The ETF

We have talked about the benefits of diversification before.  This technique should be used in your overall portfolio and within each asset class in your portfolio (meaning you should have a mix of stocks, bonds, etc. and diversification within stocks, within bonds, etc.)  If not, you might end up with the diversification they have in the cartoon.

So since we are on the topic of stocks, I am going to be introducing the exchange traded fund (ETF) which is an easy way to diversify your stock holdings.  The ETF is a security that tracks an index (a basket of different stocks or other assets) but trades like a stock.  You get the ability to buy it like a stock or short sell it and some of the advantages include lower fees than mutual funds (which we will talk about later).

What's in a Stock?

So you were convinced enough by my earlier post on why stocks to put some money in?  But you don't know what to look for in a stock?  Especially in bear markets when the economy is going down and stocks as a whole drop in price, it is important to pick good stocks.  In bull markets, it is still important but a little less so since generally stocks as a whole will go up.

There are several features that you should pay attention to when picking a stock.  These include the P/E (price over earnings) ratio, market capitalization, and return on equity.

The Short Sale

Okay, so the stock market might not be as random as this cartoon, but it does show that sometimes the market moves irrationally.  Again, I would like to reemphasize holding stocks for the long-term since most of the short-term fluctuations in price are unpredictable.  You will definitely experience a lot more volatility the first few months after purchasing a stock than when you look at time horizons of several years.

We went over last time that you can make money off the dividends and the capital appreciation of the stock.  Of course, this assumes you are purchasing a stock outright.  There are ways to make money when stocks fall as well.  I wouldn't recommend this method because of a few reasons, but it is a tool every investor should be aware of.  First of all, let's start with the basic proposition for how to make money on the change in price of stocks.

Why Stocks?

The stock market is a pretty popular place to put your money.  If you have ever seen the news, a section is usually dedicated to how the stock markets moved that day and many people have investments in various companies.  But first of all, why does the stock market exist?

Companies usually get listed on the stock exchange as a way to raise money.  Individual investors have the opportunity to give companies money in the hopes that the company is able to use that money in a solid business plan to make more money.  However, this is only in the case of an IPO (initial public offering) where a company first sells shares to investors.  During the normal day-to-day trading on the stock exchange, however, people buy or sell shares of stock to one another.  There are instances where the company may initiate a stock repurchase to buy back its shares when they think their shares are undervalued, or priced too low, but for the most part the counter-party to a trade is another investor (or fund manager, etc.).

What's Your Grade?

What is the grade of your bond and how does that affect your investment?  The grade is an indicator of a bond's credit quality.  Just like how individuals have a FICO score for credit card companies to check the quality of a person, the grade of a bond is a way for you to check the quality of an institution's ability to pay back debt.  Standard & Poor's and Moody's are the two big names in the credit rating scene.  You can see from the handy chart that the more A's the better, kind of like in school.  The speculative and highly speculative ranges are known as the junk bond ratings where you are essentially taking a bet on getting your money back, but you will definitely get a larger return than from higher rated bonds.

These ratings are based on the issuer's financial condition.  However, it is important to remember that it is only one factor going into your decision to invest in a particular bond.  Some other factors to consider is the yield on the bond, whether or not it pays a coupon, if it is tax-exempt, or if payments are inflation adjusted.  The bond rating is useful for a quick check but as always, you should always do thorough research on the securities you are looking to purchase.  I may come back to discuss more about bonds, but hopefully the next few posts will look more at stocks.

The Name Is Bond...

Okay, so it's not really about James Bond, but I couldn't help but resist the cheesy pun.  It was either a picture of this or Barry Bonds, or I could have gotten a very boring picture of a certificate which is the type I will be discussing in this post.

So if you haven't already read the first post on bonds, I would recommend going there first.  This post will just take a more in depth look at what bonds are, the different types of bonds out there, and why you should consider investing your money in them.

As I mentioned in my first post, bonds are thought of as "safe" securities.  It is a type of debt investment: you are giving your money out as a loan and expect to be paid back in full with some interest for your trouble.  Bonds are used by governments, states, companies, municipalities.  This is where most of the risk lies with bonds, and like I mentioned in the other post, the payment of your bond depends on the reputation of the bond issuer.  With corporate bonds, these can be quite risky (some of the riskiest bonds are called junk bonds, implying that you would essentially be buying junk since it isn't that likely that you would get paid, but these bonds often have the highest returns).  In technical terms, these bonds are given a low rating.  I will make another post about the ratings later on and what you should watch out for, so for now assume that the bonds we deal with are guaranteed and safe.

Why "The Smart Nickel"

I'm going to spend a post just talking about my blog to give my readers a better idea about my goals and what I hope to achieve as well as why I decided to go with "The Smart Nickel" instead of "The Smart Billion Dollars."

I sincerely believe that it is not impossible for anyone to generate at least a 5% return on their money.  With credit cards and their cash back, it is even possible to earn back 5% of what you spend.  But hopefully, my blog is able to convince many college students the importance of saving for the future and the potential your money has to grow itself over time.  So the nickel comes from the possibility to make a nickel on each dollar, which may not sound like very much but it adds up.  And that's how I made the name, but please continue to learn about the goals of this post.

