I received my first credit card as a result of a program which allowed parents to cosign with their children to obtain credit. It had a $200 limit. Every month I charged movies, lunches, and computer games to it. And every month I diligently paid it off with the money I made working at a ski area. By the time I was 21 I had an excellent credit rating with a 4-year history.
I’m not advocating that all 17-year olds should have access to a credit card. But too often I see parents who baby their children, or tell them stories about how horrible credit can be. Credit is a tool, just like a gun or a car. When respected, understood and used appropriately, it has great benefits. When used by someone uneducated and disrespectful of its power, it becomes dangerous.
Getting your credit started is not a terrible situation to begin with. When starting out, you begin with a clean slate; in the eyes of credit companies you are neither risky nor beneficial, and you have the opportunity to prove yourself.
In this case, the first thing you should at are any special programs you are involved in. College students have the best shot at this. Credit companies love students because they often spend large and spend often. They also usually have mom & pop’s salaries to bail them out when they get in trouble.
The best idea is to ignore the recruiters on campus and do your own research online. Go to specific company sites and look for their college cards, or credit-builder cards. It will be slow going for awhile when you start out with a low-limit, but it is also very easy to get limit-raises with these cards. After a couple months of paying your card on time, in full, ask for an increase.
For building your credit, a great option is looking to companies with whom you already hold a card. Ask for a limit increase or a rate decrease. Then look for which agency they pull reports from and find out which other companies pull from that agency. Then contact those companies for a card as well. Credit companies are fierce competitors, and if one of their peers enjoys having you as a card holder, they most likely will as well. Also look to diversify with different types of cards (Visa, MC, AmEx, etc.).
Another good place to check with is a local credit union. They usually can offer competitive rates on credit cards to members who are looking to build credit. The only downside is that they are not able to offer the comprehensive rewards programs of large banks, but the objective is to build credit and work up to those big cards, right?
Also remember, that credit is affected by other factors besides cards. Try to make sure your report is as diverse as possible. Utility companies, student loans, (small) car loans, and mortgages, if kept current and in good standing, are huge boosts to credit.
April 20th, 2006
All financial documents, books and people throw around words like ‘long-term’ and ’short-term.’ Some also include the ‘medium-term’ as well. But what do we mean when we throw these terms out?
Short Term
In classical finance and accounting courses, short term is usually defined as something that will be invested into and divested out of within 1 year. This definition was based on the assumption that the most common financial report available for a company was the annual report.
More modern and advanced finance/accounting classes talk about short term being relative to the period you are describing. For instance, if we are discussing a person’s monthly income, short term would refer to something which takes place in less than one month’s time.
When used outside of a frame of reference, it is safe to assume a person is talking about a 12-month or less time period.
Long Term
In classical finance/accounting, long term picks up where short term leaves off. So, in the basic sense, long term refers to any project or investment which will take longer than one year to complete.
The more modern definition is complementary to the modern short term definition, and represents periods of time longer than the inferred period. So, back to the monthly income example, if I want to invest this month’s income into a home-improvement project that will take 6 months to complete, I am talking long term.
Medium Term
Medium Term is more of a management-term than a finance/accounting term. It is used mostly to describe something that may straddle both long and short term periods.
For instance, if I am referring to my monthly income (which is short term in all definitions), and I am also talking about how I apply it to my 30-year mortgage (which is long term in all definitions), then using either short- or long-term definitions for my 6-month home improvement project will lead to confusion.
It is in this type of situation that management types, as well as my website, will use the term medium-term, simply to alleviate confusion.
So, in short, you could say the definition of medium-term is ‘not long term and not short term.’
April 18th, 2006
In a word, no, but if we focus on the definition of ‘get rich online,’ there is a ‘yes’ in there somewhere.
First of all, let’s consider that when most people see the words ‘get rich’ they unconsciously add the word ‘quick’ to the end, even if they don’t mean to. By now we should all realize that there is no way to ‘get rich quick.’ (at least none that someone well-versed in financial principles and morals would undertake).
So, is it possible to ‘get rich online over time.’ Which leads to the second assumption. A lot of people think ‘online’ is synonymous with ‘automatically.’ There is no way for a robot or piece of software to make you rich (unless you invent the robot or software which makes other people rich).
We are now left with, “Can I get rich over time, by using online tools?” and the answer is now, ‘Yes!’ Lots of people have done it, and here are a few examples to get you thinking:
Become a Webmaster
It may not be glamorous work, and it may take a bit of a technical-bent but seeing links to your website popping up on forums and in people’s emails is a great feeling.
