The Amateur Financier

How has your Financial Literacy Month been so far? I realize that I haven’t said too much about it, this year at least. But it’s never too late to try to increase your level of knowledge, particularly when the knowledge in question is something as important as handling money properly and building your wealth.

(Besides, some of you may properly argue that you should work to build up your financial literacy throughout the entire year. While this is certainly true (and goodness knows, I write these blog entries throughout the year with the expectation that they are read and help to educate my readers), it’s still good to occasionally set aside time to specially focus on the important things in life. Much the same way that it’s currently Administrative Professionals Week (a.k.a. Secretary’s Week), when we remember the people who REALLY run the office.)

Consider this a timely warning to get your secretary something nice.

Building up your financial literacy is invaluable to success in the world. The more you know about money, including how to save, manage, and invest it, the easier it will be to function in life, and build up a sizable fortune in the process. Who doesn’t want that?

How to Build Up Your Financial Literacy

To build up your level of financial literacy, there are numerous steps that you need to take. Follow them, and you’ll be sure to function much better when it comes to earning, investing, and managing your money.

1. Read Lots of Financial Information…: As with building up your regular literacy, the more you read, the better you’ll get at it. In this case, though, the ‘it’ in question is your understanding of financial terms. Even if you can’t tell your Forex from your 401(k) now, spending your time reading about personal finance and investing will boost your knowledge of money and related issues slowly but surely. As they say, Knowledge is Power!

2. …But Keep the Source in Mind: Not every source of information is written with the sole purpose of expanding your knowledge. There are more than a few sources of information out there designed instead to con you into spending or investing your money in a way that makes the writers rich, even as it decreases your funds. As you read through your information, be sure to keep track of the source, and make sure that you don’t put too much faith in any single source.

3. Double-, Triple-, and Quadruple-Check Everything You Read (or Watch): In the same vein, it’s important for you to make sure that you don’t simply rely on a single source of information before you make any major money decisions. As already mentioned, not every source of information has your best fiscal interests at heart. Before relying on a single source when making a decision, be sure to find other sources to check to ensure that you are getting good, unbiased, non-devious advice. (Be sure that your follow up sources of advice are unaffiliated with the first one; it does little good in the double-checking column to get multiple sources from the same group of people.)

4. Don’t Let Your Biases Prevail: As you seek out these follow up sources of information, it’s going to be tempting to find ones that agree with the decision you’ve already made. Resist this urge; with how many sources of information there are currently in existence, you can find numerous ones that fit any bias you might have. Instead, search for the broadest range of material you can find, look for sources with as little bias as possible, and be sure to expose yourself to disagreeing perspectives. If you can do all that, you’ll be much better prepared to use your money wisely.

5. Never Stop Learning: I shouldn’t need to say this, but here we go: at no point in the financial arena (or the world in general) can you put aside the books, webpages, and television shows and say ‘Yup, I know it all; I can stop learning now’. Even if you ignore the daily fluctuations of the market that much of the financial media focuses on, there’s still much that needs to be learned, and no way to do so without lots of learning. While you don’t need to spend every moment of the day with your nose locked in a personal finance magazine or browsing a blog (although, I won’t be mad if you want to stay a while), you do need to keep an eye out for information you haven’t learned yet, and be sure to follow any leads you encounter until you have a thorough understanding of the subject.

What are you learning this Financial Literacy Month? How has having a knowledge of financial terms helped you with investing or other money tasks? What are your favorite sources of financial information?

Welcome to the final lesson this week, this time concerning the always important topic of entrepreneurship.  I doubt something like entrepreneurship could really be properly taught in a classroom; the essence of being an entrepreneur is having the drive and willingness to go out, experiment, possibly fail, and if so, getting right back up with a new idea and trying again.  I doubt such a spirit can be taught in school (although, if there are any colleges that offer remedial courses in it to twenty-somethings, I’d love to hear about it).  With that in mind, onward to a lesson that hopefully instructs on some of the methods, if not the motivations, to becoming an entrepreneur.

The Lesson

There is a charge you’ll hear every so often from the financial media about the educational system, claiming that it is designed for twentieth century lifestyles, to slowly mold young people like yourselves into cogs in the industrial machine.  For my part, I don’t believe this is so; we as educators try to expand and improve the minds of our young charges, yourselves included, to the best of our abilities.