Update

Hello all my readers.  I apologize for not updating very frequently the past few days.  Unfortunately, the power brick for my laptop seems to have stopped working and I will be unable to go to a store to get a new one for a while.  Until then, I'll have limited access to the internet so I probably will not be able to post very often.  Hopefully, after I get that fixed up, I'll be able to continue with the stocks and bonds series and talk more about investment management.  Feel free to check back infrequently until then.

Diversifying Your Risk

Now that you have learned a little bit about stocks and bonds and since we are on the topic of risk, let me go on to probably the number one issue you should address before starting: risk management.  You often hear that the stock market is risky and it is much better to put your money in a safe bank account.  However, I would argue that prepared correctly, the stock market is actually much better suited to guarantee a more prosperous future for you.  The main tool that you use to manage the risk you take on is diversification.

Let's take a simple exercise.  If I offered you the chance to play a game where I'll flip a fair coin, and if it lands heads you win $20 and if it lands tails you get nothing and the game costs $5 to play, how many times would you want to play it?  Probably as many times as you can.  Why?  Because the expected value of the winnings is $10 (50% * $20 + 50% * $0) and the cost to play is only $5.  Although technically, you should play the game even if you were only allowed to play once, it is much more assured that in the long-run you will make $5 on average each time you play.  Playing the game once is risky, but the payoffs when you do win should more than make up for the losses if you play many rounds.

The same can be thought of for stocks.  If you put your money into one stock and it happens to do poorly, you would have lost a lot of your savings.  However, putting your money into multiple stocks diversifies the risk, as if you were playing the coin flip game multiple times.  There is a more logical mathematical proof of decreasing the risk because variance of the outcome goes down as you increase the number of stocks you own, but I won't go into detail unless a lot of readers want to hear about it.  The main idea is to, like the old saying, not put all your eggs in one basket.

The main takeaway is that you are probably as diversified as you can be by having 30 or more unique assets that are different in terms of market capitalization, industry sector, and asset class.  I will go over these more in detail later on, but hopefully my example was clear enough to demonstrate how preferable it is to have a diversified portfolio when thinking about investing since you limit your exposure to the extreme cases and try to aim for a guaranteed return.  We will next take a look at how, as a whole, stocks have given a very consistent return on investment over the long-run.

Risk Versus Reward

With any asset, there is always a trade off between risk and reward.  Often times, it feels like you are trying to walk a tightrope balancing the two of them.  First of all, let's define risk and reward.

Risk is the variance in possible outcomes.  For example, a stock that may shoot up from $10 to $20 one day and then drop down to $5 the next day is much riskier than a stock that stays at $8 over the span of a certain time period.  Or you can think of lottery tickets as being extremely risky while coupons are not.  With lottery tickets, your winnings can vary from $0 to $1,000,000+ and with a coupon, you know for certain what you are getting for certain.

Reward is pretty obvious.  In most cases, it either is or can be exchanged into money (for comparison purposes).  It is what we seek to gain from certain actions.  When you think about investing your savings, you are seeking the highest return possible (or highest growth in your assets) which is your reward.

So what is the relationship between risk and reward?  They are usually positively correlated: as you find something that gives a higher reward, it usually carries a higher risk.  The simplest example is stocks versus bonds.  There are some stocks that can increase 300% over the course of a year while others drop 90%.  Bonds, on the other hand, earn you maybe 1-3% for certain over the course of some specified time frame.

So what combination is right for you?  You should probably take a risk tolerance test online (or I might just post one up on this blog later on) to see what risk profiles you should be looking at.  Generally, younger students should take on a riskier portfolio that a retiring senior since young adults don't have to worry too much about short term fluctuations.  It also depends on how well you handle emotions and stress.  Would you be able to sit through losing half of your money on the possibility of doubling it?

As you'll see in the next post, stocks in general have the most potential and have proven to be consistently the most rewarding in the long run.  For the ambitious who want to make the most of their money, they will probably want to have an aggressive portfolio of mostly stocks, but I'll talk more about asset allocation later as well.  You should think about what time horizon you are looking to keep your money invested and find the right risk tolerance level before choosing a specific allocation.  I'll continue to give more examples as we continue discussing risk management and stocks and bonds.

Stocks and Bonds, What?

So you have some money saved up, probably from disciplined budgeting, and perhaps it's in your bank account.  What do you do with it now?  You are earning a little bit of interest, but you really want to see your hard-earned money grow, have it reproduce more of itself for you and take a little bit of the responsibility for your financial stability.  What can you do with it?  There are actually a lot of options available to you.

I'm fairly certain almost everyone has heard of stocks and bonds, but probably many college students don't know what they are or how to utilize them.  Please read the disclaimer at the bottom of my website as nothing I say will constitute financial advice.  I will try to state mostly facts and observations as well as give my own opinion, but if anyone reading this blog is actually thinking about putting money into any of the places I will mention, please do your own research to make sure any investments you make are right for you.  For this post though, I will be mainly defining a lot of these asset classes.