To get started, visit www.webmasterworld.com and have a look around. The best place to start is with something you know. Take your hobby, sport or business and crank out information or products related to it! Follow the advice of the pros at WebMasterWorld and you’ll be well on your way to a great website (with the possibility of income).
Play the Domain Game
True story: A young man in college decided to buy the domain associated with the screen name he used for forums, messaging, etc. As it turns out, a few months later Microsoft had decided to produce a game with the same title. The rights to that domain name suddenly became quite valuable, and the young man was bought out for something in the neighborhood of $30,000. Not bad for an initial investment of less than $20.
Of course, we can’t all expect to hit the jackpot on the next Microsoft release, but it is possible to predict what domain names people would like to have. To learn more, read through the materials at www.GoDaddy.com.
eBay
One of the most tried-and true methods to make money using the internet. eBay puts hundreds of thousands of buyers at your fingertips.
One of the most successful strategies used these days is to visit antique shops, yard sales and thrift stores on the weekends looking for collectible items that people might be interested in. Then you set up auctions for your new found treasures, and by the next weekend you have cash in hand for your next shopping excursion.
This strategy also works with finding good deals online (using sites like www.FatWallet.com) and then reselling on eBay.
These are just a few ideas to get you thinking. Visit the websites above and consider what it is you like to do in your spare time that could help you make some extra money on the internet!
April 18th, 2006
A lot of excellent material has been written about personal finances, because it is a subject which becomes relevant to almost everyone at some point, and because there are many different ways to approach it. In fact, it is not unlike dieting, in that there are many “miracle solutions” which promise great results with little work, and there are the tried-and-true principles which provide results over time. Everything else usually falls somewhere in between.
Before I start, let me first say that I am writing this review on the book, not on the man. I have read many reviews of the man and his philosophies, and I have to say that there is a lot of evidence that speaks to the invalidity of his claims, but there are numerous websites which already cover this, and I see no need to rehash their conclusions.
So, where does that leave the information in Rich Dad, Poor Dad?
Let’s start with what is good about this book and the underlying philosophy: spend less than you make. As simple as it sounds, this is the basic principle underlying many problems people have in their lives: burn more calories than you eat, earn more than you spend, give more than you take, etc. The unfortunate truth is that there are many, many people that need to be reminded of this fact.
The other thing that Kiyosaki does well is to make his message accessible. He uses language that the average person can understand, and gives his point of view through a perspective most can relate to: the schoolyard “my dad is better than your dad” argument. He also prices his book reasonably, which is more than I can say for a lot of so-called “financial gurus.”
What don’t I like?
First of all, every single thing Kiyosaki says can be found on the internet for free, and could have been before he even wrote his book.
The book (and Kiyosaki’s program in general) are marketed as the ‘miracle cure’ mentioned above. There are plenty of books out there which give you the same “save lots, spend little” advice without the snake-oil attitude and the constant pressure to buy more product. (See Idiot’s Guide to Personal Finance)
And while the old adage, “Invest in oil and land because God isn’t making any more of either.” May hold true, Kiyosaki places too much emphasis on real estate as the path to millions, without providing enough guidance. Not that you could read a book (any book) about real estate investing and know everything you need to know to be a millionaire. Look at Donald Trump, possibly the most knowledgeable real-estate deal-maker in the world, who lost nearly every penny he had on bad deals.
The bottom line on Rich Dad, Poor Dad, is that is the same old advice dressed up to look like the latest magic bullet, but with the dangerous side effects of providing only enough information to be dangerous.
April 16th, 2006
The concept on which almost all of the financial world is interest and interest rates. Understanding how they work, and how they relate to your investments is key to taking control of your personal finances.
What is interest?
As a general rule, interest is defined as the value of money over time. What this means is that if Person A loans money to Person B, he must place some value on the money he is loaning out. After all, if the money were still in his possession during the term of the loan, he could be using it for other things, such as investments.
What is an APR?
APR stands for “Annual Percentage Rate” which is the extrapolation of an interest rate to the period of one year. Generally speaking, the true APR will be greater than the stated rate. For instance, if you have a bank account with “nominal” or “stated” rate of 3%, and your interest is calculated monthly, you are actually receiving 3.04% APR.
The difference between APR and nominal rates is very important, especially when considering large investments such as houses or cars.
How can I calculate the monthly interest rate?
Let’s take the example of a credit card with a 12% APR. If you are carrying a balance of $100 on it, how much interest will you be charged this month?
The easiest way to approximate this figure is to take the APR divided by the number periods in a year, and multiply with the balance.
What does ‘compound interest’ mean?
Compound interest occurs when money you earn is reinvested. The most common example of this strategy is with a typical savings account.
