Debit versus Credit

Fed Cuts Rates to 1%

Many of you may have heard by now that the Federal Reserve cut their key fed-funds rate to 1%, bringing it in line with the lowest level that it’s ever been at. Interestingly enough the last time that the rate was at 1% was within this decade – from June of 2003 until June of 2004. Even more interesting is that many people and economists have laid partial blame for the housing crisis on this low rate, essentially saying that the fed made money too cheap and caused people to be greedy and take unnecessary risks. If all of this is the case, then what of this time? Will having such a low rate now cause unexpected hardships in the near future? Besides that what does it mean for me and you now that the fed funds rate is at 1%?

Let’s look at the facts…

First of all a description of what the fed funds rate is, from CNN Money.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines and credit cards, as well as for many business loans.

You’ve likely heard of the prime rate. The prime rate changes in line with the fed funds rate. It is almost always 3% higher than the fed funds rate, which would put the prime rate at 4% sometime in the near future. Almost all of the banking products that you use are based on the prime rate. Both deposit accounts and loans change along with a change in the fed funds rate (and therefore the prime rate). You can expect savings rates of all flavors (cd’s, money markets, savings) to drop and on the flipside you’ll likely see some loan rates to drop as well.

Keeping all of that in mind let’s take a look at what the lower fed funds rate is likely to do for the economy. There are two options. It will do nothing, as in not help at all, or it will hurt the economy. There is no other option. It most definitely will not help matters at all. Why?

The problem with the current credit crisis is not that loans are expensive. They’re actually pretty inexpensive. At the credit union I work at an auto loan starts at about 5.5% and if you look at bankrate.com the national average for an auto loan is about 6.5%. No, loans are not expensive, banks are just unwilling to lend, especially to each other. They are afraid that if they lend out too much of their cash that they could end up in an illiquid situation and go bankrupt just like Lehman Brothers, WaMu or any of the other failures we’ve had as a result of this crisis.

One economist said it best, as quoted again from CNN Money.

“The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets,” said Bernard Baumohl, executive director of The Economic Outlook Group. “What is needed more than anything else at this stage is simply patience.”

Be Patient Mr. Bernanke, Be Patient World.

This thing is not going to fix overnight. There is no easy fix. The fed funds rate at 1% won’t do a single thing to fix it. So why lower it? It’s probably purely psychological, and at this point it shouldn’t do much harm but I’m afraid the problem is that they won’t raise rates until the crisis cleans out completely, at which point it may be too late. By then there may have begun another lending bubble. Let’s hope Bernanke is smart enough not to let it come to that.

In the meantime let’s all practice a little patience, shall we? It is after all a virtue, and shouldn’t we all strive to be virtuous? If we were you can bet we wouldn’t be in the mess we’re in right now.

October 30, 2008
Investing For Beginners: Analyzing Financial Statements

Today I’ll be continuing the multi-part series Investing for Beginners. Don’t forget to read the first part, Stock Market Basics if you haven’t already. If you want to keep updated with new additions to the Investing for Beginners series then don’t forget to subscribe to the Debit versus Credit RSS feed. Today I’ll be covering a little bit about Accounting, specifically how to analyze financial statements.

Now hold on! Before you run away let me explain.

I realize that most of you are probably not especially fond of accounting, especially after having to endure the hell that is debits and credits. If you do enjoy accounting you are a member of a small minority and I congratulate you. As for the rest of us (myself included) accounting is much too tedious and sometimes even a little bit confusing. That’s not what we’re here for today, though. Today I will be teaching accounting, this much is true. I will only be teaching what is necessary for the dissection of financial statements, which can then be applied to researching a company that you might be interested in investing in. I promise it will be easy but more importantly it will be useful and FUN!

The only accounting that you should ever have to do when it comes to researching investments is as simple as reading existing financial statements. I am going to provide examples of an income statement today and on the next update I’ll cover the balance sheet and cash flow statements. I’ll point out what’s important and how you can use these statements to analyze how well a company is doing financially.

The Income Statement

With the Income Statement we want to pay attention to several numbers, with Gross Profit and Net Income being the most important. This is an annual report which lists the Net Income for the years ended Sep 24 of 2005, Sep 30 of 2006 and Sep 29 of 2007. This means that the income and other figures listed are from the fiscal year beginning in October and ending in September of the following year.

Gross Profit:
The difference between revenue from sales and the cost of providing the product or service for said sales.

