Archive for January, 2009
Cinderella stomped her foot. Where was her fairy godmother when she needed her? Marrying the prince had not turned out happily ever after and she had become quite short tempered. The monotony of palace life was bound to get on anyone’s nerves. She knew her shopping habit was out of control. Since it was her job to be the belle of the ball, and Manolo’s are so pretty, she had always been able to rationalize her purchases. Lately though she had begun to feel embarrassed. She had taken to putting her purchases into plain brown bags so the prince – and town people – couldn’t monitor her spending.
She knew she was overspending and if she didn’t start cutting back on expenses she would have to go back to work. Unfortunately, due to her limited skill set and education, that meant a return to the scullery.
She needed her fairy godmother to wave her magic wand and fix it all. After all, that woman could do anything. Then reality hit. Her fairy godmother had been cut in the last round of palace lay-offs. She was going to have to go it alone.
Rather than panic, she decided to do some homework and some financial planning. To begin she re-read some of the post from So Many Shoes – especially the ones on credit cards, interest rates and debt. She also turned to No Regrets for savings ideas. She vowed to get her financial life under control and to check back more often.
January 28th, 2009
You thought you knew all about bonds – friendships, relationships, marriage, the hot one who actually did call the next day. So all this economic talk about rates and payments has you flummoxed.
In financial terms a bond is a loan to a company or to a government. When you buy a bond, you agree to loan your money to the company or government in exchange for interest payments they make to you and the return of your money at a later set date. You receive your interest rate payments in the form of checks, sent out within a set time frame. You receive the full amount of your original loan back when the loan matures. The interest rate you receive depends on how strong the company is. The stronger the company, the less risky the loan and therefore the less interest you receive. (Conversely, the weaker the company, the riskier the loan and the more interest you receive.)
Just as you have a credit score, so do companies and governments. Like you, the better their score, the lower interest rate they have to pay. Where are bonds traded? Just as there is a stock market, so is there a bond market. (See January 12 Stocks posting). However, unlike stocks, some bonds don’t have to be traded in the market. When bonds are not sold on the bond market the transaction is called Over the Counter (OTC).
Turns out, financial bonds are so much easier to comprehend than the real ones.
January 26th, 2009
Barbie thought she had it all. Ken had come to senses, left Midge, and wouldn’t stop calling. She had a lovely town home, a corvette, her pilot’s license, a fabulous body and a wardrobe which put the Bratz to shame.
Unfortunately, much of this had been purchased with debt. Her mortgage, car lease, student loans and credit card bills were killing her. Then the bottom fell out of the stock market. It was time to get things under control. Marrying Ken was not the answer – they had been on and off again for years and who knew if she could trust him. She was loaded with debt. Where to start?
First, she needed to get those credit cards under control by not using them anymore. No more shopping, gym memberships or expensive dinners out. (Besides, people had been complaining she looked too thin for years.)
Once she stopped spending more, it was time to pay down her credit cards. She called the credit card company to set up a payment plan and to reduce her interest rates. If they didn’t go for it, she decided she would call a reputable credit counselor for assistance.
Then she looked for ways to consolidate her loans. For example, she grouped her student loans into a student consolidation loan allowing her to combine her multiple loans and pay a fixed interest rate to just one company. She also combined her credit card balances onto one single card (with a lower rate than her current card).
She also reviewed her budget and determined ways to increase her income. She had many skills and talents: over the years she had taught, practiced medicine, served in the military, hell she had even been President of the United States.
Once she had her plan she felt better. She picked up the phone and called G.I. Joe and the girls. Rather than a night on the town, why didn’t they all come over for pot-luck and movie?