But still, there is a grain of truth to this criticism.  We have a tendency to push you towards the waiting doors of a university, there after to find yourselves encouraged to seek a job that, in days gone by, would last the rest of life.  For better or worse, the world where you could be a company man (or less commonly at the time, a company woman) for forty years and retire with a gold watch, a pension, and a condo in Florida has all but disappeared.  Now, even if you go the traditional route of working for someone else, you can expect to change your job at least three times during your lifetime.

In the right hands, a computer is the entrepreneur's best friend

In such an environment, I’d be remiss in my duties as an educator if I didn’t at least mention an alternative: striking out on your own, as an entrepreneur.  There’s no better time in history for you to attempt to make a little bit of money when you get off of school, without having to take a part time job at a fast food restaurant.  The abundance of personal computers, the rise of the internet, and the ever increasing ways that entrepreneurial youngsters like yourself can use them to generate a profit is something that continues to amaze me.  Furthermore, you are at the perfect age in which to put your talents to use; you still have your parents to rely on in case your attempts fail, you are young enough that a temporary set back will not ruin your future, and you likely have a better understanding of current technology than any of your teachers, including me.

You might be wondering how you can put your skills to use and maybe earn some money along the way.  What follows are a few suggestions I can give you about ways to set your entrepreneurial spirit free.  It’s by no means a complete list, but will hopefully spark a few ideas and perhaps inspire you to come up with some thoughts of your own:

1) Create a Blog – Yes, it is a very common idea, and yes, you will face quite a lot of competition, particularly if you attempt to blog about a very popular topic, such as personal finance, technology, or toughest of all, blogging itself.  Still, if you are able to create interesting and unique writing on a regular basis and do not get too frustrated by the time it takes to get yourself established, blogging and be an interesting way to share your thoughts and possibly make some money.

2) Post Some Videos – If you’re a class clown, or simply believe what you say and do is of interest to the rest of the world (I’m looking at you hiding in the back there, Evan), by all means, make a video or two and put it up on YouTube.  Besides the opportunity to share yourself, you can also now profit from your popularity by becoming a YouTube partner and sharing in the revenue you generate.  Hey, it’s one way to make a living.

3) Sell Crafts - You might not have much to write or to say, but if you are the crafty sort (as in, you like to make crafts), you could find a niche selling your works.  Site like Etsy and Ebay make it easy to sell just about anything you could imagine, profiting from your creativity without ever leaving your home.

4) Offline Entrepreneurship – Lest this list convince you that you need to be online constantly in order to become an entrepreneur, here’s a handy reminder that there are still money making opportunities in the real world.  Consider the humble lemonade stand: not the most high-tech of possible money making opportunities, certainly, but one example of how to make money in the ‘meat-verse’ without having to rely on bosses or paychecks.

Hopefully, this list helps you to think about possible ways you can stretch your inner entrepreneur.  For homework, just try to come up with a few ideas for how you personally could make some extra money.  Class dismissed!

The fourth in the series of things you did NOT learn in school about managing your money, but really need to know for life.  This time around, we’re looking at investing.  Of course, because a major portion of The Amateur Financial’s coverage has always been about investing, this time, we’re going to look specifically at some of the advice you should heed if you are young and have time on your side.

The Lesson

Alright students, settle down.  Today, we’re going to be talking about investing.  There are probably as many books out there on investing as there are on all the other topics we’ve covered in this course, and there are nearly as many different investments as there are books.  Trying to cover even a small fraction of the stocks, bonds, mutual funds, and real estate investments in the world would easily take up all the time we have for this class as well as all the time you’re going to spend in this high school altogether.  That’s why, rather than trying to turn this course into Investing 101, we’re instead going to cover a few general principles of investing.

The first thing to remember about investing is to start early.  You might be tempted to think that just because you’re still in high school, you’re too young to worry about investing.  The longer you stay invested, the more time your money will have to compound, meaning more money for you when you retire.  Compound interest is your best friend when you have decades before you will need the money.

