Debit versus Credit

Determining Your Future Return With A Fixed Income Investment

If you’ve ever wondered how much money you’ll have at the end of a certain amount of time after investing in a fixed-income investment then this formula will come in quite handy. It’s called the compound interest formula and is actually quite easy to work with.

Future Return = P(1 + R)^T

Don’t be intimidated just because it looks like algebra, it’s actually quite simple. P stands for principal, R stands for you rate of return (interest rate) and T stands for the number of compounding periods that your money is going to be invested for. This formula is called the compound interest formula because it calculates the interest you’ll earn from the principal amount, as well as the interest you’ll earn on your earned interest (i.e. compound interest).

Let’s try it out, shall we? Let’s say you are going to invest $1,000 dollars in a 5 year certificate of deposit at an annual rate of 4% (compounded monthly). How much will you have at the end of the five years?

1000(1 + .04)^5 = $1,216.65

Can you see anything wrong with the way I calculated that number? The rate and the number of compounding periods is actually incorrect. If you’ll notice I said that the interest is compounded monthly. So what we need to do is divide the interest by 12 (12 months in a year) and multiply the number of years (5) by 12 months. Our updated formula should look like so:

1000(1 + .00333)^60 = $1,221

Does that make sense? It’s interesting that just by more frequent compounding you can actually earn several more dollars on your initial investment. You can use this formula with relative ease on any fixed-income investment (bonds, cd’s, etc.) to determine the end result from your initial investment.

January 23, 2009
What Would You Tell The Grad Student with A Loan Maturing Soon?

Ann R. writes:

I have a 5 year fixed rate mortgage loan that will be maturing April 1, 2009. The current balance is $20,500 and the rate is 6.75%.

I am no longer living in the property and have been renting it for the past three years (same tenants) and I resigned from my job in November ’08 to attend grad school full time. Now that the loan is maturing I need to request an extension on the maturity date or refinance.

Since I don’t live in the property or no longer have a full-time job I am running into problems requesting either option from my mortgage lender.

Would a viable option be to put the balance on my credit cards spread over two cards (currently no credit card debt)? One card has a credit line of 13K with a fixed 3.25% rate until the amount is paid off and the other card has a 20K credit line with an option for a 2.99% rate until Oct. 09 then the rate goes to 9.99%. Please let me know if this is a good option or if I should do something else.

Thank you.

What do you recommend Ann should do? Has anyone else been in a similar situation? Leave your comments here and I’ll be sure to make sure Ann gets a chance to read not only my advice, but the advice of you (my readers) as well.

My response to Ann is below… (more…)

January 21, 2009
I Need Your Help

I’m at a loss for words here. As you may have noticed I’ve lost most of my recent posts (within the past month and a half) due to some wordpress malfunctions and a little bit of being too hasty on my part. I am really bummed about losing so much of my hard work so I am asking (nay, begging) you to check and see if you have any of my recent posts in your browser cache or if you subscribe to Debit versus Credit if you could PLEASE PLEASE send me any and all posts you can find from Dec 1st up to yesterday (Jan 18th).

My e-mail address is joseph[at]DebitversusCredit[dot]com. Replacing the bracketed words of course with their respective symbols. You can also contact me through the contact link in the header menu. Thank you so much for any help you can provide!

Update: Expect some new posts starting on Wednesday, but until then there won’t be anything new as I’ll be working on trying to find and restore what’s been lost. Thanks for your patience!

January 19, 2009
5 Must Read Tips For New Graduates

Many of you know that I’m currently attending Arizona State University where I’m working on a Global Business/Financial Management Degree. Well I’m coming to the end of the line at ASU, as I am on track to graduate in May. I’m getting pretty excited to graduate and I’m hoping that I’ll be able to find a finance-related job once that day comes, but in the meantime I’ve been studying advice that’s been given to recent graduates. Most of the advice is money-related (although I do read as much as I can on job hunting) as you might have guessed.

I came across a particularly interesting article the other day at Investopedia which lists 5 financial mistakes that many recent college graduates make.

I’m going to list the 5 mistakes for you but I want to turn them around from mistakes to good financial tips. I know that making mistakes are the only way to learn some lessons, but sometimes it’s enough just to read some great tips and advice. I hope that by listing these 5 Must Read Tips for New Graduates that you will all be smart and dedicated enough to learn from them and apply them in your own personal life. So without further ado…

Tip #1: Don’t Just Plan to Save – Actually Save

Let’s face it, recent graduates always have big plans. Nobody goes to school for four years (or longer) to get a degree without having made plans for what they will do with their life after school. Travel the world? Check. Make a six-figure income? Check. We’re dreamers and our dreams usually involve money and often lots of it.

