Financial Advice That Makes Cents

Don't Forget About Me...

2009-09-13T19:08:00.001-07:00

To my loyal readers, I do apologize, but I am going to be suspending my blog posts indefinitely...I will eventually pick up my computer and return back to blogging.

Avoiding Lifestyle Inflation

2009-08-30T22:07:00.001-07:00

"I dont know what, they want from me, Its like the more money we come across, The more problems we see" -Puff Daddy (AKA Diddy)

It is always shocking to me to read articles about professional athletes and celebrities who make millions in a matter of years and seem to lose it all just as quick. It is hard to believe that it is possible to squander 20 millions dollars over a lifetime and even more impossible do it over a matter of a few years. Most people say, "If I had just one million dollars, I could probably live off that for the rest of my life", but are they being truthful?

I believe, given the circumstances that we are in today, that most people would not be able to live off one million dollars for the rest of their life. Unfortunately, this is due to a condition that is called "Lifestyle Inflation".

Lifestyle Inflation is defined as spending more money on non-necessity items as your income increases.

Do you remember that family the "The Jones's". They were the ones with the nice cars that are currently one payment away from getting repossessed, the McMansions that are on the verge of getting foreclosed on and no savings to show for all of the money that was earned. Well, the recent recession has taught up that keeping up with "The Jones" is a bad idea, but unfortunately, many consumers still continue to try to keep up. Below are some recommendations to avoid getting caught up in lifestyle inflation.

Do not compare yourself to others.

Quite often people feel pressured in spending more money due to the fact that people around them are spending. Whenever someone gets a new car or a new home, why is it that people feel like it is necessary for them to do the same? What needs to be understood is that what is for someone else may not be for you. Be content with what you have and improve on it as needed.

As you make more, save more.

One key to financial freedom is to save money. Whenever receiving a raise or other increase of income, rather than finding something new to spend the increase on, put it in an online savings account or start a new investment fund.

Treat yourself responsibly by not spending money that you do not have.

In anticipation of earning more money, people often spend money that they have not even received. This is bad because spending in anticipation can possibly backfire in the case that the money does not come through after it has already been spent. This causes more debt and potential to get in a situation that is near to impossible to get out of.

Remember, be smart and avoid "Lifestyle Inflation". Live within your means and avoid trying to keep up with everyone else. Take time to develop your plan and stick to it.

For more information on the article that inspired this post, please check out the following link:

How (and Why) Athletes Go Broke

Improving others by improving yourself

2009-08-23T21:39:00.000-07:00

"You cannot help someone build a house when your foundation has not set". ~Me

Conceited, cocky, selfish, etc. etc. These are the words that you will most likely hear when you seem to put yourself first before everyone else. However, why is there such a negative stigma with this? My guess is, the people who are usually saying those words are typically saying them because you are refusing to do something for them. In a sense, wouldn't that make them "Conceited, cocky and selfish"?

While growing up, I was taught in my household that we need to look out for others as we look out for ourselves. We were taught to try to see the good in people and always give others the benefit of the doubt. While these were admirable lessons learned, I have received a healthy dose of reality checks as I have grown up. I have learned that "Everyone does what they want to do as long as it benefits them in some type of way".

Living in servitude to others is not necessarily a bad thing. After all, a volunteer experience can be very fulfilling as it does provide a feeling of accomplishment as well as giving back to the community. However, in this day and age, it seems like the more you give to others, the more others are willing to take. One mistake I have noticed that people constantly trying to improve others by doing things for other people and neglecting themselves.

The problem with this that I have identified is that this typically results in one going without while making sure that others have. For example, how can you pay for someone else's gas but not have enough gas to get yourself to work? It is my experience that the best way to improve others is to work on improving yourself.

On my journey to improve my finances, I have implemented many changes in my lifestyle. While implementing these new changes, I have been able to spark curiosity from the people around me to ask about how I have been able to accomplish these changes. I am able to share with others my experiences and make recommendations for them based on things that have worked for me.

In addition to that, I find that whenever I have sacrificed myself on behalf of others, the end result always consisted of no change. I believe people are a lot more receptive to recommendations when they are ready to change rather than when you are ready for them to change. By allowing people to observe the positive change in your life, it may inspire them to do adopt some of those same changes.

For some recommendations on how you can improve yourself, check out my articles about Investing in your health, Investing in your knowledge, Investing in your Experience and Investing in your Future.

I believe that improving others only occurs through self-improvement, please leave your thoughts about this in the comments below.

Stay Disciplined!

Stocks: Buying on Margin

2009-08-17T06:07:00.000-07:00

Lately, I have been investing in the stock market and have been doing pretty well. I guess a lot of what the experts said about the stock market snapping back was true cause I have definitely been able to experience a lot of gains since the recent market recovery. Even though I feel like I have been taking steps in the right direction, there is always room for improvement. During a conversation with one of my colleagues, I was asked about "margins", which is something that I have heard of but do not fully understand. Of course, this would be a perfect opportunity to educate myself about this procedure as well as write an article about it.

"Buying on Margin" has a very negative connotation due to the fact that this is a practice that contributed to the Great Depression that occurred during the 1920s. From my understanding, many people took at loans to purchase stocks however, when those stocks did not appreciate, many people were left with loans that they were unable to repay. The following information is quoted directly from Wikipedia:

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiplebank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.

As with most things, when there is an unclear understanding of how something works, it is very easy for something that is supposed to be used for positive to turn negative. However, after doing some research, the whole idea of buying on margin is not nearly as complicated.

The terms "buying on margin" basically means to borrow money from a broker to buy stock. The money that is being borrowed is not a conventional loan that you can obtain from a bank. It has a lot more regulations and guidelines that have been implemented to try to help prevent a repeat of the "Great Depression". Below are some of the highlights for a margin account:

Typically requires a minimum investment of $2000.
Usually requires a set margin maintenance fee (used to insure there is enough "cushion" in the event of loss in stock value)
Allows you to borrow up to 50% of the purchase price of a stock.
This account typically carries an interest rate imposed by the broker on borrowed funds.
Penny stocks, OTCBB (Over-the-counter bulletin board) and IPO (Initial Public Offering) stocks do not qualify for margin purchases.

With all of these requirements, it is hard to see the benefits of having a margin account. However, the example below can illustrate why this account has the potential to return great rewards:

Let's assume that you have $5000 in your cash account. You want to purchase a stock that is worth $10 and you believe that it will double in the matter of a year. Instead of limiting yourself to $5000, because you have a margin account, you can purchase $10000 worth of the stock (borrowing up to 50% [maximum] of the purchase price of the stock). In a year, the stock ends up doubling from $10 to $20 and you decide to sell the stock. So the value of the amount of stock you own goes from $10000 to $20000, however, you have to pay back $5000 + interest which is the based on the original amount that you owned. For our example, let's assume that there is 0% interest, resulting in a net profit of $10000.

If you had just used a regular cash account, your profit would have only been $5000.

Margin Account:

Initial Cash Investment: $5000

Amount Borrowed: $5000

Initial Investment Amount: $10000

Final Investment Amount: $20000

Net Profit (Final Investment - Amount borrowed - Initial Cash Investment) = $10000

Cash Account:

Initial Cash Investment: $5000

Amount Borrowed: $0

Initial Investment Amount: $5000

Final Investment Amount: $10000

Net Profit (Final Investment - Amount borrowed - Initial Cash Investment) = $5000

As you can see from the above example, it seems like a really good idea to proceed with investing using margins due to the fact that the return on investment is double of what it is by using cash alone. However, it would be irresponsible to just provide the possible benefit of the accounts without discussing the cons of this type of account.

In the case that your thoughts were incorrect about the particular stock in the previous example and instead of the stock doubling in value, it was halved, things change drastically. Let's review the previous example using these new numbers:

Margin Account:

Initial Cash Investment: $5000

Amount Borrowed: $5000

Initial Investment Amount: $10000

Final Investment Amount: $5000

Net Change (Final Investment - Amount borrowed - Initial Cash Investment) = $-5000

Cash Account:

Initial Cash Investment: $5000

Amount Borrowed: $0

Initial Investment Amount: $5000

Final Investment Amount: $2500

Net Change (Final Investment - Amount borrowed - Initial Cash Investment) = -$2500

As you can see, in addition to the potential for growing your profits exponetitally, you also expose yourself to the potential to grow your losses in the same manner. One more important thing about margin accounts is that the broker reserves to the right to issue a margin call in the event that the value of the stocks has decreased below the threshold of the margin maintenance fee. Since the stocks that are purchased are held as collateral by the broker, they can force the investor to prematurely sell these stocks in the event that the investor's account goes below a certain amount.

An example of this is the following:

Initial Cash Investment: $5000

Amount Borrowed: $5000

Initial Investment Amount: $10000

Margin Maintenance Fee: 25%

Final Investment Amount: $7500

Actual Margin Funds: $2500

Marginal Funds Required in the account: $1875

With the stock price being reduced to $7500, the investor is required to have at least 25% of margin equity in the account. So, the investor is required to have 25% * 7500 of margin money in the account, that amount is $1875. The broker would not issue a maintenance call on this money due to the fact that there is $2500 of margin money in the account exceeding the required amount of $1875.

If the margin maintenance fee was increased to 40%, the marginal files required for the account would be increased substantially. See below for the new requirements:

Initial Cash Investment: $5000

Amount Borrowed: $5000

Initial Investment Amount: $10000

Margin Maintenance Fee: 40%

Final Investment Amount: $7500

Actual Margin Funds: $2500

Marginal Funds Required in the account: $3000

As you can see, the broke would initiate a margin call this margin account to make sure that there is coverage for the amount of money borrowed. This will either result in the investor depositing more money into the account to cover for the call or if the investor does not have the money to the deposit, will result in the broker selling the stocks (investor's permission may not be required).

This defeats the "buy and hold" strategy to attempt to wait out negative swings in stock as the investor may be forced to sell their stock prematurely.

Although this is an advanced topic, it is good to have a bit of an idea of some of the tools that are available to enable you to obtain financial freedom quicker. Please let me know your comments about buying on margin and some of the experiences you have had with "buying on margin".

Stay Disciplined!

Finding the balance in your life

2009-08-09T21:34:00.000-07:00

I've learned that you can't have everything and do everything at the same time. ~Oprah Winfrey

What generally happens when you eat too much salt? (high blood pressure) What generally happens when you eat too much? (obesity) What typically happens when you sleep too much? (nothing gets done). Although each are necessary, they all have to be done in moderation. A wise man once said that "too much of anything is a bad thing".

I believe one of the biggest reasons why we fail when taking on a new endeavor in life is that we try to take too much of it too fast. I know personally, I tend to get tunnel vision and disregard everything else going on in my life to concentrate on that task. During this time period I usually allow other important things (friends, family, other obligations) fall to the wayside while I am concentrating on my task at hand. This results in not having as strong ties to the people who mean the most to me and well as me not fulfilling previous obligations.

I am not trying to say that you should not devote time and focus on whatever task that you wish to accomplish, however, I do believe it is important that it is not the only thing that you spend your time/resources on. Focusing that much attention on one task does not eliminate the other responsibilities that were going on prior to acquiring the new task.

Personally, the lack of balance in my life is due to the fact that I have been devoting an abnormal amount of time to preparing for my future. I have been very focused on saving for retirement and making investments that I rarely spend money on things that I "want". I have been told over and over by many people that I need to concentrate on living my life today.

To contrast, I have seen the exact opposite. Those who buy whatever they want when they want it and amassing large amounts of debt in the process. My fear is that I have come across some people who I feel like have not dedicated enough resources to their future and I will end up owing large amounts of money to institutions forcing me to have to work indefinitely.

What it comes down to is that there needs to be a balance. Whether it be a new girlfriend/boyfriend, a new project at work, a new video or even trying to reach a financial goal, we must learn that we cannot let a single task monopolize our time. This results in us burning out with the particular task and usually results in the task not getting completed with our best effort. To prevent this from happening and to ensure balance, I recommend to do the following things below:

Always make "Me" time.

There are many things that people to do to escape from regular life. Some people travel, some people sing, some people Facebook but whatever you can do to relax, you should do at least once a week.
Relaxing is necessary but too much relaxing can mis-align your balance.

Use "Context Switching" to multi-task.

Context Switching is defined as "the computing process of storing and restoring the state (context) of a CPU such that multiple processes can share a single CPU resource." (Wikipedia Link)
Translation: A person (single CPU) executing one task (process) at a time for a dedicated amount of time (based on priority) then switching to a new task to execute that task.
Prioritizing your tasks properly can contribute to finding the correct balance.

Organize your time wisely.

Having a simple written plan of what you have to do and the steps it will take to accomplish it will help you organize and prioritize the tasks that need to be accomplished.

Accept that you cannot do EVERYTHING.

You have to pick and choose your battles and some battles are not worth fighting.
You have power to tell people "no" and it is one of the most powerful tools that you have when dealing with balance.
It is important to make sure that you do not over-extend yourself because this will not allow for balance to occur when you are spending the majority of your time on a task.

Do not be afraid to ask for help (Contract help if you need it).

A lot of people are overwhelmed due to the fact that they do not know what they are doing. Many things that seem complicated can be understood to be very easy after learning from someone who has already completed it.
No one in this world was put on here to exist alone, it is easier to have a much more enjoyable life with the help of others to help relieve some of the tasks.

What are some of the other ways you maintain balance in your life? Leave your suggestions in the comments below.

Stay Disciplined!

Importance of Interest Rates and Compounding

2009-08-03T06:45:00.000-07:00

To follow up with my previous article about choosing the best online savings bank, I want to explain the importance of Interest Rates. An interest rate is defined as the following in Investopedia:

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”. (link)

This is the main way banks make their money because they lend it out to the consumer and we pay back what we borrow plus interest (which is basically the agreed upon cost that you pay the bank for lending you the money). Well, banks charge a sizable amount of interest for the loans that they make to consumers, they rarely return the favor when borrowing your money.

This is evident by the sub par 0.1% interest that some banks pay you yearly to borrow your money. For more information about how banks work review the video below:

Money As Debt

Well, as the consumer, it is time for you to get in on some of the action. After all, as hard as you work for your money, you should get the same benefits of receiving some type of return on the money that you are lending out. This is where the importance of the interest rate that you are receiving comes in because this rate determines how much money your investment/savings will bring you back in a year.

For a quick way to calculate how long it will take your money to double at a certain interest rate, review my previous article about the Rule of 72.

The interest rate alone is not the only factor that contributes to the return your money will bring you. There is another factor called "Compounding" that is defined as the following by Investopedia:

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. (Link)

Compounding combined with a solid interest rate is a recipe for success. This allows you to fast track your savings (when starting early) because the money that you make from interest is then re-added into your principal amount, resulting in making more money from interest on that particular amount. This is much better than the alternative, simple interest, as that only pays interest on the principal alone. Below is a an example to comparison between compounding and simple interest:

You have $100 invested in two different banks. One bank offers simple interest while the other bank offers compounding interest. You are going to leave the money invested in the bank for a period of 50 years and the bank has guaranteed that they will pay you 10% interest for your money each year.

Simple Interest

Principal Balance: $100

Interest Rate: 10%

Value after one year: $100 + (100 * .10) = $110

Value after five years: $100 + (100 * .10) * 5 (no. of years) = $150

Value after ten years: $100 + (100 * .10) * 10 (no. of years) = $200

Value after twenty years: $100 + (100 * .10) * 20 (no. of years) = $300

Value after fifty years: $100 + (100 * .10) * 50 (no. of years) = $600

Formula to calculate:

Future Value = Principal + (Principal * Interest * no. of years)

Compounding Interest

Principal Balance: $100

Interest Rate: 10%

Value after one year = $110

Value after five years = $161

Value after ten years: = $259

Value after twenty years = $672

Value after fifty years = $11739

Formula to calculate:

Future Value = (Present Value) * (1 + interest rate)^{number of years remaining}

I am hoping that the information in this article has helped to convince you to understand the importance of interest rates and the significance of compounding interest versus simple interest. As usual, if you have any questions or comments, leave them in the comments section below.

Stay Disciplined!

Saving your money...Best Online Savings Bank

2009-07-26T17:44:00.000-07:00

A penny saved is a penny earned. ~ Benjamin Franklin

Ben Franklin was on to something when he said the quote above. Due to the recession, we are starting to understand the importance of saving money. Whether it be to survive during unemployment, or to take advantage of an opportunity that presents itself, having savings is a necessity. There is also the importance of making interest with that money.

There are many places where you can put your money. There are higher risk investments such as stocks and mutual funds that requires your money to be invested with the possible risk of the equities losing value resulting in a loss of money. There's also other investments such as bonds that offer less risk but typically requires your money to be tied up for a certain amount of time. For the average saver, a good interest rate and reasonable access to their money are the requirements for where their money resides.

Although there are many factors that are used for where most people decide to save their money, I personally keep my "savings" money in an online savings account.

Why Online Savings Accounts?

If you walk into your local bank branch, you will find that they offer savings accounts. These accounts are backed by the FDIC (Federal Deposit Insurance Company) and allow you more immediate access to your funds as well as the benefit of talking to someone in person in the event that you need to discuss the account. However, these accounts offer a very low interest rate. (0.1 - 0.3%) which defeats the purpose of saving the majority of your money.

Online savings accounts are also backed by the FDIC and have the benefits of having a much higher interest rate as well as reasonable access to the funds in that account. The typical three day delay of accessing your funds is usually a good deterrent to impulse buying, but is quick enough to get access to the money in the case that there is an emergency where the money is needed. The higher interest rate is the main benefit from having one of these accounts.

See below for an example of why a higher interest rate matters:

Bank 1

Bank of America "Regular Savings Account Interest Rate": 0.1% (Link)

Amount to Save: $1000

Years to allow the money to save: 20 years

Amount of money at end of 20 years: 1,020.19

Interest Paid after 20 years: $20.19

Bank 2

Ally.com "Online Savings Account Interest Rate": 1.85% (Link)

Amount to Save: $1000

Years to allow the money to save: 20 years

Amount of money at end of 20 years: 1,442.85

Interest Paid after 20 years: $442.85

Difference: $442.85 - 20.19 = $422.66

That is a $400 difference which helps to explain the importance of getting the best interest rate possible for your money.

Below are the different links to the websites of each of the online banks.

Although each of these saving accounts have individual pros and cons, the ultimate decision in deciding which account to choose is dependent on the individual saver. I recommend to go with the bank that has the highest interest rate because in my experience, most accounts typically have the same benefits as other online savings accounts.

As usual, I hope that you find the information in this blog useful. Please let me know your thoughts about your saving in the comments below.

Frugal Fasting...the difference between investing and spending money on yourself.

2009-07-19T19:32:00.001-07:00

“When the stomach is full, it is easy to talk of fasting” ~St. Jerome quotes (Father of the Latin church, 340?-420)

I was chatting with a friend the other day and topic of spending money came up. I did not think it could be done, but I believe I have finally met someone who is cheaper than me. While sitting in a local bookstore, we were looking at the food case and saw a Rice Krispy treat for $2.25. Now comes the dilemma? Do you buy the rice krispy treat or do you choose not to satisfy the urge for the tasty treat? Now to most, satisfying the urge for a rice krispy treat for around $2.00 is not a big deal, however, in light of recent times, most choose to do "frugal fasting".

