Hey everyone.
This post is going to be a response to a reader's comment. The reader, Rachel, asked,
"I may sound dumb, but what's the difference between stocks, bonds, mutual funds, and CD's?"
Rachel, that's not a stupid question at all.
A stock is ownership in a company. When a company, or a business wants to expand, it may or may not need to raise money. If the company has taken on a lot of bank debt (i.e. business loans) already in order to grow, it may be looking for other sources of capital. When it wants to raise money from the investing public - you and I - it "goes public". You may have heard this term before. You may have also heard the term "IPO" or initial public offering. When a company sells a piece of itself to public investors, it issues stock to these investors, and a company "IPO" 's .
These investors in turn have the right to a portion of the company's earnings. Depending on how many shares (a share is a single entity of stock) an investor owns, he or she may have a substantial voice in who the CEO, CFO, and board of directors are.
There are many determinants behind a stock price's ascent and decline, but the profitability or how much the company makes after paying its expenses, is one of the primary ones.
A bond is another way that a company raises money. Bonds are also sold to the investing public (aka the common Jane and Joe Blows), but sometimes, they are only sold to private investors (aka wealthy people, endowments at elite institutions like Harvard, and huge pension funds).
A bond is called a 'debt instrument' because when we buy bonds, we, the investors, lend a company money for a specific amount of time - say 2, 5, 10, or 20 years. During this time that the company has our money, it pays us interest - a certain amount of money based on the initial amount that we lent out.
The likelihood that we as investors will be the initial amount that we lent, the principal, determines the interest rate paid on the bonds by the company. The more likely we'll be paid, the less risk there is, so the less interest paid. The less likely we'll be paid, the more risk there is, and thus the higher rate of interest paid on higher risk bonds.
Bonds have credit ratings, which denote how likely or unlikely the principal is to be repaid in addition to all of the interest payments. The rating system is not unlike the American grading system. They are a little more nuanced than I a making them seem, but for all practical purposes, a rating of C is worse than B which is worse than the best, A.
Mutual funds are similar to stocks, but not exactly like them. Mutual funds are companies that have managers who buy stocks or bonds for investors. So a mutual fund can be thought of as a basket of stocks. Some people argue that buying mutual funds is less risky than owning individual stocks because there's less chance that one company could blow up and ruin your savings/stock portfolio. But buying a mutual fund with a manager that's a horrible stock picker, like most mutual fund managers are, is as dangerous, if not moreso, than picking your own stocks poorly.
Lastly, a CD or a certificate of deposit is a savings vehicle that tyour bank provides. It pays a higher rate of interest than your regular checking account, but it's more liquid than stocks or bonds, meaning that it's very easy to gain access to it.
I hope this post was informative and please let me know if you have any questions. Thanks for reading.
Tuesday, May 29, 2007
Sunday, May 27, 2007
The Beauty of Compound Interest
Hey ladies and gents.
In the link below, you'll find a great article about a phenomenon called 'compound interest'. The page also has a compound interest calculator. So you can adjust deposit rates and annual rates of return and see how much you will have at the end of a specified time period. Enjoy.
http://www.finweb.com/investing/compound-interest.html
In the link below, you'll find a great article about a phenomenon called 'compound interest'. The page also has a compound interest calculator. So you can adjust deposit rates and annual rates of return and see how much you will have at the end of a specified time period. Enjoy.
http://www.finweb.com/investing/compound-interest.html
How to Open a Brokerage Account/Different Types of Accounts
Well, now that I've already written about why you should invest, it's time to learn about how to open up an investment account. There are a few types of different investment accounts, the ins and out of which I'll explain soon. But there are also many different brokerages that you can use too. A brokerage is a fancy word for a bank that allows you to buy stocks and mutual funds.
A brokerage can also be 'full-service' or a 'discount brokerage'. The difference is basically that a full-service brokerage has investment advisors/stock brokers who you can call ask to pick and actually buy stocks for you; a discount brokerage has a customer service hotline, but you can't really call anyone and ask for investment advice or to buy an investment by talking with a real person. You buy the investments yourself using your computer. And of course, the commission or the fee paid for talking with a person on the phone is more expensive than just buying a stock online.
