Personal Finance Ology

So I was taking some time catching up on current events and the top finance news stories when I began to think about the effects a firm knowledge of personal finance issues can have on the future of my generation. The reason I became an advocate for being knowledgeable on personal finances is because I noticed that a lot of people my age just weren’t that interested in learning about their finances. This in turn leads to bad spending habits, unpreparedness for emergencies and a lot of time an extended dependence on their parents for financial assistance. I can go on an on about how this cycle then effects the parents of those uninterested in controlling their finances and how that can later trickle down to the economy, however I am choosing to take a different route.

Rather than rant and rave about the effects, I thought I’d take a look at the causes and by doing this hopefully deter some from making irresponsible financial choices or lackadaisical attempts to learn about their finances. What we don’t realize is what we pay the least attention to is what has a large impact on our lives.

Take for instance myself. During my earlier years in college, I took advantage of all of the offers of credit I was given only to later find myself unable to pay back my debts, which in turn was reflected on my credit report. The negative reports on my credit would later come back to haunt me when I was trying to purchase my first car. However, I didn’t think of that while I was carelessly spending money I didn’t really have. I just think that personal finance should definitely be talked about more in high school and college if not in depth at least to the point where it would peak the interest of students to go out and learn more about it on their own.

I know I’ve talked about this in my other blogs, but making smart decisions is a benefit in all aspects of your life-especially concerning your finances. So I thought I’d offer some areas where you could start making better decisions.

Plan What You Spend - being conscious of the amount of money you make in relation to your overhead will keep you aware of what you can and can not spend and also help you to focus on areas where you can lower expenses and create more spending money.

Use Your Credit Wisely - this means knowing the advantages and disadvantages of credit cards, their rates and their purpose. This also gets into Good Debt vs. Bad debt. I wrote about this in an earlier blog.

Stay Within Your Means - when you do this you make room to increase your means so that you are able to comfortably afford even more luxuries without overextending your finances.

Build An Emergency Fund - when you have an amount of money put aside you don’t have to worry about car trouble or a pricey repair putting you behind on your monthly expenses.

IRA or 401(k) - contributing to one of these accounts prepares you for a comfortable retirement.

Learn More About Investing - gaining more knowledge on investing will help you to increase your finances by having the ability to choose the investments that are right for you. A lot of people shy away from investing thinking they can’t do it however if you learn about it you will find that anyone can use investing to their advantage.

All of these topics, if they haven’t already been discussed, will be discussed in depth throughout this blog so that you can gain full control of your financial future. It all starts with a base. Having a firm knowledge of how personal finances work and what areas to strengthen before you move on to the next is the best way to go. That’s why in this blog I started with the base, the ground floor, of your financial fortress so that you can learn about how everything works together for your benefit. Once you understand how everything works, why you should do certain things in a certain order and how to make the right financial choices that will lead you to the achievement of your financial goals, it makes it that much easier to move along the right path to financial success. Here’s to the desire to learn more about personal finance and the want to make the right financial choices towards financial abundance!

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Inflation is often watched by economists with a detailed eye due to the effects it can have on the economy. It is normal to have moderate inflation this is a sign of a growing economy however, if inflation gets out of control it can have an ugly effect on the value of the dollar and on your savings.

What is Inflation?

Inflation is when there are too little goods or services for the amount of demand on those goods or services. Simply put it is when a lot of people want too much of one thing. This allows for the merchant to raise the price because it is a highly desired product that is hard to get.

The biggest effect inflation has is it’s ability to rob you of your purchasing power by lessening the value of your money in the future. For instance, if there is a 4 percent a year inflation that means anything costing a dollar today will cost $1.04 in a year. Usually when you see the rate on inflation it is just an average number and does not necessarily mean everything will rise to that number. Some things will not rise as high and some will rise higher, whichever way keep in mind that the rate of inflation is normally given as an average and not a definite number.

It is important to consider the effects of inflation on the future value of your investment only if you are choosing between different time periods. If you are choosing between two different amounts but with the same time period the effects of inflation need not be considered.

The Dangers of Inflation

In most cases with the rise in prices there is a rise in salaries. However, there may be some companies who, due to the need to compete with other businesses, aren’t able to raise their prices therefore enabling them to raise the salaries of their employees. This in turn has a negative effect on those employees.

Another danger with inflation is for those who are invested in a fixed income product such as bank CD’s or bonds. With one of the solutions to inflation being higher interest rates those involved in a fixed rate investment will definitely lose out on the benefit of the prevailing interest rate.

What Does Inflation Mean To You?

Inflation can work for you or against you depending on your situation. If you are invested primarily in stocks for a lengthy period of time you could do fairly during the fluctuation of inflation. However, the negative effect comes into play if your money is heavily involved with bank CD’s or bonds with fixed interest rates. If you feel safer with your banks CD’s or bonds it is important to see if they offer special investments with inflation protection. If your bank doesn’t there may be other banks that do offer these services. Therefore, always remember to do your research before committing to an investment.