While there’s nothing inherently wrong with desiring money it’s important to remember that in the real world dreams don’t mean much, unless you make them mean something. If you want to have a lot of money you have to teach yourself to save money. If you never learn to save you’ll likely never be wealthy, no matter how much you make a year.

Tip #2: Money (Poorly) Spent is Money Lost

Sometimes it seems like it’s in human nature to be wasteful. We get a great job and an even better paycheck and suddenly we find ourselves wanting needing things that we couldn’t afford before we got said paycheck. While I’m all for enjoying life it’s still a good idea to think a little before spending money, especially large amounts of it. Check out what Investopedia had to say on the matter:

In the real world, assets either appreciate or depreciate. The purchase of a car is the purchase of a depreciating asset; it diminishes in value as soon as it leaves the lot. The same is true for furniture, clothing and expansive television screens.

Tip #3: If You Don’t Control Your Debt, It Will Control You

Here’s some advice to further the last tip that I’ll start off with a question: If you spend uncontrollably what is likely to end up happening? The answer? You’ll likely find that you’ve spent more than you make and your debt levels will start to increase. This is not to say that you shouldn’t take on any debt, but rather the type of debt that often comes from uncontrolled spending.

If you increase your levels of bad debt (credit cards or other unsecured) then you’ll find your net worth quickly decrease and your cash flow decrease as well. While a lower net worth is bad news in the long run a low or negative cash flow can be especially dangerous to your financial health. Eventually if you don’t control the amount of debt that you’ve taken on you’ll find that it is controlling you – and that is a situation you never want to find yourself in.

Tip #4: Build Yourself a Positive Credit Rating

In the U.S. credit is everything. Without a positive credit rating you’ll have a difficult time buying a house, your insurance rates will be higher and you’ll find yourself with exorbitant interest rates on any loans that you do qualify for. As I’ve pointed out in a previous post your credit score literally defines who you are to most financial institutions. Therefore in order to carve out a favorable image of your credit-self you’ll need to build yourself a positive credit rating.

If you’re interested in how you can increase your credit rating then don’t forget to click on the link above. You’ll find a wealth of information on how your credit score is calculated and what it can have an affect on.

Tip #5: You’re Going To Eventually Die – Make Sure You’re Prepared

They say only two things in life are certain: taxes and death. The cold hard fact is that you’re going to eventually die – we all are – and it’s best to prepare early for the inevitable, because you never know when that day is going to come. It’s important to prepare for your death, not only by getting life insurance (in order to support any of your family that depended on your income) but also by preparing a will or trust in order to pass on your assets to those closest to you (and take care of funeral expenses, etc.).

I’ll be honest with you here – I’ve not done all of the above tips. I’ve followed most of them but I’ve made mistakes as well. I really like the above advice and I completely believe that if new and recent graduates were to follow them religiously they would find themselves in a very happy place. Good luck out there.

January 12, 2009
A Lesson On Compound Interest

Compound Interest Is The Most Powerful Force In The Universe.

There is a good chance that you have heard this quote before. Any guesses on who it was that originally said it?

If you guessed Albert Einstein then you are correct and you should absolutely reward yourself with something nice… maybe a cookie or some fudge.

So what exactly is compound interest? I’ll quote the definition from wikipedia* for you.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded).

It’s simple really. You take a loan out from a bank and every month (or whatever the terms declare) they “charge you interest” or compound the interest back into your loan. Then the bank will start to earn interest off of the interest that they just “charged you.” Make sense? Obviously if you’re paying the interest off every month it won’t have much of an effect on you, but the act of compounding still does make a difference.

Here’s where you really want to pay attention when it comes to the power of compounding interest. Let’s say that you buy a brand new, top of the line, television set from Best Buy and spend a total of $2,500 with taxes. Now let’s assume that you charged this television set on your credit card, which has an 18% interest rate. If you paid only the minimum payments (usually 3% of the outstanding balance) then it would take you 180 months (fifteen years) and about $4,798 dollars to pay off said television set.

The lesson here? Other than pay more than the minimum on your credit card, you should remember that compound interest can either hurt you or it can help you. You might as well make compound interest work for you, by saving and investing your money.

*I’ll not make a habit of using wikipedia as a direct source, but in this case I couldn’t have defined it better had I done it myself.