First of all, what are stocks and bonds?  First, let's look at the question of equity versus debt (stocks are a form of equity and bonds, debt).  Equity is ownership in something.  When you buy a stock, you are becoming a partial owner of the company and purchasing ownership.  Debt, on the other hand, is similar to the loans we have talked about for credit cards and banks.  When you buy bonds, you are loaning money to the entity on the other side.  If you buy government bonds, you give the government money and get a bond (a certificate that says the government owes you some amount of money) in return.

What is the difference in how these assets earn you money?  With equity, the value of your ownership depends on the performance of the company.  If you take some time to follow the stock market, you will see that it fluctuates day to day.  You can earn money through two avenues: capital appreciation of the stock (you buy the stock at one price and sell it at a higher price) or dividends (similar to interest you earn on debt).  For debt, you earn interest either when you get your principle back at the end of the term or as a stream of payments up until the end of the term.  It is kind of similar to how you pay interest on your credit card balance if you don't pay it off in full, except when you buy a bond, you are the one getting paid as the lender.

Bonds and debt securities are considered safer securities than stocks and equity because you are guaranteed your money back (depending on how reputable the bond issuer is).  Stocks do not have to guarantee a dividend and the value of a company can drop pretty steeply with some bad news.  However, with greater risk often comes greater reward, which I will discuss more in depth in my next post.

How To Open A Bank Account & Recommendations

If only I could find a bank where something like this community chest card event actually happens...  But more realistically, on to the actual point of this post.

So let's say you've done some research and you've found a bank that looks like a good match with your goals (and if not, I have recommendations throughout).  How do you go about opening one?  You can either open an account online or in person.  I would recommend opening one in person if it is your first time since you can ask any questions you may have.  Just make sure that you have brought enough money with you for the minimum opening balance or you have a check you can use to deposit.

When you open an account online, you simply go to the bank's website and find where to apply for the checking account.  You can usually use the website's search engine or Google it.  I would try to find student accounts if you are a student, particularly because banks are usually more lenient with maintenance fees if they do have any. Then you go fill out some personal information as well as a method to make the opening deposit and then you're done.

In terms good banks, I know that Bank of America often has a lot of maintenance fees and you have to jump through a lot of hoops to waive it (such as only use the ATM to deposit and withdraw AND sign up for online statements).  I would also make sure to keep an eye out for opening offers (some banks offer money when you open an account with them).  Just Google searching checking account offers leads me to see an ING Direct Checking offer of $50.  I got a $50 bonus when I opened my U.S. Bank Checking account and a free iPod Touch when opening my Bank of the West checking account (I actually opened Bank of the West solely for the iPod Touch, but their service has been great).  So make sure you stay on the lookout for these offers since it can be some easy money in your pocket (or your new bank account).  Another quick note is that these offers I got were over the summer so I'm not sure how time sensitive these things are.

Also make sure that you get your first order of checks for free with a checking account.  This was the case for U.S. Bank, Bank of the West, and PNC Bank, but I'm not sure if it is standard for all banks.  These three are the only banks where I have experience with their checking accounts.  I have also looked at Bank of America, but their fees usually persuade my to look elsewhere.  I have heard good recommendations for Wells Fargo though.

In terms of savings accounts, I like Discover Bank because I have their credit card and because it pays the highest interest rate I know of.  The thing about Discover Bank though is that it is solely an online savings account so there is no physical bank for you to go to.  This means that you must have a checking account or savings account at another bank in order to withdraw your money (I only use the ACH transfer to my checking account but I believe you can wire transfer as well for a fee).  They have no monthly minimum balance and no fee and the APY is 1.15% currently.  It isn't that much but it's higher than most of the other savings accounts I have seen so when interest rates do go back up, I expect Discover to stay on top.  A close second, however, is Capital One which has a 1.1% APY and a bonus 10% on interest you have earned in the quarter if you have their credit card or maintain a $10K balance.  I would recommend these online savings accounts, especially for students and young adults in my generation since we are usually more comfortable with handling money online.  If you aren't, then a normal savings account at a bank is fine as well, but I generally don't find too many with a leading interest rate on the account.

What To Look For In A Bank Account

Now that you know a little bit about how banks work, let's go over the key features you want to pay attention to when selecting a bank account.  You can use Google's site to compare some popular checking and savings accounts.

Like credit cards, you will have to pay attention to a certain rate when looking at savings accounts (although some checking accounts have one at times too).  This is your interest rate that you will be earning on your balance with the bank.  It is called an APY (annual percentage yield), similar to the APR (annual percentage rate) on credit cards.  This number is typically around 1% for savings (but there are some banks who offer something like 0.35%) and next to nothing for checking accounts nowadays.  Normally, the savings interest rate is much higher, but the government is currently keeping interest rates low to encourage consumer spending.  And obviously, the higher the APY on your account, the better since you will earn more interest.

One minor thing to keep in mind is how often your interest is compounded if the bank you are looking at is advertising a higher interest rate but does not specify that it is the APY.  Compounding is the magical way of earning money exponentially since your interest earns interest, then your interest's interest earns interest, and then... well you get the idea.  Of course, it takes a while for this effect to become significant and almost all banks compound interest daily.  The APY is calculated as the effective rate using a compounding period of one year, so it should be a good comparison tool across banks.  You may be interested, however, in how often the the bank pays out interest as well (most pay out monthly I believe).

