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Invest in Your Future

Posted on by christyne

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

Importance of an Emergency Fund

Posted on by christyne

Along with making goals, creating a budget, and managing debt, it is very important to establish and maintain an emergency fund. Most people at some point in their life, have heard from their grandmother or some other person “save it for a rainy day.” This may seem cliché because it is said very frequently, however, in the world of finance and money management, there is a 100% chance, at some given time in life, it will rain. By having an established emergency fund you can save yourself a lot of pain and hardship when faced with a financial or life emergency.

Getting Started

The first step in establishing an emergency fund is calculation and saving. Many experts agree that a well-established emergency fund should be between three to six months living expenses. This is because many financial emergencies involve loss of income in some form. By having three to six months saved, this will give you ample time to find a new source of income while still paying all of the bills you may normally have to. Similar to budgeting you must calculate your monthly living expenses including mortgage or rent, vehicle or other loan payments, utility bills, groceries, gas, or other expenses essential to living month to month. Once you know the amount you will need monthly you can multiply it by three to six and start saving. This money needs to be somewhere safe but it must also be liquid, meaning it can be converted to cash quickly should you have an emergency and need it. Saving accounts are safe, however, once you begin to have a bigger savings you may want to think about putting that money where it has a better chance of making money through interest such as a money market account or a short-term certificate of deposit (CD).

It Takes Time

Your emergency fund does not need to be established overnight; in fact, it is very unrealistic to establish one overnight. Although, if you have the ability to establish one overnight, such as an inheritance or bonus, it is important to put that money away in savings and do not look back. If you have a hard time putting away or saving money, do not be afraid to start smaller and work up to a larger amount. Start with $10 per month, or per paycheck, and do this for a couple months. It will not be a lot of money, but you will develop a habit and eventually will not miss the $10 you have been putting away. Once this happens you can think about bumping the number up to $15 or $20. These small numbers will eventually turn into big numbers as long as you keep working hard toward reaching your goals.  You can set up automatic transfers or direct deposit so that the money is put aside before you even see it!  Remember:  always pay yourself first.

Emergency Means Emergency!

It is important to remember why you have this emergency fund and define what it should be used for. There will be times when it is tempting to use this money for expenses such as vacation, down-payments, going shopping for seasonal clothing, getting a new game system, paying down other debts, or other things along those lines, but try to abstain from this activity. Your emergency fund is for financial emergencies, which can come in many forms.:  you can make a list of acceptable emergencies and only use the money on the things on that list. Everyone’s list will look a little different, however, here are some of the common things emergency funds may be used for: unemployment expenses, medical emergencies, unexpected repairs such as vehicle or household (due to unforeseen causes), unexpected tax bills, emergency veterinary bills, to name a few. It is important to remember the purpose of this account is to keep you from adding debt as a result of trying to come up with money quickly. Plan for worst case scenario so when smaller emergencies arise they are easily covered.

Revise and Maintain

It is essential you maintain your emergency account. There will be times you draw money from the account because emergencies happen, but remember that the money you use on emergencies is money that can no longer be used on other emergencies. This goes back to starting small, if it has been a while since you have contributed a portion of your paycheck to saving, you may have to go back to saving $10-$20 per paycheck until you get your emergency fund balance replenished. You will also have to reevaluate your emergency fund throughout life to adjust to life changes such as marriage, children, etc. Choosing a number that will give you three to six months of living straight out of college could be significantly smaller than three to six months of living expenses when you are married with children. If in doubt, save more.

This concludes the Financial Literacy Month series on money management.  Look for other posts for more tips on both saving and spending money wisely.

Resources

http://financialplan.about.com/od/savingmoney/a/emergencyfund.htm

http://www.investopedia.com/financial-edge/0812/why-an-emergency-fund-is-important.aspx

 

Shannon Vaughan
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

Setting Financial Goals

Posted on by christyne

April is Financial Literacy Month, and Powercat Financial Counseling is taking this opportunity to write a series of articles related to basic financial management.  To kick the month off, we’re starting with setting financial goals.