The lowest commission paid for a trade - the buying or selling of a stock or mutual find - is $7, and it's at a brokerage called Scottrade. But here's a link to the Motley Fool's Broker Center to help you choose which brokerage is right for you.
http://www.fool.com/dbc/dbc.htm
If you choose to open an account, I recommend Scottrade. They have the lowest commissions, great customer service, low account minimums and are really helpful at tax time. To open an account, just go to www.scottrade.com and click on 'Apply Now'.
Now for a brief rundown of the types of accounts one can open.
Individual Investment Account: This account is not a retirement account. It is an account, just like your savings or checking account, that allows you to buy stocks, bonds, mutual funds, and certificates of deposit. You can withdraw the money in this account at any time, but if you make money on a stock and sell it in less than a year, you have to give 20% of your profits to the government. If you make money on a stock and hold it for a year or more, when you sell, you only have to pay 15% of your profits to the government. These are called, respectively, short-term and long-term capital gains taxes.
Roth IRA: This is a retirement account and it stands for Roth Individual Retirement Account. Senator William Roth sponsored this account in the Senate and it allows people who meet certain income requirements (for single people, the maximum amount you can make and still contribute to a Roth is $96,000 and it's $150,000 for married couples) to save $4,000 a year in this account. The contribution goes up progressively with inflation and the passage of time. (In 2008, the contribution limit will be $5,000.)
You can withdraw your contribution money ($4,000) at any time without tax consequences. However, if you withdraws gains on that contribution money before 59 yrs. of age, you pay the same taxes that you would pay on gains in an individual investment account. So, let's say you contribute $4,000, and have a great year and make 25% on your money, netting you $1,000. You can withdraw the $4,000 you put in, but if you withdraw more than that, you get taxed at 15% or 20%, depending on how long you've held the investment.
Also, you can use this account to pay for higher education expenses or up to $10,000 (whether from gains or contributions) to put a downpayment on your first home, provided the account has been open for at least five years.
Please contact me if anything here has been unclear and you want to know more. As always, thanks for reading too.
A brokerage can also be 'full-service' or a 'discount brokerage'. The difference is basically that a full-service brokerage has investment advisors/stock brokers who you can call ask to pick and actually buy stocks for you; a discount brokerage has a customer service hotline, but you can't really call anyone and ask for investment advice or to buy an investment by talking with a real person. You buy the investments yourself using your computer. And of course, the commission or the fee paid for talking with a person on the phone is more expensive than just buying a stock online.
The lowest commission paid for a trade - the buying or selling of a stock or mutual find - is $7, and it's at a brokerage called Scottrade. But here's a link to the Motley Fool's Broker Center to help you choose which brokerage is right for you.
http://www.fool.com/dbc/dbc.htm
If you choose to open an account, I recommend Scottrade. They have the lowest commissions, great customer service, low account minimums and are really helpful at tax time. To open an account, just go to www.scottrade.com and click on 'Apply Now'.
Now for a brief rundown of the types of accounts one can open.
Individual Investment Account: This account is not a retirement account. It is an account, just like your savings or checking account, that allows you to buy stocks, bonds, mutual funds, and certificates of deposit. You can withdraw the money in this account at any time, but if you make money on a stock and sell it in less than a year, you have to give 20% of your profits to the government. If you make money on a stock and hold it for a year or more, when you sell, you only have to pay 15% of your profits to the government. These are called, respectively, short-term and long-term capital gains taxes.
Roth IRA: This is a retirement account and it stands for Roth Individual Retirement Account. Senator William Roth sponsored this account in the Senate and it allows people who meet certain income requirements (for single people, the maximum amount you can make and still contribute to a Roth is $96,000 and it's $150,000 for married couples) to save $4,000 a year in this account. The contribution goes up progressively with inflation and the passage of time. (In 2008, the contribution limit will be $5,000.)
You can withdraw your contribution money ($4,000) at any time without tax consequences. However, if you withdraws gains on that contribution money before 59 yrs. of age, you pay the same taxes that you would pay on gains in an individual investment account. So, let's say you contribute $4,000, and have a great year and make 25% on your money, netting you $1,000. You can withdraw the $4,000 you put in, but if you withdraw more than that, you get taxed at 15% or 20%, depending on how long you've held the investment.
