather than my money. As I have become a busy grad student and full time worker, I have found that money is more abundant than time, and I have decided on a few small donations.
I am going to give weekly directly from my paycheck to Hillel, the Jewish student group that helped me take two trips to Israel and gave me more free food than I can ever say thanks for. My donation is through United Way and is matched 75% by my company.
I have given and will continue to give a small amount every year to my old fraternity, Alpha Epsilon Pi. I helped my chapter grow from eight members to over thirty, and I want to help them stay successful.
The Boy Scouts are also high on my list, as a scholarship from the local Boy Scouts paid for my entire undergraduate education.
If your company does not have automatic donation options you can always use bill pay through your bank to automate giving. If someone gave you something, it is great to give back. If someone is in need, it is great to help them. If you are reading this post, you are already much better off than many people. You might think you are in bad shape, but there is always someone you can help too.
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November 27, 2008
Take today off from worrying about your finances. Be grateful for what you have and quit thinking about what you want. As the song goes, “You can’t always get what you want. But if you try sometimes well you just might find, You get what you need.”
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November 26, 2008
Value investing is Warren Buffet’s secret to being rich. However, it is not a secret. He tells the world his investing methods. Anyone can do it. It is a simple concept with complicated variables.
The big principle is to find a company that can be invested in for a lower cost than the company is worth. Value investing generally uses book value for determining company value. This is a very conservative valuation method, as it does not take into account future earnings.
Because of the conservative valuation method, you are essentially buying the company for less than it is worth. Even if the company goes out of business, you still have an ownership in assets that are worth more than you paid.
How can you identify these opportunities today? Look at a company’s financial statements and find net book value and assets and liabilities. If the market capitalization (total value of all shares of stock) is lower than assets less liabilities, you found a bargain according to the value investing method.
While Buffett is the most famous value investor, he did not come up with the idea, he just adapted it to his own investing style. Benjamin Grahm is often credited with creating value investing. He worked with co-professor David Dodd to create this “cautious approach to investing”. Grahm was Buffett’s professor at Columbia.
Since the 1970s, Warren Buffett and his partner Charlie Munger have been considered the top value investors in the world. Proof is in stock. Just look at Berkshire Hathaway over the last four decades, value investing works.
November 25, 2008
Some people say that owning your house outright is a waste of money. They argue that you can earn better returns on the cash than you earn having the money sit in your home.
There are merits to this argument, but there are faults as well. So, the question is, should you pay off your house in full or refinance and use the cash elsewhere?
If you are on the investment side, using your home as leverage, you keep loans out on your house indefinitely through re-financing and home equity loans. These loans generally have very low interest rates as they are secured by your house. If you have a 7% loan and you can make 9% per year in the stock market, you are better off by investing and making a 2% profit over what your loan interest rate is.
This does not go without risk. If you have a bad spell in the market and lose a lot of money, you are far worse off than had you paid the money into your loan. In a worst case scenario, you lose so much that you cannot pay your loan and you lose your house!
As you might guess, I am an advocate of paying for your loan as quickly and early as possible. I have a car loan out right now that I am over 12 months ahead on. It is a 5 year loan and I am on track to pay it off in about 3 years.
If you are cocky, you might make leveraged investments using a margin account or your home to bankroll your stock picks. This can pay off big, but it can lose bigger. If you are considering this route, consider the risks and benefits. I say the risks are far worse.
Do you investing using leveraged investing? Why or why not? Let us know in the comments.
November 24, 2008
When you are searching for stocks to buy, you have the option to look at stocks that have dividends and stocks that do not have dividends. Instinctual, you would want a stock that pays you. However, that is not always the case.
When you buy a stock, you buy it to earn a return. If you buy a stock for $10 and it goes to $11, you made a 10% return. How you get that 10% does not really matter.
If you have a choice between buying a stock for $10 that you think is worth $11 per share or a stock that costs $10 and is worth $10 per share but has a .50 dividend, you should buy the stock that does not pay the dividend because you will have a return 5% higher.
Dividends are great. I get dividends on most of the stocks I own, but I reinvest them in the stock. If it is worth owning, it is worth owning more of. That way, my return goes back into my long term investment.
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November 23, 2008
I am on vacation this weekend with my favorite girl. We are staying in Glenwood Springs for the weekend, which is about 4 hours west of my home in Denver. This is a “budget vacation”, and still will cost around $500. Is it worth it?
It depends on how you are paying for it. If you have to pay for a trip on a credit card, you should wait until you have saved up enough cash to pay for it up front. You should never do something that is considered a luxury with a credit card. You should never carry a credit card balance for anything.
If you work hard and manage your money well, you should take a vacation. You earned it. You can decide how often you can afford to go and what you can afford to do. For example, last year we went to Disney World for a long weekend. Now I am in school and a closer trip is what I can afford.
Some people would rather do smaller trips more often. Some would rather do a big trip less often. Some would rather just save. I think it is important for your brain to get away once in a while, and this is my time to do it.
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November 22, 2008
I wrote a guest post regarding traffic statistics for my other blog for Problogger. Check it out.
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A corporation is an entity that has cash inflows and outflows. It can have assets, liabilities, and engage in business deals. That is kind of like you.
If a company goes bankrupt, it is pretty much screwed for a while. It can rebuild, but it will be a while. That is kind of like you.
You should think of yourself as a company. You even have stockholders. They are you, your significant other, your kids, your pets. If your net income goes down, your shareholders will be negatively impacted. If your income goes up, your shareholders will be positively impacted.
Like a company, you should assume that most money you have goes back into the you company. Operating expenses (housing, food, clothes, transportation) must be kept to a minimum to ensure higher net income. You should also maximize income to ensure that goes up.
When you buy things for fun, think of it as taking a dividend. You could have put that money back into the company (invest) to try to increase future returns. It is a decision that CEOs and CFOs make every day.
I am the Eric Company. I have a major income source (work) and several subsidiaries (blogs and other endeavors) to increase my gross income. I have several operating expenses (living, car, etc) that offset my gross income to find my net income. I also invest (education, stock market) with the hope of building future returns. I even take an occasional dividend (vacation, DVDs, dinner with the girlfriend) to make my shareholders happy.
If you think of yourself like this, how can you waste money or waste opportunity? You can’t. Work to build your net income today and in the future. Maybe you will build up enough that you can live off of dividends for the rest of your life. (That means retire).
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