Planning Ahead

Setting goals, especially financial ones, can be a challenging, and sometimes daunting, task.  Having goals is important, though, in that they give you something to aim for and work towards.  To quote Zig Ziglar, “If you aim at nothing, you will hit it every time.” A good place to start is to think about your life in the future.  How do you want to live?  What do you want your life to look like?  Do you want to be debt free, buy a car and a house, start a family, or travel?  How will you accomplish these tasks and get to the life you really want?  Thinking about these things now is important.  When you graduate and enter the workforce, it is easy to get caught up in your daily routine and not give much thought to your future.  You will probably be inclined to think a few weeks or months ahead, but it might be hard to think a few years ahead.

Short-term vs. Long-term:

A short-term goal is one that is set for two years or less, and a long-term goal is one that is set for five or more years.  Some examples of short-term goals are planning for spring break and summer trips and building an emergency fund, while long-term goals might be buying a car, buying a house, or paying off student loans.  Even if you have trouble coming up with specific savings goals, you should still try to save whatever you can.  A good first goal for everyone, which should be a priority, is an emergency fund.  An emergency fund is a separate store of money which you access only in emergencies (ordering a pizza in the middle of the night because you don’t have food around is not an emergency).  If your car suddenly got a flat tire, how would you pay for it?  If you lost your job all of a sudden, where would the money come from to get you by until you get another job?  These are the types of situations in which an emergency fund would be useful.  It is recommended that you work up to having three to six months’ of living expenses saved up in the event you lose your job or are unable to work due to an injury.  This may seem like a lot of money, and depending on your situation, you as a college student could probably afford to wait a little while to get to the point of having this much saved.  Your parents may be willing to bail you out if something comes up.  But it is still a good idea to have at least $500 to $1,000 on hand in case of emergencies.  Life happens: will you be prepared when it does?

SMART Goals

When setting goals, it is important to define them well.  Your goals should be Specific, Measurable, Attainable, Relevant, and Timely, or “SMART.”  If your goal doesn’t have these characteristics, you will likely give up on it.  This is why it is important to write out your goals with these specifications and keep it somewhere where you will see it on a regular basis.  You will also want to prioritize them.  It is important to note that your goals may change over time and to review them periodically to make adjustments as necessary.  Set a reminder for yourself every few months to review your goals and see if you need to adjust them.  Maybe something came up since you set and prioritized your goals, or perhaps your goals will drastically change once you graduate; if so, you will want to make the necessary adjustments and re-prioritize.

Motivation to Save

Some people find saving to be difficult for them, whether it is because they feel like they are depriving themselves or they have loans to repay that they don’t think that they can save.  One way to save without “missing” your money is to ask your employer or your bank to direct deposit a portion of your paycheck to a separate savings account.  The general recommendation is that you save 10% of each paycheck; however, be careful not to set aside so much that you aren’t able to pay for your immediate expenses.  Every little bit adds up, so save as much as is within your means even if it is only $10 or $20 a month.  If you are able to save more than 10%, that is great too.

“If you are failing to plan, you are planning to fail,” said Benjamin Franklin.  Planning really can be a challenge, especially if you don’t know how to start.  One website that might be helpful is Sorted.org: https://www.sorted.org.nz/a-z-guides/setting-goals#s6.  It helps you to organize your goals with its “goals worksheet” and walks you through the planning and implementation process, offering tips along the way.  It even talks about goal-setting in relationships, which can be even more of a challenge than setting goals on your own.

In closing, it is important to set goals in order to achieve the life you want.  Start thinking about it now and begin developing a plan to get you there.  You will want to evaluate the short term and the long term, but allow for some flexibility in case your desires or values change.  Saving as much as you can now and building up an emergency fund will pay off in the long-run.  Be on the lookout in the next few weeks for more helpful tips about personal financial management during Financial Literacy Month.  If you have any questions about setting goals or financial management and would like help with any of those, please make an appointment on our website: www.k-state.edu/pfc/services.  We provide free and confidential counseling to all K-State students.

Rachel Vogler
Peer Counselor II
Powercat Financial Counseling
www.k-state.edu/pfc

Thinking About Studying Abroad?

