Archive for June, 2009
Let’s continue the last post. Why is an understanding of your personal risk tolerance important? Because if you decide to invest your money in anything more complicated than a CD, you’ll need to know how much risk you can stomach without getting queasy. Your risk tolerance helps determine what kind of investments you will be most comfortable with and where you should focus your attention.
Risk tolerance is different for everyone. You need to choose the risk level which feels comfortable to you. Most of the investments we will cover in this book are not federally insured. This means that if you lose any money, it’s gone. Obviously, some people tolerate this knowledge better than others. How do you know how much risk level you can stand? This quiz will help.
- Which Sex and The City Character do you most identify with: (a) Samantha, (b) Carrie, (c) Miranda, or (d) Charlotte?
- Which is your very favorite pair of shoes: (a) Stilettos, (b) Stacked heels, (c) Wedges, or (d) Flats?
- You are in Vegas! and you are down 500 dollars. How much money would you be willing to risk to break even? (a) Whatever it takes, (b) 1,000 dollars, (c) 500 dollars, or (d) nothing – you are done for the night!
- When do you stop to fill up the gas tank in your car: (a) not until I have to, (b) when the light comes on, (c) when the tank is one-quarter full, or (d) when the tank is half full?
If you answered mostly (a) you have a fairly high risk tolerance, (b) you have a moderate risk tolerance, (c) you have mild risk tolerance and, (d) you have very little tolerance for risk.
Note:
Any woman who regularly wears high heels understands the saying “no pain, no gain”. We all endure pain and discomfort in the name of fashion—and great looking legs—but we also know that those had to have them high heels could cause blisters, calluses, corns, bunions, lower back pain, and ankle sprains. Women everywhere know flats are inherently more comfortable. We balance—pun intended—how much we want the higher heels against the possibility of any pain or discomfort. Going after higher returns on our money requires the same balancing act. You must consider the risks of placing your money in less secure and more volatile investments against the security of federally insured but possibly lower returns. If you decide that your risk tolerance is low, that is perfectly okay. Flats are always “in” for a reason!
June 29th, 2009
I am thrilled to announce I will be on the radio discussing my new book. Please check my website (www.somanyshoes.net) for updated dates and times.
In the meantime, let’s discuss investing. Why should you think about investing your money? Why not just put it into a checking or savings account and let it sit there? Because investments offer a way for you to increase the money you invest by paying you a return.
One way to describe how fast your money is growing (or the increase in the value of your money), is through a concept called return on investment (ROI), a measurement of how efficiently your money is working for you. It is usually expressed as a percentage. It is an important concept to understand because ROI tells you how much your money will grow. Here is the formula for calculating your return on your investment: The gain from the investment minus the cost of the investment, divided by the cost of the investment
Note that while it is a math formula, it only uses subtraction and division. Let’s look at two examples.
Example one: you put 1,000 dollars into your savings account at the beginning of a year. The bank paid you interest on your money. Let’s assume you left the 1,000 dollars in there for the entire year and, at the end of the year, you check your savings account balance and see that you have 1,020 dollars. What was your return on investment? Your return on investment was 2%:
1,020 dollars minus 1,000 dollars equals twenty dollars.
Twenty dollars divided by 1,000 dollars equals 2%.
Example two: let’s assume you put 2,500 dollars into your savings account at the beginning of a year. You leave the 2,500 dollars in there for the entire year and, at the end of the year, you check your savings account balance and see that you now have 2,600 dollars. What was your return on investment? Your return on investment was 4%:
600 dollars minus 2,500 dollars equals 100 dollars.
One hundred dollars divided by 2,500 dollars equals 4%.
As you can see, in both cases you earned money, but the amount of money you earned was small. Your money earned money, but it could have earned more than it did. You work hard for your money and your money can work harder for you.
In a checking or savings account, your return on investment comes solely from the interest the bank pays you which are typically, fairly low amounts. However, in addition to checking and savings accounts, banks offer other kinds of accounts which pay higher interest.
One type of investment account that banks offer is called a certificate of deposit (CD for short). A CD is a special type of savings account and is a great place for a beginning investor to start investing their money. A CD differs from both a savings account and checking accounts because your money goes into a CD for a specific, fixed period of time (often three months, six months, or one to five years). During the period of time that you sign up for, you really don’t have access to your money. (In a regular checking or savings account, you can withdraw your money at any time you need to.) In a CD, if you pull your money out early, there’s a penalty fee. However, in return for leaving your money in the bank for so long, the bank pays you a higher interest rate than they pay on a checking or savings account. Once the period of time that you selected ends, you get back all of your money plus the interest your money earned for you. Then you can decide if you want to re-invest your money in another CD, selecting perhaps a different time period, or put it back into your checking or savings account.