What do the numbers mean? And what do we do with them? There are some relatively obvious ways to dissect this Income Statement. For example Apple’s net income for the year ended September 2007 was $3,496,000,000 ($3.5 billion) dollars. If you compare this to the previous year ($1.9 billion dollars) then it seems that Apple is doing something right. But we’re doing something wrong. Comparing dollars to dollars isn’t usually the best way to read financial statements, as it’s akin to comparing apples and oranges – especially when trying to compare Apple’s net income against say Dell’s or Microsoft’s. So how do we do it?

(more…)

October 29, 2008
4 Ways College Students Can Save Money
Being myself a student I’m fully aware of all of the potential cost-savings that can come along with pursuing a higher education. Of course these cost-savings don’t come cheaply: paying for college can cost thousands to tens of thousands of dollars a year. But you’re already paying for that right? You might as well take full advantage of what you’re paying for and listed below are 4 ways to do just that.

Cancel your magazine and newspaper subscriptions. The library at your university or community college is more than likely well stocked with all of the latest magazines and newspapers. You may not find any of those “special interest” magazines that you keep under your bed, but you’ll likely find all mainstream magazines as well as business and hobby magazines.

Cancel your gym membership. Many colleges offer unlimited use of their workout facilities. Take advantage of this. There is no point to paying for an expensive gym membership when you probably already have full access to the gym at your school.

Cancel your Internet. I’m willing to bet that your college offers free Wi-Fi everywhere on campus. I’m also willing to bet that their Internet access is a lot faster than your current one. If you live on campus or close enough to the campus where it’s just a hop skip and a jump away you might consider cancelling your Internet and taking your laptop to school whenever you need (or want) to use the Internet.

Take your date to school. If you’re looking for a great date idea that doesn’t cost much then look no further than your local college campus. I’m not talking about taking her to your accounting class with you (you’ll not likely have a girlfriend any longer if you do this) but rather taking advantage of the sports courts that your campus has. More than likely your campus has racquetball courts, tennis courts, a sand volleyball court and a basketball court. Volleyball and racquetball are my favorites, but maybe your date prefers to play some b-ball. Either way it’s all right there, for you to use.
October 28, 2008
Scratch Beginnings

It’s not every day that you get an opportunity to read and review a book before its publication. You can imagine my delight when Adam Shepard, the author of Scratch Beginnings, contacted me and asked if I’d be interested in reading his book. Now technically the book has been around for a couple of years now, as it was originally self-published, but now it’s been picked up by Collins to be published. In fact since I’ve had the book it’s actually been published and you can now find it at your favorite bookstore or at Amazon.com. You can also enter a contest that I’m holding where I’m giving away three signed copies of Scratch Beginnings.

Scratch Beginnings was a fun read. It’s an Autobiography that sometimes makes you feel as if you are reading a journal. For anyone who’s ever read their siblings or significant others journal you know how much fun this can be. The plot is simple. The author, Adam Shepard, is to undergo an experiment where he will move to a random city in the Southeast U.S. with nothing but $25 dollars, a sleeping bag, the clothes on his back and an extraordinarily strong will to succeed. His goal is to prove, or disprove, the notion that one can not rise above their situation. His secondary goals are to have $2,500 dollars in cash, a fully furnished apartment and a car that is in good working condition after the period of one year.

Criticism and Defense

The major criticism against this book is that the author is a white, educated male and therefore any such “experiments” are immediately flawed. I think that we can safely brush aside the notion that just because Adam has a college degree the experiment is flawed. He did a wonderful job of completely immersing himself in the experiment and never once did he reveal his formal education or any related qualifications while interacting with those around him. It’d be foolish of me to pretend that white privilege is not in existence and that he had nothing to gain from being white, but I’m of the opinion that if it made any such difference it was not much at all.

The fact is that he was dedicated to his goals and he worked hard every single day to accomplish them. Things weren’t ever easy for him, but he always pushed ahead knowing that he could make something out of himself no matter what life threw his way.

Wrapping it Up

What I enjoyed most about Scratch Beginnings was how real it seemed. Of course being an Autobiography that’s how it’s supposed to be, but usually Autobiographies seem stuffy and often unrealistic. Not Scratch Beginnings though. Everything about this book screams reality, from the difficulties on the streets to the abrasive language often spoken by characters that you meet. It likely won’t ever be listed on the NY Times Best Sellers list (due to its limited mass-market appeal), but you can be sure that it will be respected by all who read it for the sheer level of honesty and commitment that the author portrays.

October 24, 2008
How To Get a Free Copy of Your Credit Report

Today I’m going to feature my very first screencast, which walks you through getting a free copy of your credit report from annualcreditreport.com. Sorry about the crude quality, I’m still new to this, but it gets the job done!

October 23, 2008
Apple: Are They Unstoppable?