Posted on by christyne

More and more college students from all over the country are choosing to study abroad. Spending a semester or a couple of weeks in a foreign country is both exciting and beneficial to your personal development. A growing number of employers see this as a plus because it can suggest your global perspective and awareness. One might think picking the ideal country to study in is the hardest part, but in the hype of the excitement, many students overlook the costs of financing the trip. Here are a few tips to help you plan accordingly without having to worry about money.

Create a Budget

The first course of action is to determine whether or not studying abroad is feasible months in advance. You’ll need to obtain an estimate of the total costs of your intended countries you may study in (as well as possible excursions you may take while abroad).  This includes, but is not limited to, passport or visa applications, tuition, books, housing, meals, bottled water, plane and train tickets, transit (i.e. metro or taxi), and souvenirs.  Then, you need to figure out how much you currently have to pay for the trip and how much extra you’ll need to save up. The best solution to this task is creating a budget. Start by listing all your monthly sources of income and deducting all your monthly expenses to establish your discretionary balance (the money you have left over). If you are in the red (negative balance), funding this trip might be a difficult task. Don’t fret, though, as there are alternative funding strategies. If you are in the black (positive balance), then you are more likely able to finance the trip.

The next step is to set up a “Study Abroad Fund” and contribute monthly to build up the balance. This fund will be your go-to source of money when abroad. The amount that you can contribute will depend on how much money you have left over to generate on a monthly basis. Being college students, that amount tends to not be significant. Thankfully, there are alternative sources of funding available to students who plan on study abroad and they come in the form of scholarships. Scholarships are free money and you should try to obtain as many as possible. Check with K-State’s Study Abroad Department for more details at http://www.k-state.edu/studyabroad/current-students/funding/scholarships.html. A new and popular way of raising funds comes in the form of crowdfunding. You can set up a campaign on sites like indiegogo, kickstarter, and gofundme and have access to a community of millions of people that can help raise funds toward your trip. You also are eligible to receive student loans during your time abroad if you are enrolled at least half time, which can help with the costs of tuition, room, and board. For more information, you can visit Student Financial Assistance’s page at http://www.k-state.edu/sfa/policies/studyabroad.html.  If you still need more money for your trip, don’t be afraid to speak to your parents and family for assistance.

All these sources of income are better utilized or obtained if you have a thorough budget drafted that illustrates your financial need and capability. You can use PFC’s free spending plan worksheet to help you with this task by going to http://www.k-state.edu/pfc/budgeting.

Does your Debit/Credit card Work in Foreign Countries?

Once you are in the program, have chosen a country to study in, and raised all the funds you’ll need, then you are almost at the finish line of enjoying a financially stress-free trip. What you need to do next is figure out if your debit and/or credit card(s) work in the country you plan on travelling to and if so, if you will incur any fees every time you swipe your card. You can easily check with your bank on this matter and if need be, obtain a card that allows you to do so without any costly fees.  Most banks will charge a flat cost for using international ATMs (i.e. $5) and some will charge a percentage of the withdrawal (i.e. 3%).   Some credit cards won’t have foreign transaction fees, but this only applies to transactions made using the card.  Be aware that many places abroad only accept cash and you won’t be able to use the card with no foreign transaction fees.

Additionally, it’s very important to put a travel notification on each card you may be using abroad, including ones brought for emergencies only.  This can be done by calling each bank or company and letting them know the dates of travel as well as the countr(ies) you will be in.  Failure to place a notification can result in your card being frozen due to a suspicion of theft.  This can last for days and may only be able to be lifted by a phone call to the bank or company.

Do I Have an Emergency Fund?

Lastly, you need to be prepared for any surprises that can financially impact your study abroad experience. You need to have an emergency fund set up that will only be used if something bad happens. Examples include losing your wallet, pick pockets, travel or lodging mix ups, or a medical emergency. It never hurts to be prepared and you’ll have less things to worry about knowing that you have a back-up plan.

If you need further assistance in planning for your trip, feel free to set up an appointment with PFC by going to www.k-state.edu/pfc/services.