Frugal Fasting as I define it is denying yourself something that you "want" because there is a cheaper alternative or you can just deal without.

I typically never spend any money on something that has a cheaper alternative or something I could do myself. After all, paying $2.25 for one serving of something that I can make a whole pan of for $2.50 just seems crazy. However, there are times where I make exceptions to these rules due to the fact that my health or my time may be worth more to me than the actual money that can be saved.

During the rest of the conversation with my friend, I kept asking myself a question as to how many people consciously make a decision to go without eating or eat poorly (such as the value meal at fast food restaurants) to save money rather than just pay to eat decent food.

I think about my college days as an example in my life where I did this constantly due to the fact that I did not have a lot of money. I'm sure there will be people that say fast food in moderation is no worse than anything else and there is value behind ordering from the value menu at most stores. However, I'm sure people would have second thoughts if they saw the movie "SuperSize Me". Thirty days of eating fast food wrecked the main character's body.

So the real question is, is it worth the investment to pay the money on every day items or should you go without to save some money? I think the answer is to go ahead and spend the money. Why? Well, as said previously, spending money on yourself is an investment. By eating higher quality foods, you can help you remain healthy over the course of your life. I have learned this by talking to one of my coworkers who only eats organic food. Although he pays more for his food than the non-organic counterparts, he told me that after switching his diet to totally organic, lost over 20 pounds over the course of a year. Amazing to see what eating food without all the additives can do for you.

In addition to that, in my current situation with renovating my investment house, I am finding that spending the money to contractors (over doing the work myself) has allowed me to be less stressed as well as avoid doing hazardous work. By no means am I trying to say that one should not try to save money where possible, however I believe that there has to be a balance. Is saving money worth putting your body through more stress? I say no.

I wonder what kind of damage I have caused to my body by applying "frugal fasting" to my purchases. There are many times where I have chosen saving money at the cost of sacrificing something else. However, I think that I will try to include more balance when faced with that dilemma again.

How often do you do Frugal Fasting? What items do you sacrifice daily for the sake of money? Where is your balance?

Stay Disciplined!

Money Saving Tips Around the House

2009-07-12T21:38:00.000-07:00

I like to think that I am very frugal in my everyday living. With this understanding, I have been keeping a closer eyes on my bills lately and have noticed that I have reduced the amount I have spent last year this same time. Now there are some extenuating factors that go into this reduction in the amount that was being spent, however, I have consciously attempted to reduce my bills by making smarter decisions around the house.

With everyone "Going Green" now these days, there are many that are coming to the forefront that enable you to save money around the house. Some require that you invest a bit into certain products, others just require that you change your behavior in your house. I want to share with you a combination of things that I have done around my house to reduce my energy usage and save money.

Reducing the amount of electric light usage.

In my bathroom, I have a bathroom bar that has eight lights on the fixture. EIGHT LIGHTS! Are eight lights really necessary to light my bathroom...I think not. So instead of luminating my bathroom with all eight lights, I unscrewed every other light immediately cutting my energy usage from those lights in half. In addition to that, I am able to cut back on my replacement of those lights when one goes bad because I have four other lights currently not being used.
Whenever leaving out of a room, I usually immediately turn off the light. Even if I am going to come back to the room, I still make sure that the light is only turned on when I am in the room using it. In addition to that, I find that using natural sunlight (opening a window) is a free alternative to using lights during the day.

Reducing the amount of air condition usage.

One of the best inventions in regards to air conditioning is a scheduling thermostat. Using this, I have been able to turn my air conditioning off when I am not at the house, but have my house cool when I return.
In addition to that, I typically keep my setting on the air conditioning to be somewhere near 77 - 80 degrees. Many people would call that "uncomfortable", however I find that it just takes time to get adjusted to it. Also, I typically only turn on my air condition at night when going to bed.

Using alternative methods to cool your home besides air conditioning.

Surprisingly, the use of a ceiling fan cools the house well. The use of these fans allow air condition to not even be used during the cooler part of the day. Also, using a portable fan can be a good substitute if you do not have a ceiling fan installed.

Investing in Compact Fluorescent Lighting.

I have made an effort to replace each light bulb that goes out in my home with a highly efficient compact fluorescent lightbulb. Although they typically have a higher up-front cost, these lights tend to pay for themselves within the first six months of use.
In addition to that, albeit very small, CFLs emit less heat than regular incandescent light bulbs. For more information about these bulbs, check out the Energy Star website.

In June 2008, I paid my electric utility company $125.67. However, this year, I ended up paying $81.92. Saving $40 in one month makes a large difference because that type of money can be better reallocated to other bills or even be contributed to a savings account.

I hope you find these tips useful. If you have any other tips that you use to save money around the house, please leave them in the comments below. Stay Disciplined!

The Best of Pamplona Finance (so far)

2009-07-06T03:32:00.000-07:00

Sometimes it is good to sit back and review what you have already done. It is good motivation to keep pushing forward. Even "It's Easy As P.I.E." has the evaluation stage where it is important to evaluate your plan make sure you are still on track.

Below are some of my favorite articles written by the Pamplona Finance Group in recent months.

Using the Power of Negotiation - May 3, 2009

The Ultimate Bargain Shopping - March 29, 2009

Lessons learned from Investing during a Recession - March 22, 2009

Steps to Prepare for Home Ownership - March 8, 2009

Take control of your finances by creating a budget - January 18, 2009

To all of my readers, I want to say thank you for your support in lending me your attention for a few minutes out of your week. I hope that you find the blog articles informative as well as useful.

As usual, if you have any topics of what you think I should write about, or would like to submit an article to post on the blog, please email me. Also, your honest feedback is also welcomed! I want to do my best to make this blog as useful as possible for you.

Stay Disciplined!

Importance of your Credit Score

2009-06-28T21:07:00.001-07:00

“The most important thing for a young man is to establish credit - a reputation and character.” ~John D. Rockefeller

The current economic situation has made many consumers to become aware of credit. After all, you cannot turn on a TV, browse on the Internet or listen to the radio without hearing an advertisement about improving your credit. What is "improving your credit" and what is its significance? I am so glad you asked...

The definition of credit is listed below:

Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date.

Credit is one of the most important metrics used by banks to evaluate someone's ability to pay back a loan. How does this affect you? It basically works like this:

You walk into the bank and ask for a loan.
You will out the many applications they give you, one of the applications containing a release form that allows them to pull your credit score.
The banks immediately receive a credit report with your credit score and hopefully the terms of the contract provided you the best interest rate possible for the loan.

Many people are pretty familiar with the credit application process, however it is a mystery as to how that credit score is determined. It breaks down into the following categories:

Payment History (35%)
Amounts Owed [Outstanding Debt] (30%)
Length of Credit History (15%)
New Credit (10%)
Types of Credit Used (10%)

Payment History

This contains information about the delinquincies on your opened credit accounts. This can also be an indicator of any past bankruptcies. It also lists the time since the last delinquent account. Delinquent accounts definitely has a negative impact on your credit score.

Amounts Owed

This contains information about the proportion of money owed on outstanding debt. A large amount of outstanding debt will negatively impact your credit score.

Length of Credit History

This contains information about the time each account has been opened. This also contains information about the time of the latest activity on each account. Having a very short length of credit history will negatively impact your credit score.

New Credit

This contains information about recently opened accounts, credit inquiries and re-establishment of positive credit after prior delinquencies. Many credit inquires on your report will cause your credit score to be negatively impacted.

Types of Credit Used

This contains information about the different types of credit. Some of the credit types are mortgage, retail, credit cards, etc.

It is close to impossible to purchase a home, a car or even start a business without having a good credit score. In addition to that, even some employers will consider a person's credit score during their application process. Also, credit scores are used by landlords when choosing certain tenants to rent to.

From this article, I hope that you are able to better understand the different components that make up your credit score as well as the importance of keeping a good credit score. Stay Disciplined

References:

http://en.wikipedia.org/wiki/Credit_(finance)

http://www.investopedia.com/articles/00/091800.asp?viewed=1

http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

Name Brand vs. Generic?

2009-06-21T19:28:00.000-07:00

Imitation is the sincerest of flattery. ~Charles Caleb Colton

I commonly tell people "Be an original, not a copy". However, everything from medicines, dish detergent, cheese, even cookies, have both a name brand (original) and generic (copy) counterpart. As an informed consumer, I want to get the best value for the money that I have to spend. So the question comes down to this, "What is better, name brand or generic products?"

Well, in general, generic products are cheaper than "name brand". This can easily be seen by going to your local grocery store and check the grocery store brand of cheese to a name brand product such as "Kraft" or "Sargento". You will see that there maybe upwards to $1.00 in savings if you purchase the generic brand. If price is your only factor that you consider with a purchase, then hands down, the generic cheese wins consumer dollars.

It is a common thought that name brand products are higher quality than generic products. This could be the case, but if you look on most of the packaging for generic products, you will see that most of the time, generic products are usually made in the same factory that the name brand products are made. Of course this does not mean that they use the exact same ingredients, however it does not mean that there is not quality in both products.

Although cheese is just one example of a product, there are also other products that many consumers have to make a choice about. I personally use about 50% generic and 50% brand name. Some items (such as aluminum foil, and plastic bags) do not have any noticeable differences than the most expensive counterparts. However, there are somethings that I do not skimp on.

What it all comes down to is your personal preference. It is up to the consumer to decide whether or not the name brand product is worth the extra dollars. What products do you buy that are generic? What products do you buy that are name brand?

Stay Disciplined!

Taking the Leap of Faith

2009-06-14T21:17:00.000-07:00

Every accomplishment starts with the decision to try. ~Unknown

Wisdom can come in the oddest forms and when you least expect it. While having lunch with one of my mentors, I found myself questioning some of my most recent actions. I just bought an investment property that is truly a "fixer-upper" and I have no handyman experience nor do I have a lot of capital to invest in paying others to fix up the property for me. I had contemplated this decision prior to actually taking the plunge, however, I was starting to feel some after purchase jitters.

I shared my feelings with my mentor and he reminded me about everyone's biggest obstacle hindering the completion of their goals. The obstacle of fear. Fear can take on many forms. For me, it is the fear of losing my job, the fear of having too many unexpected expenses and even the fear of foreclosure caused by the unforeseen circumstances.

I do not understand why the human mind tends to always prepare and expect the worst out of any situation. Although the statement was not explicit, my mentor helped to remind me about "Faith". From the bible, Faith is defined as the following:

Now faith is the substance of things hoped for, the evidence of things not seen.
(Heb 11:1)

To provide a more simplistic explanation, Faith is defined as the following from wikipedia:

Faith is the confident belief or trust in the truth of or trustworthiness of a person, idea, or thing.

In both definitions, there is a commonality of trusting/believing in something that you may or may not be tangible. Just believing alone is not enough for Faith to work, there are the required actions that must accompany it. Even if you are unsure if the actions are correct, sometimes just doing something is enough to make progress on your endeavor.

It just seems my list of things to do to work on this house is continuing to grow. However, every week, I try to accomplish a small goal to make progress on the house. I honestly do not know whether or not I will succeed in this venture, but I do believe I will try to do everything necessary to be successful.

What are your thoughts? Share them in the comments below.

Stay Disciplined!

Getting Credit benefits on a Debit Card

2009-06-07T18:28:00.000-07:00

No man's credit is ever as good as his money. ~Edgar Watson Howe

The last time that you have used your credit card, what option did you select? Credit or Debit? For the longest time, I was swiping my debit card as a debit card although I had this large Visa symbol listed on the bottom right hand corner of the card. Well, to most, this does not seem like a big deal because the money comes out of the account just the same. However, each time we swipe our debit cards as debit, we miss out on the benefits and protection offered by the little symbol in the bottom right side of the card.

Although this may not seem like a big deal, it actually is. See below for the benefits of using your Visa debit card as a credit card:

Gain peace of mind with Visa's extra security protections.

When you sign for your purchases, your money comes directly from your checking account, but you also get security protections that help prevent, detect and resolve fraud, including:

Visa's Zero Liability Policy*, which protects you from unauthorized charges. Any funds taken from your account due to fraudulent use will be returned to you.
Continuous fraud monitoring to detect and prevent suspicious activity on your debit card
Access to Identity Theft Assistance to help you recover your identity and prevent further problems
A 3-digit security code to verify your identity for Internet and phone purchases

All of this information was quoted from Visa's site. I recommend that if you have a card other than Visa, to go to the banks site and see if they offer similar benefits.

From now on, I hope you take a second thought about whether or not you will use "Credit" when you are swiping your bank debit card. Stay Disciplined!

The Difference Between Value and Growth Stocks (Part 2)

2009-05-31T20:54:00.000-07:00

Regardless of the previous behavior of the market, one can see with its recent performance that it is still a great investment tool. According to Google, the Dow Jones Index was actually down to its low of 6547 on March 6,2009. Now, it is currently at 8500. That is over 30% up in just one 3 months. However, as mentioned before, there are very few out there that can time the stock market that well in order to get those returns.

To continue from the previously written article, Value stocks are great choices for those who believe in holding a stock for the long term. Below is the definition cited from Investopedia:

A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio. (Citation)

These particular stocks are viewed as being "undervalued" and typically do not have quick growth rates. More characteristics of these stocks are the following:

Dividends
Equity equals the amount of debt held by the company.
2x Assets to liabilities.
Very low Price-to-Earnings

Examples of these companies are well-established blue-chip companies that typically have a very long history of successful operation. Some examples of these companies are the following:

IBM
General Electric
Wal-mart

As you can tell from these companies, they typically provide a service or product that is always in demand no matter the economic climate. In addition to that, they have pretty high stock prices which do not fluctuate often. Of course there is an exception to the rule (as seen over the past year) due to internal and external factors that can cause a company to reduce its market share and even fail. However, most well established/well ran companies can usually weather any storm.

As hard and as nerve wrecking it may be, it is always a good idea to have some portion of your investment portfolio into stocks. Whether your investment style is risky or stable, there are some stocks from each class that will fit your requirements to help provide the results you desire.

What are some stocks that you are invested in?

Stay Disciplined!

The Difference Between Value and Growth Stocks (Part 1)

2009-05-24T20:40:00.000-07:00

The stock market...such a taboo word these days. It almost shares the same stigma as the words "foreclosure" and "credit". However, it seems as if that particular word (stock market) is losing all of the negative connotations it once had. After all, investor confidence is slowly starting to be restored as more and more people get comfortable with investing in the stock market.

There is a misconception in the whole reasoning behind investing in the stock market. I mean after all, you will find that many "experts" state that the average stock market return is somewhere between 8 and 12% annually. Well, as we have noticed from recent turn of events, it all depends on when you have started investing in the market. I have had the unfortunate lesson of learning that timing is everything and if you started in 2007 (like I did), it was bad timing.

However, there is a silver lining to every cloud and many lessons have been learned since then. Some stocks are at a very cheap price and fortunately I have been able to pick some up and receive some really outstanding returns. Honestly, there was a time period recently where it did not matter what you bought, there was almost a definite positive return on the stock within a short period of time.

Typically follows into one of two classifications. The first classification is called "Growth". Below is a definition of this class of stock from Investopedia:

A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. (Citation)

From my understanding, these particular stocks consist of companies that are typically smaller in size and have more potential to increase in share price. Examples of these types of companies are:

Google (GOOG)
Cisco (CSCO)
Intel (INTL)
Apple (APPL)

As you can see from above, the stocks that are typically growth fall into the "Technology" sector and you can more than likely find them composing the Nasdaq Market. Some events that help growth stocks to become lucrative are when these companies release some new product or services that causes a massive amount of demand for that company's product. For example, after Apple released the IPod, as the amount of sales grew for this product, the stock price grew exponentially.

Growth companies are typically for those who believe that a company is going to grow through the release of some new product or some service that is high in demand without competition to take away the market share. Stay tuned for the next article that is going to explain "value" stocks.

Hedging Against Everyday Expenses Using Stocks

2009-05-17T21:56:00.000-07:00

During a visit home, while passing a gas station my father remarked "Wow, these gas prices are really going up". After giving it some more thought, I realized that he was right. After all, just back in December, the average price per gallon in the United States was $1.65/gallon. (Citation) Now consulting the same source, I see that gas on average is $2.30/gallon and rising! Well, there is a silver lining in every cloud and this blog article will provide you with information on how to see it.

Definition of Hedge (Hedging)

In finance, a hedge is a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market. (Citation)

In plain English, all it basically means is to have an equal but opposite position to offset the risk taken with an investment. This procedure was used massively by many investment groups to short sell many stocks. Many critics point the finger at these funds as a key contributor to the recession that is currently being experienced. Although "hedging" takes a negative aspect in this situation, it can be used on a smaller scale to benefit the average consumer. Let's take hedging against an everyday expense for example.

It is a requirement that you have gas for your car. In order to hedge against the rising gas prices, one would invest in a index or mutual fund that invests in gas and oil. The way that the hedging process works is that as the gas prices continue to rise, the oil/gas stock would rise also allowing the owner to offset the added expense of paying more at the pump.

It is good to know, just as hedging can work for you in a positive way, the opposite can happen also. In the case that the gas prices go down, the stock that invests in oil/gas can go down also. Although you are paying less at the pump, there is a higher chance that the oil/gas stock will decrease in value.

Although this one particular example uses gas as a means to hedge, one can also use many different industries such as housing, groceries, technology to perform the same type of strategy. What are some industries that you think will be good to hedge against? Stay Disciplined!

The Pursuit of Happiness

2009-05-10T23:24:00.000-07:00

Aim for success, not perfection. Never give up your right to be wrong, because then you will lose the ability to learn new things and move forward with your life. ~Dr. David M. Burns

To preface this article, I know that this blog is geared towards "Financial Advice that Makes Cents". However, I believe understanding the mindset behind accomplishing all goals (including finance) is very important in obtaining the desired results.

Recently, I had a conversation with an old friend who I have not seen or talked to in about five years. While trading life stories, we eventually got on to the topic of pursuing dreams and happiness. It seems that at some point in time, the focus was lost about what made her happy and instead, she concentrated on other things that were not contributing to her happiness. During this conversation, I reflected on some of the decisions that I have made in the past and determined how I transitioned to the person that I am today.

Happiness: State of well-being characterized by emotions ranging from contentment to intense joy (Citation)

During the hustle of life, I believe most people get caught up in the many distractions that life consists of, that we forget to live. After all, I believe this was the case in my life due to a period of unhappiness that I experienced towards the end of my tenure at college. For a while, my life was a standard routine; wake up, eat, class, eat, homework, sleep. I truly felt like I was a zombie in life and merely going through the motions rather than living day by day. It was at this point that I truly realized that I had no defined purpose for my life outside of graduating from school.

It is really easy for anyone to get at a point where a routine seems normal and living slowly seems to become purposeless. However, becoming complacent with this type of life was not the choice for me. Instead, I made a decision that I needed to define what made me happy and pursue it to the fullest extent. Below are the points I followed for the pursuit:

It is OK to put yourself first.

One major roadblock to obtaining happiness was that I was afraid to look out for my number one fan, myself.
It is hard to build the foundation to someone else's house while your house is in shambles.

Impressing/pleasing others causes one to regress.

Another huge problem is that I spent too much time and resources trying to impress people who did not care.
Aiming to always please someone else will leave you empty because there will always be someone new to please.

Happiness requires work.