Another major feature to pay attention to is a monthly fee.  Sometimes, banks charge a monthly fee on your account unless you maintain a certain minimum balance.  If you are about to open an account and they mention that there is a monthly fee,  I would ask first if there are student accounts available.  Most of the time, these accounts don't have any monthly fee or any requirements.  One such bank I know this case applies to is Bank of America.  Make sure to avoid paying monthly fees on either your checking or savings accounts, simply because there are alternatives out there which don't have such a fee.  There may be other fees such as an overdraft fee and other fees that you should look out for so make sure you read through the fine print.

The last feature to pay attention to is the minimum amount to open an account.  For checking accounts, this is usually either $1 or $100, but it can vary.  Savings accounts usually have slightly higher minimums to open, either $100 or $500.  Obviously, you have to make sure that you have enough money to put into the account to open it.

I will mention some of my recommendations for checking and savings accounts in the next post.

Introduction to Bank Accounts

Now that we've learned a lot about budgeting, where should you put your money?  Hopefully, you have decided to save at least 20% of your income (may be less depending on how large your income is and how much your needs take up), but where should you put those savings?  The most common place is the bank.

I don't think I have ever met someone who wasn't familiar with what a bank is, but there may be some of the smaller details you have never thought about.  So for those of you who are starting to become fully financially independent, a bank is probably one of the best places to store your money when you are not going to be using it in the near future.  There are two specific types of bank accounts: checking and savings.  A checking account is used for a lot of transactions (when you need to withdraw money from an ATM or write a check to pay your bills) and savings accounts are used to put away money for long periods of time so that you can earn interest.  Interest is essentially the bank paying you to leave their money with them and the main motivation for why you should save money: your money will be making money for you.  Also, with a checking account, you usually get a debit card and a checkbook with a set of free checks.

I will go over the nitty-gritty details about how to choose a bank and what features to look out for next time, but for now let's just talk about how commercial banks work.  The typical bank makes money by lending it out to people so it plays both the role of the borrower and the lender.  For people who need to take out a mortgage loan or any other type of loan, a bank assesses their credit risk and offers them the loan at a specified interest rate.  Where does the bank get this money?  There are a lot of technical details with how banks manage money with each other and the government, but essentially a lot of their holdings come from people like us who deposit our hard earned money into the bank.  Usually, loan interest rates are much higher than savings account interest rate because the bank earns money on this difference.  What determines interest rates?  That takes a couple economics courses worth of material that will probably put you to sleep, but in general it is determined by how much money is available in the economy which is determined by the government to some extent.

One important thing to note is that banks do not hold all the money they receive from us.  It was implied by the fact that banks lend out money but banks normally only have a percentage of our deposits in cash with them.  If we theoretically all went to the banks and demanded all the money in our accounts at once, the bank would be unable to give it to us because they don't have enough cash on hand to satisfy all the liabilities.  These circumstances have happened in the past, called bank runs, especially in times of crisis.  An important thing to look for when choosing a bank is to make sure that it is FDIC insured.  FDIC is the federal government agency that insures your account with the bank so that you will be guaranteed to get your money from the government if the bank ever fails.  The current insurance amount is $250,000 per depositor, per insured bank for each account ownership category, and most of the big banks are FDIC insured.  If your local bank is a little smaller, I would double-check to make sure that it is FDIC insured so that it will be one less worry on your mind.

One final thing to note about savings accounts is that there is a monthly limit on how many transfers you can make from the account.  The current limit is 6 outgoing transfers per month, and I don't believe it will change in the near future but it is possible it will change some time from now.  There is usually a fee charged if you go over this limit, but I usually just move the total sum of my credit card debt from my savings to a checking account in one transfer and then pay off each card separately.  Just keep in mind that with a savings account, there is a limit to how many times you can move money out of it (although not into it) while a checking account has no such restrictions.

Budgeting Tools

If you haven't read the post about why budgeting is useful, I would recommend going here first.  If you already understand the benefits of budgeting and just want to learn effective and efficient ways how, then go here.  And finally, if you just want to see some of the programs you can use then you are in the right place.

First of all to review, what do you need to take into consideration when you create a budget?  We can split our overall categories of spending into needs, wants, and savings.  Needs include basic necessities to live such as food, rent, utilities, and other products for which you can't avoid paying.  Wants are extra things we buy to satisfy some of our desires, but ultimately they are not necessary to live.  Obviously, there are some gray areas: does eating at a fancy restaurant count as a want or a need?  These issues don't need to be exclusively addressed since categorizing your monthly or yearly expenditures is supposed to be more of a guide than a strict limit.  You would also need to pay attention to your income.  If you have a job, how much is your paycheck normally and how often do you get it?  It may be good to set your budgets biweekly if your paychecks arrive biweekly so that it is easy to see what you need to adjust.  Generally, you don't want to budget to spend more than your income since you will run out of money very quickly by doing so.  If you are currently not employed but receive an allowance from parents, use that as your income to measure how much you can spend.  As a college student, this is good practice before getting a real job and managing a steady flow of income each month.