January 23rd, 2009
In his inaugural speech, Obama quoted the Bible: “the time has come to set aside childish things.” The question is does that include an obsession with shoes? He asked the nation to grow up and cited our “badly weakened economy” as a consequence of not just “greed and irresponsibility on the part of some but also our collective failure to make hard choices…”
So yes, sadly, it applies to shoes – or at least our obsession with them. A poll of 1,057 women by the Consumer Reports National Research Center for shopping magazine, ShopSmart, found that U.S. women on average own 19 pairs of shoes, although they only wear four pairs regularly; 15 percent have over 30 pairs.
Carrie: [In shoe store with Miranda]: Where did all my money go?
Miranda: At four hundred dollars a pop, how many of these do you own? Fifty?
Carrie: Come on…
Miranda: One hundred?
Carrie: Would that be so wrong?
Miranda: Four hundred dollars times one hundred, there’s your down payment.
Carrie: That’s only four thousand dollars.
Miranda: No, that’s forty thousand dollars!
Carrie: I spent forty thousand dollars on shoes and I have no place to live? I will literally be the old woman who lived in her shoe.
Carrie, with her disregard for her spending habits – tossing off hundreds of dollars for things she doesn’t need and will, in all likelihood, never wear – might be incredibly chic but is a very bad financial role model.
Managing your money, taking control of your finances and living within your means requires hard choices. However, if you put off or don’t make the hard choices, they become impossible.
January 22nd, 2009
Today, Michelle Obama wore Isabelle Toledo and the girls wore J. Crew. This is a great example of mixing high and low (well, J. Crew is not exactly a low). It is your prerogative to be a slave to fashion, and especially expensive designer items, if, but only if, you can afford them. Coco Chanel once said, “Fashion is made to become unfashionable.” If you can’t afford them – and most of us can’t, let’s face it – there are always alternatives, notably second label lines, which are cheaper but still high-styled.
Smart shopping requires four things: Planning, focus, investing and finding bargains. Most of the following tips come from In Style Secrets of Style:
Plan:
- Figure out what you have and what you need – shop with a list.
- Determine how much money you can spend.
- Shop when you are feeling good about yourself, not when you are bored or upset.
- Shop when stores are the least crowded, so you can get the attention you deserve.
- Dressing well requires strategy so take your time.
- Know the store’s return policy – we all make mistakes and the fashionably and financially responsible thing to do is return the item when that happens.
Focus:
- Shop by yourself – unless you need someone to keep you in check and to tell you to “just back away from the shoes” – friends can distract you and encourage you to buy items you don’t need.
- Know what styles work for you and stick to them – just because something is trendy does not mean it is right for you.
- Buy for the body you have, not the one you want: Spending money on a size four when you are an eight is not smart – yes, I know you will be a four in no time, but the point is, you’re not a four this minute.
- Don’t deviate from your plan.
Invest:
- Buy complete outfits; otherwise you will have a closet full of nothing-to-wear. True classics are the exception – black, grey, navy or tan pants, white shirts, classic skirts.
- Buy the best quality you can afford for the classics and scrimp on the trendy stuff.
- Be wary of sale racks – Just because it is on sale does not mean it is a bargain or you need it. You only save money at a sale if it was something you were already looking for.
Bargains:
- Study the deals and steals sections of most fashion magazines.
- Go to your favorite shopping website and check out the sale section (or sign up for their emails).
- www.bluefly.com: Up to 40 to 70 percent off retail; need I say more?
- Boutique stores: Get on their mailing lists to receive notices of sales.
- Department stores: Look for second lines like Marc by Marc Jacobs and wait until they have a sale.
- Outlet stores
- Sample sales
- Lower scale retailers: Have you been to Target lately?
- Newsletters: www.dailycandy.com can tell you about sales, not to mention fabulous boutiques in your area.
- Thrift shops, known euphemistically as vintage stores; but be forewarned, genuine vintage clothes can cost a bundle.
Last but not least, try, just try, to exercise some discipline.