Whenever picking and choosing your investments and determining their present and future value it would be wise to always consider inflation and the effect it will have on your investment.

Photo by: ZeroOne

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In my last blog, I talked about online banking and it’s association with customers concerns about identity theft. Well here I will take a moment to explain to you the safety of the money in your account as it pertains to your banks stability. I know with the current economic instability and the prevalence of banks going under there is a high concern of where your money is and if it should stay there or not. The reality is there is some protection of your money by the Federal Deposit Insurance Corporation. The origin of this entity goes back to the Great Depression of 1929-33 which caused the crash of the stock market. It was during this time that a lot of depositors lost their money due to the failing banks. Due to this turn of events, bank regulations were created to protect the bank and it’s customers.

The FDIC

The creation of The Federal Deposit Insurance was designed to insure up to $100,000 of the money deposited by the banks customers. This means in the case of bank failure the FDIC will guarantee a return of your funds up to and not to exceed $100,000. Any bank that offers the protection of their customers deposits by the FDIC will have a sign in their facility that says “member FDIC”. When opening an account with a bank be sure to look for this sign to ensure your protection.

Although the FDIC covers $100,000 per customer there are a few exceptions to the rule. U.S. Treasury securities, annuities, insurance products, stocks, bonds and mutual funds are examples of items not covered by the FDIC. Although you may come across some of these products that operate like a checking account-allowing you to write checks, etc.-it is imperative to find out if it is protected by the FDIC.

Is Your Bank Safe?

A good way to check out the stability of your banks is to visit www.bankrate.com and use the rating service titled “Safe and Sound”. This tool gives you a rating of banks and credit unions by using different financial measurements such as earnings (how profitable a bank is), liquidity (how well the bank can meet its day to day expenses), asset quality (the quality of the loans provided by the bank, how risky they are and how many are delinquent) and capitalization (how much of the company’s assets are company owned or owned by it’s shareholders as opposed to being owned by creditors). The strongest rating is a 1 and the weakest rating will be a 5.

You can use the ratings provided by the website to choose a bank or decide if you are going to stay with your current bank. However, this doesn’t mean that the ratings are 100% accurate but they will give you an idea of where each bank stands.

Photo by: kenyee

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Now that the $787 billion stimulus package has been negotiated to terms both Congress and the President can agree upon, the new question is what effect does it have on those dealing with this weak economy. I know throughout all of the meetings and disagreements, I was curious as to how it would be changed around and how it would benefit me. Well here is what I’ve discovered after following this saga venomously.

According to CNNMoney.com the money’s allocation is broken down into three parts. $308 billion (39% of the money) goes to discretionary spending. This includes projects related to energy infrastructure, such as making homes energy efficient etc. $267 billion, which is 35% of the funds, is dedicated to direct aid. This increases unemployment and food stamp benefits. Lastly 26% of the funds, $212 billion dollars are allocated for tax relief focused mainly on individuals however some businesses may benefit from this relief as well.

In an effort to break the recovery plan down further I’ve decided to add a few pointers. The recovery plan includes:

A $400 credit per worker. A full credit is given to singles making $75,000 or less and for couples the credit will double for those making a combined $150,000 or less.

Temporary expansion of the child tax credit will lower the income requirement by $3,000 this year and next year.

Homebuyer incentives that are increased to $8,000 as opposed to $7,500 for homes purchased from January 1, 2009 to December 1, 2009. It also removes the requirement that made homebuyers pay back the credit if they stayed in the home over three years.

Car-buyer incentives offering the ability to deduct state and local tax if your income is less than $125,000 as a single filer or less than $250,000 if you are a joint filer.

Higher education tax credit goes from $1,800 to $2,500 and shall be in effect this year and next year.

Alongside these prominent points the recovery plan also has a lot more to offer. Other benefits include a twenty five dollar weekly increase to unemployment benefits, a 13.6% increase to food stamp payments, health insurance assistance for the unemployed, a 5% increase in the earned income tax credit, a one-time $250 payment to retirees, those who are disabled and those who are not working, it even offers a tax break for families in the higher income bracket.

I tend to believe this recovery plan covers a spectrum of assistance and it has the potential to assist a vast majority of people. As with anything it takes time to fix and recover all that has been lost but I am looking forward to it slowly reviving a dying economy. However, I am curious to see how others feel about this $787 billion recovery plan. Please feel free to comment, complain or applaud the efforts of the higher ups and vocalize any concerns, resolutions or tips on how you will use your portion for benefit. We all can learn from one another’s opinions and ideas!

Photo by: Shirley Two Feathers

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