Also, you can use this account to pay for higher education expenses or up to $10,000 (whether from gains or contributions) to put a downpayment on your first home, provided the account has been open for at least five years.
Please contact me if anything here has been unclear and you want to know more. As always, thanks for reading too.
Saturday, May 26, 2007
Why We Invest vs. Just Save
Hey guys and gals.
Today, I'd like to talk about why anyone would want his or her money to grow and why it's impossible to get rich using just your primary paycheck. But before I go into that subject, which will be my main topic, I'd like you to adopt an attitude - as silly as it may sound to you.
Instead of thinking that you never have enough money, and saying that you are "always broke", repeat to yourself that you have infinite sources of money from the universe. That you always have more than you need. That you are already wealthy because you're alive, have friends, people who love you, and the will to live on. Indeed, we all, no matter how depressing our situations may get, have a lot to be thankful for. And when we starting acting like we have abundance in our lives, and are thankful, that's when we handle our money better and make it grow.
Now, on to the main topic.
Why put your hard earned dollars at the filthy hands of the risk of loss when you can just try to save your money. Well, there's something called inflation. I'm sure that most of you have heard of it. It basically means a rise in the cost of goods or a decline in the amount of goods your money can buy, as a result of the increased money supply in the economy. Here's an example.
You ever hear your grandfolks or older people talk about how Coke used to be a quarter in the 1960s, and now it's a dollar fifty in 2007. That's inflation for you. In the 1960s, it cost Coke a certain amount less than a quarter to make Coke and then they sold Coke at a profit. As the price of the materials and labor needed to make those same Cokes rises, Coke has to sell its drink at an 'inflated' cost to make the same or greater profit.
The Federal Reserve and the Federal Open Market Committee (FMOC) - the government entity that controls the money supply, interest rate you get on home loans, credit cards, and auto loans - would like to see inflation at no more than a certain amount - usually 2 to 2.5%. 3% is pushing it.
So, ideally your paycheck would rise along with the cost of goods. That means that if milk was $1 a year ago, and now it costs $1.20 - a 20% rise in the cost of goods - your paycheck, which was $1,000 last year, is now $1,200. This is called 'keeping up with inflation'. Unfortunately, over the past few years, 'real wages' - that is, wages adjusted after inflation - have been falling.
But even if wages were just keeping up with inflation, you wouldn't just want to have the same inflation-adjusted paycheck your whole life. You want more money for your labor, experiences, and cultivated talents. Well, if you invest your money in the stock market, it's possible to beat inflation, by 7,8, or even 9 percentage points. Here at Gen Y Financial Freedom, we strive to beat inflation by 12%. And if inflation averages 3% a year in general, that means that our annual gains on our money is 15%.
How much interest does the best savings account pay? Somewhere a little above 5%. If inflation averages 3%, then in inflation adjusted terms, you are only making 2% gains on your money. Even less after taxes. Yes, savings accounts are taxed too!
This, my friends, is why we should and do invest. And not for the sole purpose of amassing large amounts of money that we never enjoy or do something altruistic with. It is so that we can help others in need in our families and communities, and do work that we find soulful - not just work that 'pays the bills'.
Thanks for reading. And I encourage you to post with any comments or questions you have.
Today, I'd like to talk about why anyone would want his or her money to grow and why it's impossible to get rich using just your primary paycheck. But before I go into that subject, which will be my main topic, I'd like you to adopt an attitude - as silly as it may sound to you.
Instead of thinking that you never have enough money, and saying that you are "always broke", repeat to yourself that you have infinite sources of money from the universe. That you always have more than you need. That you are already wealthy because you're alive, have friends, people who love you, and the will to live on. Indeed, we all, no matter how depressing our situations may get, have a lot to be thankful for. And when we starting acting like we have abundance in our lives, and are thankful, that's when we handle our money better and make it grow.
Now, on to the main topic.
Why put your hard earned dollars at the filthy hands of the risk of loss when you can just try to save your money. Well, there's something called inflation. I'm sure that most of you have heard of it. It basically means a rise in the cost of goods or a decline in the amount of goods your money can buy, as a result of the increased money supply in the economy. Here's an example.