January 20th, 2009
Recent statistics show that the Botox treatment industry has generated over $1 billion per year in revenue. When an industry hits that threshold, it’s a viable, on-going market. Although the recent market downturn may put a slight wrinkle in sales, younger and younger women are now trying the procedure. A growing number are getting Botox the moment they graduate from high school.
This is an example of really bad money management – not to mention a totally unnecessary cosmetic procedure. At upwards of 300 dollars per appointment, you would be much better off paying down your credit card or other debts or saving or investing. Even if you are completely debt free, and can truly afford it, there is plenty of time to freeze your face.
If you put the $300 in your savings account instead and earned 4% interest, in five years you would have roughly $1,460 dollars ($300 x 4 times a year – usually you need three to four injections per year). If you waited five years to start Botox, and saved the money each year, you would have saved approximately $6,700. What could you do with $6,700?
January 16th, 2009
There are two kinds of interest: Simple and compound.
Simple interest means that when you borrow money, you pay back the amount you borrowed, which is called the principal, plus the interest. The interest is only calculated on the amount of the principal. The amount of interest you pay back depends on the interest rate, which is usually expressed as a percent due for a full year, and the length of time over which you borrow the money.
There is a formula for calculating simple interest: Simple interest equals: Principal multiplied by the interest rate multiplied by the length of time. While you don’t need to remember the formula, please note two things: (1) The formula only uses multiplication and, (2) You know what each of the things you need to multiply are.
Here is an example of how to calculate simple interest. If you borrowed 1,000 dollars (your principal) at a 10 percent interest rate per year (the bank’s fee), for three years (the time period), the simple interest rate is: 300 dollars (1,000 dollars multiplied by 10 percent interest, multiplied by three years, equals 300 dollars). The total amount you would owe the bank at the end of the three years would be 1,300 dollars (1,000 dollars, the original amount you borrowed, plus the 300 dollars interest).
Compound interest is like simple interest in that when you borrow money, you pay back the amount you borrowed plus the interest. However, unlike with simple interest, where the interest is calculated only once, for compound interest the interest is calculated at the end of each compounding period. A compounding period is how often interest is charged – which can be yearly, monthly, weekly and even daily. This means you are charged interest on the prior period’s interest as well as interest on the principal.
Here is an example of how compound interest is calculated. In the simple interest example above, we borrowed 1,000 dollars at a 10 percent interest rate per year for three years. If the bank charged compound interest instead of simple interest, and they were compounding the interest annually (once a year), we would use the same formula: Interest equals the Principal multiplied by the Interest Rate multiplied by Length of Time, but we would use it three times.
In year one: 1,000 dollars, multiplied by 10 percent, multiplied by one year, equals 100 dollars. The total amount owed at the end of year one would be 1,100 dollars (1,000 dollars, the original amount you borrowed, plus the interest, 100 dollars).
In year two: Perform the calculation again, but this time use as the starting point 1,100 dollars – the balance at the end of year one. To calculate year two, multiply one 1,100 dollars, by 10 percent, by one year. This equals 110 dollars. The total amount owed at the end of year two is 1,210 dollars (1,000 dollars, the original amount you borrowed, plus 100 dollars, the interest from year one, plus 110 dollars, the interest from year two).
In year three, start with the 1,210 dollars from year two and perform the calculation again: 1,210 dollars multiplied by 10 percent, multiplied by one year. The total amount you would owe at the end of year three is 1,331 dollars (1,000 dollars, the original amount you borrowed, plus 100 dollars, the interest from year one, plus 110 dollars, the interest from year two, plus 121 dollars, the interest from year three).
The higher the interest rate, and the more you borrow, the bigger the difference between simple and compound interest becomes. Unfortunately for borrowers and credit card users, the interest on most long-term debts and all credit cards is calculated using compound interest. Banks know how much the difference adds up.