You also want to be sure not to take too little risk, especially when you’re young.  It’s tempting to put your money into savings accounts or low yielding money market funds, especially at times like we are currently experiencing, filled with fear and doubt about the future.  It certainly feels safer to have your money somewhere it will not lose value; but inflation will slowly eat away at the real value of your money.  You’ll also miss out on the growth potential offered by ‘riskier’ investments that offer greater returns, like stocks.

Let’s put this into more concrete terms, so you can see how time and risk (as measured by potential returns) can benefit you. Take a look at this chart:

The growth of $1 over time

This table shows the growth of one dollar from the listed ages until you reach 65, the standard retirement age.  It also shows how the returns on your investments effect the final total.  A six percent return is fairly conservative, and is achievable with a primarily bond portfolio, while a ten percent return reflects a portfolio of all stocks.  Eight percent is a reasonable return for a balanced fund, or a mix of stocks and bonds.  If you want to figure out how much an investment of more than one dollar will be worth, simply decide how much you want to invest, and multiply that dollar amount by the appropriate figure in the table to determine how much your investment will be worth.

Two things I want you to notice about this table.  First, the younger you are when you start investing, the greater the time your investments will be able to grow and the more money you will have when it’s time to retire.  Begin investing at eighteen, and you’ll have more than ten times as much money as you would if you started investing at sixty.  Second, the younger you are when you start investing, the more time your money will compound, and the greater a difference the return you get on your money will make.  If you start investing at fifty, a ten percent return leaves you with less than twice the amount of money of a six percent return.  However, start investing at the tender age of eighteen, and taking a bit more risk to achieve a ten percent return gives you nearly six times as much money as you would get with a six percent return over the decades.  Taking on some extra risk is a winning gamble, especially when you are young.

A third tip: when investing, follow the advice of Jim Cramer (for this particular piece of advice and few others) and think about your investment money in two different piles, the retirement pile and the discretionary pile.  The retirement pile should be invested with an eye on preserving it for the future; while you can (and should) attempt to maximize its growth while you are young, by investing in growth vehicles like stocks, you shouldn’t try to shoot the moon with your retirement fund.  Instead, invest in nice, steady mutual funds, which are unlikely to go bankrupt or otherwise destroy your retirement fund.  For the discretionary pile, you can take more risk; as long as you are using money you don’t need for another purpose, such as retirement savings or living expenses, you can speculate with your discretionary money without adversely affecting your life, and maybe, just maybe, succeed with making money fast(er than other people).

Finally, be careful who you turn to for money advice.  There are many good sources of advice out there, from books and magazines to financial advisers and even some well-written, highly impressive blogs. But there are also many sources of financial information that are incorrect at best, and downright dishonest at worst.  Watch out for false information of all types, as you are the person who will care the most about your finances.  If something sounds too good to be true, like a promise of returns on investment far in excess of the typical returns for that asset class, it probably isn’t a real opportunity.  If you take nothing else from this class, be vigilant and skeptical in your investing life.

*Bell Rings*  That’s it for now, students; enjoy the rest of your classes, and be sure to make good financial decisions in life!

Welcome to another edition of Financial Lessons, the week long series where we cover some of the lessons you SHOULD have learned before graduating high school, but didn’t.  So we go on boldly, covering yet another aspect of personal finance that is quite simple, yet usually ignored: making a budget.  Sit down, put your books away, and get ready for more learning!

The Lesson

Settle down, settle down, we need to get started.  Today, we’re going to talk about making a budget.  Don’t worry, it’s not as tough as it sounds, and hopefully, it doesn’t sound all that tough.  First thing I want you to do is to take out a piece of paper and turn it on its side.  Draw a line dividing it in half, and label the left side ‘Income’ and the right side ‘Expenses’.  You should have something that looks like this:

Not too hard yet, right?  Alright, now you need to list your sources of income on the left.  For you as high schoolers, it’s probably pretty easy: just a part time job, perhaps an allowance.  As you get older, your income will become more diverse, and you’ll have to consider investment income, rental property income, and possibly income from a business, as well as income from a salaried position.  You can do the same thing on the right, listing any expenses you have, from the gas you put into your car to the amount you spend going out on dates.  Again, with age will come complexity, and your expenses will increase over time to cover things like insurance, mortgages, and household expenses on top of your current spending.  You should also budget in some amount for saving and investing each month; if you tell yourself that you’ll ‘invest what’s left’, you’ll almost never find yourself with anything left.

