Monday, January 30, 2006

I'm so scared and confused about what to do with my money:

Many people, not just college students, are too worried about what's going to happen with their money if they invest it that they just let it sit in a checking account all their life. This may be okay for people approaching retirement, but it is not okay for college aged people. Being young, you can afford to take risks, and if you make a bad decision, you will still be able to survive. Once you purchase a house, have children or do anything else that requires you to give a major chuck of your check to them, you will need to lower your risks a bit. Now however, its time to take a risk.

Many people read financial information, and it tells you that if you invest you can make tons of money with very little investment as long as you keep it in over a long period of time. Usually this information doesn't tell you what to invest in, or how to do it, in order to make all of this money. So let's use this entry in the blog to tell you what steps you need to take to start investing. You should already have a high interest savings account if you have been reading this blog for a while, almost every post I make, I discuss these accounts. This will be one of the last times I talk about them for a while.

So once you have a good chunk of money in one of these savings accounts (NOT YOUR EMERGENCY ACCOUNT!) it's time to open up a brokerage account. A good chunk of change means at least $500, but preferably $1000. But there are so many brokerage companies, I don't even know where to start you might say. Well hold on a second and keep reading! I would recommend going with ShareBuilder because it is only $4.00 for purchases. It costs more than that to sell, but that is good, because you should not be selling your stock anytime soon. Another good company is Scottrade, which is what I use. It is $7.00 to buy and sell stock with them.

So you have filled out all the forms for the brokerage saying you aren't an illegal person and you have your account open, transfer money into it! Make sure you find out if there is a minimum amount you need to trade at a specific brokerage. Scottrade, for example, requires at least $500 to invest. Don't just jump in and buy the first stock you find, or one that is mentioned in the Wall Street Journal, you need to do some thinking before you give a company your money. Your first investment should be an Index Fund, not a single stock. This makes it much harder for you to screw up and lose all your money get mad at me and never invest in the stock market again. This site has a list of Index Funds available, the site is a little old, but all the funds still exist as far as I have seen. You can open in Index Fund with as little as $1000, if for example, you chose the Kent Index Equity Fund. Pay close attention to the Expense Ratio Column, this tells you how much the Fund Manager charges you to hold a fund with them. Stick with a fund that is listed in the top half under S&P 500 Index.

How do I buy this fund you say? Well go to your brokerage website and go to the trade section. Then select the Mutual Fund option and say how much money you want to invest in it. Remember you need to invest at least the minimum in it in order to invest at all. Mutual funds are only bought and sold at the close of the market, 4 PM EST.

Sit back and watch your money grow. If it doesn't go up immediately, don't worry about it, don't even check it everyday, check it once a week at most.

Thursday, January 19, 2006

Why budgets don't work for college students:

A lot of financial advice columns and books will tell you that you need to have a budget in order to correct save and spend money. I think making a budget is a useless waste of time for a college student. The spending of someone in college is so random that most will find it hard to budget how much they will spend on food or clothing each week. Some weeks you get asked to go out to dinner with friends 5 times, others you might not be asked at all so you don't spend any money. Setting up a budget also takes quite a bit of time, and even though college students usually have plenty of time they are usually lazy when it comes to spending time on things that don't have instant benefits. So how can you prevent yourself from saving money if you don't budget exactly where you are going to spend it?

It's not very hard to do at all. You need to pay yourself before you pay anyone else. Every time you get paid, whether you have a steady job and you get paid every week or two, or you do random jobs here and there and might only get paid once a month or three times a week, give money to yourself before you give money to anyone else. Most college students do not have the option of contributing to any sort of retirement plan, so that means the government will be the first person to take your money when you get paid, through federal and state taxes along with social security. Now before you give anyone else money, the credit card company, the bank for your car loan, or the school for tuition, pay yourself!

You should take between 10 and 20 percent of each paycheck and put it into your high interest savings account. 10 percent is the absolute minimum you should take out of each paycheck. 15 percent is what you should be averaging each time you get paid; when you get paid more than usual put 20 percent away and when you are a little strapped for cash you only put away 10 percent. Never should you pay someone before yourself! No matter how strapped for cash you are, you need to ensure you pay yourself first! This way you will always be saving money before it all runs out.

Paying yourself first prevents what usually happens to people trying to save money. They say after I pay off my bills and buy everything I need to for the week I will put all of the rest of the money in my savings account. The problem is there is never money left over, or if there is, it's so little they say its not really worth saving. By paying yourself first you prevent yourself from spending that extra money you don't need to spend. This is kind of like budgeting, except instead of suggesting to yourself how much you should spend on stuff each month it actually controls it. Try this for a few months and I think you will be amazed at how much you save!

