Debit versus Credit

Buffett’s Buying – But Should You?
If you read any financial news at all, then you’re likely to have read about Warren Buffett, the “Oracle of Omaha” and his proclamation to the world that he’s buying stocks. A would-be investor would naturally assume that if Warren Buffett (who has made his fortune from the stock market) is buying then now is a great time as any to buy themselves. However this logic is flawed, on the basis that what’s best for Buffett may not be best for you. Let’s take a quick look at the facts.

Warren Buffett is extraordinarily wealthy

The point here is that Mr. Buffett can afford to take risks that some of us may not be able to take. He’s wealthy beyond most of our imaginations and if he loses half of his fortune by taking chances in the stock market he’ll still be wealthy beyond our imaginations. With a net worth of $62 billion (as reported by Forbes in March of 2008) he’s got plenty of room to take risks. We however may not be so wealthy and may not be able to handle losing all of our cash is poor investments.

Warren Buffett admits that near-term we’re going to see more pain

While I’m no believer in market timing (it just can’t be done without some degree of luck) it’s still important to remember that we’re likely to see more pain in the economy over the coming months. With this being the case we may still see more fallout on the markets. Things will eventually get better, but in the meantime it might not be quite the best time to throw all of your money into the market.

Being greedy has always worked for Warren Buffett

Moving away from playing the devil’s advocate I want to point out that Warren Buffett is, in fact, the richest man in the world. He has gained his fortune from investing in companies and he is likely to continue to increase his wealth. He has a rule for investing in companies, which I’ll quote for you now…

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful

This rule has played out well for Mr. Buffett over the years. If there has ever been a time when people are fearful it is now. Thus if you are willing to follow the mantra of the Oracle of Omaha you may do well for yourself over the long-term.

Follow these rules, and you’ll be okay

We absolutely have to pay attention to what others are doing when it comes to investing, but more importantly we need to pay attention to our own personal needs. The question is “should I buy?” and the answer is that I just don’t know. It’s going to be a personal choice based on hundreds of variables. I can’t answer that question for you, but I can help you answer it yourself. Based on what we’ve learned from Warren Buffett’s behavior we can formulate a simple list of reasons why investing now may or may not be in your best interests.

Don’t invest anything that you can’t afford to lose

To lower your risk it might be best to invest smaller amounts over a long period of time

Diversifying your portfolio can help you to avoid unnecessary risk

Being greedy has worked for Warren Buffett… can you make it work for you?

Be careful out there. Don’t risk more than you can afford to lose, but please do take advantage of this fantastic opportunity to invest in great companies that will still be around after all of this mess has blown over. You’ll be much wealthier for it in the future!
October 20, 2008
Retirement Planning: What You Can Do To Retire In Good Financial Shape

Today I’m featuring a guest post about retirement planning. Stay tuned next week for some great updates including a new Friday Book Club and the continuation of my Investing for Beginners series.

Where do you want to be when you retire? Will you be on an island in the Bahamas? Working in a different field? Or simply enjoying your spouse? Ninety-five percent of Americans have fears about retirement and 42% feel they will run out of money entirely, according to a 2005 study by NAVA. Just as you wouldn’t go on vacation without an itinerary or a budget, you shouldn’t run toward your retirement blind. With the right plan, retirement planning can be a breeze.

When you’re first getting started, you’ll want to envision how you want your retirement to be. While you’ll be saving money on gas and eating on-the-run, remember that there will be additional expenses — notably healthcare — as you age. Check with the Social Security Administration to find out what your benefits will be. Go over your employer’s retirement and 401k plan. After realistic considerations, you may want to consult a retirement planning calculator.

Some feel most comfortable using retirement planning software. Forbes Magazine recommends Quicken Retirement Planner ($59), Morningstar ($125) and ESPlanner Plus ($199). This option allows you the time and a no-pressure approach to examining your options independently. If you like having things explained in person, you can ask your banker, life insurance agent, investment broker, accountant or attorney for advice. To avoid the hassle, retirement planning services are another avenue, although most places charge around $200 per consultation.

Don’t rely on social security! Social security only provides for approximately one-third of the average American’s retirement plan. Instead, focus on your 401k as the bulk of your retirement savings and invest as much as possible. Consider annuities as a great supplemental retirement plan. Remember, tax-efficient options are increasingly crucial in saving up that nest egg.

Contribute the maximum on your 401k! Putnam Funds did a study in 2005 that found if you earned $40,000 in 1990 saving 2% of your salary, you’d have $40,000 by 2005. However, if had you saved 6% of your salary, your return would have tripled!

Beware of inflation! Ronald Reagan once warned, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Many people forget to factor inflation into their retirement planning. Consider that a $60,000/year lifestyle will cost you $80,635 in ten years and double that in thirty years! Your investment returns should be high enough to cover this pitfall. Most pensions and social security account for inflation and adjust accordingly; however, if you plan to dip into savings accounts or investments, your money will decrease in value over time.