January 15th, 2009
There are as many different investing philosophies as there are fashions trends (According to Vogue.com Spring ’09 promises us: Nudes, metals, sky high stilettos, tribal, harem pants, and God forbid, jumpsuits.) The investing beginner should ignore this and choose with an eye towards the future, not just what is in style today. Day-to-day, stocks and stock markets, mutual and index funds will go up and down, sometimes a lot. If you did your homework before investing and kept current on your investments, you shouldn’t get overly excited either way.
There is a school of thought in investing that following crowd behavior – trends – creates opportunities. For example, if everyone believes denim jackets are back this season (Jcrew.com) and you spot the trend ahead of other people – you realize denim is going to be so this season before everyone else – you can profit by buying ahead of the crowd. You make money as denim prices increase.
However, there is also an investing school of thought who believes in eschewing trends: If denim is in, they ignore it and invest something else – such as leather. They believe that since everyone will be buying denim, and no one will be buying leather, denim will be over-priced and leather will be under-priced. When leather comes back into style, you profit because you bought leather when it was cheap and out of fashion.
Who is right? Both. However, unless you are a seasoned investor, remember, “Fashions fade, style is eternal.” Yves Saint Laurent
January 13th, 2009
Buying stock is buying ownership in an individual company; how much ownership depends on how much stock you buy. When you buy a share of stock, you are buying a small piece of everything the company owns and owes. So, for example, if a stock is selling for 110 dollars per share and you ask your stockbroker to purchase one hundred and 10 dollars worth, you now own one share of the company. If the company has one hundred thousand shares total shares outstanding, you just bought .00001 percent of the company.
Stocks are traded on a stock market. You buy stocks with the help of a stockbroker who is sort of like a personal shopper for stocks. There are well over 2,500 different companies whose stocks are traded on the New York Stock Exchange (NYSE) alone. Companies earn money and lose money. As their fortunes go, so does their stock. By owning their stock, you can make or lose money right along with them. Examples of the different kinds of familiar retail stocks you could own are: Abercrombie & Fitch, Saks, Nike, Polo and Ralph Lauren. Not only can you own a piece of these companies but you can show your brand loyalty by wearing them.
Think of a stock market as resembling a department store where you can buy all sorts of designer clothes, cosmetics, shoes and bags in one place. In the stock market, you can buy stocks and bonds and other financial instruments instead. In the United States, there are two main markets: The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Internationally, there are lots of others, like the London Stock Exchange and the Hong Kong Stock Exchange. You can shop at these markets just like you can at any other market, as long as you use your broker or have an investment account which will let you purchase directly.
Each market (or exchange) lists all of the stocks and other financial instruments it sells. You can browse all the offerings, narrow down your selections and hone in on your purchases. You can even try on, before you buy, by selecting a stock to watch. Don’t spend any money until after you have watched it for a while and also learned something about the company. See how much it fluctuates, the price of stocks constantly changes and you have to be sure that the stock you are watching is a value at the price at which you decide to buy it at. If the shoes were a steal at 125 dollars, would you still think they were worth buying at 200 dollars?
I do not recommend owning individual stocks unless you really know what you are doing and can afford to lose some money. The stock market, particularly now, can be a raucous place. When you are starting out, it is much better to own a professionally managed mutual fund or, even better, an exchange traded fund, which uses a different kind of shopping approach than that of buying stocks.
January 12th, 2009
One of the worst of the recent horrible headlines is the $50 billion dollar swindle perpetrated by Bernie Madoff. If you have not been following the saga, you should. It provides a valuable lesson about why understanding money and taking control of your finances is so important.
In a nutshell, Mr. Madoff paid early investors with money from later ones. He did this for so long, and on such a large scale, he convinced folks that whether the stock market was rising or falling they could invest with him and receive the same return – earn money on their money – without any risk.
Through understanding money, you understand the risks involved with investing. A higher return on investment almost always comes with a higher risk of losing your money. Most of us already know there is no such thing as a free lunch – or a free dinner. The same is true of investing: If something sounds too good to be true, it probably is.
January 9th, 2009
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