Very rarely does happiness just occur without some type of effort.
Obtaining your goals are worth the effort and the sense of accomplishment contributes to the overall level of happiness.

Using these principles, I was able to proceed with pursuing my goals and dreams that ultimately contributes to my happiness. Although over time, my goals may change, the goal of obtaining happiness will never change. What are some of the principles you use for obtaining happiness? Stay Disciplined!

Power of Negotiation at work

2009-05-09T15:51:00.001-07:00

Well, I just wanted to report in that some of the readers of the blog have had outstanding results using the information in the previous post. Below is a comment that I have received:

Just called comcast and got bill reduced by twenty [dollars] a month. I'm a negotiating beast! Lol.

As mentioned in the previous post, although it may be a bit difficult to step out of your comfort zone, you may find that the rewards are worth way more than the cost. On top of that, the worst that could happen is the company could say "no" and you would be in the exact same place that you were in prior to the conversation.

I am very curious to hear that results you receive from trying the steps in the previous post. Please send in your comments or leave them in the field below!

Using the Power of Negotiation

2009-05-03T19:13:00.000-07:00

Let us never negotiate out of fear but let us never fear to negotiate. ~John F. Kennedy

One lesson I have learned during this recession is that prices that are advertised are not set in stone. Everything from major appliances to contractor work is willing to take a reduced price in order to get the business. It seems like the price that we are given at a store is merely a "suggested" price, but not necessarily the price that you have to pay. This leads to the use of one of the most powerful tools that we have as a consumer. The power of Negotiation.

By definition, Negotiation is the following:

A dialogue intended to resolve disputes, to produce an agreement upon courses of action, to bargain for individual or collective advantage, or to craft outcomes to satisfy various interests. (Citation)

Although negotiating may seem like a very trivial task to some, it proves to be very complex to most. According to wikipedia there are six different negotiation styles. Personally, I probably fall into the category of "accommodating" as I typically like to avoid conflict and will sacrifice of myself in order to get past the issue (or just the uneasy feeling of tension). This has not always proved to be beneficial for my best interest as I have found myself paying more for items that I have regret at a later date.

I rarely had confidence in my negotiation ability due to the fact that I did not know what I was doing. However, recently I made a decision to begin reducing my bills further by cutting back on the money I spent for luxuries such as cable and Internet access. Since my satellite company just increased the amount that they were charging me, I naturally started with them first.

I made a call to my satellite provider and called to see if they could do anything to reduce the amount that I was paying for my current channel listings. Unfortunately, when I called, I did not have a good reason as to why I was requesting this reduction in price except for the fact that "money was tight and I was not sure if I was going to be able to afford the service".

The customer service representative offered the options of a $5/month reduction for six months or changing to a cheaper package that did not contain all the channels I wanted to see. At the end of the phone call, I politely told the customer service representative that I was going to research my options and probably cancel the service. It is my thought that he probably thought that was an empty threat due to the fact that he allowed me to get off the phone.

At this point, I began what I believe to be the successful negotiation procedure listed below:

Research your options

Immediately once I got off the phone with the satellite provider, I began my process to research with my other options. Fortunately I found a very comparable option with another provider that was $10/month cheaper (even after the promotional period was up).

Have good reasoning to support your argument

In addition to the new option being cheaper, I also had more channels as well as free HD options that were not provided by my satellite provider.
The speed of my Internet access was greatly increased.

Look to see how both parties can benefit from the negotiation

During the initial phone conversation with the satellite provider there was not really an effort from the customer service representative to see a real benefit for both parties. In my opinion, he seemed fine with me discontinuing my service with their company as well as them losing the revenue.

Stick to your guns

During the initial phone conversation, I laid out the terms that I felt were reasonable to have fulfilled in order to continue service with the satellite provider. There were multiple times when the customer service representative wanted me to downgrade the channel listing (giving up TNT and TBS) which was unacceptable to me. I never conceded on reducing my channel listing.

Do not be afraid to walk away

Ultimately, as a consumer, the most powerful weapon in negotiation that you have is the ability to walk away. The most important thing that I have learned during this process is that no matter how bad we want something, it will not be the end of the world if we do not get it at that particular time.

So on the day that I called DirecTV to cancel my service, I got a different customer service representative who wanted to know why I was canceling my service. In addition to the same reasoning I explained to the previous CSR, I provided her the information on their competition and the deal they were providing (without any loss of channels and features).

Immediately she began to bring out her arsenal of discounts and added channels to try to keep my service. I kindly explained to her that the opportunity had passed and that I was still switching to the other provider. At this point I realized that I had an "upper hand" in the negotiation process due to the fact that the satellite provider did not want to lose one of their customers with perfect payment history.

Although I did switch from my previous provider, I learned some very valuable lessons during the negotiation process as noted above. I really recommend stepping out of your comfort zone and trying to use the negotiation procedure when making your next purchase where prices are not set in stone.

Where are some of the other places you have received success in negotiating? What are some of the techniques that you have used to successfully negotiate in your favor? Leave your comments below.

Stay Disciplined!

Getting more with less at the grocery store

2009-04-26T19:29:00.000-07:00

Like most people surviving in the current economic situation, I have decided that I am going to further tighten the belt of my budget for the sake of my investments. I have reduced a lot of my re-occurring expenses by switching from DirecTV and AT&T DSL to bundle my TV and Internet with Comcast. In addition to that, I have reduced my electricity usage and natural gas usage.

I am looking to further reduce the amount of money being spent due to the fact that I have now taken on an investment property. In my current budget, I have allocated $130/month for groceries. I am looking to reduce this amount drastically. I have given myself the goal to live for three weeks off of $50 groceries. Although I feel like this was an arduous task, this type of pressure requires one to get creative. Also, using the principles of "P.I.E", I feel that any task is quite manageable.

To proceed with accomplishing this task, I do what I usually do before going to the grocery store, checking the weekly ads. Fortunately with Kroger, they list all of their "weekly ads" on their website. After getting an idea of the items with the best value, I make a small list of my needs. This list is typically comprised of items that I have already decided on cooking for the day/week as well as some staples that I can create a meal from in the pantry.

As a side note, below are some of the "staples" that I require in my pantry:

Rice
Beans
Corn
Barbeque Sauce
Brocolli
Sweet Peas
Bread

Now taking on this goal requires that I draw a very distinctive line between what I want and what I will need to accomplish this goal. It just so happened that this week at Kroger, there was a special on meat at Kroger, so I definitely had to take advantage of this by stocking up on high value items. Although meat typically has a short shelf life, you can easily extend it by freezing those items immediately and using them at a later date.

During this whole experiment, I am hoping to eat healthier as well as learn to get a bit more creative in the kitchen. I am also hopeful in learning to discipline myself in my consumption of food and find other things to do beside eat and lounge around my home.

If you have any suggestions on how to stretch your groceries a little bit further than usual, please leave them in the comment section below.

Stay Disciplined!

The Rule of 72

2009-04-19T18:11:00.000-07:00

“The keys to patience are acceptance and faith. Accept things as they are, and look realistically at the world around you. Have faith in yourself and in the direction you have chosen.” ~Ralph Marston

Earlier this week, I was asked the question, "Do you know what the rule of 72 is?" I thought about it and promptly responded back with "of course", followed by my rendition of the answer to that question. However, the person I discussed this with stated that over 90% of the people, he asked that question, did not know the answer. This is quite staggering to me due to the fact that this is a very simple idea and it is very valuable to know in terms of investing.

The definition for the rule of 72 is listed below:

The rule of 72, is a method for estimating an investment's doubling time. The number, 72, is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. (Source)

For those who understand formulas, it looks like the following:

(Years to Double) = 72 / Interest Rate

View the following example for further clarification:

HSBCDirect offers you an unlimited length Certificate of Deposit (CD) for 4% Annual Percentage Yield (APY). If you just deposited $10,000 and wanted to know how long it would take to double into $20,000, you could use the following formula below to calculate it:

72 / 4 = Approximately 18 years to double.

To get a more exact amount of time to use for doubling, you can use the "Future Value" (FV) formula.

FV = Present Value x ((1 + Interest Rate)^N)

(Where N is the Number of Years)

To calculate the number of years, you can use the following formula (just solving for # of years):

ln(FV/PV) / ln(1+I) = N

(Where PV is Present Value)

Using the numbers from the previous example, you get the following:

ln(20000/10000) / ln(1+.04) = N

17.673 = N

As listed above, the interest rate is represented in terms of the actual decimal number rather than the whole integer value.

As you can see from the two formulas, there is a lot more complexity to get a more exact estimate of time. However, using the "rule of 72" can give you a quick estimate when weighing your investment options and correctly balance the amount of risk you take with an expected return.

If you have anymore comments or any other shortcuts or rules you know about in regards to investing, please leave them in the comments below.

Stay Disciplined!

Flexible Spending Accounts vs Health Spending Accounts (Part Two)

2009-04-12T22:40:00.000-07:00

“The first wealth is health.” ~Ralph Waldo Emerson

As mentioned in the previous article, there are many different requirements for a person to meet in order to qualify for a Health Spending Account. One alternative to the Health Savings Account is a Flex Spending Account. Below is the definition for this type of account:

Flexible Spending Account: one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. (Citation)

Flexible Spending Account (FSA): is a tax-favored program offered by employers that allows their employees to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars. By using pre-tax dollars to pay for eligible health care and dependent care expenses, an FSA gives you an immediate discount on these expenses that equals the taxes you would otherwise pay on that money. (Citation)

Unlike a Health Spending Account (HSA), the FSA can be used with most health insurance plans provided by the employer. Typically the employer offers this plan in conjunction with their current health plans and allows the employee to pay for medical expenses not covered by insurance. Some examples of these types of expenses are listed below:

Dental
Vision
Over-the-Counter Drugs
First Aid Kits

For a general list of the different expenses that can be covered by an FSA can be found in the Publication 502 citing medical expenses recognized by the government.

Typically, users of an FSA incur the medical expense and then submit documentation to their FSA provider to receive reimbursement for the expense. However, some providers are beginning to provide FSA debit cards that can be used withdraw FSA funds immediately for a qualifying expense, rather than waiting for reimbursement.

Although it is mostly dependent on the plan on the exact stipulations on whether there is a maximum or minimum that can be contributed to the FSA, the government requires a maximum dollar amount or a maximum percentage of the salary to be specified in the terms of the account. (Citation) This is due to the fact that the government allows contribution of pre-tax dollars to the account overall reducing the employees gross income and tax burden.

To assist with calculating how much this provides a benefit to the employee who takes advantage of this plan, refer to the previous article about maximizing deductions.

To provide a complete review of this type of account, one must take in account the negative aspect of a Flexible Spending Account. FSAs require special planning due to the fact that they are a "use it or lose it account". What this means is that the if account holder does not use all the funds that are in the account by the end of the coverage period, the money is returned to the employer and the employee loses that contribution.

The coverage period is typically the calendar year (starting on January 1st and ending on December 31). However, the government allows for a 2.5 month grace period after the calendar year to further incur anymore expenses that can be used to deduct from the remaining balance on the FSA.

Overall, this account is a good idea for someone who does not qualify for an HSA but still has medical expenses not covered by their employer's health insurance plan. As long as the employee conservatively plans for their medical expenses, this account will be beneficial in allowing the employee to pay for their expenses as well as provide a tax break. Please leave your comments below in your thoughts about HSAs, FSAs, or any other savings plans you may know about.

Stay Disciplined!

Flexible Spending Accounts vs Health Spending Accounts (Part One)

2009-04-05T22:01:00.001-07:00

“It is health that is real wealth and not pieces of gold and silver.” ~Mahatma Gandhi

One of the big points that was discussed in the previous presidential campaign that was mentioned was the idea of health insurance. One of Obama's platform is to make health care "affordable and accessible to all". (Citiation) Well, I for one, am a proponent of taking care of yourself without relying on the use of any one (or any entity) for that matter.

I believe that one should use all the tools available to be responsible for ones health care and fortunately there was one tool that was made available by the previous administration if you qualify. The "Medicare Prescription Drug, Improvement and Modernization Act" signed by President George W. Bush in December 2003 created the "Health Savings Account". Below is the definition for this account:

A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). (Link to Definition)

A Health Savings Account (HSA) is a special account owned by an individual used to pay for current and future medical expenses. (Citation)

This particular account is somewhat similar to a tax-sheltered account (such as a 401(k) or IRA) that allows you to contribute pre-tax income to spend on health related expenses. Like the 401(k), there are contribution limits imposed annually. In addition to that, these funds can reside in an investment vehicle such as mutual funds and stocks. Although this sounds like a very good product to take advantage of, there are certain requirements that have to be met before you qualify.

In order to be able to contribute to an HSA, the person must be the policy holder of an HSA-eligible high deductible health plan (HDHP). An HDHP is basically a policy that does not cover first dollar expenses (unlike Medicare , Flexible Spending Accounts , etc.) which basically provide benefits as soon as the medical expense is incurred. HDHPs usually have a high deductible (i.e. $1100+ for self coverage, $2200+ family) but a lower premium since they require the policy holder to pay a higher deductible than most other health insurance plans.

For the year of 2008, the maximum contribution to the HSA was $2900 for a person who is single. For 2009, the maximum contribution was increased to $3000 for a person who is single. The money contributed to this account can be withdrawn for any medical related expense. The method of withdrawal is highly dependent on the agreement that the account holder has with the HSA provider. Some HSA providers give their account holders checks or debit cards to use with medical related expenses. Although purchases can be made by these methods, it is good practice to keep documentation of each medical related expense in case the IRS wants to make you prove that the expense qualified for a withdrawal.

Some of the benefits to use a HSA are the following:

Premiums for HDHP are generally lower.
HSA provides flexibility to pay some expenses not covered by traditional health insurance such as over the counter drugs, orthodontics and vision.
Money from the HSAs can be rolled over year after year and available for withdrawal without penalty after age 65.
Some employers match an employees contribution to the HSA.

There are some associated disadvantages with the HSA listed below:

Non medical related HSA withdrawals are subject to a 10% penalty as well as a standard income tax.
Qualified medical expenses can only be incurred on the date of or after coverage has started, it is not retroactive.

As you can see, there are advantages to having an HSA. Hopefully you feel a bit more empowered to know your options to take control of your health care coverage if you qualify for this particular product. The next article that will follow up this particular topic will be about "flexible spending accounts" which are easier to qualify for than HSAs.

If you have anymore information about the topic of Health Spending Accounts or want to discuss this issue, please leave that information in the comments below.

Stay Discplined!

Sources
http://www.ustreas.gov/offices/public-affairs/hsa/pdf/all-about-HSAs_072208.pdf
http://en.wikipedia.org/wiki/Health_savings_account

The Ultimate Bargain Shopping

2009-03-29T20:09:00.000-07:00

"There must be a reason why some people can afford to live well. They must have worked for it. I only feel angry when I see waste. When I see people throwing away things we could use." ~Mother Teresa

There seems to be a new trend with many Americans that 2nd hand goods are the way to go. It seems like more people are comfortable with maintaining what they currently have or buying gently used items that others are selling. With that in mind, I have been looking at the tools available for this purpose.

Below are these tools:

What other tools do you use for bargain shopping? Please leave those tools in the comments section below.

Stay Disciplined!

Lessons learned from Investing during a Recession

2009-03-22T21:25:00.000-07:00

“Do not brood over your past mistakes and failures as this will only fill your mind with grief, regret and depression. Do not repeat them in the future.” ~Swami Sivananda

With the stock market at unprecedented lows, it gets more appealing every day to invest into the stock market. There is always the underlying fear of whether or not I will immediately lose more money (that I have already lost) from investing. After reviewing so many outlooks from different "experts" and "analysts", the general consensus is that it is a great time to buy stock.

Well, is it really a good time to invest? Well, the stock market is roughly 50% of the level it was at during its peak. Also, it seems that a lot of bad news has been dispersed over the course of the year, which means good news has to be around the corner right? Unfortunately, I could not find out what was going to happen tomorrow after looking into my magic crystal ball. After all, if I was able to do so, my NCAA bracket would be in a lot better shape than it is right now.

So what is the secret to excelling in the stock market? Any person who has read an investment book or have watched a financial channels knows that the secret to investing in the stock market is to "buy low and sell high". Although that is easy to say, what does that really mean? What do you consider a low price for a stock? How much money do you consider to be "high"?

I think that a lot of people realized from the previous years that it is really easy to lose money in the stock market. Especially with new investors, who invested in the peak of the stock market, we are really discouraged about how quickly money disappeared. However, most seasoned stock investors realize that there are many opportunities to invest wisely and make some money in the process.

Although I have not officially studied investing or received any formal training on the subject, I have learned some lessons from the previous market. Below are some of the lessons learned:

Buy Low

Although this may seem like an obvious point, it is surprising how hard it is to actually buy a stock at a low point.
From my personal experience, one usually buys a stock on the way down, however, it is after the initial dip from a previous high which may not be the lowest point of the stock.
Reviewing the stock's 52-week low and even daily low is helpful when determining a "low" price to purchase a stock.

Sell High

Once again, another obvious point that many cannot seem to get right
One would like to sell a stock for a profit over the price that was originally paid, however most hold on to a stock trying to break even from the original stock price plus the commission for the buy.
Very rarely does a stock give you a massive return in a short time, however over time, the potential for that stock to give you those types of returns are possible.

Stock prices are based on emotions, not always on facts

Unfortunately, the average stock investor is typically "along for the ride".
There are many big time investors (investment bankers, hedge funds, mutual funds, etc) that sway the price of a stock. The average consumer does not really affect the price of the stock by buying and selling.
Just because a stock has good news, does not necessarily mean that it will go up. The same goes for the converse of that, bad news does not necessarily mean that the stock price will go down.

It is impossible to time the lowest price of a stock

Timing a stock is almost near impossible. It is a better idea to purchase a stock at a price that you are comfortable with. Honestly, when a stock is being purchased, it is literally buying a piece of paper that you are assigning a value to.

Do not watch your stock everyday

Watching a stock everyday will cause you to be stressed out.
It is best to set a limit or a stop limit order to purchase a or sell a stock.

I know these points are not necessarily the most profound and can even seem like common sense, however it took me a year of investing and losing a lot of money to fully understand these principles. Hopefully, this will help you to understand the market a little better and will prevent you from making some of the same mistakes I have made.

If you have any other life lessons you would like to share about investing, please leave them in the comments below. Stay Disciplined!

Understanding the Good Faith Estimate

2009-03-15T20:49:00.001-07:00

During the home buying process, one of the most important steps is to determine how to actually pay for the home. In my opinion, the average person does not have enough money to buy a home outright (even with the deeply discounted prices in the current housing market). In most cases, a loan is required in order to purchase a home.

As most seasoned bargain hunters know, it is important to shop around to get the best possible price/terms for whatever product one is trying to purchase. This same principle should be applied to obtain the best possible loan. To make it easier for this process, banks that offer you the loan are required by the Federal Real Estate Settlement Procedures Act to provide a Good Faith Estimate within three days of receiving the loan application.

Good Faith Estimate: An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application. (Reference)

Below is a list of the different items along with an explanation of each item included in this estimate:

800 ITEMS PAYABLE IN CONNECTION WITH LOAN:

801 - Loan Origination Fee

This fee is a charge for originating or creating the loan

802 - Loan Discount

This is an upfront charge paid to the lender to get a lower mortgage rate – the same as “buying the rate down”

803 - Appraisal Fee

This is the cost of the independent appraisal. It is usually paid by the buyer.