Resources

http://www.forbes.com/sites/alexadavis/2014/07/10/6-ways-to-cut-the-costs-of-your-study-abroad-program/

Gerald Mashange
Peer Counselor II
Powercat Financial Counseling
www.k-state.edu/pfc

The Most Convenient Way to Keep Track of Your Budget

Posted on by christyne

It’s important to keep track of one’s budget for many reasons.

  1. First of all, a budget let’s you decide where your money goes before you spend it, instead of wondering where your money went at the end, or worse in the middle, of the month.
  2. Secondly, by keeping track of your budget you can find categories that you spend a lot of money on. It helps you get an exact picture of your spending and helps you decide whether or not it depicts your priorities. Is spending $30 a month on coffee where you want your money to go? Do you really like TV enough to spend $100 a month on it? What else could you do with that money?
  3. Further, keeping track of your budget allows you to plan your financial future. Saving for emergencies, a trip or retirement and repaying loans is only possible if you have a good grip on your finances.

All the benefits of setting up a budget can empower and motivate you to try and follow everything to a tee to get your finances in great shape. Unfortunately, the reality of tracking all of your spending can be tedious. When you have to keep all your receipts and enter the amounts, one by one, into a spreadsheet or even a notebook, staying on top of your budget can become a pain.

A good and reasonable budget is important and is actually tied to financial success. At PFC, peer counselors use the budgeting process for many different personal financial situations. Budgets uncover spending leaks, show how large an emergency fund needs to be, can give college students an understanding of how much the first job out of college should pay, how much student loans are needed and last, but not certainly not least, to decide where the money should go before it’s spent.

One thing that we have found very helpful and has found much resonance with clients is Mint.com. The website comes with an app for iOS and Android and is the best resource we have found to track spending and manage finances. When a user first opens an account with Mint, he or she is prompted to enter access information to all checking, savings, and investment accounts, credit cards, and even loans. There is also an option to enter property, such as cars and a home, to the account. This approach allows the user to examine his or her entire financial situation.  Mint has a triple layered security system to protect this sensitive information, which one can read more about on their site before creating an account.

The main function of the site, however, is tracking spending and budgeting. By entering credit card and bank account information, the user allows the website to track all transactions. Mint automatically places the expenditures into categories. So a purchase at a supermarket, such as Dillon’s, will automatically be placed under “Groceries”, and a transaction with Chipotle will automatically go into the “Restaurant” category. There are a problems with misplacement, especially with one-stop shops such as Wal-Mart, however the website allows one to change the category of a particular purchase and to split the transaction into multiple categories.  If you spend cash, there is also the option to manually input transactions.

Spending in each category fills up a bar graph representing the budgets the user sets on the budget tab. Mint will come up with an estimate of an appropriate budget based on past spending and US spending averages, but they can also be manually adjusted by the user. The Website will send alerts via email when spending approaches budgeted limits, keeping the user on track. Besides setting budgets, users also have the opportunity to set goals, such as for a spring break trip, paying down debt, or saving for a down payment. Mint has preset goals that walk the user through the process, while custom goals are also an option.

On the trends tab, users will find statistics about their spending, income, debts and assets. This tab, among other things, can be useful in determining what the biggest spending categories are and give users a visualization of net income. While most investors find this information with their brokers, Mint’s investments tab can be useful by having all the information in one place. Lastly, the “Ways to Save” tab gives suggestions for savings and checking accounts, loans and credit cards, as well as investments and insurance. If a user is actually in the market for any of these items, this tab can be a great place to start researching, however it should not be the only place to look or and should not encourage one to take on new, unneeded credit.

Overall, Mint is one of the easiest money management and budgeting tools out there and a gold mine for anyone who struggles to keep up with tracking, no pun intended.  Mint is one of the best websites/apps to help track spending, because it’s able to integrate with users’ bank accounts. Mint currently collaborates with more than 7,500 financial institutions, more than any other budgeting website (Rapacon*). Transactions are updated and put into categories automatically which makes it the easiest to use application out there.  Try it out today by going to http://www.mint.com.

*Source:  Rapacon, Stacy. “The Six Best Budgeting Sites.”  Kiplinger.com.

Lara Blomberg
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

The Power of Compounding

Posted on by christyne

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