After taking into consideration what goes into a budget, what tools should you use?  One popular tool I have heard a lot about is Mint.com.  It is an online tool developed by the makers of Quicken to help manage your personal finances online.  You enter your bank, credit card, and investment information and it organizes everything in an easy-to-view format.  Whenever you pay for something with a credit card, the transaction will automatically appear on your mint account.  However, I have read a lot of reviews online talking about its security and I am still hesitant to input all my information into one location.  One very comprehensive review can be found here.  You can see the Mint video on their homepage and they way they describe how people usually keep track of their financial information is actually very accurate for me: statements and spreadsheets.  While Mint.com does look very useful in tracking all your information and making it less tedious since transactions are imported automatically, I still would not feel comfortable using it.

Excel is the main tool I use to keep track of my expenses on my computer.  I don't have an extremely comprehensive mastery of all the excel functions, so anyone should be able to use excel to at least budget.  I usually use three columns to list each item: Date, Merchant, Amount.  In the fourth column, I label the overall budget I have for all my expenditures and (for this example let's say I have a budget for $4000) type in the box below "=4000 - SUM(C:C)" which is set to automatically calculate how much budget I have left after subtracting the total of all the numbers put in the amounts column from $4000.  Obviously you can change the number from $4000 to anything you want, and I've included a screenshot below in case anything I said wasn't clear.

As you budget, you can just look at the number below Budget in the D column to see how much is left.  You can create different spreadsheets for different budgets, but I may update later with some more sophisticated formulas you can take advantage of.  The downsides to using Excel over a powerful tool like Mint is that it can be painfully tedious if you aren't that interested in budgeting in the first place.  You would have to remember to budget and write down the amounts that you spent somewhere so that you don't forget them by the time you get home to your computer.  However, there is no threat of someone getting access to all your bank account and credit card information.  Also excel is fully customizable so that you can manually add in categories for your spending and use it to display handy graphs to give you a visual representation of the data.  I may try to go over some of this excel functionality in a future post.

I'll leave it at that for now.  Overall, you can choose between some more sophisticated programs or budget manually.  There is some trade-off between security and convenience (you could also make your own sophisticated program but that would take a lot of technical skill).   Also, the SpendingLite app I mentioned earlier may be the easiest thing for people with an iTunes handheld.  I may revisit this topic later if there is a lot of interest in it, but hopefully you feel like you will be able to do the basics of budgeting and add that to your personal finance toolbox.

Budgeting App: SpendingLite

I thought I'd quickly share a very handy budgeting tool I personally use.  The downside is that it is an iTunes app so if you don't have an Apple handheld (such as an iPod Touch or iPhone), you won't be able to access it but I'm sure there must be similar apps for other smart phones.  Anyway, the app is called SpendingLite and it is completely free.  There is a paid version that gives some minor functionality improvements (such as saving data and adding different types of income) but the free version provides the majority of the value of the program.  It is extremely simple to use.  You have a big income button and expense button when you want to record.

You can also select the category of your expenditure and view your expenses in a nice bar graph or pie chart for the day, week, month, year, or any period of time you choose. money you receive or spend.  

Hopefully these screen shots are helpful.  Again, the main reason you would want to budget is just to get an idea about where your money is going and how your expenses look relative to your income.  If you find that you are spending more than you earn every week, there may be some reason to look into it.  I'll talk a little more about some other tools that can help your budgeting next time.

How To Budget

I've now talked about why you should budget, so now let's talk specifically about how to budget before going on to budgeting tools.  I found a really good article at this other blog called Get Rich Slowly, which you can take a look at, and I like their breakdown of necessities and discretionary items which I will mention again.  And although it is insightful to further break down these categories, generalizing them into three overarching sections can help simplify your budget and make it more easy to read.  It references the Balanced Money Formula which breaks down your after-tax income into three categories: 50% needs, 30% wants, and 20% savings.  I've copied the helpful picture below.

They define needs the same way I do necessities: your rent, food, health care, transportation, insurance, clothing.  Wants are cable TV, cell phones, books and magazines, vacations, and food and clothing beyond the basics.  Again, they also recommend that this is a guideline instead of a bible.  For example, I would probably move the phone bill to necessities in my budget.  

Also, the 50-30-20 budget breakdown can be adjusted to your desires.  For me, savings would probably take up more than 20% simply because I don't have many wants besides my needs.  Right now, about half my income is spent on necessities, albeit I do go out and eat at a nice restaurant once in a while, and the other half I usually just save.  I try to take advantage of free internet and free food events (which I will probably have a post about later as well) so my formula is pretty different.

The main takeaway is to shift the weights to match your goals.  Your basic rent and insurance premiums probably do not change month to month, so after a while you should be able to see what percentage it is of your income.  Find out if your needs takes up 30% or 50% or 70% of your income and learn what excess income you have to allocate to wants and savings.  If you plan on making a large purchase in the near future (a house or a car), you may want to have savings take up the majority of what's left of your after-tax income after your needs.  If you don't plan on purchasing anything big for a while, perhaps you can spend more on your wants and save a little less (but hopefully after reading about how much your savings can grow, you will be a little more enticed to save).