If you invest $100 in a savings account at 3.5% APR, then in one year’s time you will have $103.50. But, the bank doesn’t mail you a check for $3.50, they credit the money to your account. If you leave that money in the account for another year, you gain interest not only on your original $100, but also the additional $3.50.
As an example of how much faster compound interest grows vs. non-compound, take a look at this table:
Non-Compound Compound
Year 1 $ 103.50 $ 103.50
Year 2 $ 107.00 $ 107.12
Year 3 $ 110.50 $ 110.87
Year 4 $ 114.00 $ 114.75
Year 5 $ 117.50 $ 118.77
Year 6 $ 121.00 $ 122.93
Year 7 $ 124.50 $ 127.23
Year 8 $ 128.00 $ 131.68
Year 9 $ 131.50 $ 136.29
Year 10 $ 135.00 $ 141.06
Year 11 $ 138.50 $ 146.00
Year 12 $ 142.00 $ 151.11
Year 13 $ 145.50 $ 156.40
Year 14 $ 149.00 $ 161.87
Year 15 $ 152.54 $ 167.53
Year 16 $ 156.11 $ 173.40
Year 17 $ 159.71 $ 179.47
Year 18 $ 163.35 $ 185.75
Year 19 $ 167.03 $ 192.25
Year 20 $ 170.74 $ 198.98
So after 20 years, you will have almost $30 more in interest when your money is compounded.
There are, of course, more exciting applications of this concept, but this is a basic example.
April 16th, 2006
There are numerous methods to determine the market value of a property, including income valuation, replacement value and comparables sales.
Comparable Sales Method (Comps)
This is the most common, quickest, and usually most accurate method. It takes into account supply and demand in the real estate in your specific location, which are the best indicators of market price. You will hear about this method from realtors, investors and appraisers since it is a fairly accurate way to assess value at a glance.
Appraisers use this method by finding recent sales of similar properties in the area and then determining the value different features contribute to the home’s value. For instance, a bedroom might add $20,000 to the price of a house, so a 3 bedroom would be worth $60,000 based on bedrooms alone. They add up all the features in the subject house to find a comparable value.
In order to simplify this method, realtors and many investors use the assumption that a home’s price can be based on the square footage. This is usually a safe assumption, especially when you are only trying to get a rough idea of a house’s value. In this case, you take your comparable homes and divide their selling price by their square footage and multiply the result by your subject property’s square footage.
Comparable sales information can be obtained from realtors or appraisers with access to local multiple-listing systems, or from title companies. There are also valuation websites that can give you an idea of your home’s value, but they usually require handing over personal information in order to get access. They also keep their methods and databases secret so who knows what criteria they use to determine comparables.
Replacement Value
This method is not widely used in the real estate industry any more, but previously had its place among insurers and investors. The idea is similar to an appraiser’s comparable methods, except that for this method you determine how much it would cost to build each piece new today. For example, maybe it costs $20,000 to build a 2-car garage. So you again add the values up to find the market value of your home.
The downside to this method is that it assumes that the construction market and the home-sales market follow the same trends. If new homes in the area are in demand, then construction companies will be too and will raise prices accordingly. In the same area, older homes will not have the same value as new homes, so their real market value will be different than the implied value of this method.
Income Valuation
Income valuation is most commonly used by investors, and more specifically in the office-rental sector. Office buildings are monstrously expensive to build and maintain, but because they have a very clear division of revenue and cost, it can be beneficial to determine the building’s value based on income.
This method makes use of Net Present Value and is therefore a sound estimation for businesses to use.
An example of this usefulness is if office buildings are not in demand, but a particular office building is leased for 10 years by a company. Selling prices of offices in the area will be depressed, but the value of the lease-income on this building will not be considered in the comparable-sales method, so and income valuation will provide a more accurate value.
It is uncommon to use this method to value residential property except in the situation that it is a rental property with relatively stable rental history (such as a student-home in the area of an established university).
April 16th, 2006
One reason many people get into trouble financially is because they start off in life with a job, and end up acquiring responsibilities as they go. Cars, houses, kids, pets, medical conditions, and other financial responsibilities can certainly add up over time, and many people are still doing the same job for the same pay.
It is important to carefully plan your future according to your monthly budget, but sometimes people are worth more than they are making, and that is the time to ask for a raise.
How do I know what my income should be?
In the US, there are many checks and balances to keep undesirable effects from entering our society. One of these is the tendency of foreign workers to work for less than American workers because they place a higher value on each dollar. The Foreign Labor Certification board keeps a careful eye on what immigrant workers earn at their jobs to make sure that everyone is treated fairly by employers. This database is available online at http://www.flcdatacenter.com/OesWizardStart.aspx and is an excellent resource.
