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Love Your Money

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People are willing to do a lot for someone they love such as try new things, change their style, and even relocate.  However, what are they willing to do for their money?  Sometimes it can be misplaced, torn up, abandoned, left unprotected, and even thrown away on insignificant things.  What if you treated your money as special as you would treat someone you love?  Things you may do are…

Make Time For It

When you love someone, you may hang out more and more and structure your day around him or her.  How much time do you take for your finances though?  Try carving out some time in your day or week to:

Just like relationships, your money can flourish if you put in the time to get to know it and make a point to include it in your everyday living.

Show It What It’s Worth

You may buy flowers or gifts, go out to a nice dinner, and even spoil each other to outwardly show your love and communicate your significant others’ worth to you.  However, the cumulative cost of junk food, drinks at the bar, bank fees, and other spending that will seem insignificant further down the road when you’re going to purchase a new car, have a child, or retire.  Instead, show money its worth through:

  • Smart shopping (i.e. sales, coupons, and discounts)
  • Memorable spending (i.e. experiences in place of material goods)2
  • Mindful prioritization (i.e. saving for a coffee maker later instead of a cup of coffee now)

Prioritize It

As relationships progress, your significant other becomes a bigger and more important part of your life.  This may lead to changes in how you structure your day, the traditions you create, and the sacrifices you make for the betterment of the relationship.  Likewise, your financial priorities change throughout life and become more and more necessary in order for you to accomplish your financial goals.  Some current wants may need to be cut back in to make room for saving up for more special wants (i.e. vacation) and future needs (i.e. house payment).  Steps to prioritizing your spending to enhance your financial relationship:

  1. Brainstorm financial goals
  2. Make your goals SMART3
    1. Specific (what why and how)
    2. Measurable (set dollar amounts)
    3. Attainable (realistic)
    4. Relevant (fits with bigger picture and your other goals)
    5. Timely (set dates)
  3. Calculate how to achieve your goals
  4. Tweak current budget and spending accordingly
  5. Find an accountability partner

Protect It

We want to do everything to protect the one we love both physically as well as emotionally from any pain.  Sometimes, life happens and we do the best we can to build back up and heal.  There are many ways to protect your money such as having an emergency savings to cover unexpected expenses and prevent debt or outrageous interest costs as well as consistently monitoring for identity theft and bank fraud.  Emergency savings should have 3-6 months’ worth of money in a relatively easily-accessible account to cover such things as medical bills, car repairs, or a loss of job.  You can monitor your credit through pulling a credit report at least every 4 months (https://www.annualcreditreport.com) and can protect from bank fraud by review your bank statements and utilizing credit card EMV technology when you can4.

Be Patient With It

Rushing into things can sometimes end up bad and sometimes the best things in life take time and hard work.  Your money probably won’t grow overnight (barring lottery winnings and surprise inheritance), so you’ll need to be patient with it and continue to nurture it.  Interest rates are most beneficial over time and frequent changes in investments may not pay off.  The market changes every minute, but despite dips and turns, a lot of investments pay off if you are patient and wait out the lows.

Commit

So you’ve spent some time together, you’ve gotten to know him or her more, and you’ve decided that he or she is worth prioritizing.  The next natural step is to decide whether you want to stay together in the future and beyond.  Rather than staying focused on the present, you may make a commitment for the long-haul.  Similarly, this may be something beneficial to do with your finances.  Picture your life with it in the future and what you want that to look like.  You’ve mastered saving for emergencies and upcoming trips, now what about for retirement or future children’s educational expenses?  These decisions come with more of a commitment due to the limitations on their spending, but can be truly beneficial in the future should you follow through on the commitment.  Time is your greatest ally in the realm of saving and investing.

