Personal Finance Blog by Debit versus Credit

Mutual Funds 101

May 29, 2008 | Filed in: Finance 101, Investing | No comment

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I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in - you guessed it - income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com

Tags: diversification, diversified portfolio, funds, Investing, mutual funds, stocks, vanguard

The Worst Years of My (Financial) Life

October 26, 2007 | Filed in: Debt | No comment

I have a confession to make. It wasn’t very long ago that I experienced the worst few years of my life, financially speaking. In the latter-half of 2004 I began my adult life full-force, and I hate to admit, but I began it quite poorly. In not very much time at all I managed to get myself in thousands of dollars of credit card debt, which I discovered was a debt that would not easily go away. In my defense I was a full-time college student working part-time jobs to try and pay the bills, but playing the devils advocate it is obvious that I could have done more with the little money I made. I managed my money poorly for a time, but thankfully I’ve been able to learn from those mistakes. I’d like to share just a little bit with you on what I did wrong and, as cliché as it sounds, what I would do differently if I could do it all over again.

It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

It all actually started out pretty ironically. I told one of my friends in early 2004 that I wanted to save $30,000 by the end of the year 2005. In fact I almost did quite the opposite; I do believe by the end of 2005 I had around $15,000 - $20,000 worth of student loans and credit card debt. It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

Let the reckless spending begin

I started my freshman year of college in August of 2004 and due to certain circumstances I had no money to pay for my tuition. Doing what I figured was absolutely normal I borrowed some money from my brother to pay for my tuition. I started looking for a job at about that time also, realizing the need to repay my brother, but didn’t find anything steady for a few months. At that point I had applied for and received a credit card which I used to pay for my basic living expenses: gas, food and the like. I expected to pay off my credit card and my brother within a few months from the time I got my job, but instead I kept using my credit card and accumulating debt. I hadn’t done any budgeting and figured out how much I could afford to spend a month, and so I did what so many Americans do; I spent more than I made every single month. Within no time at all I had accumulated around $5,000 dollars worth of credit card debt, and I was beginning to feel as if I were drowning in debt. It was at this point that I began looking for a solution, but the solution I found was not a permanent one.

I wanted to cut down my credit card debt and figured I could take out some student loans to pay it off and then I could start fresh. This worked for a few months, but I still had not disciplined myself to live within my means, and when my lack of discipline was combined with the cost of tuition and books my credit card debt quickly climbed back up to its previous levels. This is when I decided to take on more student loans to pay down my credit card debt again, only this time unsubsidized loans with a higher interest rate. After I had racked up credit card debt and taken out student loans to pay it down a few times I finally realized the error of my ways and decided it was time for me get serious about my finances. To my credit I did fairly well with this at first, but eventually I managed to slip up again… and this time for even more than all of my student-loan debts combined.

New cars are great… if you want to throw your money away

I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

Yeah I did it, I bought a new car. Not just any new car though… I bought myself a 2006 Mitsubishi Eclipse back in March of the same year. Even though I had managed to accumulate a significant amount of student-loan debt at this point I had not yet made such a large financial mistake as I did when I purchased this car. Once all was said and done I had a loan in the mid to high 20’s and a car worth barely 20 thousand dollars. Viola! Instant 36% depreciation. I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

After this mistake I had had enough of my idiocy. I realized how poorly I had been managing my finances for the two prior years and I resolved to shape up. I concentrated on spending less so I could pay down my debts and save a little each month. I paid just a little extra on my car each month to try to get the principal balance down. I married a woman who knew how to save. I am proud to say that other than my student loans and my auto loan I am debt free. My wife and I have also managed to save between our 401(k)’s, a brokerage account and an emergency fund enough to almost completely pay off either my auto loan or my student loans.

If I could do it all over again I would have made myself a budget and stuck to it. I still would have had some student loan debts, but looking back I realize I could have avoided most, if not all, of my credit card debt and I could have my original auto loan almost completely payed off by now, had I not traded it in for a car two and a half times more expensive. I believe I would have been able to save a decent amount during that time. I would not have accomplished my goal of $30,000 in savings, due to my small income, but I would have accumulated some wealth if I had done these things. Mistakes are meant to be learned from, and I do believe that I have learned my lesson from these mistakes in my past.

What about you?

What financial mistakes have you made that you are not proud of, and what have you done to learn from them and/or correct them? I’d love to hear what you have to say!

Tags: Accounting, affordability, Budgeting, Debt, Discover, funds, Investing, wealth