804 - Credit Report

This is the cost of the credit report

805 - Lender's Inspection Fee

This is the lender’s cost of inspecting a property – some may double check the appraisal provided by an independent appraiser

808 - Mortgage Broker Fee

This is the upfront charge that a mortgage broker charges. Brokers can also earn a “rebate” from the lender which is not listed here

809 - Tax Related Service Fee

Lender fee, usually small, for handling tax related matters

810 - Processing Fee

This is the charge for processing the loan – collecting your application, running credit, collecting pay stubs, bank statements, ordering appraisal, title, etc.

811 - Underwriting Fee

This is the cost of the loan underwriter (approver)

812 - Wire Transfer Fee

This is the cost of wiring the money around, which is usually done by escrow.

900 ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE

901 - Interest for days X $ per day

This is your prepaid interest for your mortgage loan.

902 - Mortgage Insurance Premium

This is the prepaid mortgage insurance premium, if you have one. This is the insurance premium some lenders charge for loans with little equity.

903 - Hazard Insurance Premium

This is your home’s hazard insurance being prepaid.

905 - VA Funding Fee

This is the Veterans Administration funding fee, which is something you will not incur unless you go through a VA program.

1000 RESERVES DEPOSITED WITH LENDER

1001 - Hazard Insurance Premiums # months @ $ per month

This is any prepayment of your future hazard insurance expense

1002 - Mortgage Ins. Premium Reserves months @ $ per month

This is any prepayment of your future mortgage insurance expense

1003 - School Tax months @ $ per month

This is any prepayment of your future school tax expense

1004 - Taxes and Assessment Reserves months @ $ per month

This is any prepayment of your future tax expenses, such as property taxes

1005 - Flood Insurance Reserves months @ $ per month months

This is any prepayment of your future flood insurance expense

1100 TITLE CHARGES

1101 - Closing or Escrow Fee

This is the cost of escrow. This is the service of a neutral party that actually handles the money between all the different parties in a real estate transaction, including: the lender, the buyer, the seller, the agents, notary, etc. This is often done by the “Title Company” – a related entity in the same office that provides title insurance

1105 - Document Preparation Fee

This is the charge for preparing the loan documents. Lenders often email the loan documents to the escrow company, which in turn prints them out and reviews them before signing

1106 - Notary Fees

This is the cost of the notary. This is to have all of the legal documents surrounding this transaction notarized

1107 - Attorney Fees

Any legal charges

1108 - Title Insurance

This is the cost of insuring the title of the property. If there is a question about title (who really owned the property), after the transaction is done then this insurance protects the lender from future problems

1200 GOVERNMENT RECORDING & TRANSFER CHARGES

1201 - Recording Fees

This is the cost of updating relevant government records

1202 - City/County Tax/Stamps

Unavoidable government charge

1203 - State Tax/Stamps

Unavoidable government charge

1300 ADDITIONAL SETTLEMENT CHARGES

1302 - Pest Inspection

This is the cost of the pest inspector. Their purpose is to document the state of the property that the lender is making the loan on.

Information above taken directly from the following wikipedia article.

All information above was republished under the terms of the GNU Free Documentation License.

The list above contains general items that most Good Faith Estimates contain, however, some items are particular to the lender who is providing the loan. Below are a things to watch that can vary from loan to loan:

Loan Discount

Some mortgage brokers may try to offer you a very interest low rate for the purchase of your home, however, they will offer you this rate by placing the cost to reduce the interest rate directly into your closing costs.
This is beneficial to you if you have your closing posts being paid by the seller, else this cost will come directly out of your pockets as you will be paying for this up front rather than over the life of the loan.

Seller contribution for closing costs

A mortgage broker may recommend for the buyer to roll up the closing costs into the price of the loan and have the seller pay for the closing costs. The caveats to this is to know that the seller is only allowed to pay up to 3% closing costs for a conventional primary residence FHA home loan. The maximum a seller can contribute for an FHA investor loan is 2%.

Loan Application Fee

The loan application fee is typically required up front by the mortgage broker in order to process the loan. This item is usually listed on the Good Faith Estimate however the buyer should receive a credit for this charge during closing since it is paid up front.

To get an idea of what a Good Faith Estimate typically looks like, go to the following example.

I have always expressed the importance of educating yourself and planning for obtaining your goals. Now I am hoping that this article has equipped you a little better to understand the beginning steps for the loan acquisition process to purchase a home. If you have any comments, send an email to jtorian@pamplonafinance.com or leave them in the comments below.

Stay Disciplined!

Steps to Prepare for Home Ownership

2009-03-08T17:55:00.000-07:00

This is a very sensitive topic to talk about given the current situation that our economy is in. I am in no way ignorant to the fact that many good people are losing their home due to the downturn in our economy. The only hopes of this article is to educate my audience on the steps (as determined from my experience) to purchase a home if it is a good investment option for the particular person.

Over a year or two ago, the terms foreclosures, auctions, short sales, etc would have seemed like a foreign language to most Americans. I mean after all, I have never heard my parents talk about any of the terms previously listed the whole time that they have owned their home. Now, it is common place to see advertisements for foreclosure auctions, or even receive emails to your inbox announcing a fire sale of condos at "below builder price".

With the abundance of vacant properties in America, in my opinion, it is a great time for the first time home buyer, second time home buyer or even the investment buyer to look at purchasing a home. It is definitely a buyer's market and with patience and the preparation, home ownership is just around the corner for many Americans. I did some research on the topic and found the following link that was interesting to try to explain the previous downturns of the housing market in America:

Housing Data Shows Downturn Could Be Prolonged

Although this particular article claims that this housing downturn could persist eight years, I am optimistic that we are at a point where houses are beginning to be a good value again. I am currently in the process of pursuing an investment property and wanted to share some of the preparation that was needed in order to begin this process:

Ask yourself the following questions and be honest

What is your price point for your house that you can afford?

As a personal rule of thumb, I have always believed that the primary mortgage should not be anymore than 33% of your take home (after taxes) pay.

What location do you want your house to be in?
What type of house do you want? (Townhome, Single Family, Condo)?
How big do you want your house to be?
What special features you want in your home?

Write down a description of your home

This step is important so you do not compromise on getting the house that you want. Throughout this process of searching for a home, I got discouraged when others beat me to the punch when placing a contract on homes that had 60 - 70% of what I wanted. However, I eventually found the house that had 90%+ of what I wanted and I currently have it under contract.

Research your Credit Score

There are a multitude of ways to research your credit score on the Internet. Below are the free alternatives that I use:

Realistically, many of the loan officers I spoke with stated that they are looking for 700+ credit scores. However, do not get discouraged if your credit score is not that high, I recommend to at least try, the worst thing they can say is "no".

Find a Real Estate agent

A real estate agent can determine how your home buying process will be. They generally handle all of the paper work and discussions with the seller (or the seller's real estate agent).
In addition to that, they will be the ones to make the necessary arrangements to view the property.
Usually they also have easy access to people you may need during the home buying process (inspectors, general contractors, loan mortgage officers, etc).

Research homes

There are many things to take in consideration when purchasing a home. Below is a short list with somethings worth considering:

Utilities
Taxes
Repair on the home
Maintenance
Location

For more things to consider, look at the article at the following link.

Find a Mortgage Broker

Talk to the mortgage broker to find out what packages they have and make an educated decision on which offered package is best for you.
Get financial records in order for loan qualification process, what you will need:

Last two paycheck stubs
60 days worth of bank and investment account statements.
W-2s from the last two years

A few important notes:

The loan company should be able to provide you with a loan pre-qualification letter and Good Faith Estimate without any type of commitment to obtain the loan with the company. You should use these documents to compare offers and get the best deal possible.
One concern that many people have when it comes to obtaining loans is the credit-check process. From this article, credit scorers look at all credit inquiries made within a 14-day interval as being the same as one inquiry. This will allow you to shop around for mortgages for a two week period without substantial negative impact on your credit score.

As I am in the stage of just getting my home under contract, I am currently waiting to proceed with purchasing this home. However, I find that educating yourself about the home buying process is the best thing that you can do in order to successfully proceed with purchasing a house. There is a lot that goes into the process of purchasing a home but the information in this article can at least help the novice to get started in the process. It may seem overwhelming at times, but if you get the right people on your team (real estate agent and mortgage broker), you will find that it will progress and you will be owning your new home before you know it.

Please let us know if you have any comments or questions below. Stay Disciplined!

Previous articles that relate to this topic:

http://getmoneyandmore.blogspot.com/2008/10/are-foreclosures-good-investment.html

http://getmoneyandmore.blogspot.com/2008/11/more-information-for-foreclosure.html

Disclaimer: The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment adviser.

Conquering the fear of failure

2009-03-01T23:26:00.000-08:00

"Don't let fear guide you." ~Anthony Johnson

Fear: a distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined (Link to Definition)

There are a lot of things to be fearful about today. The stock market is at its lowest levels since 1997. The economy is in the toilet due to Americans cutting back. The unemployment rate is the highest it has been in years and if you are fortunate to keep your job, there's a high chance that you have received a pay cut. The list goes on...

During President Obama's inaugural address, he explained that these are hard times:

So it has been. So it must be with this generation of Americans.

That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

Overall, there is a lot of pressure placed on people to try to succeed in these trying times. You have two ways to handle the pressure...it can either cause you to burst or it can bring out the best of you and make you into a diamond. When faced with the possibility of failure, how do you react? Now is the time to collect yourself and focus on creating a better YOU.

For those who have lost your job, now is the time to re-evaluate your financial situation. Know that being "in between jobs" is not failure and although it is not the most pleasant of situations to be in, it's doable. More than ever, a budget is needed to ensure better tracking of your money to make sure it is going to where it needs to be. Maybe it is time to start looking at your current career and think about getting a new direction by training for a new career. You can even leverage your current skill set to make income for yourself.

It has never been a better time to take a chance on yourself. Whether it be putting off pursuing your dreams to maintain your comfortable lifestyle or being hesitant to make an investment for your future in a home, not exposing yourself to risk will greatly reduce the reward you can receive in the long run. Do not let the fear of failure prevent you from accomplishing great things.

Being scared to fail is a completely natural response, however, it can be a hindrance from reaching your greatest potential. Below is a great quote from Michael Jordan about failure:

"I've missed more than 9,000 shots in my career, I've lost almost 300 games. Twenty six times I've been trusted to take the game winning shot and missed. I've failed over and over and over in my life. And that's why I succeed!" - Michael Jordan

I have learned in my experience that sometimes you have to create a plan and then jump right into it not knowing whether you are going to succeed or not. If you find that things do not go according to plan, make the necessary adjustments and then try again. The key is never to give up or accept failure. It is even better to remove that word from your vocabulary and know that whatever you put your mind to, you will accomplish.

With the current outlook looking grim, there is a lot of fear and anxiety about the future of this country. It seems like there is no light at the end of the tunnel and there is nothing that can be done to change this situation. However, I am confident that things will turn around as long as focus is maintained. If you are at a point where it seems like you cannot make a shot, keep shooting, you're bound to make a basket eventually. Stay Disciplined!

Credit Crisis - Visualized

2009-02-23T06:53:00.000-08:00

I just received an awesome link to videos that do a great job of explaining the credit crisis that is currently being experienced.

Special thanks for my friend linking me to MNPublius.

Stay Disciplined!

Understanding the Psyche Behind Debt Elimination

2009-02-22T19:43:00.000-08:00

What is debt?

According to Investopedia, debt is the following:

An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Definition of Debt

Maybe it is a new TV? Maybe it is a new car? Basically debt takes on many forms depending on the person who makes the purchases. At any rate, debt is a bad thing...or is it? Sometimes debt is necessary to make progress in life. Sometimes it is needed in the form of a mortgage. Sometimes it may be needed in order to pay for medical bills and save a life. At any rate, for most Americans, debt is a way of life. Although many of the popular TV analyst swear up and down that debt caused the economy to be in the state that it is today, I disagree.

I believe that one of the causes of this particular situation is due to the fact that Americans have lost control of their debt. It seems like we stopped using debt as a means to secure a home or buy a reasonable car and instead purchase clothes, tvs and other luxuries that almost immediately lose value. Contrary to the way most people use credit, it seems like as far as I could remember, my parents never had that problem.

It seems like my parents never really had a problem with credit. They never bought lavish luxuries such as TVs or furniture. They simply got their mortgage, got their car and followed the rules to pay their minimum payment on time. However, using this method, it just seemed like my parents were always sending out checks to creditors to make a payment. Throughout my whole life, I could not remember a point at which my parents never had to send out a check to pay for some kind of debt.

Although my parents never really complained about debt or money, I am sure they wished that they were not in it as long as they were so they could have done more. It seems like today, our mindset has changed to eradicate debt and become debt-free as soon as possible. In an attempt to find out what is different between when they used credit and what we do today, I had a conversation with my friend who is currently working on becoming debt free.

During the conversation with my friend about her progress on eliminating her debt, she explained to me that it is important for her to get rid of her debt. She explained to me the following points she has understood to help herself to become debt free:

It is hard to start paying when the debt seems to be so much

Debt is so easy to obtain that before you know it, you are over your head in no time.
Over time, anything can be accomplished, but you have to chip away at it.

A budget is necessary in order to make progress.

The first step to controlling spending is identifying where the money is going.
A budget allows for the pre-allocation of funds.

Paying the minimum is just not enough.

Just as compound interest works in your favor when you are lending your money, it works against you when you are borrowing.
Paying more than the minimum specified amount reduces the amount you will be paying on the loan as well as the time that you spend paying the loan back.

Seeing progress helps with following through on the plan.

Achieving small goals allow for a sense of accomplishment.
Setting a goal and achieving it propels you forward to continue with the plan.

The potential from the freed income is limitless.

The new income allows for money to be allocated for investing or other projects.

From discussing these points, I understand that situations and mindsets are different. Although my parents did not mind having debt, they did not use it as a tool to buy furniture, TVs or other "luxuries". However, my friend used her credit to make purchases for her home comforts. The difference between the two is that in this day and time, it is a general consensus that debt is necessary but needs to be eliminated as soon as possible. What do you think?

Stay Disciplined!

Track the Stimulus Spending

2009-02-18T13:41:00.001-08:00

It seems that President Obama read my previous post about the stimulus package (if only I were that lucky). I just learned through a colleague that the government has created a website that explains where each tax dollar is going to with the stimulus package. It went live as soon as the President signed it into existence.

Here is part of the FAQ from the website:

Q: What is Recovery.gov
A: Recovery.gov is a website that lets you, the taxpayer, figure out where the money from the American Recovery and Reinvestment Act is going. There are going to be a few different ways to search for information. Within days after the signing of the legislation, Federal agencies will start distributing funds, and you will be able to see which states, Congressional districts, and even Federal contractors are receiving them. As soon as we are able to, we'll display that information visually, through maps, charts, and graphics.

To view this site, click on the link below:

Recovery.gov

From time to time, I plan on checking this site to see how our money is being spent. Stay Disciplined!

The New Stimulus and How It Affects Me Directly.

2009-02-15T21:18:00.000-08:00

"In human affairs, the best stimulus for running ahead is to have something we must run from” -Eric Hoffer

President Obama is expected to sign the new stimulus package to help in the economic recovery of the United States of America. While waiting in anticipation of him signing this new plan, I have been trying to research as to how this package will effect me. I feel that I am a good representation of the "Middle Class" that Obama has referred to so I was very hopeful that the Stimulus package would be very beneficial to me.

On the contrary, according to the information I have read, it seems like there will not be much included in this stimulus package that will be directly applicable to me. From what I saw, below are a few highlights as to some of the applicable points of the stimulus:

New tax credit

•About $115 billion for $400 per-worker, $800 per-couple tax credits in 2009 and 2010. Credit phases out for individuals with adjusted gross incomes of $75,000 to $90,000 and couples with AGI of $150,000 to $190,000.

From my understanding, this change goes into effect starting in June. We are due to start seeing $13/week extra in our paychecks which will reduce the overall money taken out of our checks due to federal payroll taxes. I am not sure how much this will allow me to help stimulate the economy, but at least I can have enough money to buy a lunch or dinner each week (which could help).

Auto sales

•$2.5 billion to make sales tax paid on new car purchases tax deductible.

If I decide to purchase a car this year (which I highly doubt because the Civic is running like a champ), I would be able to deduct the sales tax for the vehicle. This is not a credit, but rather a deduction, and the information I have read so far does not clarify whether you will be able to take this deduction if you take the standard deduction in 2009.

Outside of the these two provisions, I do not really know what else is going to be applicable to me to help stimulate the economy. However, I do trust the vision of the leadership and hope that they understand how this will bring the economy around. I am very hopeful that the other provisions will indirectly affect me and allow us to turn our economic situation around.

Below is the source of the information provided in this log.

http://www.usatoday.com/money/economy/2009-02-12-stimulus-plan-breakdown_N.htm?loc=interstitialskip

Please let me know your thoughts on the economic stimulus package below. Stay Disciplined!

How To Be A Cheap Date

2009-02-09T04:56:00.001-08:00

I thoroughly enojoyed reading Jonathan's recommendations for saving money on Valentine's Day. My wife and I have had a lot of fun "going cheap" in the Atlanta area ever since we started dating, so I thought I'd pass along some of the activities we've tried:

Stargazing at the Fernbank Planetarium - The Fernbank Planetarium hosts stargazing sessions every Thursday and Friday (weather permitting) from 8:00 PM until 10:30 PM on their 36 inch Cassegrain. There is no charge to attend, and this sets you up to tell your date, "Instead of coming all the way down here, I could have just spent all evening staring at the stars in your eyes." You can grab dinner beforehand at one of the cheap spots on Ponce De Leon - Eats, The Old Spaghetti Factory, etc.

Ice Skating - Even though the Centennial Olympic Park Ice Skating Rink won't reopen until November 14, 2009, you can still go skating at the Ice Forum in Duluth or Kennesaw.

Banana Split at Brusters - Brusters sells banana splits for 50% off on Thursdays if you bring your own Banana. Stop by the grocery store before picking up your date, then surprise her by bringing the bananas out when you get to the ice cream shop.

Bike Ride on the Silver Comet Trail - The Silver Comet Trail is a great low-key bike ride - the trail is paved, and extremely flat. Bring a picnic lunch and a bottle of Sparkling Lingonberry Juice (alcohol is apparently forbidden on the trail).

Go to the High Museum for free - If you're a Fulton county resident, you can visit the High Museum of Art for free on the first Saturday of every month. Even if you have to buy a ticket for your out-of-county date, you're still getting a good deal!

Go to a Swing Dance at Georgia Tech - During the Spring and Fall semesters, dances feature a live singer and big band. Admission is $10 each, and include a one hour lesson.

A day at Stone Mountain - You can grill burgers, hot dogs, or steak for lunch, and finish off the evening by watching the Laser Show.

Hit up a dollar movie - I like to go out for cheap movies over at the "Picture Show at Merchant's Exchange". Evening movies are only $1.75, matinees are $1.25, and movies are $0.75 all day Tuesday. At that price, you can justify spending more on dinner or even buying a container of popcorn.