You ever hear your grandfolks or older people talk about how Coke used to be a quarter in the 1960s, and now it's a dollar fifty in 2007. That's inflation for you. In the 1960s, it cost Coke a certain amount less than a quarter to make Coke and then they sold Coke at a profit. As the price of the materials and labor needed to make those same Cokes rises, Coke has to sell its drink at an 'inflated' cost to make the same or greater profit.
The Federal Reserve and the Federal Open Market Committee (FMOC) - the government entity that controls the money supply, interest rate you get on home loans, credit cards, and auto loans - would like to see inflation at no more than a certain amount - usually 2 to 2.5%. 3% is pushing it.
So, ideally your paycheck would rise along with the cost of goods. That means that if milk was $1 a year ago, and now it costs $1.20 - a 20% rise in the cost of goods - your paycheck, which was $1,000 last year, is now $1,200. This is called 'keeping up with inflation'. Unfortunately, over the past few years, 'real wages' - that is, wages adjusted after inflation - have been falling.
But even if wages were just keeping up with inflation, you wouldn't just want to have the same inflation-adjusted paycheck your whole life. You want more money for your labor, experiences, and cultivated talents. Well, if you invest your money in the stock market, it's possible to beat inflation, by 7,8, or even 9 percentage points. Here at Gen Y Financial Freedom, we strive to beat inflation by 12%. And if inflation averages 3% a year in general, that means that our annual gains on our money is 15%.
How much interest does the best savings account pay? Somewhere a little above 5%. If inflation averages 3%, then in inflation adjusted terms, you are only making 2% gains on your money. Even less after taxes. Yes, savings accounts are taxed too!
This, my friends, is why we should and do invest. And not for the sole purpose of amassing large amounts of money that we never enjoy or do something altruistic with. It is so that we can help others in need in our families and communities, and do work that we find soulful - not just work that 'pays the bills'.
Thanks for reading. And I encourage you to post with any comments or questions you have.
Thursday, May 24, 2007
Why Gen Y Financial Freedom
Hello All.
I'm new to the Blogosphere, but since you've taken the time to read my blog, I figured I'd explain who I am and why I created Gen Y Financial Freedom. My name is Jonathan Pollard and I'm a recent Duke University graduate. '05 to be exact. And like most of you, I have a mountain of student loan debt from my undergraduate education. But instead of just putting my head in the sand and saying that it's impossible to dig out from this huge hole, I've decided that I'm going to take control of my financial future. Actually, I decided that way before I graduated from college.
But enough about me. My primary reason for creating this blog is because I see too many people my age - I just turned 24 in April - spending freely and not being concerned with their credit scores and making their money grow. And I want to change that by disseminating information about how to get rich, in a fun and exciting way.
Let me pose a question to you that shocked me when I read the answer. Do you know how many streams of income the average millionaire has? Not one, not two, not four, but seven! Seven, ladies and gentleman. That means that while Ms. or Mr. Millionaire is engaged in her or his primary pursuit to put food on the table, she or he has six other ventures going that bring in income. How would you like to have six other sources of income? I bet that'd get those student loans paid off quickly.
Join me in a quest to learn how to be financially propserous life and thank you for reading.
I'm new to the Blogosphere, but since you've taken the time to read my blog, I figured I'd explain who I am and why I created Gen Y Financial Freedom. My name is Jonathan Pollard and I'm a recent Duke University graduate. '05 to be exact. And like most of you, I have a mountain of student loan debt from my undergraduate education. But instead of just putting my head in the sand and saying that it's impossible to dig out from this huge hole, I've decided that I'm going to take control of my financial future. Actually, I decided that way before I graduated from college.
But enough about me. My primary reason for creating this blog is because I see too many people my age - I just turned 24 in April - spending freely and not being concerned with their credit scores and making their money grow. And I want to change that by disseminating information about how to get rich, in a fun and exciting way.
Let me pose a question to you that shocked me when I read the answer. Do you know how many streams of income the average millionaire has? Not one, not two, not four, but seven! Seven, ladies and gentleman. That means that while Ms. or Mr. Millionaire is engaged in her or his primary pursuit to put food on the table, she or he has six other ventures going that bring in income. How would you like to have six other sources of income? I bet that'd get those student loans paid off quickly.
Join me in a quest to learn how to be financially propserous life and thank you for reading.
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