Basically you enter your geographic area, area of expertise and job function and you are presented with a list of average salaries by job “level.” In general the “levels” break down as such:
Level 1: Generally assigned to entry level experience and may or may not indicate the need for a degree or specialized certification. The position is usually closely supervised. Sometimes this associated with internship or “in-training” titles
Level 2: Defines a “qualified” worker who works largely unsupervised and performs tasks mostly without prior authorization. This level of job can usually be associated with job offers which require either an amount of years of experience, or a certain amount (or level) of education.
Level 3: Assigned to jobs where a person must have enough experience or education to have attained special job-related skills. This level will often be responsible for coordinating other employees’ actions, and keywords will include things like: senior, lead, head, chief, etc.
Level 4: Assigned to workers with enough skill, experience, and education to provide long term planning and execution of strategy and to independently evaluate their success. Workers in this level will have their work evaluated for sound judgment and application to the overall strategy of the organization, rather than correctness. Generally this position will come with management, and/or supervisory responsibilities.
Each of these levels defines some form of income increase. Remember, though, that these are averages. If you have excellent benefits, extra vacation or other perks at your current job, it is important to take those into account when comparing with the database.
April 16th, 2006
One of the newest inventions in the banking world is the use of bank cards (formerly an ATM card) as a kind of credit card. The idea is that you can use your debit card just like a credit card, except that it is connected to money you already have in your account, not to a credit account. In theory, this is a helpful tool, but here are the reasons to avoid become debit-card dependant.
Not Rewarding
Debit cards are very convenient for consumers, but not for a bank. The bank’s objective is to keep as much of your money in their bank for as long as they possibly can. This means that now and in the future banks will be hesitant to offer rewards programs as liberally as credit card companies do.
This might not seem like such a big deal, but let’s look at the case of someone who makes $40,000 per year and spends $20,000 using either a debit or credit card.
With one of the common cashback programs for this tier, the user could receive a check for $1,000 at the end of the year. Or even more when the rewards are in gift cards for specific stores (how about $2,000 at Home Depot?).
With the debit card, that money is gone.
Vicious Cycle
Many people have begun using debit cards because they do not have the credit or income to get a very good credit limit. The problem with credit is that it is a “use it or lose it” system, the longer your credit history, and the more credit you use responsibly, the more you can get in the future.
The widespread use of debit cards, especially among young people, paints a bleak picture for the future when these people try to purchase homes, or cars, or start businesses.
Debit cards do serve a valuable purpose among people who really, absolutely cannot manage credit cards, but that population is really so small that there is no practical reason so many people should use debit cards over credit cards.
As an analogy, using debit because of lack of credit (or the perceived inability to manage it) is like wearing a helmet everywhere because you don’t want to hit your head and look foolish.
The helmet keeps you from your goal much more so than just keeping your eyes open for low-hanging objects.
So, while some people may disagree with the credit system as it stands (and it does have its problems), it is the system in which we live, so it is better to take advantage of the system than to be abused by it.
April 11th, 2006
This myth is a long standing one among consumers of credit. The basic premise is that there is some magic number of accounts that you need to have in order to receive good credit. This simply isn’t true.
For example, I once worked with a real estate guru who had over 200 accounts on his credit report; mortgages he had used to build his business. He rarely ever had trouble finding another loan, because he had a proven track record of on-time payments and loan repayment.
The possible origin of this myth is that sometimes when a consumer goes to get an auto or home loan, the lender may look at their credit record and see some extra credit cards, or an unused line of credit. Sometimes, the lender will refuse to loan to a person until they remove that potential debt from their record.
In math terms, you can think of a person’s available credit as an empty glass. Let’s say you want to buy a car, and (based on your credit rating, income, etc.) your “glass” can only hold $300,000 worth of debt. You have a $200,000 mortgage, and $70,000 in various other credit accounts. If you want $40,000 for your new car, your glass would be too full. The lender may tell you to cancel some of the extra accounts that you don’t use.
Of course, this is a fictional example. In reality, if your credit threshold is $300k then no lender will want to be the last one to “fill
your glass” so to speak.
The bottom line is that closing an account will hurt you more than keeping it open. If you’ve already opened some extra accounts, just keep them open until you are specifically asked to close them by a lender.
There is no benefit to closing accounts to try to stay under some magic number.
April 9th, 2006
Shares of ethanol producers rose in Monday afternoon trading as oil prices hit a new high for the year after Federal Reserve Chairman Ben Bernanke said the U.S. economy is recovering, which could increase demand for gasoline.
Continue Reading January 1st, 1970
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