Most importantly, any of these things can be done solo as well, in case you're celebrating "It's okay to be single" day.

Love Don't Cost A Thing

2009-02-08T20:22:00.000-08:00

"Money can’t buy me love." -The Beatles

Well, with Valentine's Day around the corner, if you are anything like me, you are struggling to figure out what you are going to do for your special someone. There are tons of gifts that one could buy. There's flowers, stuffed animals, jewelry, chocolates, etc, but I have one thing that is working against me, I'm CHEAP (or just really frugal). I am convinced that Valentine's Day does not require the $25 bouquet of roses or the $60 dinner to be successful.

I can see why some guys like to stay single around this time of year. Waiting until the last minute and standing in line to get picked over roses from the grocery store does not cut it for most. There's only so many times when you can buy the above mentioned items until it because a routine and no longer "special". Spending money in general to impress someone is quite overrated also. This year, I am putting a new theory into practice to see if I can come up with a way to have great results for little money.

Now by no means, do I feel like I am a creative person. After all, I am a geek at heart and accustomed to thinking inside the box. However, I believe with enough time and a clear objective, anyone can come up with a creative way to have a successful Valentine's Day. After all, "it's as easy as P.I.E" isn't it?

I have brainstormed and researched to come up with a list of great Valentine's Day ideas that are free or cost very little money.

Write a love letter and mail it to your companion (be sure it gets there by V-Day).
Create handmade coupons with gifts your partner can use anytime, such as a massage, cleaning or something your mate enjoys to do.
Create a photo book of you and your companion. (Snapfish.com - Great Site To Create Own Photobooks)
Make a mixed CD of all of your favorite loves song. Go a step further and create a unique CD cover and make sure to include the year. Has a great replay value for special occasions later on.

Create a blog for your mate and write a new note to them everyday so they can check it online and show their friends.

Cilck here to create your own blog!

Turn your home into a fancy restaurant by buying a table cloth, a few candles, playing music and cooking dinner.

To help create a romantic environment for your mate, if you have access to a laptop and an HDTV, you can create a Powerpoint presentation and play it on the big screen.

Click for a Free alternative to create a slideshow if you do not have Powerpoint.

Create a Valentine's day box for your mate that includes a combination of the previous mentioned items.
Gather a group of your friends and stage a nice sit down dinner and split the costs.
Create a Valentine's Day card.

There more Valentine's Day ideas that you can probably research online. However, the point of this article is to mention that having a successful Valentine's Day does not require a lot of money, although it does require effort.

What are some of your (frugal) Valentine's Day ideas that you will be putting into action this year? Leave them in the comments below.

Stay Disciplined!

Withholding Judgement

2009-02-04T11:03:00.000-08:00

While at lunch with a group of coworkers recently, a colleague made a comment about how unfair it is that bonuses and overtime gets taxed at 40%. He had recently received a paycheck for $50 with $20 worth of tax taken out, and wanted to know why the government is taxing this type of income so heavily.

The answer, I was surprised to learn, is that they weren't taxing him at 40% after all. The misunderstanding arose from the governmental policy of tax withholding, a process with is sufficiently nebulous that most people have no idea how it works (or even why it occurs). This article will attempt to clarify the concept of withholding while also exploring how to insure that an appropriate amount of income is withheld.

A bit of history

First, it's important to cover some history of taxation in the United States. Taxation has been a part of American life since pre-revolutionary times, and was deemed important enough that the Congress is specifically empowered by the Constitution "to lay and collect Taxes, Duties, Imposts, and Excises...". With the development of the modern income tax during the Civil War, the government faced the dual challenges of determining how much taxable income was earned, and also insuring that owed taxes were actually paid. (For more information about the history of taxation in the United States, you might enjoy reading the Department of the Treasury's History of the U.S. Tax System.)

In modern times, this responsibility is largely delegated to the individual employer. First, employers are required to report earned income to the government and to the employee using Form W-2. Secondly, employers are required to withhold a certain amount of income from each paycheck and pay it to the government, which will then count it towards taxes owed at the end of the year. This process has greatly simplified the process of collecting taxes, but also made it more difficult for employees to realize how much tax was actually being paid on a month-by-month basis.

This difficulty is what lead to my colleague's misunderstanding. Although it appeared that his paycheck was being taxed at 40%, it was actually being withheld at 40%. What's the difference? With withholding, you can (often) get the money back.

How Withholding Works

Four things are routinely withheld from an ordinary paycheck: Social Security, Medicare, Federal Income Tax, and State Income Tax. Social Security and Medicare are withheld at 6.2% and 1.45% respectively, while the amount of Federal and State income taxes withheld will vary based on your expected filing situation and the number of allowances you take.

The most important thing to remember about allowances is that they are not the same as deductions. Deductions are used to reduce the amount of tax you have to pay at the end of the year. Allowances simply control how much tax is withheld from your paycheck in advance.

By default, tax is withheld from your paycheck at a certain fixed rate based on your projected annual income level. (Jonathan previously discussed these rates in his post, Owing the Government less money by maximizing deductions! (Part 1)). However, since nearly everyone gets some type of deduction or income adjustment, this would result in everyone having too much income withheld. To compensate for this, you can use your previous tax return to predict how much tax you will owe in the following year. You can then take a certain number of allowances to reduce the amount of money which is withheld from your paycheck. This will reduce the size of your end-of-year refund, but will increase the amount of money you see in your paycheck every month.

So how do you calculate how many allowances to take? The easiest way is to use the IRS Withholding Calculator. Once you've completed this, you can file an amended Form W-4 with your employer as described in IRS Publication 919. To see how a change in allowances will affect your take home pay, refer to IRS Publication 15, section 16. It's also worth noting that according to IRS Topic 753, you may be subject to a $500 fine if you submit (without reasonable basis) a W-4 which results in less tax being withheld than is required.

Supplimental Wages

You may be asking yourself, "Okay, I understand that your friend wasn't getting taxed at 40%...but why was he getting withheld at 40% if he had already reported correct allowances on his W-4?"

According to IRS publication 15, section 7, overtime and bonuses can be handled one of several ways:

The employer can pay supplimental wages on the same paycheck as normal wages, and withhold at the the standard rate.

The employer can pay supplimental wages on a separate paycheck, but calculate the withholding as though the wages were paid in one lump sum.

The employer can withhold at a flat rate of 25%.

For convenience, many employers will simply go with the third option. The result of this is that more tax is withheld from each check than is actually necessary. When combined with Social Security (6.2%), Medicare (1.45%), and state withholding (6% for Georgia), this adds up to nearly 40% of your income being withheld. If you work a lot of overtime or typically receive a large bonus during the year, it may be worth using the IRS Withholding Calculator to adjust your allowances on ordinary income to compensate for this, so that you don't have to wait up to 15 months to get a refund on that additional withheld income.

State Taxes

State income taxes are also typically withheld from your paycheck alongside Federal Taxes, but (with the exception of a handful of states), the withholding calculations are completely different. For taxes collected in Georgia during 2008, allowances are calculated by taking the deductions listed on Georgia Form 500 and amortizing them over the number of paychecks which will be issued during the year.

Summary

Withholding is an important component of the modern tax system to be aware of. Even if you are able to take a tremendous number of deductions on your annual tax return, you'll still only see this money once per year (in the form of your tax refund) unless your withholding allowances are set correctly. Correct withholding also makes it easier to avoid making a large unexpected tax payment every April. Finally, it keeps you more aware of what is actually going on with your earnings, and makes it possible to more accurately budget and plan for upcoming expenses.

If anyone has questions about anything discussed here, please let me know, and I will discuss them in a followup article.

Owing the Government less money by maximizing deductions! (Part 2)

2009-02-02T05:03:00.000-08:00

Owing the Government less money by maximizing deductions! (Part 2)

I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money. ~Arthur Godfrey

Well, if you read the previous post, you may have a better understanding about how taxes are calculated by your total income that you have received over the year. Whether that be from a employer, rental income or even self-employment, you have to pay taxes on money that you receive while in the United States. However, there is a silver lining to this cloud.

The government is not some heartless entity that ignores the fact that life happens. Sometimes there are things in life that reduce our ability to pay taxes and the government takes account for that in the form of deductions, adjustments and credits.

Deduction: An amount that may be subtracted from income that is otherwise taxable.

Adjustment to Income: An expense that may be deducted even if the taxpayer does not itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income.

Tax Credit: A recognition of partial payment already made towards taxes due. (Similar to a credit to your account with a bill)

Common Deductions

Mortgage Interest

If you have a mortgage for your primary residence, you are able to deduct the interest paid on that mortgage for the year 2008 on your taxes.
http://www.irs.gov/taxtopics/tc505.html

Charitable Contributions

If you pay tithes or donate money to a church, those contributions are deemed to be charitable and be deducted from your taxes.
If you contribute clothes to a Goodwill or Salvation army and received a receipt, you can claim the worth of your donated items up to $500 without an appraisal.
http://www.irs.gov/taxtopics/tc506.html

Medical Expenses (greater than 7.5% of your adjusted gross income)

There is a large list of medical expenses that are tax deductible. Some common ones that may not be known are bandages, blood pressure machines, nursing services, etc.
Please review the deductible medical expenses link for more information about deductible expenses.

http://www.irs.gov/taxtopics/tc502.html

Student Loan Interest

The interest from student loans is usually qualified as a tax deduction.

http://www.irs.gov/taxtopics/tc456.html

Tuition

If no one else claims you as a dependent, you can claim your tuition fees and education related expenses as a deduction on your taxes.

http://www.irs.gov/taxtopics/tc457.html

Stock Losses

You can either use your stock losses to offset your gains dollar for dollar or you can deduct up to $3000 of stock losses for the year. If you have more than $3000 in stock losses in a single year, you can carry over your excess (up to $3000) to the next year and so on.

http://www.irs.gov/publications/p550/index.html

Business Expenses

Your home, travel and car can be written off when used for your business. In addition to that, most business related expenses can be deducted from your taxes also.

State Taxes

Four types of deductible taxes

State, local and foreign income taxes;
Real estate taxes;
Personal property taxes; and
State and local sales taxes.

http://www.irs.gov/taxtopics/tc503.html

Educational Expenses (work related)

If you received a new certification to help improve your current job, that is a tax write-off! See quote below:

"To be deductible, your expenses must be for (1) education that maintains or improves your job performance or (2) serves the purpose of your employer and is required by the employer or by law to keep your salary, status or job, and (3) the education is not part of a program that will qualify you for a new trade or business."

http://www.irs.gov/taxtopics/tc513.html

Work Related Expenses

Did you buy some snacks for a work event and was unreimbursed? Maybe you had to buy some equipment to help with your job but never received any money from your employer. That's tax deductible!

http://www.irs.gov/taxtopics/tc514.html

Casualty

If you go through the unfortunately situation of having your property destroyed or stolen, you can write off any part that it costs to replace it (that's not covered by insurance).

http://www.irs.gov/taxtopics/tc507.html

Theft Losses

If you go through the unfortunately situation of having your property destroyed or stolen, you can write off any part that it costs to replace it (that's not covered by insurance).

http://www.irs.gov/taxtopics/tc507.html

Moving Expenses

As long as you meet a few criteria, you can deduct your moving expenses from your taxes.

http://www.irs.gov/pub/irs-pdf/p521.pdf

Common Adjustments

401(k) or IRA Contributions

If you received a W-2 from your employer, you may have noticed that there is a difference between the income that you received from your employer and the income that is taxable by the government.
You can deduct up to 15,500 of your 401(k) contribution for the 2008 year or you can deduct up to 5,000 of your IRA (Individual Retirement Account) contribution for the 2008.

Health Savings Account

For more information, read the following Government Publication 969.

Common Tax Credits:

First Time Homebuyer Credit

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009.
For more information, go to the First Time Home Buyer Website.

Child Tax Credit

With the Child Tax Credit, you may be able to reduce the federal income tax you owe by up to $1,000 for each qualifying child under the age of 17.
For more information, go to the Claiming the Child Tax Credit Website.

It is easy to see why tax preparers make so much money when preparing taxes, but even if you do not do your own taxes, you should at least read the information listed above. It is good to understand what exactly is going on as well as making sure that you receive every deduction that you are entitled to for your taxes.

In total there are over 350 deductions that you can deduct from your taxes if you quality. If you would like to review the source of all this information, please click on the following link below:

http://www.irs.gov/taxtopics/tc500.html

I hope this information leaves you feeling a little bit better prepared for this year in taxes. In addition to that, I hope it empowers you to receive a tax return for some of the money that you have contributed to the government. If you have any questions or comments, please leave them below. Stay Disciplined!

Owing the Government less money by maximizing deductions! (Part 1)

2009-01-25T19:08:00.000-08:00

Tax Season...

To some, it's the most dreaded time of the year, to others, it is a wonderful time. It all depends on which side of the line you are on. The side of where you owe the government money, or the side of where the government owes you money. Typically, the government gets its cut up front, hence this is why you see things like "Fed Inc Tax" on your paycheck with a big "-" sign beside it.

Now many wonder why they still owe the government money even after paying so much in taxes all year. Well, let me give you a rough example of how to calculate taxes:

*DISCLAIMER: I AM IN NO WAY AN OFFICIAL TAX ACCOUNTANT NOR OFFICIAL, THIS EXAMPLE IS BASED ON MY UNDERSTANDING AND I DO NOT CERTIFY IT FOR CALCULATING TAXES. PLEASE USE FOR GUIDANCE AT YOUR OWN RISK*

First, let's calculate your taxes using the document from the following link:

http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

2008 Tax Rate Schedules

Filing status of Single

Taxable Income Over:	But Under	The tax is:	of the amount over
0$	$8,025	10%	$0
$8,025	$32,550	$802.50 + 15%	$8,025
$32,550	$78,850	$4,481.25 + 25%	$32,550
$78,850	$164,550	$16,056 + 28%	$78,850
$164,550	$357,700	$40,052.25 + 33%	$164,550
$357,700	....	103,791.75 + 35%	$357,700

Let's take a person who makes roughly $50,000/year of taxable income. The total amount of taxes they would pay is calculated by the following formula:

4481.25 + (.25 * (50000 - 32550)) = 8843.75

This is very close to the estimated tax of the document, which is 8850.

Now this calculated amount is strictly without any deductions or exemptions. As you can see, you owe the government over $8000 in taxes! If you do not take out enough money, you will be required by the government to pay at the end of the year (by April 15). However, let's see the difference a few deductions can make.

Let's take the same person who roughly makes $50,000/year of taxable income. The total amount of taxes they would pay (after taking a standard deduction and one exemption [claiming as sole dependent]) is calculated by using the following formula:

4481.25 + (.25 * ((50000 - (5450 + 3500)) - 32550)) = 6606.25

$5450 deduction is the standard deduction for a single employee

$3500 is the deduction for claiming a dependent. You claim yourself as a dependent (if no one else can claim you).

As you can see, with standard deductions, you can save approximately $2000 on the amount of taxes owed to the government.

Website used to calculate the taxes.

This is just the first half of calculating your taxes. The next article will feature some common deductions and tips on maximizing your deductions to reduce the total amount owed to the government so that you can pay the least amount or even get a refund back.

Stay Disciplined!

By all means, please leave comments if there are any corrections you would like to make or have any information about deductions.

Take control of your finances by creating a budget

2009-01-18T19:33:00.000-08:00

It's clearly a budget. It's got a lot of numbers in it. ~George W. Bush

I know you have to be thinking that I am kind of crazy posting the quote that I did. However, in 2008, it seems like the Government took this type of approach when handling the finances of the country. Not only are we currently in a recession, but the current steps taken to get us out of this predicament is highly flawed. I mean after all, we have given over 300 Billion dollars to companies and have no idea about what they are doing with the money.

As much as we would like to blame the government for all of our problems, that would be ignorant to do so. I mean in retrospect, 2008 was a year that most Americans paid for previously bad decisions. Whether it was being caught in the "oil" rush, buying the biggest SUV possible, taking out an ARM loan to re-finance the house or even buying the big screen TV on credit, Americans have learned this year really how vulnerable our economy and personal finances are. The Jones's are no longer the family to be and keeping up with them is for the birds.

We are far from the times of good job security as many people on Good Morning America reported that they feel like they were "disposable" once they were laid off by their job. However, there is a silver lining, going through these times helps us to reconsider how we evaluate ourselves. We learn new and improved ways to define ourselves and not tie ourselves down to nothing more than a specific job.

2009 is a new year and the mood of America, based off the latest choices we have made as a country, demonstrates that it is time for a change. We are moving from a consumerist nation to a nation who is re-taking control of our personal finances. It is time to get back to making the choices that secure our financial future rather than impede it. It is time to do what Americans do best: become innovative, make the best of what we have and change for the better.

One of the best choices you can make to take control of your financial future is creating a sound budget. Although this sounds like a daunting task, you can accomplish this by completing five steps:

Track Spending

The most important step to developing a budget is tracking your spending. This will allow you to identify holes of your income and help you isolate spending problems areas in your life.
Steps to Track Spending

Each time you buy something, SAVE THE RECEIPT. Even if it is a pack of gum, a utility bill or whatever, take the receipt and file it away in an envelope, a folder or a filing cabinet.
At the end of a 30 day period, collect each of the receipts and figure out general categories most of the receipts can be grouped into.

Example of categories

Utilities
Mortgage/Rent
Eating Out
Gas
Groceries
Discretion Funds
Savings
Retirement

Once you have developed your categories, use a spreadsheet program like Microsoft Excel or Google Spreadsheets, put the date of the receipt and the amount into each category that is most applicable to.
Add the totals of each category and develop your estimated monthly expenditure for each category.

Prioritize

For most of us, budgeting will require us to make sacrifices in order for us to abide our plan. Whether it is cutting back on eating out so we can save more for retirement, or wearing sweaters in the home so we can lower our gas bill to spend more money at our discretion, we have to prioritize what is important to us.
The most helpful thing you can do to help with prioritizing is develop a goal or an end point of what you hope to accomplish.

Be Realistic

Although most people have good intentions with the initial development of a budget, a lot of time people fail due to having goals and expectations that are not realistic.
Rome was not built in a day and neither will having the "ideal" personal financial situation.
Patience is your friend and just by following a well thought plan, you will be able to eventually reach your goals.

Use Automatic Accounting

Automatic accounting automates your budgets.
Not having to worry to about your money and actively touching it can reduce the stress in money management.
See the following article for more information about "Automatic Accounting".
Automatic Accounting

Evaluate and Re-evaluate

Although you may invest a lot of time to develop your initial plan, things change. You may get a pay increase, you may lose your job or you even may take on a new financial responsibility.
There has to be a re-evaluation period that takes place to look at your current plan and make changes to accommodate whatever new changes you experience in your life.

Although many corporations are really hurting right now due to this current economy, some are still staying afloat. They accomplished this by determining a budget that was tailored to their personal situation and stuck with a sound plan that continues to work for them. In addition to that, they took the necessary steps to adjust to the current economic situation. Unfortunately, many companies that tailored themselves to become more like their competition and did not change from their ways have caused them to fail.

Remember, 2009 is a new year and it is time for you to take control of your situation. It is no longer a time to make excuses or blame our current situations on someone else. We must hold ourselves accountable for the decisions that we make. Starting today, make a decision to change for the better.

Stay Disciplined!