So, figure out your goals in terms of your plans for large purchases over the next few years.  As a college student, it may be a while before you start really thinking about buying a house and a car but it shouldn't be too far off.  Remember that budgeting is simply a guide to let you know how strong you are setting up your financial position for the future.  If you want to celebrate during Christmas and spend most of your income after your needs on high-end restaurants and a shopping spree, go for it as long as you are okay with it.  But you should always try to save at least a little of your paycheck for emergencies to have some margin of safety. With later posts, whatever money you do save should be able to grow significantly to help you out when you do need it and you should be able to feel secure with your finances.

Why Budgeting?

After talking about credit cards to help facilitate spending, budgeting seems like the next logical step.  Budgeting is a critical control technique to try to take out emotions from our purchasing habits so that we don't overspend and put ourselves in debt.  However, people often don't take the initiative to budget because of the limitations it puts on them and it is a little tedious to do.  There are lots of applications to help you budget, and I by no means have tried them all.  I will try to focus on some of the major reasons why you should budget and talk about how to do so easily with basic programs in a later post.

First, why should you budget?  I believe that it is extremely important to know where your money is going.  A lot of people think that the number one reason is to limit their expenditures, but I would argue that the primary reason you should budget is to be aware of what you are spending your money on.  Is most of your money going into rent and groceries or high-end restaurants and shopping malls?  Setting limits is fine, but there isn't any extrinsic force that will punish you for going over your budget limit.  You are in control of your finances; as long as you are aware of what you are spending your money on then budgeting will have been successful regardless if you stayed under your limit or not.  This means though that every time you make a purchase, you will have to record it somewhere.  This can be pretty tedious for some people but I will talk about certain tools you can use in a later post.

The next and more obvious reason to budget is to control your spending.  A lot of people suffer from impulsive shopping and often spend more than they can afford.  This is often overdone in combination with credit cards (a few articles I have written which you can see here) since with a credit card, you don't actually need to have the cash on you to spend it.  And business often try to do everything they can do facilitate consumer spending.  Do you know why milk and eggs are always in the back corner of every grocery store you visit?  It is so that you have to go through the other aisles first, to entice you to see something else you need to buy.  Online shopping has exploded with the internet and now all you need to do is enter a credit card number and click a few buttons to spend as much as you want.  Now, while you are still in control of your spending urges, you can logically plan out how much money you can afford to spend in the next week, month, or year and how much you want to save for future spending.  These limits that you set don't have to be concrete, but they should be a very good guide about how much you are logically willing to spend over a given timeline.

Let's say you budget $200 for food this week.  However, your best friend gets a job offer in the middle of that week and you all decide to go out to a very fancy restaurant to celebrate. You end up going over budget.  Have you failed at budgeting?  No, you had a general idea of how much you were going to spend and you know what circumstances led to you going over budget.  Obviously, this example is a little different from setting a budget of $200 for clothes and then getting so excited over a sale at the mall that you spend $400, but in either case you can look back and see how your actions measured up to your expectations.  In the shopping case, maybe it would be good to total up your purchases before going into the check-out line.  Or maybe you should increase the size of your shopping budget if you are okay with spending that amount.  However, given a limited pay check, whatever you move into shopping will have to come out of something else and if it turns out that you would have to cut food or rent, you may end up rethinking your spending habits.

Again, you are in control of your finances.  Hopefully, this post has been able to show you how useful a tool budgeting can be in order to meet your goals and expectations.  My next post will be about how to specifically budget by using excel, apps, or other programs.  Combined with later posts about savings and investing, hopefully you will be able to create a comprehensive idea about how you can maximize the value of your money in the present and for the future.

Credit Card Recommendations

This is continuing my credit card section so if you want to read about why you should get a credit card, I would go to my first post.

There are several factors to keep in mind when picking a credit card, but the most important one in my opinion is that it should have NO ANNUAL FEE.  There are so many credit cards available without an annual fee that I don't see any reason to get one that does.  The main benefits with a credit card are already achieved through a standard one, so one with an annual fee doesn't seem justifiable no matter what marginal bonuses are added on.  And annual fees are like a guaranteed cost.  They are not necessary and should be avoided in looking for a credit card.

The second thing I look at is the rewards.  Most cards give 1% back as a basis, either through cash back or points, and have additional benefits on special vendors or in revolving categories.  This is how you measure the potential return a card can give you on how much money you spend.  There is often also a nice signup bonus where you can get $50-$100 after your first purchase or spending a set amount of money in a set amount of time after receiving your card.  Also, I personally prefer cash-back but there are other options such as points and miles that you may prefer.  It is important to look at what rewards program your card will offer and if it matches your tastes.  I'll mention some of the rewards with certain cards below.