While it may seem overwhelming at first, all the tools are available to make your retirement planning less tedious. Whether it’s a retirement planning service and personal consultant or retirement planning software, you’ll find answers. You can leave the investments up to a trustee who will take the guesswork out or you may choose to take a more active role in your investments. Your best bet is to start now and make a variety of investments to ensure your golden years are truly the best.

October 17, 2008
Win a $25 Gas Card and a Personal Finance Book!
With the high price of gas and entertainment these days it’s sometimes better to just stay inside and entertain yourself at home. I want to offer you something more than that though. How about a $25 gas card and a personal finance book? This way you can afford to drive your car to the other side of town AND for those nights you want to stay in you’ll have a great book to sit down and read. It’s an absolute win-win situation, in my honest opinion.

So here’s what you need to do. There are five ways to enter the contest.

1 Entry    – Subscribe to my feed via e-mail

1 Entry    – Follow me on Twitter

2 Entries – Write a short blog post about Debit versus Credit and why you think your readers and friends ought to check it out.

1 Entry    – Link to Debit versus Credit

In order to qualify, however, you need to leave a comment at my one-year blogoversary post where I introduced the contest. So leave your comment letting me know what you did and how many entries you deserve. I’ll make sure that your entries are legit and then at the end of this month I’ll do a drawing to see who the lucky winners are!
October 15, 2008
Blog Action Day 2008: Fighting Poverty

Today is Blog Action Day 2008. The focus this year is on Poverty and overcoming the devastating effects of said tragedy.

Poverty is a terrible thing. So many people around the world are suffering because of a lack of resources, a lack of money and a lack of opportunity. Truly I am blessed having lived in the U.S. my entire life. I’ve been blessed with many opportunities. Unfortunately being so blessed its sometimes difficult to remember that others aren’t nearly as fortunate. It’s not fair to only think about the suffering outside of my little world more than once a year, and I hope that you, my readers, don’t think of me that way. I hope to one day devote my life to philanthropy and charitable giving. However this day, this Blog Action Day gives us all a great chance to think about what is wrong in the world and more importantly, what we can do to help it.

What can we do anyway? I am sure you have asked this question by now. I want you to follow this link (it will open in a new window or tab) to see what one person can do. There are a great many ways to donate of your time or your money to fight a cause so important as poverty is. My plan is to donate all ad income from this blog today to either a charity listed in the above listed link, or to microfinance a loan to someone faced with poverty. I can’t of course encourage any ad link clicking, but if you do see something that looks interesting, please feel free to let your finger do the talking.

For more information I strongly encourage you to check out the homepage of Blog Action Day. Good luck everyone and lets do what we can to fight poverty not only today, but until it is gone from the face of the earth.

October 15, 2008
The Carnival of Personal Finance #174
Greener Pastures is hosting the Columbus Day edition of The Carnival of Personal Finance, highlighting the best personal finance articles around. My recent article on Debit versus Credit, Stock Market Basics: Investing for Beginners, was featured under Investing.

There are some fantastic articles in this week’s carnival. In addition to the Editor’s Pick articles, here are some that I found interesting.

Rate Cuts: What Does It Mean?

Best Financial Advice You’ve Received

Ten Ways To Save Money and Lose Friends

There are some of my favorites. Make sure to check out the entire carnival. It’s hard to believe how much great information is packed into this edition of the Carnival of Personal Finance.
October 14, 2008
4 Simple Ways to Improve Your Credit Score

Be honest with me here. How is your credit? Is it great? Good? Or… not so good? The fact is that hundreds of thousands of Americans have anywhere from decent to borderline terrible credit. It doesn’t take much you know. A missed payment here and there, a bill that you never received, one too many credit card applications. God forbid that you face all of these dilemmas at once. It’s easy to ruin your credit score (which is an extension of your credit report), and one would think it’d be much harder to improve your credit score. It’s actually not, however. In fact it’s not much harder to get a great credit score than it is to get a terrible credit score.

…it’s not much harder to get a great credit score than it is to get a terrible credit score.

There are four simple things that you must do if you want to improve your credit score. They’re not terribly difficult things to do. They will take some dedication, however, and they will take time. To improve your credit score you need a minimum time horizon of six months, with a year being preferable.

Improve Your Credit Score: Step One

Your credit score is a reflection of your ability to manage credit extended to you. In other words it calculates how well you do at paying your bills on time! So it’s only natural that if you don’t pay them on time your score will free fall. Step one to improving your credit score is this: Pay your bills on time.

Improve Your Credit Score: Step Two

Hypothetical situation: You go to the mall and you buy a great new outfit or some electronic gadget. The store offers their own credit card and upon approval will take 15% off of today’s purchase. Do you apply for the card? If you answered yes, then you are either dangerously frugal or a possible credit card addict. The short story is this: if you open up too many credit cards or credit lines within a small amount of time it appears to the credit agencies that you are reckless and irresponsible with your credit. Therefore your credit score will likely be dinged. So step two is this: Stop opening new credit cards.