Through my daily readings I came across several articles about Apple’s (AAPL) quarterly earnings report and was pleasantly surprised to find that even in the midst of an economic slowdown they made fantastic earnings and even broke a quarterly sales record for their flagship line of Macintosh computers.

Some of you are probably aware that I’m a recent convert to Apple (I bought a MacBook Pro in January of this year) and also that I hold several shares of AAPL stock in an investment portfolio. I’m probably, then, slightly biased but I just can not help having a healthy level of adoration for this company. They really seem to have their stuff together.

Apple is (according to AMR Research) the most well-run company in the world when it comes to supply chain management (see the Supply Chain Top 25). They have an extremely healthy trio of products, between their iPods, iPhones and Macintosh Computers. They have the support of many educational institutions far and wide and also the support of audio and visual professionals around the world. They also have a devout following among “Apple geeks” in the computer world.

Honestly they’re one of my favorite companies, not only for their products but for the amount of respect that they deserve for the way that they run their business. So then I was happy to find that their quarterly earnings report was better than expected.

The company posted revenue of $7.9 billion and net quarterly profit of $1.14 billion…

That quote is from Digital Daily and the remainder of the article can be found through the following link: AAPLause, Please. I really like this quote from Steve Jobs which he said sometime during the earnings report.

We don’t yet know how this economic downturn will affect Apple. But we’re armed with the strongest product line in our history, the most talented employees and the best customers in our industry. And $25 billion of cash safely in the bank with zero debt.

What a great position to be in. Zero debt and billions of dollars of cash just sitting in the bank. Like them or love them you have to admit that Apple is one very well run company.

Congratulations Apple on a great quarter (and year) and may your future be filled with all the success that you’ve found over the past several years.

October 22, 2008
An Easy Way To Save Money: Plan.

Today we’ll be featuring a guest post from Michael Caldwell at UseTheDollar.com, a finance blog for college students.

Stores Expect to Sell you more than you came for

The majority of my unplanned spending is composed of impulse buying of items in stores. Your lack of planning and Store’s tricky methods cause you to spend way more than you need to be.

Though many people, notably women, go shopping just for the rush; I rarely step foot in a store without some sort of mission. “I want this book” or “I want this new sweater” — So I go looking for that item. Barnes and Nobles is counting on me to see other things and walk out with them as well as my book though. Stores spend money to fool you.

A large amount of employees’ time, marketing expenses, and floor space is spent to build displays of items they’d like you to bring home. Here are some steps you can take to keep yourself from spending more than necessary at the store.

1. Always take a list.

Whether you are shopping for Christmas, for clothes, or just going to the grocery store; do not go without a list of what you need to buy. And do NOT deviate from the plan. Stick to your list and there’s no way for you to buy on impulse.

2. Take Cash

Another great control on your spending is to only bring cash. By deciding how much you’ll spend (using your list and prices) before you leave, you can take an envelope of cash in that amount. This way, you won’t charge or spend any more than you have planned.

Impulse buying adds up fast. Bringing cash is a surefire way to not go overboard.

3. Clip Coupons

The Sunday paper, cliche as it may be, will cost between $2 and $3 each week. It can contain anywhere from $150 to $300 worth of coupons. Granted, you won’t use all of them, but if you can find even $3 worth of savings then you’ve made it worth having bought that paper. Hey, maybe you’ll even read a little and educate yourself some.

Looking for another way to save more and build wealth? Check out my post on boosting your active and passive income.

4. Don’t fall for store trickery

How often do you see a mannequin with only a shirt on? Stores understand that psychologically, if you see a shirt that you want to buy that is on display with a nice pair of pants, you’re likely to buy the pants as well! Don’t fall for their trickery. Buy what you went in for and nothing else.

5. Put on the blinders

I used to work in Retail and whenever I would work the cash register (actually, we called it the Box Office at the Disney Store) I would be required to ask each customer if they would like to add one of our counter items to their purchase. These ranged from $1-$5, and it amazed me how many people actually fell for this. They never needed that stupid cup or poorly made stuffed animal, but hey: it was cheap, convenient, and they might even hurt my feelings if they didn’t buy it; so they did. Put on your blinders at the register. You’ve nearly completed your mission — don’t succumb to the corporate mischief now.

By following these tips I think you’ll be very surprised just how much you manage to save. An amazing amount of your money goes towards items you never planned or needed to buy — if you can eliminate impulse spending, you’ll be able to build some serious wealth.

You may also be interested in checking out these easy money saving tips for students.

About The Author

Michael Caldwell is a lifelong entrepreneur who has become active in the Financial world. He is the Co-Founder of UseTheDollar.com, and provides valuable, insightful posts, videos, and explanations to help students better understand the financial world.

October 21, 2008