I see some of you are already concerned about how to cover non-monthly expenses and income, like Christmas gifts and automobile inspections.  There’s two ways to handle it.  You can include them only for the months where you have them, although this will make your budgets vary from month to month.  Another method, one that strikes me as superior, is to break your large, non-monthly expenses down into smaller, monthly sums.  If you spend $300 on auto insurance once a year, for example, you can budget $25 for it each month.  Put that money into a designated account or otherwise keep it separate from your regular spending money, and you’ll be sure to have enough when those once in a while bills roll around.  (For the unexpected additions to your budget, like bonuses at work or gifts from your family, you can probably avoid including them; they’re unpredictable, and will only skew your budget to make it look like you have more money available than you really do).

Sum up both sides of your budget, and you should have something that looks a bit like this:

Now that you’ve summed both your income and your expenses, it’s time to subtract your expenses from your income.  Take the total on the left, subtract the total on the right, and you’ll see whether your budget is balanced or not.  If you have a positive number, congratulations!  You’re spending less than you earn, and you have some extra you can save, invest, or possibly just spend.  If you came up with a total of zero, less congratulations are in order; you’re riding on the border of going into debt, and one month with greater expenses than you planned could be disastrous.  Let’s just see what sort of number I have…

Uh oh, I’ve got a negative number; I’m spending more each more than I’m earning.  There’s no way I can keep up this pace without going into debt; clearly, I need to make some budget cuts.  If you can’t bring in more income each month (and there’s usually no way to do that, short of working a lot more overtime), you’ll have to find some fat to trim from your spending.

I suggest numbering all your spending based on the priority it has in your life; you can either start with the highest priority as number one and go down from there, or grade everything like we do here at school.  In that case, a four would be anything you absolutely have to have, like food, running water, and medicine,  a three would be something you’re really reluctant to lose, but could give up to keep the fours, a two would be something you want but don’t need, and a one would be something you can happily lose in order to keep your finances sound.  (A zero would be something you wouldn’t even miss, and are surprised you were even bothering to keep paying for it.)  My priorities would look like this:

As you can see, keeping a roof over my head and the power and water flowing range the highest with me.  My car is next on the list, as I need to be able to go to work and get home again, and I also put food as a three.  Not that I can go without eating more than I can without a house, mind you; instead, this shows that I spend a portion of my food budget on restaurants and other expenses I can cut, while still eating regularly.  My rental property and investments come after that; while I want to keep investing, if push comes to shove, I can cut or even eliminate the amount I spend on this expense.  Last on the list is entertainment; while I don’t want to live the life of a miser and have no fun at all, I can cut back on my movie viewing or pay television without seriously hurting my future or my quality of life.  At this point, you should probably try to break down your expenses in more detail to determine how you would rank the different sub expenses in each category, so you can see how much of your food expenses go into eating out, for example.  But that would give us some rather cluttered graphs on the board, so let’s stick with this.

Now comes the tough part: if you are spending more than you earn, or even if you are spending most of what you earn, you need to cut back.  Depending on how much you need to cut, this can either be fairly easily, or diabolically difficult.  If you only need to cut a small portion of your expenses, it can be possible to get your budget back in balance by trimming off some of the things you don’t really need and cutting back on the expense of things you do need.  In the example I created, we could cut the entertainment budget in half, trim about one hundred dollars from the food budget, and possibly decrease the utility charge by cutting back on water and electric usage.  All of these are fairly painless, and give us a budget that looks like this:

You see, it’s not too hard to get into the black.  The problems start to arise if you need to cut down even more; soon you find that you may run out of ones and twos to cut from your budget, and have to seriously consider how whether you can cut down or even eliminate some of the three and four ranked items on your list.  Still, if you value a balanced budget (and you should, if you don’t want to build up debt) you’ll have to be willing to sit down and seriously consider the priorities you have for your money.

Hopefully, this lesson will help you in making up your own budgets.  For homework, work with your parents to make up a budget for your family, and be sure that it balances out.  *The bell rings.*  Have a great day, students!