The third thing to look at is the network.  I generally find card acceptance for networks fall into two tiers: Visa and Mastercard are the most widely accepted while Discover and American Express seem to have lower acceptance, although this has recently been changing.  I believe that Discover's student credit card is fairly popular, and I generally don't have too much problem with its acceptance at vendors in general.  Depending on how much of a credit history you have, I would recommend trying to get a Visa or Mastercard, all else being equal (rewards and annual fees).

Another important feature to pay attention to is the APR (annual percentage rate).  However, I would say this is the least important number if you do what I do and pay off your entire bill at the end of each month.  The APR is the interest rate charged on any unpaid debt after the grace period.  I'll have to admit that I don't know the APRs of any of my credit cards simply because I never pay interest.  This number generally varies between 10-20% but may be higher or lower and it is very important to pay attention to it if you are someone who is likely to be unable to fully pay the balance on your card at the end of the month.

Now I'll list the credit cards I have with some comments and ratings (out of 5 stars, *):

**** Discover Student Rewards Card (Discover): This is a fairly standard card for students since it is fairly easy to get.  I started out with a $500 credit limit and it has basic cash-back rewards.  It has a revolving 5% cash back on certain categories like groceries, restaurants, department stores, and travel.  For example, from January to March, I can get 5% cash-back on restaurant purchases.  These revolving 5% cash-back is subject to a maximum limit (i.e. 5% cash-back on up to $600 of grocery purchases), so make sure to pay attention to that if you are spending partially to get the cash-back.  It is also important to note that the card normally gives UP TO 1% cash-back on other purchases (I believe it is actually around 0.10% up until a certain spending amount before it actually becomes 1%).  I usually only use this card on when I have the revolving 5% bonus.  Something that is really nice about the rewards system though is that after earning, let's say, $20 in cash-back, you can actually get another bonus and trade those rewards for a $25 gift card.  This increases the yield and makes the Discover card one of the most attractive rewards vehicles in terms of credit.  Again, the acceptance is not ubiquitous but there probably won't be too much difficulty with places accepting the card.

** Citi Forward for Students (Visa): I got this card early on but I rarely use it ever.  For whatever reason, they gave me an abnormally large $4000 credit limit which was convenient for booking plane tickets and buying summer storage.  However, in terms of rewards, I have to say that it is the most disappointing out of all the cards I've had so far.  There was a nice bonus for signing up and switching to e-statements, but the rewards system they use is called Thank You points and almost any reward will be less than a 1% return.  Right now, I just leave it at home instead of carrying it in my wallet.

*** Capital One Cash Rewards (Visa): I got this card within the past year and it has been great.  It does a basic 1% cash back on purchases and 2% cash-back on dining, book stores, telecom, and entertainment.  I'm not sure how it picks the categories because I believe if you look at their site right now, it will say that the 2% is for gas stations and groceries.  Overall, the yield is a little low but it's a good standard card.  Redeeming cash-back is also simple without any minimum amounts (like you don't need to get $25 cash-back before you are able to use it.  Regardless, I usually use my Capital One when I don't have a revolving 5% cash-back available on Discover or the next card I will show.

***** Chase Freedom (Visa): Chase is the most recent card I have received and it does something similar with Discover in that it has a revolving 5% cash-back and basic 1% cash-back on normal purchases.  It comes with a nice sign-up bonus (mine was $50 after the first purchase) and they have some interesting features such as full-pay where they will tell you your total spending in certain categories so that you can pay those off and avoid paying interest on it.  I got the feature even though I never use it since I pay off the bill in full every month, which is again what I recommend to anyone who gets a card.  And Chase Freedom is definitely a card I would recommend to anyone who has a decent credit history since the Visa network makes it more widely accepted than Discover.  Currently, I believe they have an offer for $150 cash-back after $500 in purchases within 3 months of getting your card.  If you are buying a round-trip ticket from school to home over the summer, that alone could satisfy the minimum and get you 30% back on that $500.

The first two are student cards so if you are starting out to build your credit history, I would recommend getting those first.  I actually got a co-signed credit card before my Discover which may have helped me get all the cards I have now by having some credit history instead of no credit history.  If you are not looking for a student credit card, I would definitely recommend Capital One and Chase.  By keeping track of the categories with the most cash-back, I have accumulated a couple hundred dollars worth of gift cards or cash-back over the past two years.  I have seen some other promising cards like the American Express Blue Cash Everyday which gives more cash-back all year round in certain categories (but beware of its acceptance) so it may be good to shop around.  If anyone knows a no annual fee, cash-back card that I haven't mentioned that may be useful to look into, I would appreciate hearing about it in a comment.

Overall, credit cards can be a great way to build up your credit and earn some free money.  It is important to remember to fully pay your bill by the end of the grace period each month, but as long as you do so, you should be able to earn a decent sum over the course of a year.  Not to mention the convenience of just swiping a card instead of getting out cash regularly as well as the ease of paying bills online nowadays, a credit card is a handy tool if used correctly.  I haven't placed links to the credit cards I mentioned since I don't want it to seem like I personally endorse them or that I get some sort of referral bonus.  They are easily searchable on Google but I am happy to help if anyone has any trouble finding a card I mentioned here.