Thursday, January 12, 2006

What should you do when the money runs out?

Nothing, you are screwed, you should have set up an emergency fund to avoid running out of money when you lost your source of income. If you did lose your job, and you need a source of income because you have no money saved, its time to suck it up and go work in retail, or in a grocery store, or anywhere you can get money. It doesn't matter if you are above working in retail, you aren't above the repo man who is going to take all of your stuff away when you can't pay the bills. So go to work.

Now to what you should have done before you ever lost your job, or what you should be doing now that you are working. Time to set up an emergency fund. This should be a savings account that you will not be able to access at an ATM. Don't open up this account at your current bank because it is too likely that you will just transfer the money to your checking account and spend it when you decide you need a new TV or some more beer money.

Your best bet, as I have said numerous times before, is a high interest savings account at either EmigrantDirect or ING Direct, both banks make it easy to transfer for money from your current checking account into them, and if need be, transfer money back into your current checking account.

Now you might say, but I can only afford to pay my bills each month and have a little money left over for food and a little spending. Well it looks like you are going to eat some cheaper food and stop buy so much clothing or beer. Every time you get paid, take 5 percent of your pay check and transfer it to your new savings account. Better yet, if you have direct deposit at work, set it up so that 5 percent of your check (or what ever dollar amount that usually is) goes into that account.

How much money do I need in this account you might ask? First you need to figure out about how much you spend each month, this does not mean how much you pay in bills, but the total amount you spend including food and shopping each money. Multiply this number by 3 and that is how much you need. That's right, you should be able to live off this account for 3 months with no change in lifestyle at all if you lose or quit your job. Once you have 3 months worth of savings in that account, don't touch it!

The money that you were saving for that emergency fund will now be able to fund your investing...More to come on this later.

Wednesday, January 11, 2006

In college and don't have a credit card? You need one:

If, for some crazy reason, you have made it to or through college without a credit card, I applaud you! I do not think I know any college student that does not have a credit card. The problem is, if you ever want to buy a house, or a car, or anything that will require you to take out a loan, you need to have some credit history. Without a credit card, it is very hard to have a credit history.

Let's set a few ground rules before you apply for a credit card:

1. NEVER, EVER, apply for an in-store credit card. The interest rates a way too high, and you can only use them at one store or chain.
2. If you won't be able to pay your balance in full at the end of the month, don't use the card!
3. Once you get your first card, don't cancel it! Keeping a card for a long time helps your credit score tremendously.

Okay so now it's time to apply for a card. Ask your parents what cards they use and like. Find out what your friends are using for cards. Go to your current bank and find out if they have a card.

When you apply make sure you tell them that you are in college, most companies will throw credit cards at you if you are a college student. Second, check the interest rate! Not just the introductory rate, the actual rate you will pay after the introductory period expires. This should be 15% at most. Some places will give you an instant decision about your application, others will take time, and call you to verify information before they process it.

Once you get your first credit card make sure you follow these easy rules:

1. Don't carry it with you everywhere! Only bring it with you once or twice a month, that way you aren't tempted to use it.
2. Don't buy things that you use up quickly with it, such as food, movie tickets, ect. These things are gone before you even get the bill. If you can't afford them, don't buy them!
3. Pay off most of it every month. Carrying a small balance ($75 or less) shows lenders that you are able to handle carrying some amount of debt.
4. Don't say "Oh I will just pay it off next month." Next month turns into the next month and then it ends up being a year and your card is maxed out. If you start to get in trouble over using your card, ask your parents or someone you trust to take it and hide it so you stop using it and pay it off.

You have taken one step towards financial freedom!

So you thought credit cards were free money?

Well I sure if you are interested in personal finance you have learned by now that credit cards are not in any way free money. If you are a college student you are likely paying at least 20% interest on your credit card. That means if you have $2000 racked up on your card you are paying $400 a year on that credit, or you paid $60 for that $50 pair of jeans you bought a year ago and you haven't paid off yet. Now that doesn't seem too bad does it, I mean $10 over a year is only 2.8 cents a day right?

Well think for a moment what would have happened if instead of paying $400 in interest last you you invested it in an index fund? (A list of great index funds can be found here) If you earned a conservative 8 percent on that money you would have $432. Again $432 dollars doesn't seem like much, but the next year you would have $456.84, then $493.39, then $532.86. In 8 years you will have doubled your investment! Or instead you could just use your credit card with 20% interest and double the amount you owe every 3.8 years. So in 4 years you could end up with -$800 instead of -$400 or in 8 years you could end up with $800 instead of $400...you decide!

Pay off your freakin credit cards and invest!