Leveraging your knowledge to make extra income

2009-01-11T19:32:00.000-08:00

Have you ever thought that you could be making better use of your free time? I mean after all, you are a pretty smart person. You have a lot of knowledge about the field that you work in and there would have to be some way that you could make money using this knowledge, right? Maybe you are a little reluctant to start your own business because of all of the overhead that is required. Or maybe you do not have the investment capital to invest in yourself. Well...all that is about to change...

In addition to my interests in personal finances, I am also a huge computer enthusiast. During my usual brainstorming process, I was trying to think of a way to leverage my current knowledge and ability to make some extra income. I did a few searches online and found that there are a lot of sites that you can do freelance work and they pay you for it! Yes, you can actually work from your computer at home and make money.

For my skeptics out there, I know this sounds too good to be true, so let me go into further detail. There are two websites that I have come across that have great opportunities for freelancing. The first is Guru which is a site dedicated to match-making between freelancers and those who want to purchase their service/product. Below is a small excerpt from the website:

Guru.com is the world's largest online marketplace for freelance talent. Through our free service, employers find top freelance and contract talent locally, nationally, or globally. Our web-based marketplace directly connects businesses with more than 100,000 active freelance profiles specializing in over 160 professional categories including web design, programming, graphic design, business consulting, and administrative support.

Although I have not personally registered for the site, it is a great concept and a great way to help supplement your current income (especially during these times). I am still deciding on whether or not I am going to sign up for this site, but it is always great to have options.

The second (and my favorite) site is JustAnswer. Below is an excerpt on how the website works:

How JustAnswer works

1. Ask a question.
Enter your question, and create a user account.
2. Name your price.
You can pay up front or wait until an Expert answers. Prepaid questions are typically answered faster.
3. An Expert answers, often within minutes, usually within a few hours.
JustAnswer will send an e-mail notifying you of any answer or request for information from an Expert.
4. Accept the answer.
If you got great service, consider adding a bonus. Your acceptance pays the Expert and tells us you’re happy.

That’s all. We guarantee your satisfaction.

So how does it all relate to you? Well, I am so glad you asked...there's more:

More Expert Information Apply now to earn money for all of your answers that are accepted! New (4 or less accepts) or below average Experts earn 25% of what a customer is offering for an answer and above average Experts earn 50%. Once you have more than $20 in your account, just request payment and we'll Pay Pal the money to you on the first business day of the month.

Now, because I have signed up for this website and actually use it, I can provide for you my experience with it. After applying to the site (as a Computer Expert), I was given a test with 10 questions. I guess I answered them correctly because they made me an expert in computers rather quickly. (I had to wait one day before I could start answering questions)

Now, whenever I have free time, I log into the website and monitor a queue that new customer's send their questions into. I find questions that I know I can answer, answer them, and get paid. It's literally that simple. So far, after 3 days of being on the site and having 7 accepted answers, I have made $40.25. Now I understand that I will not be able to go out and buy that Mercedes Benz with it, however, in my eyes, that's free money for answering questions all from the comfort of my computer.

The great thing about this site is that there are many other experts that you can apply to become. Everything from answering math questions to being a business consultant, there is an expert position that you can apply for to make some extra income. Now, "not being able to find some work" is one less excuse you can use for this new year.

Stay Disciplined!

If you have trouble registering for the JustAnswer website as an expert, send me or email or leave your email address in the comments and I will send you an invite.

Setting Resolutions...better yet, Goals for the New Year

2009-01-04T18:47:00.000-08:00

Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. ~Stephen A. Brennan

It is a new year and a chance to start over again. It is during this time that many people try to make "New Years Resolutions" only to realize that a month into the new year that the same old habits are still prevalent. Whether it is exercising, controlling spending or reducing debt, many of us find that we have good intentions when we start, however it is hard to stay consistent with our intentions.

At the beginning of 2008, I decided to set goals to improve my life (financially, physically and other ways). After spending about a week figuring out some of the things I wanted to accomplish, I decided to write them down. Now in retrospect, coming into this new year, I have looked at my previously written goals and feel a great sense of accomplishment due to the fact that I have completed most of the goals that I set for 2008.

During a recent conversation with my sister, I let her know of my sense of accomplishment due to the status of my goals for 2008. We discussed the idea of writing down these goals and she agreed 100% that writing down goals for the new year was the way to go. I know that sounds amazingly easy, however, there was a very meticulous procedure that was followed in order to ensure success in obtaining these goals. Below is the procedure followed:

Write the goals down.

Writing down your goals helps you remember what exactly you want to accomplish.
It allows for accountability of the goals.

Write a tangible metric to measure success on obtaining goal.

How do you know when your goal is reached?
Write down an expected outcome to measure the expected results once the goals has been met.

Give yourself a deadline.

Just writing down goals without any deadline can make that goal last forever.

Write possible steps to obtain your goals.

Jotting down some typical first steps for your goal can provide an immediate action plan to start on your goal.

Share your goals with a friend for accountability.

Sharing your goals with a friend can help you facilitate discussions to double check that proper progress is being made on the goal.
Your friends can offer a different perspective on obtaining your goals.

Check your goals monthly to note the type of progress being made.

Always check your progress monthly to make sure obtaining your goal is on track to meet the deadline.

Remember, "It is Easy as P.I.E."

Plan, Implement and Evaluate.

*Extra: Choose a theme for yourself that represents your ideas/goals for 2009* (My Theme: "No Excuses")

Creating goals can help you finally reach your financial situation that you have been wanting to achieve in previous years. In addition to your personal finances, settings goals can help with obtaining a more fulfilling life with accomplishing things that you set your mind to.

When discussing the previous year, a lot of my close friends looked back at 2008 and are very happy that it is over. In order to prevent experiencing the same feelings for year 2009, we have made sure to set appropriate goals, share them and go about the proper steps to accomplish them.

What are some of the recommendations that you have for setting goals? What other recommendations do you have to improve your life for 2009? Leave them in the comments below.

Stay disciplined!

Getting the Recognition you Deserve at Work

2008-12-28T19:56:00.000-08:00

Don't worry when you are not recognized, but strive to be worthy of recognition. ~Abraham Lincoln

The onset of a recession has caused many people to have to worry about their job security. Keeping your job is enough to worry about in itself, but at the end of the year is the time that you most are evaluated based on the work that they completed for the year. Now, many employees do not want to seem to burden their employers by asking for an increase in pay during times where jobs are scarce and money for companies is hard to come by. However, companies want to retain their good talent, especially those who produce results and will usually try to work with employees to increase their compensation.

Employers can easily be compared to the average consumer. Most consumers typically like to get the best bang for the buck, and if they are going to pay premium price for a product, they want to make sure that it will last and continue to be worth the price.

Below are some of the principles I follow to try to get recognition at work:

Think outside the box to fix a problem.

Always try to come up with three solutions to a problem.
After determining a solution for a problem presented to you, think about whether or not it is the most efficient way to solve the problem.

Do the work no one else wants to do.

Oftentimes, my management likes to request a volunteer to do an extra project before assigning it out to an employee. I volunteer for those requests frequently.
Shows initiative and willingness to work.
Increases your net value to the company.

Document the value of your accomplishments (as they happen).

Many times people document what they do instead of how what they did positively impacted the company.
Document the results of what you did and have it improved a process to the company.
Use a format that is similar to listing your accomplishments on a resume
Example: Provided great customer service to walk customer through initial setup of product resulting in less call volume for initial setup of product.
Each time you complete a project or receive a kudos for a job that you had involvement in, archive the email under an "Accomplishments 2009" folder and write it down in a notebook. I use "Google Notebooks" for this.

Expand your network at work.

Companies want employees that help create a comfortable work environment.
Always try to be nice to your colleagues as well as help out those who are struggling.
It may even be worth it to hang out with colleagues outside of your job to create trust as well as receive help from your colleagues when you are in a bind.

Increase your net worth

In terms of accounting, you are either going to be a net asset or a net liability to your company.
The company can make this judgement by determining the amount of assets you bring to the table versus the amount of liabilities caused by the company.
Examples of Assets of an Employee:

Employee Productivity
Employee customer relations
Employee skills

Examples of Liabilities of an Employee:

Paycheck paid to the employee
Benefits provided to the employee

It is always a good recommendation to make sure that your employer sees good value from your performance at work by your contribution to the company being worth more than what they pay you for it.

Less complaining/More resolutions

Unfortunately, most work environments are not perfect. There will always be something to complain about. Rather than complaining to your boss over things that cannot change, try to deal with them.
If there is something that needs to be changed, instead of just complaining alone, present a solution to resolve the problem.

By following these principles, you can increase your overall value (net worth) at work and give your employer more reason to provide you a pay increase after your evaluation at the end of the year. Even if you get turned down for a pay increase this year, you can start following these principles in the new year to request an increase at the end of 2009.

What are some of the other recommendations you have to get the recognition you deserve at work? Leave them in the comments below.

Stay Disciplined!

Cash Rebates for Shopping...Microsoft Live Search Cashback

2008-12-15T23:11:00.000-08:00

Special thanks to Nate Lee who inspired this article. Thanks for the heads up for the readers to get a quick money rebate during the holiday season!

I am deciding to break away from my normal blogging schedule and share with you a quick and awesome program going on with Microsoft right now. Currently, Microsoft has created live search for products that you can purchase online. Now, while many search engines currently have this capability, the kicker with Microsoft is that they pay you instant cash back for certain qualifying items.

For instance, I just searched on the Microsoft Live Search site for "Dell 6000 AC" and purchased a Dell AC adapter for my brother on Ebay. I clicked on the link that had the little Microsoft Cashback symbol and received 8% cash back on my purchase. Not only did I pay less than retail for the adapter but I received a rebate also that will be deposited into my paypal account, that's too sweet of a deal to that I felt compelled to share. I have spoken with my friend who gave me the heads up about this program and he stated that his friends confirmed that it is legit as Microsoft has cut checks to people who have purchased through this program.

Ok, I'm convinced, sign me up!

To enroll in the program, you have to meet the following requirements (taken directly from their FAQ Page):

Who is eligible for Live Search cashback?

You are, as long as you:

Provide us with a valid email address and password for account access.
Are at least 18 years of age and reside in the U.S.
Have a valid U.S. mailing address (a P.O. Box won't work).
Create or have an active Windows Live ID and cashback account.
Adhere to the Microsoft Service Agreement.

To use the program with Ebay, you will need a paypal account and ebay account that are both in "good" standing. Other points to mention is that it is required that you have at least $5.00 in your cashback account before the send you a check and there's a waiting period of at least 60 days in most cases before you can receive your rebate.

For more information about this program, refer to the Microsoft Cashback FAQ page.

Do you have any tips or secret gems you know about for getting the best deal online? Please share them in the comments below!

Stay Disciplined!

Accounting 102...Using the Double Entry System

2008-12-14T22:45:00.000-08:00

To every action there is an equal and opposite reaction. - Newton

*To better prepare for the concepts explained in this article, please read the previous article "Personal Accounting 101...Understanding the Basics to Accounting"*

As mentioned in the previous article, I am planning on taking on my personal finances from a different perspective in 2009. I want to become my own personal accountant and understand my finances at a higher level to track each and every dollar that I spend. In order to do this, there are some accounting principles that must be understood to ensure proper accounting of my money.

The latest principle that I have learned about is the "Principle of Balance" in accounting. This principle seems necessary to me because I want to know where each dollar comes from and goes to in my personal finances. Knowing this information will help with identifying any kind of holes that my money seems to disappear into. In addition to that, it will help identify my spending trends and adjust finances according to the previous trend so that I can better eliminate unexpected expenditures.

The "Principle of Balance" is implemented in a accounting method called Double Entry Accounting. Below is a definition of what exactly this is:

Double Entry Accounting: A standard accounting method that involves each transaction being recorded in at least two accounts, resulting in a debit to one or more accounts and a credit to one or more accounts.

Although this seems like a lot of overhead for tracking your personal finances, it offers several benefits:

Accounting Trail

Using Double Entry accounting allows you to track where the money originates from as well as where it ends up at. This way each dollar can be tracked and it is easier to identify when money is being wasted.

Automatic System of Checks

Since every transaction is being recorded twice, it provides an automatic system of mathematical checks to make sure that all money is being accounted for. With this method, all credits have to match all debits in a transaction.

For further clarification, let's take real world example of this scenario. For instance, if an employee has their paycheck deposited directly into their checking account from an employer, then the money has been withdrew from the employer's account in the form of a paycheck and deposited in the employee's checking account in the form of increased funds. Using the double entry method of accounting, the journals that record this entry would look to be the following:

Income: Paycheck (-$500) -> Asset: Employee's Checking (+$500)

To make this a little more complicated, let's look at the terms debit and credit to understand this in more formal accounting terminology.

A quick explanation of how debit and credit works is listed below:

Debit
Money is recorded in the debit column, which is always the left column, when it is being transferred to an account. Also referred to as depositing into an account. (Citation)

Credit
Money is recorded in the credit column, which is always the right column, when it is being transferred from an account. Also referred to as withdrawing from an account. (Citation)

Applying this new terminology to our current real world example, you get the following:

Debit:Employee's Checking - 500
Credit: Income Paycheck - 500

*I know this seems a little backwards and is a bit to wrap your head around due to the nature of Credit and Debit cards, and how they work, but once you start thinking in terms of deposits and withdrawals, it will be easier to understand*

Now the previously referred to benefits of this method are obvious because all debits (deposits) have to equal all credits (withdrawals). However, recording each transaction and then performing calculations seems to be a complicated and tedious task. This would be true if we did not have computers, however there is free software that handles most of this for us. All that is required from the user is to save receipts and enter them into the software.

Doing a quick Google search for "Accounting Software" can turn up many choices, however I plan on using GNUCash. Not only is it free, but it is very feature rich allowing the user to create charts, graphs and reports.

What are some of the financial resolutions you are going to make for 2009? Do you have better ways for money management? Let us know!

Stay Disciplined!

Personal Accounting 101...Understanding the Basics to Accounting

2008-12-07T20:40:00.000-08:00

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson (1743 - 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)

With the new year right around the corner, I have decided that one of my resolutions this year will be to track every dollar earned as well as every dollar spent in my personal finances. I am going to start up a new pseudo-company called "Jonathan Torian Inc." and become my own personal accountant. In order prevent failure and ensure a promising financial future, I am going to begin learning the basics in accounting and apply it to my every day life.

Two Types of Accounting

Cash Basis of Accounting

An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid). The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle. (Citation)

Accrual basis of accounting

The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service). (Citation)

Cash Basis Accounting is the most applicable to the individual consumer.

Main Financial Statements

Income Statement
Balance Sheet
Statement of Cash Flows

Income statements

Show how profitable you are during the time interval. Profits will be measured in the amount able to be saved after a given time period. This can be used to show what time of the year money is more likely to come in or go out. Profitability involves two things, amount of money earned (revenue) and expenses.

Revenues

The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. (Citation)

Expenses

The economic costs that a business incurs through its operations to earn revenue. (Citation)

Matching Principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense. (Citation)

Balance Sheet

A financial statement that reports the amount of a company's assets, liabilities. (Citation)

A "snapshot" of a individual's financial position at a given moment in time.

Previous Article about using Financial Snapshots

Assets

Assets are things that an individual owns and are sometimes referred to as the resources of the individual. (i.e. Personal vehicle(s), its cash in the bank, home, etc.)

cost principle

The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value. (Citation)

Depreciation

Depreciation is required by the basic accounting principle known as the matching principle. Depreciation is used for assets whose life is not indefinite—equipment wears out, vehicles become too old and costly to maintain, buildings age, and some assets (like computers) become obsolete.

In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. (Citation)

Liabilities

Obligations of the company; they are amounts owed to others as of the balance sheet date. (i.e. Loans, credit cards, etc.) (Citation)

Statement of Cash Flows

Shows how Direct Delivery's cash amount has changed during the time interval shown in the heading of the statement. Good for helping to determine your financial circumstance and whether or not things need to be adjusted.

The goal of these articles will be to get a basic understanding of accounting principles then determine ways to integrate them into my personal finance. I am hopeful in being able to become the Chief Financial Officer of my finances for 2009.

Too often we rely on others' book keeping to determine if our finances are balanced. How many times do you check your bank account after you receive a bill to make sure that the power company debited the correct amount? How many times have you been overcharged by a department store or did not receive a store credit for returning an item. Unfortunately, I believe we can attribute much of the economic woes today due to not tracking expenses correctly and understanding the underlying debt trap that many Americans laid out.

By tracking my expenses, I hope to avoid this trap and being in less debt than what I owe today.

What are some of the financial resolutions you plan on doing for 2009?

Stay Disciplined!

Reading the Prospectus...A tutorial about knowing what you are invested in.

2008-11-30T19:37:00.000-08:00

You can know the name of a bird in all the languages of the world, but when you're finished, you'll know absolutely nothing whatever about the bird... So let's look at the bird and see what it's doing -- that's what counts. I learned very early the difference between knowing the name of something and knowing something. -Richard Feynman

With the current downturn of the economy, many people are uncertain about their future with the current financial situation that the country is facing. If you were fully invested in stocks since October 2007, your portfolio is probably down somewhere in the neighborhood of 30% - 40% of its value on that date. It is amazing the difference a year can make.

I must admit, I have fell victim to the downturn of the stock market just as many of my colleagues have. As of today, I am currently down 38.8% in my 401(k) alone not to mention the many other investments that I currently own. While I am in no position to make a recommendation on what to invest in next, what I can do explain the tools provided for the investor that can help you make an informed decision about where to place your hard earned money.

Some of the fundamental steps that is incorporated in "It's Easy as P.I.E" is the planning and evaluation phases. Both of these require that you do the necessary research to make sure that your current allocation is the best applicable to your current financial situation. It also requires that you periodically review your current allocation to make sure that your portfolio is best suited for the amount of risk you are willing to take on. One of the most important tools for doing this research for a stock or mutual fund investment is given in the form of a prospectus.

Prospectus: A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. (Link to Investopedia)

Prospectuses are usually broken down in the following structure:

Overview

Typically provides a high level overview of what the stock or fund is comprised of.
May provide a small summary of the objectives of the company and how they plan to make their revenue.
Provides some general information about the investment and provides in general a snapshot of the investment Year to Date (YTD) performance and price.

Expense and Fees

In the case of mutual funds, there is usually a management fee that the mutual fund charges you in order to maintain the fund purchased. This fee is usually referred to as the Expense Ratio.

Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. (Link to Investopedia)

Some funds also contains a load fee that is charged for maintaining the fund.

Load: A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund. (Link to Investopedia )

May also contain a minimum amount required to purchase the fund initially. From my own experience, it does not look like this minimum price needs to be maintained, but just done on the date of the initial purchase of the fund.

Performance

This section may be the most important part of the prospectus as it will generally give you an idea of what kind of return you will be able to get on your investment.
Contains average annual returns for 1, 3, 5 and 10 years. May contain the funds performance since the fund's inception.

Return: The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.(Link to Investopedia)
The use of the return helps gauge future performance of the fund or stock. Depending on the market conditions, it can allude to whether or not the investment is going to continue to provide a good return on your investment or whether you should look elsewhere as it might have hit its peak.
Usually represented in a percentage form that displays your overall return in the case that the investment was made at whatever previous time period without further contributions.