Improve Your Credit Score: Step Three

The so-called “utilization ratio” is a magical number that refers to the amount of credit that you are using divided by the total amount available. For example I have a credit card with a $3,000 dollar limit and I owe $500 dollars on the card. My utilization ratio with this card is 16.6% (3000/500). This is a good number. You don’t want to use any more than 50% of your available credit. Actually to maintain a high a score as possible I recommend keeping your utilization somewhere under 30%. So if you have a credit limit of $3,000 then you don’t want to have a balance of anything more than $900 dollars. Step three, then, is this: Don’t use more than 30% of your available credit.

Improve Your Credit Score: Step Four

With recent changes to the credit scoring system it’s become progressively more difficult to “cheat” the system by artificially inflating your credit score. That’s not to say, however, that it’s become impossible. If you really want to boost your credit score much more quickly (and ONLY AFTER DOING THE FIRST THREE STEPS!) then you can always piggyback off of another persons’ good credit. To do so you’ll have to be a joint owner on one of their credit cards… which might require a fair amount of trust and coaxing. If you can manage to convince them to add you as a joint owner on their credit account though it should definitely help to increase your own personal credit score. The final step is therefore: Piggyback on another persons’ good credit.

I told you, it really isn’t that difficult to improve your credit score. It will take some work and some time, but it will be worth it in the end. Good luck out there, and please if you have any other ideas leave a comment!

October 14, 2008
Credit Cards 101

What is a Credit card? How do I choose one? Why should I use a credit card instead of cash? I’ve been asked questions like these over and over again, usually by young people who are just starting to learn about the world of credit and personal finance. However it’s never too late (or too early) to learn more about credit cards. Welcome to Credit Cards 101!

What is a Credit Card?

A credit card gives you easy access to a revolving line of credit which you can use to purchase products and services just about anywhere. There are four major credit card companies in the United States: Visa; MasterCard; Discover and American Express. These card issuers, while all structured differently, essentially provide the infrastructure to companies (such as Best Buy) who want to offer their customers the ability to pay with a credit card.

When you use a credit card the purchase amount is debited from your line of credit and paid to the vendor from whom you made a purchase. Within a month of your purchase (credit card bills are generally sent out on a monthly basis) you will receive a bill from your credit card company showing any purchases throughout the previous month, the full balance owed, and a minimum payment amount. The minimum payment is calculated as a percentage of the balance owed on your card, usually between 3 – 5%. Be careful paying only the minimum payment though, and here’s why:

Let’s say you owe $2,000 on a card with 15% interest and a 5% minimum payment rate. This would give you a minimum payment of $100 at first and lower every month as you pay down the principle. However paying only the minimum (without ever using the card again) will take you 84 months to pay the card off and will cost you over $630 dollars in interest!

Choosing a Credit Card

When choosing a credit card you want to read the fine print. The Terms and Conditions of the card you are considering must legally be provided BEFORE a card can be applied for. These are the things you should pay close attention to:

• Annual Percentage Rate
• Annual Fees
• Balance Transfer Fees
• Cash Advance Fees
• Late Payment and Overlimit Fees
• Minimum Finance Charges

You should look for a card with a low APR, no annual fees, a low balance transfer fee, and NO minimum finance charges.

Why Use a Credit Card?

So why are credit cards important? Wouldn’t it be better to just pay with cash? Credit cards can be a convenience but I make it a habit to think of them more as a tool, and a dangerous one at that.

To understand why credit cards are important, you have to remember that the world practically runs on credit. If cash is King then credit is the Queen, and we all know who is in charge in that relationship. Credit (and your credit score) is a reflection of your ability to borrow and to repay money. So when you purchase something with your credit card and then pay off the balance on time this is reported to credit scoring agencies, who then update your credit report and score on a monthly basis. The higher your credit score the easier it will be for you to qualify for loans of all types.

Fraud Protection

VISA cards offer a zero liability policy, which with a few exceptions basically protects you from all forms of credit card theft and fraud. If someone were to get a hold of your card number somehow and make a purchase with it all that needs to be done is to report it to VISA and you will not be held responsible under most circumstances. MasterCard, American Express and Discover likewise offer fraud protection. This is another reason why I prefer credit cards over cash; the security is far superior.

Credit Card Benefits

Did you know that by using your credit card to pay for a car rental that you are automatically protected with rental insurance? There are many benefits that credit cards offer to their cardholders, some of which can save you money.

Take this knowledge and use it. I don’t want to hear about any of my readers applying for bad credit cards. On that note if you have any credit card horror stories or any further questions please contact me; I try to respond to all messages!

October 13, 2008