This ends my short series on credit cards.  I haven't quite decided what the next topic will be about but I may ask my friends for some recommendations.  Feel free to comment if any current readers have a preference, although I won't expect any since this blog is so new.

Why Credit Cards?

This post will primarily be about what is a credit card and how you can use one to make money on the money you spend.  I will go over credit card reviews in the next post most likely, but you can look at some credit card comparisons here.

A lot of college students actually don't use a credit card, or at least a lot of my friends do not currently own one. Yet I believe a credit card, used wisely, can actually be one of the best ways to make some money back.  Nowadays with the rewards programs offered by many credit card issuers, it is easy to make back 1-5% back on your normal purchases and you are essentially getting paid to spend what you normally spend.  For those of you who have a savings account (which I'll go over in a later post), this means even more potential earnings since you delay payment of your purchases by a month or more which allows your cash to earn interest in the bank.

First of all, what is a credit card?  A credit card is a plastic card with a magnetic stripe which you can use at most businesses.  You have some credit with an issuer, let's say $500.  Essentially, when you make a purchase with your credit card, the company giving you credit promises to pay the business you are shopping at and then bill you at the end of the month for the total purchases you make, up to your credit limit of $500.  Why would a company offer to pay for you?  Credit card companies make money through two main sources: interest on late payments and fees charged to merchants.  You usually get a grace period of around 25 days after you are billed to pay the amount you spent that month, and if you pay it in full before the grace period ends, there is no interest charged.  If not, then whatever balance you have not paid off will accrue interest (usually 10-20% which can add up, so make sure you pay your bill in full every month if you do decide to get a credit card).  Also, if you swipe your card at your local grocery store for $10 worth of groceries, the store actually only receives perhaps $9.50 and the last fifty cents go to the credit card issuer and the credit network you are with.  There may be a minimum fee along with a percentage, which is why a lot of stores often have a minimum purchase requirement to be able to use your card.

Why should you use a credit card?  The first reason many people start getting a credit card, especially when they are in college, is to start building up a credit score.  This credit score, called a FICO score after the company that handles the process, is a measure of how risky a person is with credit.  It is used for other credit cards, car loans, mortgages, etc.  The main metrics used to determine your FICO score include your credit card payment history, the length of your history, amount of debt you currently have (in proportion to your total credit limit), new credit you have recently opened, and the different types of credit you have.  The score itself is between 300 and 850 and normally determines whether you qualify for loans and other forms of credit above, as well as how high of an interest rate you will be charged.

The second reason is to be able to afford things you normally wouldn't be able to (and not have to carry around a lot of cash all the time).  By using a credit card, you could buy something you wouldn't be able to afford until next week when your pay check arrives.  Although I use my credit cards the same way I do cash, there are some people who forget about how much they spend in a month and often go overboard.  However, if you use a credit card the same as you do cash for necessary purchases, you can actually make money off the rewards you get back, which brings me to the third reason.

This is probably the most overlooked reason since many people underestimate how much 1% on how much a person spends in a year really is.  It can easily get up into the hundreds of dollars a year for essentially buying the same things you would buy normally.  And, depending on how you manage your credit cards, you could end up earning back 5%.

So to sum up, getting a credit card at any age is important to start building your credit history, to have the option to spend more than what you actually have, and to earn cash back for almost no extra work.  Especially as a college student, it is important to learn how to become fiscally responsible and manage your personal finances.  Of course, the critical note to remember is that credit cards can be very dangerous without full control over your spending habits.  Many people fall victim to spending more than they can afford just because it is available and they don't have to worry about paying it until later.  If you do get a credit card, only spend what you have the cash for and make sure you follow a budget (I'll talk about a budget in a later post and how it shouldn't be as much of a restriction as it should be a guide).  In the end though, credit cards are the logical first step toward personal finances, and I would strongly recommend getting them.  Hopefully, this post has shown why they are important and you can read a future post to decide how to pick which card is right for you.

Introduction

Hello readers,
I am currently a college student and I am creating this blog to post some personal finance management tips for anyone out there.  I am currently pursuing a degree in finance but much of my experience will be from real world applications instead of academic study.  Hopefully, the posts I make will be relevant and helpful for those who read this.  I will be including basic personal finance advice such as how to invest money, manage credit, budget and save, and other random tips that may help earn a few dollars on the side (which hopefully add up to a nontrivial sum).  Most of my friends see me as kind of an extremist when it comes to managing personal finance (I often give advice unasked for) so hopefully I will be able to use this blog as a channel for my passion.  I have always enjoyed making the most of limited resources.  Ever since I was small, I have enjoyed playing games and figuring out what is the best way to maximize whatever objective I had in front of me using what resources I had.  This eventually led me to business school where I am learning how to maximize the value of the dollar.  Eventually, I hope to maybe give stock recommendations and economic analysis, but that day is probably very far off.  Also, I will probably see what is the most convenient frequency for me to post on my blog.  I will try some happy medium between daily and weekly although since classes are out, the frequency over the next few months won't be consistent with the entire year.  And my blog is currently very simple and I'm not sure how fancy I will make it, but seeing how my main discussion topic is more practical, I will probably try to have a layout that facilitates reading if anything.