This section may also contain a graph of the prices of this investment over time for a predetermined time period allowing for an example of what a certain amount of money would have returned over the past.

Portfolio Composition

Another very important section to the prospectus is the portfolio composition.
Contains information about the specific stocks or other mutual funds and the amount of them that the investment is comprised of.
In a mutual fund, usually contains a list of the Stock Style

Stock Style: The investment approach or objective that a fund manager uses to make choices in the selection of securities for the fund's portfolio. (Link to Investopedia)
Flash Movie of Stock Styles

Displays the sectors of the market that the fund is exposed to.

Prices and Distributions

This section contains a historical reference of the prices that the stock or mutual fund closes at on a daily basis.
Can be useful for determining whether a stock is over-valued based on the price over a given period of time.
Can also help to identify the best time to purchase the stock during the month.
Contains the rolling 52 week high and low which allows you to gauge the high price and low price for the year of the investment.

Although I am unsure about how much lower the Dow Jones will go, I am still hopeful that the stock market will rebound and pull itself out of this funk. In my opinion, I think that there will be a lot of bad days down the road, however, if I am able to make an informed decision by investing in the sectors that I believe will bring America back to the forefront of the global economy, I may be able to reap some great rewards.

Feel like I missed something in this article about prospectus? Please share your knowledge about this topic in the comments below.

Stay Disciplined!

P.S. - For some real world examples of prospectuses, look at the links below:

Fund listing for Vanguard
Fund listing for TRowePrice

The Privilege of Giving

2008-11-23T22:37:00.000-08:00

Title: The Privilege of Giving

Body:

“It is more blessed to give than to receive.” — Jesus, Acts 20:35

While watching CNN tonight, I saw a compelling story about a family in Phoenix, Arizona that was begging on the side of the street for money. The father had recently lost his truck driving job and has currently had to resort to panhandling in order to feed his family. Now although I strongly believe that people are in charge of their own fate to a certain degree, I cannot help but to have a few heartstrings pulled when I see a grown man cry due to being unable to feed his family by his own devices. With as much emphasis put on a man as being a "provider" in our society, I cannot help but guess that this man has to be feeling that he is failing in his responsibility.

One sad realization about this is that this and many other stories will continue to happen due to the current economic situations. A co-worker once told me that layoffs always seem to occur when money is needed the most and with it being the holiday season, it would seem like the absolute worst time to lose your job. Many Americans unfortunately face this uncertainty as they are working in industries that are cutting back majorly due to the slowdown of the economy. Although it is hard to provide a solution that will encompass the multiple problems individuals face, there still are some things we can do to help.

One of the main principles I abide by in my personal finances is giving back. Whether through money, volunteering time, or donating my unused goods, I feel that one important aspect to help remain humble in personal finances is through giving. Below are some of the guidelines I follow when giving:

Take care of home first then branch out.

Always make sure that you take care of yourself and immediate family before reaching out to others. It is hard to build someone else a house while your house is currently falling itself.
Sometimes people decide against giving if they feel that there is no one they know who is in need, but you may be surprised to find out that people close to you may be in need but too proud to ask for assistance.

Have the right motive for giving.

Giving is a privilege, not an obligation.
The attitude you take towards giving will definitely reflect and affect those around you. If you give with good intentions, you may inspire someone close to you to do the same.

Give what you can afford.

Giving must be done in moderation. There is no reason you should go into poverty or slacking on your responsibilities due to your giving.

I sat down and spoke with my great aunt today and she explained to me that during her younger years, she would go to school during the day time and work in the cotton fields immediately after she got home. She told me that all the food that they had was grown in a garden and many of the luxuries that we value today were not in existence or were too expensive to afford. She explained to me how she lived through the Great Depression and World War 2 and how they were able to get by with what they had. Unfortunately, we do not realize today how much of an abundance we have.

As mentioned by the quote at the beginning of this article, if you have the privilege to give, you are blessed. Often times we analyze our situation as being poor due to not having all the material things that we want. However, after talking to my great aunt, I find that we are much better off than our ancestors were. Some of the ways you can choose to give are listen below:

Feeding America
http://feedingamerica.org/take-action.aspx

Big Brothers Big Sisters
http://www.bbbs.org/site/c.diJKKYPLJvH/b.1539751/k.BDB6/Home.htm

VolunteerMatch
http://www.volunteermatch.org/

What other ways do you feel are positive ways to give back to society? Are you planning on giving back during the holiday season?

Stay Disciplined!

The Economy is in a complete recession...What do I do with my 401k?

2008-11-16T20:07:00.000-08:00

Don't waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour's duties will be the best preparation for the hours and ages that will follow it. - Ralph Waldo Emerson

At the time of this writing, the stock market has closed approximately 400 points down today. This is very disheartening information for many Americans today who are constantly saving money for retirement in the stock market. Although many of the analysts and financial gurus are saying that "this is the time to invest", it is hard to contribute 6% of my bi-monthly income to a retirement account only to see it decline 4-5 percent immediately thereafter. Even I find myself becoming a bit more doubtful in the future of our stock market because it just seems like every day we take one step forward, the next day we take two steps back.

This time period has given me the opportunity to begin researching other investment options outside of the stock market to learn the all important rule in smart investing...diversification.

Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)

A silver lining in a gray cloud

Some of the online analysts and experts recommend to have a 100% diversified stock allocation if you are saving 20+ years for retirement. I agreed with this particular recommendation until I came across this latest financial crisis. Now I believe that true diversification is having a mix of bond and stock securities at all times no matter the length of years to wait before retirement.

Back in July, during the time the Dow Jones index was around 11,000, I shifted about 30% of my total allocation from stocks to two specific bond securities. Although most of the positions in my 401k portfolio are down at the current moment, however the investments in the bond markets have provided a positive return.

Although a lot of focus is not placed on bonds, I wanted to highlight the two that I am currently invested in. I believe these bonds have the potential to give a decent return in the current market conditions:

Inflation Protected Bond Fund (TIPS)

What it invests in
The return earned on an inflation-protected bond comes from two components that respond to movements in inflation and real interest rates. The first component of return adjusts the yield by the change in consumer prices. In contrast, the second component of return operates inversely with the movement of real rates; if real rates rise, the price of the fund will fall, and vice versa. (Taken from the Prospectus on Fidelity's 401K Site)

Stable Value Fund

What it invests in
The fund invests in fixed-income securities and book value wrap contracts issued by banks and insurance companies, which provide for the payment of a specified rate of interest and for participant withdrawals at book value (i.e. principal plus interest). (Taken from the Prospectus on Fidelity's 401K Site)

Although they do not have great returns, something positive is better than something negative.

Timing is Everything

Although I am looking at approximately 35 - 40 years before I am able to touch the savings in my 401k and Roth IRA, I have already planned how I hope to allocate my funds as it gets closer to retirement. The strategy I plan on following is to place most of my allocated money in an aggressive (higher risk/higher return) allocations and continue to have some money allocated in more conservative (less risk/less return) investments while I have more than 10 years to touch my money.

The thought behind this is that although the stock market may continue to be volatile, I will end up positive in the long run. The goal of this type of allocation is to gain a higher interest rate than that of investing in a high yield savings accounts or in bonds.

As I approach closer to the time where I am able to access that money without penalty (within approximately five years), I will make the shift to a more conservative portfolio that will allow me to reduce my risk in the stock market and continue to keep the majority of my money on fixed rates. Although I will not potentially make as much in interest on my money, I can rest assured that I will not lose the majority of my money in volatile stocks. An example of a conservative portfolio is 75% bonds and 25% stocks.

Eyes on the Prize

The key to succeeding in long term investing is to develop a plan and stick to it. Although I have seen the value of my funds decrease over the past few months, I have seen the overall number of the amount of shares that I own increase. I have continued to contribute to my stocks to continue increasing the shares that I own. It is my hope that the economy will rebound soon to help continue to increase the overall value of my retirement plan.

How are you holding out with your 401K plan? Do you still contribute? Share your thoughts below.

Secure Computer Practices to Protect Your Personal Finances from Identity Thieves

2008-11-09T21:52:00.011-08:00

The onset of a recession is causing some people to try to get more income by any means possible. Although this is a great motivational tool for people when this is done ethically and legally, it can also be very negative when illegal means are used to increase one's income. Due to the dire situations (banks failing, credit crunch, etc) of our economy, there are many opportunities forscammers and thieves to try to take advantage of the average consumer.

To the average computer user, security is not a top priority. It is simple for most users, turn the computer on, read a few emails, pay a couple of bills, browse a few websites, turn the computer off. Although this seems like a relatively simple and safe thing to do with every day computing, statistics show that over 15 million Americans are victim of identify theft every year. (Citation)
With these circumstances, it is extra important for people to become vigilant to protect their assets as well as identity.

Things to Protect Yourself From While Online

Spamming: the abuse of electronic messaging systems to indiscriminately send unsolicited bulk messages. (Cited From Wikipedia)
Phishing: The criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details, by masquerading as a trustworthy entity in an electronic communication. (Cited From Wikipedia)

Ways to Spot a Phishing Attempt

Malware: a portmanteau word from the words malicious and software, is software designed to infiltrate or damage a computer system without the owner's informed consent. (Cited From Wikipedia)

Types of Malware

Virus: a [malicious] computer program that can copy itself and infect a computer without permission or knowledge of the user. (Cited From Wik ipedia)
Trojan Horse: Malware that appears to perform a desirable function but in fact performs undisclosed malicious functions. (Cited From Wikipedia)
Spyware: Computer software that is installed surreptitiously on a personal computer to intercept or take partial control over the user's interaction with the computer, without the user's informed consent. (Cited From Wikipedia)

Although there are a lot of malicious things out there to try to compromise your security, securing your computing is not an impossible. Below are some easy ways to prevent your identity from being compromised online:

Ways to Prevent Your Identity from being Compromised

Passwords

Choose a password that is at least 8 characters in length. If allowed, a combination of upper and lower case letters, numbers and symbols.

Never store your passwords in a public place accessible by many. (Good idea to keep it in a wallet or purse, bad idea to keep it on a sticky note on your work monitor)

Delete Spam

Use the built-in spam filters of your email provider.
Be sure to report obvious spam to increase the accuracy of the spam filter being used.

Use Encryption (https) when possible.

Most reputable companies that require you to do any kind of online transaction usually support encryption.

Use caution when on public wireless access points.

Wireless access points transmits unencrypted network traffic in plain text. That means Instant Messaging, email, web traffic and any other transmitted information can read by someone using a network sniffer.
If at all possible, always try to encrypt your network traffic (using https) or use caution and refrain from transmitting sensitive information while connected to a wireless access point.

Security Software

Anti-Virus software will help protect the integrity of your computer and check the files located on them for any malicious programs. Below are recommended free anti-virus software.

Firewall software will allow for you to make sure no unsolicited connections will be allowed on your computer preventing unauthorized access to your files and personal information. Below are some recommended firewalls:

Built-In Windows Firewall (Windows XP and Vista)
Comodo Firewall

Spyware Removal

Browser Protection consists of programs used to identify false websites that may try to portray a legitimate site

No Script
Automatic phishing detection (Internet Explorer 7 and Mozilla Firefox )

Monitor Credit Reports

The government has mandated that all consumers be allowed to receive at least one credit report for free from all the credit reporting bureaus (Equifax, TransUnion and Experian)

The only free (without any strings attached) credit report can be acquired from Annual Credit Report.

Keep your Operating System up to date

Microsoft constantly finds new vulnerabilities in their software that can allow a malicious user to access your computer without any authorization. They release security software updates at least once a month to fix these vulnerabilities and close these holes.

It is impossible to eliminate your risk of identity theft when using the your computer on the Internet however, using the recommendations above, you can reduce the likelihood of your identity being stolen. What are some of the ways you protect you identity when using your computer?

Stay Disciplined!

More Information for Foreclosure Investments

2008-11-01T20:18:00.000-07:00

I realize that the previous post about the foreclosures was a bit incomplete because I did not really leave you with too many links that you can use to actively research the foreclosure market. Having these tools listed in this article can help you decide whether an investment in the foreclosure market is a sound decision.

Finding Foreclosures

As mentioned in the previous articles, foreclosure listings can be bought in three different phases. Those three phases are:

Pre-Foreclosure (Short Sale)
Foreclosure by the Bank (Courthouse Steps)
Sold/Auctioned as a Foreclosure

Below are some of the links that you can use for researching these properties. Please hover over the links for a description of each link.

Atlanta Journal Constitution Foreclosure Listing

US Home Auctions

Hudson and Marshall Auctions

Georgia MLS

Trulia

Due Diligence

Part of the due diligence for determining whether or not any property is a good investment is find out key pieces of information. Some of the things to research are:

Crime in the Area
Schools in the Area
Property Taxes to pay
Previous value of the home

Below are some of the links that you can use for researching this information. Please hover over the links for a description of each link.

Atlanta Police Google Map Showing Crimes in the City of Atlanta

Listing of the current and previous value of a home

Georgia MLS

County Tax Records for Homes in Georgia

Getting the Finances in Order

The last and in my opinion, the most important step is getting your finances in order to purchase any kind of investment. In addition to the information listed in my previous post below is a website that contains great information to help calculate whether or not you are in a good position to finance an investment.

Great Place to learn about Financing an Investment

I hope that these links assist in your decision of whether or not to pursue an investment in real estate. Please share with us any other links that you find useful to assist you in your decision of whether or not to invest.

Stay Disciplined!

Index Funds...The Investor's Training Wheels

2008-10-26T18:23:00.000-07:00

The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. -Jesse Livermore

On my birthday during one my wonder years (where I did not have to worry about things like bills, stocks, recession, etc), my father bought me a bike. After the initial excitement of realizing that I got a bike had passed, I realized that I was going to have to learn how to ride the thing. I was a bit timid of the thought of having to get on the bike, maintain balance and pedal all at the same time. After all, I could fall off the bike, get hit by a car in the street or many other bad things.

However, my friend Zack would come by my house on his bike. His house was a mile away from mine and while it took me about 15 minutes to walk to his house, he could get to my house in 5 minutes. Well, now it was my turn, now that I have my bike, I was capable of getting to his house within 5 minutes or less, I just had to learn how to ride it.

So when I tried to ride my new bike for the first time, I hopped on and tried to pedal. Unfortunately I did not understand the concept of balancing on the bike and got approximately 1 foot forward before having to put my feet down to prevent me from falling. After a week after these failed attempts, my father came out and showed me a couple of tricks. He taught me how to coast down a heel to learn how to maintain my balance. Once I learned how to maintain my balance, I learned how to pedal and eventually was able to put the two together and ride my bike.

At the end of the whole learning process my dad told me, "Man, maybe I should have gotten you some training wheels, that would have made this a lot easier and you would have been riding in no time." What, training wheels? Are you serious!? Are you telling me that I could have gotten back at least a few days of failures if I just had training wheels!?

Well, it seems like history repeats itself, because I made the same mistake on my initial entry into the stock market. The simple rule to succeeding in the stock market is to "Buy low, Sell High". Sounded simple enough to do so back in October 2007, Washington Mutual was on its way down and I thought that they looked like a good buy. They were down to $20 from their high of $47 and I just knew when they rebounded, I was going to be able to recover all of my money as well as make a hefty profit.

Well, if you have not followed Washington Mutual's fate, currently they are bankrupt meaning that their stock is worth $0 and no longer exists. Fortunately, I was able to recover some of my money before losing it all, however, the fact of the matter is whether I lost $1000 or $10, I still lost which is the exact opposite of my motivation for investing in the stock market.

Once I realized that my individual stock picking skills were not up to par, I realized that I need to get some "training wheels" so that I do not let history repeat itself. While researching one day, I came across Index Funds.

Index Fund: A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.

(Index Fund Definition taken from Investopedia)

*For a list of other common stock indexes, view the Wikipedia page*

An Index Fund is the novice's best investment tool as it offers the following benefits:

Allows you to easily diversify your portfolio without having to choose individual funds

Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)

Low Management Costs

Since Index funds are managed by computer models that try to purchase the exact funds listed by an index rather than relying on stock analysts, the fee to manage index funds are typically lower than those of other mutual funds.

Low Turnover

Turnover: The number of shares traded for a period as a percentage of the total shares in a portfolio or of an exchange. (Cited from Investopedia)
Lower turnover allows you to pay less transactional costs as well as reduce the capital gains tax that you will incur for trading funds held less than a year.

No commissions to pay when bought directly from some mutual fund companies.

Unlike many online stock brokers, when you buy more shares of an index fund directly from the mutual fund company, you do not have a to pay a commission for each purchase. In addition to that, you typically do not have to pay a commission to redeem the fund at a later date.

Easier to do Automatic Investing for dollar cost averaging

Dollar Cost Averaging: The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. (Cited from Investopeida)

Although there are many advantages to investing in Index Funds, there are some disadvantages as well.

Index funds are designed to perform at the index rate of return

If you are trying to get a higher return than the rate that is given by the market, you will typically not achieve it by having an index fund.

As with all investments, there is a risk that the overall index can go down meaning you would get a negative rate of return. (i.e. our current market situation)
Investing through a brokerage typically requires a hefty minimum if you are investing in a general account.(i.e. Vanguard requires $3000 for a minimum investment into their funds for a general investment account)

Index funds give you the chance to invest in the stock market without a lot of experience or knowledge. I highly recommend that you if you wish to start investing in the market, that you do so using an index fund especially with the market at historic lows. For those who are interested in getting their feet wet with index funds, you can do some research at Vanguard for the different funds they offer.

Do you have any recommendations for Index Funds or any other beginner investments, please share them in the comments below.

Stay Disciplined!

Are foreclosures a good investment?

2008-10-19T19:57:00.000-07:00

Every Cloud Has A Silver Lining ( be hopeful because difficult times always lead to better days ... ) - Unknown (quoted from GoEnglish)

Everyone knows about the huge sub-prime mortgage debacle that is unfolding in our country right now. According to the New York Times, (link to article), six million people are expected to default on their mortgages this year. In addition to that, houses are rapidly decreasing in value all over the United States due to lack of demand. Although this is really bad news, for some, it presents a huge opportunity.

This opportunity is to diversify your current investment portfolio. I have been looking into expanding my investment portfolio into the real estate arena because stocks are still highly volatile and the prices in the real estate market have fallen drastically. Plus, having a guaranteed way to make passive residual income is very appealing. However, before diving in head first, I wanted to take the steps to educate myself on the topic to see if it is a viable way to invest.

Earlier this week, I attended a Foreclosure Investment Property Seminar at the Georgia Tech Alumni Association given by Mary Beth Lake who is a Realtor with the Harry Norman Realtors company. She provided us a very informative and interesting presentation that covered the pros and the cons of investing in Foreclosure properties. I felt that this presentation is great information to share with anyone who was thinking about investing in Foreclosures or Real Estate in general. Below is a summary of the presentation she provided as well as some of my added notes:

Investment Real Estate (Foreclosures)

Investment Real Estate: Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. (Citation)

Foreclosures

Foreclosures are typically "distressed" properties that a bank repossesses in means to recover the cost of the loan that a homeowner has defaulted on. Foreclosure usually progresses in the following stages:

Pre-Foreclosure

If the homeowner misses one mortgage payment, the foreclosure process can begin.

Sometimes during the pre-foreclosure stage, the bank will work with the homeowner and agree on a "Short Sale" in which the bank agrees to take a lower price on the home than what is actually owed.