Why is a CD a great place for a beginning investor to start? Because a CD pays a higher rate of interest than a checking or savings account and so you receive a higher rate of return (ROI) on your money. But because you can’t take your money out early without incurring penalties, you learn whether you have the tolerance to keep money tied up for some period of time. A CD is a way to check if you will miss having access to your money, without the risk of losing any of it. A CD is federally insured against losses, and allows you to begin to understand your personal risk tolerance.
More about personal risk tolerance and other kinds in investments in posts to follow.
June 24th, 2009
I am thrilled to announce my new book: So Many Shoes, So Little Money – A Girl’s Guide to Finance is now available on Amazon.com!
I use the language of fashion and shopping to convey money management fundamentals: The basic questions of how to budget, when to use credit cards, how to know which fashions to buy, what to do when you’re in debt and more ― it’s all covered. Each chapter draws parallels with fashion while delivering the primary message: If you want to be stylish, you must take care of your money―and the sooner the better. Managing your money truly is the new black.
Click here to purchase.
Thank you!
June 16th, 2009
Which have not been uttered…
Can you embroider “My 401K lost 30%” on this pillow? Are you sure I can’t pay more? Does my bank account make me look fat? Do you think my credit card company has my back? Is my CPA single? Taxes anyone? Do you think his checking account is what killed him? How great is my bank card photo? Can you make my paycheck smaller?
June 8th, 2009
With apologies to the urban dictionary…
Annual Percentage Rates (APR)
Fees charged by credit card companies when you do not pay your bill in full.
The credit card company charged me major bucks last month when I didn’t pay my bill in full – damm you Jimmy Choo!
Budget
An itemized plan of what you earn, what you spend, and what you can spend.
The new Gucci bag I am coveting is not in my budget – I might have to rent it!
Debt
Spending more than you can afford on anything (un-stylish)
Girl #1 – “Fantastic new jeans – tres chic! Were they expensive?”
Girl #2 -“Very. They put me in debt but I had to have them.”
Girl#1 – “That is so not stylish.”
Compound Interest
Where you pay (or receive) interest on your interest.
I owe so much interest on my credit card bill it’s as if my shoes bought their own shoes.
Time Value of Money
All things being equal it is better to receive money sooner than later.
A true Fashionista measures time in seasons and hates to wait.
Professional Help
Experts who can help you manage your money: Accountants, Attorney, Financial Planner, Investment Adviser, Insurance Broker, Realtor, Stock Broker
I’ve hired a professional, after all it’s a fine line between super stylish and fashion train wreck.
June 5th, 2009
Retire, who me?
A 401K, is a retirement plan your employer can offer you if they so desire. Yes, I know retirement is a long, long way off but as a fashion fashionista you know how good it is to start saving early. You can only get a 401K through your employer. A 401K automatically takes money out of your paycheck—you decide how much, up to the federal limit—and deposits it into a retirement savings account set up for you. You then decide, based on the options the employer provides how your retirement account will invest your money. Usually your employer will offer a range of choices, ranging in risk from preppie conservative to cutting-edge fashionista.
The money you allow your company to deduct from your paycheck and put in your 401K is deducted pre-tax, meaning before you pay taxes on it. In other words, you do not have to pay any taxes on the money you put in. You get to invest this part of your paycheck, earn money on the government’s share of its taxes, and keep the money you earned on that share when you eventually withdraw the money from your account and pay the taxes on the amount you withdraw. So you have the use of the government’s money to earn interest until you are sixty-five or older and can withdraw the money.
If your employer offers a 401K plan you should take full advantage of it. It will force you to save because it takes money out of your paycheck before you ever see it. Plus, it will lower your tax rate, since it is money you won’t be taxed on, and, even better, some employers offer you an incentive to invest in a 401K by contributing to your account as well, which should make participating irresistible.
The amount your employer contributes is called a matching contribution and usually consists of a percentage of your paycheck up to a defined maximum. For example, an employer might offer to match you fifty cents for every dollar you contribute up to some specific percentage of your salary, usually three or four percent. So over the course of a year, if you invested one thousand dollars, your employer would deposit five hundred dollars into your account. This is like getting an instant raise with no extra duties required.
If you leave the company, you can take the 401K account with you and roll it over into an Individual Retirement Account (IRA), a kind of stand-alone 401K, or leave it with your former employer to administer even after you leave. Sometimes they charge you a fee for doing this so I suggest rolling it over into an IRA. (Also, if you plan to have more than one employer before you are sixty-five, it is nice to keep your accounts together in one place that you control.) IRAs are more flexible than a 401K; your money can be invested in whatever you want, not just what your employer has chosen—from stocks and mutual funds to bonds and real estate. There are lots of different kinds of IRAs so you need to check them all out. The downside of IRAs is there is a limit on the amount you can invest in them each year, although 401K rollovers are exempt from this limitation. The limit changes so you need to look up the limit for a particular year. You can Google “IRA” to learn more.
June 2nd, 2009