Resources

  1. http://www.k-state.edu/pfc/planning/Financial%20Goals%20Worksheet%20-%20Specific.pdf
  2. http://www.forbes.com/sites/hbsworkingknowledge/2013/08/05/want-to-buy-happiness-purchase-an-experience/#34522db1704d
  3. http://freefrombroke.com/guide-setting-smart-goals-finances/
  4. http://blogs.k-state.edu/pfc/2015/10/05/credit-cards-are-changing-are-you-ready/

Christyne Stephenson
Peer Counselor III
Powercat Financial Counseling
www.k-state.edu/pfc

Invest in Your Future

Investing may seem like a foreign concept, however, you invest in yourself every day. By investing your time studying, you hope to achieve a better grade than say spending an evening in The Ville. Simply being here at K-State is an investment. By spending thousands of dollars today, you hope to have a higher salary than you would with a high school diploma. Much like these forms of investing, financial investing occurs with the hope that if one puts a little money away today, there will be more money in the future. The financial markets can sound like an intimidating, scary, and complex world, but with a better understanding of some of the underlying terminology, you can gain a better grasp of how they operate and one day be able to invest in yourself financially.

Financial Market

A financial market is any marketplace where buyers and sellers trade assets such as stocks, bonds, commodities, and derivatives. In today’s world most of these transactions take place online and an individual can get involved by setting up an account with an online brokerage firm, such as E*Trade, Schwab, or Scottrade.

Stocks, Bonds, and What??

Stocks, bonds, and derivatives are all financial instruments, but they all come with various advantages and disadvantages. Stocks are a financial asset that give you partial ownership of a corporation. When you purchase stock in a company, you are entitled to some of their earnings which come in the form of dividends, however companies are not required to pay dividends. Stocks are extremely volatile and their prices fluctuate often as the market fluctuates. While historically stocks have performed well, the return is not guaranteed. These factors make stocks extremely risky, however the return on your investment is approximately 5% greater than the return for bonds.

Bonds are a debt instrument, thus when you purchase a bond, you are lending money to the government, a municipality, or a corporation. When you buy a bond, or give out a loan, you make your return by earning interest. Bonds are less risky than stocks for several reasons. Unlike stocks, when you purchase a bond the issuer promises to pay back the face value, or the amount you purchased the bond for. The amount of interest earned is also backed by a promise from the issuer and the interest rate is often fixed. Historically the bond market is less vulnerable to changes in market price.

There are hundreds of financial instruments out there including derivatives, options, futures, CDOs, and swaps. These assets are more complex than stocks and bonds. For more information on any of these financial instruments, you can go to www.investopedia.com.

Market Indexes

In the news you may have heard phrases such as “the Dow drops 600 points” or “the S&P 500 soars.” The Dow Jones Industrial Average and the S&P 500 are both examples of stock market indexes. A stock market index simply measures the value of a section of the stock market. The Dow and the S&P 500 are two of the most widely analyzed indexes. The Dow Jones index includes 30 of the largest and most influential companies in America. Since it includes some of the most well-known companies in America, the Dow usually corresponds to changes in the entire marketplace, though it may not be on the same scale. The S&P 500 is made up of 500 of the most widely traded stocks in the U.S., and it represents approximately 70% of the total value of the U.S. stock markets. Since it is more diverse, it generally gives a good indication of the overall movement in the U.S. marketplace. Points for these indexes are simply a whole number in the index value used to more easily measure the increase or decrease in the indexes.

Portfolio

A financial portfolio includes all of the investments you have, whether that includes stocks, bonds, or other financial assets. In order to minimize risk, your portfolio should be diversified. It should include different types of financial assets, all with varying risks and maturities. For example, a diversified portfolio may include riskier investments such as junk bonds or stock in a new company as well as government bonds and stock in a well-established company. It is also important to invest across market segments (technology, energy, etc.) rather than put all of your investments in one industry. Risk is important to reduce, however, the lower the risk, the lower the return. Vanguard has created some model portfolio allocations (https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations). These allocations show varying types of portfolios and the historical risk and return associated with each. Many advisors recommend investing in riskier assets when you’re young, such as stocks, and investing in safer assets as you near retirement, such as bonds.