January 7, 2009
When Looking Forward Don’t Forget To Look Back

The start of a new year, new month or even a new day is a great time to look forward to what you want to accomplish. Do you remember the phrase “Carpe Diem” from that horribly depressing movie, Dead Poet’s Society? It means “seize the day.” There really is no better day than today to decide on who you want to be or, financially speaking, what you’d like to do.

Look Back Before Looking Too Far Forward

Before you get too far ahead of yourself on your looking forward don’t forget to look back. If you want to change your spending habits then you’ll need to be aware of where you messed up and on the flip-side where you did well. With that being said, what did you accomplish yesterday, last month or last year? How did you do financially? Take a good look at how you’ve done with your money in the past and try to identify any areas of weakness and strength.

How Have Your Saving and Spending Habits Been in the Past?

Did you save more than you planned, or did you end up with more debt than you had at the beginning of the year? Maybe you went on holiday and overspent or, on the other hand, spent less than you had budgeted for. No matter how horribly (or how well) you’ve done with money management in the past it’s never too late to learn from your mistakes and what you’ve done right.

Now Look To The Future

Now that you’ve identified areas where you’ve had difficulty in the past it’s time to take a look at how you can do better with these problem areas in the future. First take a look at your regular monthly income and expenses and pay special attention to any areas of weakness. For example if you consistently overspend on eating out try to compensate for that in your budget by either budgeting a higher amount for eating out or forcing yourself to eat in more often. By doing this you’ll be able to regain control over problem areas in your budget.

Try To Anticipate Unexpected Expenses, and Budget For Them

Don’t forget to take into consideration any unexpected expenses that you could run into throughout the year – and especially don’t forget the little things that no one really thinks of such as birthdays and anniversaries. If your car is pretty old don’t forget to plan for possible repairs or if you anticipate buying a new tv or other expensive items don’t forget to budget for that as well.

How have you done with budgeting in the past? Do you have any experiences you’d like to share? I hope that you were able to pick up on a few things. Good luck out there and… Carpe Diem.

January 5, 2009
5 Common Financial Mistakes Entrepreneurs Make

Today we’re featuring a guest post from Trisha Wagner of DestroyDebt.com.

The decision to start a new business is never easy; deciding to launch a new business in the current economy can be downright frightening. Statistics show that you are just as likely to fail as you are to succeed, and one of the main culprits that shut down new businesses during the start up period is money. Either the lack of money or accumulating debt can cripple your best efforts. If you are considering following your dreams and striking out on your own in 2009, consider these common financial missteps that often stop a business before it gets off the ground.

Attempting to do too much too soon.

A common mistake that many entrepreneurs make is taking on too much too soon after launching their business. There is some truth to the age old saying that you have to have money to make money. While you may be bursting with great ideas and endless energy when you start out, you must remember to take things slowly. With limited capital to work with you could easily be tempted to start numerous projects to get things rolling quickly. However each new project requires time and attention to be successful. If you stretch yourself too thin, both personally and financially you could be setting yourself up for failure.

Not sticking to necessities.

When you are first starting out, you have to remember to think small. It takes both time and money to build a successful business and unless you have unlimited funds to start out, you could quickly go in the red by not sticking to necessities. Use less expensive alternatives to accomplish core objectives and increase expenditures only as your revenue allows. Once your business is off and running you can re-evaluate your spending to reflect increased cash flow.

Trying to do everything by yourself.

You are only one person and it is important to remember to delegate. Even if you are starting out with a skeleton crew, remember you are the idea person. It is natural to be tempted to have your hand in every aspect of your business, and of course you should know what is going on on all fronts. However you are doing a disservice to yourself if you insist on micromanaging and not focusing on building your business. Let your employees do the job you are paying them to do.

Racking up debt early in your venture.

Try to keep a handle on your expenses and pay the bills as they come in. Many people are tempted to use a shiny new business credit card to keep cash on hand. This is a common mistake that can have drastic consequences as your business grows. Just as interest and accumulating debt can be a death sentence for your personal finances, the same theory applies to your business.

Failing to collect accounts receivable.

Sure you are just starting out and want to establish good relationships with your clients, but you must stay atop money owed to you. Don’t be afraid to be a bad guy, you are providing a service and in order for your business to thrive you have to be able to collect payments in a timely manner. A client who doesn’t pay isn’t a client you should worry about keeping. There are numerous invoicing tools available that make it easier to collect accounts receivables, which ensure your business will have the capital needed to survive.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

January 5, 2009