Foreclosure by the Bank

The bank goes through the process of evicting the tenant out of the home and repossessing the home to put it up for sale.
The bank can advertise the home on the courthouse steps to have the property bidded on.
Some states are non-judicial meaning that the bank does not have to take the home owner to court to evict them.

Sold/Auctioned as a Foreclosure

The bank can sell the home on the courthouse steps.
If the home does not sell, the bank can choose to list the who with an Real Estate Owned (REO) Agent who can either choose to sell the property through a public auction or by using the traditional means such as the Multiple Listing Service (MLS).

Caution: Pre-foreclosures and Short Sales can take a lot of time and require a lot of patience. Short sales are very risky and foreclosure homes are usually sold without any disclosures. This is important to know because states like Georgia are "Buyer Beware" which means the buyer would not be able to hand back the property if they decide they do not want it anymore after signing the contract.

Due Diligence

Prior to investing in the foreclosure market, much due diligence needs to be done to determine whether or not the home is a good investment. To assist in the planning of this one must realize the four financial benefits of owning investment real estate and how to calculate them. The four benefits are the following:

Income
Principal Reduction
Income Tax Savings
Appreciation

Income: Revenue generated by the Real Estate property (rent).

Principal Reduction: Reducing the amount borrowed or the amount still owed on a loan.

Income Tax Savings: Deductions that you can claim on your income from owning Investment Real Estate. For more details, click the "Financial World" link. (Financial World )

Appreciation: An increase in the value of an asset over time. (Investopedia)

To assist with the analysis of the investment property, the presenter (Mary Beth) provided us with an excel spreadsheet she acquired from Tom Lundstedt who gives seminars about investing in Real Estate. (Thanks Mary Beth and Tom!) This file is accessible to our members through the "files section" on the Pamplona Finance Google Groups Page.

For those who review the pre-filled excel spreadsheet, the scenario to accompany that file is listed below:

Scenario:

You are investigating a property in east Point that is listed for $139,000. You think that you can negotiate the seller down to at least $130,000.
You plan to put 20% down and pay all the closing costs.
You would like to close in early December 2008 so that you can make any necessary repairs over your holiday break and hopefully have it leased by January 1st 2009. You plan to lease it for a year.

Some other useful tips during due diligence is to do the following:

Use the tool to analyze multiple homes in the area.
Fill out a Schedule E for Real Estate Investments to claim on your taxes.
Can request a Schedule E if purchasing this home from a Real Estate Investor.

For more information about the Schedule E, consult about.com article here.

Gathering the Money to Invest

With the economy being in the state that it is, many investors are not able to reach deep into their bank accounts to put the money up to obtain an investment property. Most first time investors will have to take some type of loan from a bank and pay the money back over an extended amount of time. This part of the presentation was given by George Connolly who is a mortgage broker with SunTrust Mortgage. Below are the initial requirements needed to finance a Real Estate Investment if borrowing the money from a bank:

20% of the sale price down payment.
3% closing cost of the loan.
Six month property emergency fund to cover mortgage and monthly expenses when the house is not generating income.
$5,000 - $10,000 in liquid reserve for repairs, emergencies.
Monthly expenses

Accounting Fees
Attorney Fees
Landscape Maintenance
Utilities
Taxes
Insurance

The Exit Strategy

With all businesses, it is important to know what you are going to do once you figure that the property is no longer a good investment or you are ready to cash in. In the optimum situation, the house will appreciate over time and you will build equity in the home. Equity is the difference between the current market value of the property and the amount the owner still owes on the mortgage. (Investopedia) There are three ways to move the equity:

Sell the current property and buy another.

Will have to pay Capital Gains Taxes. (Captial Gains Tax Calculator)

Refinance the current property and use the money to buy another property.
1031 Exchange.

1031 Exchange - A tax deferred exchange that is for like-kind investement with property with a specified strict time period. (IRS)

More Useful Information

Always purchase Owner's Title Insurance.
Financiing can make the difference between a property performing well or going down the drain.
Don't confuse Inflation with Appreciation.
Places to purchase a great deal

Excellent School Districts
Developed/Developing areas
Places you would not mind living yourself

Get a team of proven professionals to assist you with investment decisions. Team should include the following:

Accountant
Attorney
Loan Officer
Property Management Company
Realtor
1031 Exchange Qualified Intermediary

One thing that the presenter shared with us is that Foreclosed homes are a lot of work and may not be as lucrative of an investment as many people think it is. To help with your decision, I have included a video that I took while surveying a home that I found on www.ushomeauction.com.

In summary, if you are willing to put in the effort, time and money needed, a foreclosure can be a good investment. However, I think that it may be worth the time and effort to spend a little extra money on a non-foreclosed home as it may require less work to make it habitable for re-sell or a tenant. From my research, I have learned that it if you want to invest in Real Estate, do not just limit yourself to searching for foreclosed homes.

Do you think that Foreclosures are still a good investment? Please leave your comments below.

Stay Disciplined!

By the way...we do workshops too!

2008-10-14T18:53:00.000-07:00

So to step away from one of my regular posts, I just wanted to bring to your attention another great resource that you can use on your journey to personal finance freedom. We, in the Pamplona Finance Group, typically hold a monthly - quarterly workshop about a personal finance topic that we receive input on from our members. The workshops are free of charge (for now) and all we ask is that you come out ready to participate and learn.

The video above is a trailer from the latest workshop done in September. (Please forgive my video editing skills) The workshop was very interesting and informative. The presentation was delivered by our very own Marc Wilson who is passionate about taking the proper steps to secure his financial future.

If you would like more information about our workshops, please join our subscription list by adding your email to the section labeled "Google Groups" on the right side of the page. We send out the information about our workshops to members who are subscribed to our list.

We really encourage you to come out to learn as well as share any information that you want. In addition to that, this is a good way to network as well as meet some potential accountability partners who can help you achieve your financial goals.

Stay Disciplined!

Surviving the Recession...Getting Back to the Basics

2008-10-12T20:07:00.000-07:00

To use fear as the friend it is, we must retrain and reprogram ourselves...We must persistently and convincingly tell ourselves that the fear is here--with its gift of energy and heightened awareness--so we can do our best and learn the most in the new situation. -Peter McWilliams, Life 101

Earlier this week I took a trip to New York for my job. Now, I am by no means a fan of airplanes, but I understand that they are relatively safe and each time I have flown, I made it safely to my destination. So in my mind, it was going to be business as usual as I settled comfortably in my coach seat, although there was a slight drizzle coming down and the sky was painted gray with clouds at Hartsfield Airport.

The most fearful part of flying for me is taking off as I have heard that many say that the highest risk of something going wrong is during that part and landing. As we aligned ourselves straight on the take off runway, I hear the engines roar and we are off. As I feel the plane separate from the ground, I notice that everything seems to be going normal. Just as I get ready to breathe a sigh of relief, the plane takes a sudden drop. My stomach goes to my chest and we hear the captain of the plane say "Please remain in your seats with your seatbelts fastened as we are going to be in rough air".

Shortly after the intercom turns off, the plane takes another dip and I look around to see other people with fear obviously on their faces. I begin to think to myself that this is the end and say a short prayer as I may be getting ready to meet my Maker. However, the captain continues to push the engines full throttle and after we experience a few more dips, we finally level off at 41,000 feet where the air is a little smoother. Needless to say, although we experienced a few more bumps in the air, we arrived to our final destination safely and in one piece.

Later that day, I realized that the airplane ride was a strong analogy to what our economy is going through right now. We are currently at the point where most Americans are looking at each other with fear on our faces thinking some variation of "this is the end". However, just as the captain did what it took to navigate through the turbulence in the air, our government will do the same. Although we may go through a few more bumps while trying to get to our final destination, ultimately we will arrive safely.

If you do not know that a recession is going on right now, then this is your wake up call. All the times of spending more than we make, eating out, burning gas, etc are coming to an end. Below are some of the basic principles that I am using to survive this recession.

Budget.

One of my friends always budgets and sets aside a specific amount of cash that he can spend at his discretion (eating out, partying, etc). He does this because it really resonates with him as he sees cash leave his fund as well as allows him to think twice before spending the money. Once that money is gone, he knows that he has to wait until his next paycheck before he can do any further discretionary spending.

Save at least 10% per paycheck.

One of the most important assets to have during tough times is a fund that is highly liquid (Emergency Fund). This comes in handy to carry you in between pay periods as well as cover any unexpected expenses that can occur while money is tight.
Devoting 10% of each paycheck to a high-yield savings fund will add up quickly. Recommended bank where I keep my Emergency Fund: HSBC

Plan out trips.

Having a car is quickly becoming a larger and larger expense because of the cost of gas. Planning out the trip and knowing exactly where you are going prior will allow you to consolidate trips and conserve gas rather than having to make multiple trips in one day.

Cook.

On average, I spend about $7/meal when I eat out at a (decent) fast food restaurant. When I eat at a sit-down establishment, that goes upward to $13 - $15 (tip included).
My average meal at my house costs about $15 to make, however, it typically lasts for 3 days. I typically eat leftovers twice a day for those three days which roughly equals 6 meals total. Doing the math, you see that my average cooked meal costs $2.50. Big big savings!

Below are some useful websites with quick and easy recipies.
Kraft
All Recipies

Work Overtime (if your job allows it).

Overtime is great because it typically pays 1.5 times your hourly rate as well as it typically does not require any extra work outside of your regular job.
Overtime gives extra unbudgeted income that can be used to weather the recession period.

Turn a hobby into Entreprenuership.

One of my biggest hobbies is computers. I have turned my hobby into a small entreprenuership where I help out people with any computer problems they may have. This is a double win because I get money for doing something I would do for free as well as people save money by using my services rather than some big company that charges an arm and a leg for the same service.
Some other entreprenuer ideas...fashion consultant, tutor, dance instructor, bartender, party planner...get CREATIVE.

Find creative (cheap) sources of entertainment.

Game nights have become a regular routine amongst my friends. Rather than going out to spend money, we typically organize a game night or crank up some Rock Band and have a blast..
Another interesting idea to do is have a potluck dinner where each of your friends cook an item and create a buffet of food. Just make sure your friends can cook.

No one said this was going to be easy, however, it is very doable. The key is to not give up and become very resourceful to make it through these turbulent times. So fasten your seatbelts and hold on because the ride is going to be bumpy, but if we stay the course, we will make it through it. What are some of your tips to make it through this recession period? Please share them in the comments below.

The Credit Default Swap...A Contributing Factor to Today's Economy

2008-10-05T16:10:00.000-07:00

There is not really one clear reason as to why the economy is in the situation that it is in today. There are many contributing factors that have been at the center of the government's investigation consisting of subprime mortgages, high consumer default rates as well as unemployment. However, one of the known, but not talked about, contributors to the current state of our economy is an investment product called a Credit Default Swap.

Below is a short explanation of the credit default swap as shown from wikipedia:

A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default^[1] or "credit event" in respect of a third party or "reference entity". (Source)

To put this in more plain terms, take the following example:

Most of us (the buyer) who have cars have car insurance in the case that something happens to our car and we need to have our car replaced. We pay a periodic "premium" to an insurance company (the seller) in return to have the insurance company to provide the replacement cost of our car in the event that something happens to it. In most cases, if something happens to our car, we have to provide evidence to the insurance company by showing them the car. After the insurance company sees the car, they will more than likely provide you the money according to the previous agreement. Sounds reasonable right...

Well, let's take a look at Credit Default Swaps. The way it was designed to work is to allow investors to buy insurance on fixed income that they bought from a company (such as a company bond) so in the case that the company went bankrupt, they could recover some of the cost they invested in the bonds. Well, due to many factors, this started to be abused by investors and instead of actually buying the insurance to protect against losses for bonds possessed by the investor, they began buying the insurance with intent of receiving a big payout if the company went bankrupt.

Since there is technically no regulation in this market, investors did not need to show proof that they owned $10 million dollars worth of bonds to take out $10 million dollars of protection against this bond. In addition to that, the companies providing the protection (insurance companies and others) would gladly accept the insurance premium paid by the investor to insure companies (such as Lehman Brothers and Washington Mutual) that seemed financially sound and did not look to have a big risk of defaulting over the past years.

In most cases, those same insurance companies did not set aside the needed capital to cover the coverage promised in the case of a default by those companies (although they signed contracts legally obligating them to pay the specified coverage). So in turn, when major corporations, who have been opened for multiple decades (such as Lehman Brothers and Bear Stearns), began to fail, those insurance companies were unable to pay contributing to the bankruptcy problem being experienced by our financial institutes.

The insurance companies never should have accepted premiums from investors that could not prove if they owned the fixed income securities. In addition to that, they should have operated as their purpose and set aside the money necessary to cover the insurance claims in case of a default.

The financial lesson learned is that unethical business practices (AKA greed) never pays off and is eventually destined to fail. A lesson that we all can learn from this is that there are not too many highly-probable ways to get rich quickly. It all comes down to how much risk you are willing to take as well as the level of loss that you are able to deal with. Below are some of the lessons that I have learned recently about greed and personal finance in regards to my situation:

Day-Trading in the Stock Market
Investing in Penny Stocks
Investing without doing Due Diligence on companies

By no means am I trying to discount these methods of investing as many will argue that these exact methods have worked for them. I am purely providing my experience with these methods in hope to save someone the financial grief that I have experienced before. By all means, if you have the magic formula that works for you 99.99% of the time, please feel free to share it with us.

P.S. - I learned about the Credit Default Swap product from attending a highly informative ToigoTalk about the subject. Click on the link to learn more about this and other financial topics.

For another interesting article about Credit Default Swaps, check out the following link:

http://www.dailywealth.com/archive/2008/oct/2008_oct_04.asp

More Information about Recessions

2008-10-02T08:46:00.000-07:00

Well, I think that the country is in a bit of a recession now. No worries though, during my usual exploring on the Internet, I found an interesting chart that contains information about past recessions the country has experienced. The link below provides a bit of an explanation as to why the recession may have occurred as well as give the duration of it.

This may help to calm all of your fears about our current economy. Check it out!

Brief History of Recessions [Harvard Business School via Consumerist]

The Best Return...Investing in your Future

2008-09-28T14:52:00.000-07:00

“When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.” -John M. Richardson, Jr.

We are definitely in some times of great uncertainty right now. The housing market is in shambles, the stock market is not much better and more than ever people are questioning the government's ability to bring us out of this situation. Well to be quite honest, no matter who gets elected this coming November, no matter how much change each respective candidate promises us, the real change is not going to happen until we decide it to happen.

So how are we supposed to accomplish this change?

A change can start right now when you commit to investing in yourself. As I have tried to explain in the previous articles, we are our most important asset because we each hold unlimited potential to what we can accomplish. Due to this, we should use our potential to accomplish our goals by investing in our future.

Take calculated risks

There is a difference between an investment and gambling. Note the differences in the definitions below:

Investment: the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. (Source from Dictionary.com)

Gamble: to stake or risk money, or anything of value, on the outcome of something involving chance (Source from Dictionary.com)

There is no mention of "chance" involved in investing which means that with a sound investment strategy, you are almost guaranteed a reasonable return on your money. Understand that one must invest in knowledge on your different options for investing and the risks associated with each option.

Give 110% in everything you do

I always like to think of the saying "Go hard, or Go home!" when I am not feeling as motivated about doing work. It is a classic statement because it is so true. Unfortunately, we all get tired and lose motivation every once in a while, however, we do not get a second chance at life. If we do not push forward and do the best we can everyday we have the chance to, there is no telling of what opportunities we may miss. We should never be mad at ourselves if we have done the best we could and gave it all that we got!

Help Others

Paying it forward may one day pay you back.
If you ever receive the opportunity to help someone out, take advantage of it and do it. We never know how some day that person (or someone else) will return the favor. Also, must realize that we are very fortunate to offer assistance to someone else because with the state of this economy, we never know when the shoe will be on the other foot.

This concludes my series on "Investing in Yourself". I hope that we begin to realize that we are our best asset and by increasing our stock price, we will be able to increase our overall situations as well as our economy. I will resume talking about personal finances and continue to share my experience as it happens but I really hope that we become more aware of the true power of change each of us possess.

As the quote says at the beginning of this article, there are three types of people...which one are you?

The Best Return...Investing in Experience

2008-09-21T12:00:00.000-07:00

"You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, 'I have lived through this horror. I can take the next thing that comes along.' You must do the thing you think you cannot do." -Eleanor Roosevelt (1884 - 1962)

Have you ever got in front of a large group of people to give a speech only to experience that sudden tingle of nervousness and fear before opening your mouth? At this point, you have two options, either remove yourself from the spotlight, or continue with your planned speech. You decide to go with the latter, take a deep breath and give your speech. Usually upon completion of the speech, you will say to yourself, "That was not that bad after all" and feel like public speaking is your new niche.

Although this is a trivial example, we find the more we experience, the less fear that we have. This is especially evident in today's market due to the fact that those of us who are new to investing look at the market today and see that it seems like the "Great Depression" is coming for a second time around. However, for those who are more seasoned, they know this current economic condition to be part of a financial cycle that is completely normal to the economy. They have lived through and experienced the economy during the early 1980s (which was dubbed a "recession") as well as when the technology bubble burst in the early 2000s.

They know that historically, the market recovers and surpasses the point at which the economy slowed. So while many of us are afraid to dive in, pull out our money and use techniques such as Dollar Cost Averaging to make more money, they patiently continue to follow their investment plan and continue to increase their shares in the market. As illustrated by the initial example, a lack of experience can cause imminent fear and hold us back from reaching our goal.

Experience as defined by Wikipedia:

Experience as a general concept comprises knowledge of or skill in or observation of some thing or some event gained through involvement in or exposure to that thing or event. The history of the word experience aligns it closely with the concept of experiment.
(Link to Definition of Experience)

Below are some of the ways that experience can be used to increase your overall stock price:

Experience is the best teacher.

A mistake is not a mistake when a lesson is learned.
During my initial entry into the stock market, I went against the recommendations of my colleague and invested heavily into the financial market during November 2007. As most know, this was the beginning of the mortgage meltdown and I lost about 50% of my initial investment during this time. I learned a lesson to perform more due diligence and to develop a sound financial strategy rather than betting blindly.
Never be afraid to try something new in fear that you will not get it right.
"Anyone who hasn't made a mistake, hasn't learned anything"

Experience is fulfilling.

I went White Water rafting for the first time a few months ago and it was a BLAST. During the trip up to the site, I was nervous due to my fear of the river. However, by having an experienced guide, my fears were calmed and I had the adventure of a lifetime!
So much focus is placed on "learning from mistakes" through experience, however there are times when you get it right! Do not forget that there is a 50/50 chance to succeed during your experience.

Experience makes you stronger/provides hope.

Once you have gone through something, you know what to expect and do not have the same fear to go through it again.
Knowing that you have accomplished something builds onto your confidence and helps you know that you can accomplish more.

We must learn that no one is perfect and that it is impossible to get everything right as we go through life. One of the biggest failures that we can have is to not experience new things at all. We must embrace new experiences and take positive risks to improve ourselves.

What is holding you back from experiencing new things and taking control of your financial future? What are some of the experiences that you have had (good/bad)? Feel free to share with us your thoughts on whether you would do it again.

Stay Disciplined!