What now?

The best way to invest smart is by understanding the markets and being knowledgeable about the financial world. Paying attention to the financial news today, even if it is just looking at an article a week, will help you gain a better understanding for when you’re ready to invest. The Wall Street Journal, Google Finance/Yahoo Finance, and other credible news sources are all excellent ways to stay up-to-date in what the market is doing. Investopedia is also a great source for understanding different aspects of the financial world. As with most things, practice makes perfect. Luckily, there are several free stock market simulators out there to help you gain a better understanding of how it works without risking your own money! Investopedia Stock Simulator, Virtual Stock Exchange, and Wall Street Survivor are some of the most popular simulators out there. By expanding your financial knowledge and seeing how the market operates, you will be able to make smarter financial decisions and be prepared to invest in your future.

Sources:

http://www.vdmtrading.com/2010/05/top-6-best-stock-market-simulators.html
www.investopedia.com

Jillian Taylor
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

The Power of Compounding

Albert Einstein once said that compounding interest is the most powerful force in the universe. Luckily, you don’t have to be as smart as Albert Einstein to understand this simple, yet very powerful concept.

The wonder of compounding can substantially grow your money over time.  The simple idea is that the investor is generating earnings on an asset’s reinvested earnings. In order to work, you will need initial investment, re-investment of earnings, and time. The earlier you start, the more you are able to accelerate the income potential of your original investment. Metaphorically,  you can think of compounding interest as a snowball rolling downhill:  it is going to get bigger over time as it accumulates more snow along the way.

Example:

Let’s say that you have $10,000 today and you can put it in a savings account that pays 5%. For simplicity purposes, the interest is compounded annually. This means that in a year, you will have $10,500 ($10,000*5%). Now, let’s assume that rather than withdrawing your interest gain of $500, you keep it in there for another year. If you continue to earn the same 5% rate, your investment will grow to $11,025 ($10,500*5%). As you can see, by reinvesting your earnings of $500 with your principal of $10,000 at 5% interest rate, you will be able to generate an additional $25 that you otherwise wouldn’t have if you invested just the principal of $10,000 at 5% in year two. In year three, you will have $11,576 ($11,025*5%). Without compounding interest, at the end of the year three, you would have $11,500 which is $76 ($11,576-$11,500) less than with compounding interest. This might not sound like a lot at the beginning, but it will make a big difference as time passes in the long run.

The Rewards of Starting Saving Early

Let’s consider a hypothetical situation of twin sisters Jessica and Kim. Jessica and Kim just graduated from college at age 25 and they were able to get very good jobs that offered them a $5,000 signing bonus.

Jessica starts saving now

Jessica decided she was going to put $5,000 towards her savings account right away at age 25. The savings account offered Jessica 5% annual interest rate. After 35 years, when Jessica is 60 years old, she will have $27,580.08 ($5,000*[1+5%]^35) in her savings account.

Kim starts saving 10 years later

On the other side, Kim spent her signing bonus when she started working at age 25. After 10 years, when Jennifer was 35, she started worrying about her retirement and decided to put $5,000 towards her savings account at 5% annual interest rate. After 25 years, when Kim is 60 years old, she will have $16,125.50 ($5,000*[1+5%]^25).

Lesson Learned

Jessica is able to make $11,454.58 ($27,580.08-$16,125.50) more than Kim just by starting 10 years earlier. Both Jessica and Kim were able to generate funds by not doing much rather than just letting their money grow with compounding interest. This is a very simple example, but you can imagine how much money you would be able to generate if you have a higher initial investment to start with or if you are putting away a monthly portion of your paycheck towards your savings account that is using compounding interest. If you allow enough time, the power of compounding can do wonders for your financial goals!

Elvis Hodzic
Graduate Assistant
Powercat Financial Counseling
www.k-state.edu/pfc

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