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Investing 101

Most adults are well aware of the fact that they should be investing, and that they should start as early as possible in order to save for retirement. Unfortunately, the learning curve for investing is pretty steep and the prospect can be intimidating for newbies (and even seasoned investors).

In short, most people don’t have the faintest idea how to get started when it comes to investing. How much money should you sock away each month? Which types of investments should you choose? Do you even know what types of investments are available to you?

Although getting started with an investment strategy can be overwhelming, you shouldn’t let the complexities of this process derail you, especially if you’re interested in making your money work for you. With some basic knowledge under your belt, you should be able to hit the ground running. Here are a few things everyone should know about investing.

What is Investing?

The concept of investing is actually pretty simple. If you have a savings account, you’re already investing, whether you know it or not. Investing is, in the most basic sense, the act of committing funds to an investment account for a set amount of time with the expectation that you will see a percentage of return.

When you put money into your savings account, it won’t earn much interest – generally less than 1% annually these days. Still, at the end of the year you will have more money than when you started and all you had to do was place your funds in the account and let them sit.

This is the easiest and safest form of investing, but it is not the most lucrative by a long shot. This brings up a good point, though. When investing, there is always potential to make money, but you have to assess the risks associated with different investments.

Often, there is a risk of losing money when you invest, and the more you stand to gain, the greater the risks usually are. You need to balance risks and potential rewards any time you invest your money so that you don’t stand to lose more than you can afford to.

Many people equate investing to gambling, but this is hardly the case. Some people do treat the process like gambling, selecting risky investments without first researching their options. However, when you behave responsibly, comparison shop for investment opportunities, and analyze the potential risks and rewards in order to make an informed decision, you can mitigate risk factors and invest your money wisely.

What is Compound Interest?

Interest is easy enough to understand. When you invest $1,000.00 in a CD (certificate of deposit) and earn 2% interest over the course of a year, the end result will be $1,020.00. Compound interest is a little more complicated, but a lot more appealing when it comes to investing.

Compound interest allows you to earn interest not only on your principle investment, but also on the reinvested interest earnings. Suppose you put money into an investment account that’s earning 5% interest annually, just for example.

If you start with $1,000.00, you’ll earn $50.00 in interest and have $1,050.00 at the end of the year. If you reinvest that $50.00 you earn in interest, however, the next year you’ll earn $52.50. The year after that you’ll add $55.13. This is assuming you add no additional principle to the account.

The point is that your money will start to increase exponentially, earning you more and more as it grows, whether you add more principle or not. As you can see, compound interest accounts are the very best way to make your money work for you with very little effort on your part. The only caveat is that you can’t touch the money – time is the key component in making a compound interest strategy pay off.

Types of Investments

There is no shortage of investment opportunities to consider. When you hear the word “investment” you might think of a portfolio of stocks and bonds. However, as already discussed, even a simple savings account is a form of investing.

You can also invest in real estate, for example. Some people invest in collectibles like comic books or movie or sports memorabilia. Or you could place money in retirement accounts like a 401K, Roth IRA, or index universal life policy (IUL).

Before you get into particulars you should know that there are a few broad categories of investments. The first is investments that you own, and this includes tangible assets like real estate, art, or jewelry, just for example. If you own a business, it could also fall under this category, and stocks confer partial ownership of a publicly traded company.

Assets are further broken down into asset classes for the purpose of investing, so speak with your stockbroker or financial advisor to find out more before you decide where to put your money.

Another category of investment is loans, whereby you loan your money to the government, a bank, or other entities and basically earn interest in the process. When you buy a government bond, for example, you’re giving the government a loan with a set term after which it must be repaid with interest. The same is virtually true of CDs, whereby a bank holds (and uses) your money for a set amount of time and then returns it to you with interest.

There are also cash equivalents, which are short-term investments considered to be “as good as cash”, such as treasury bills, commercial paper, and marketable securities. Or you could become a venture capitalist, loaning money to small business startups that show growth potential.

Once you start delving into investing, you’ll find that there is a whole world of investment opportunities available to you. Until you understand the many types of investments, though, it’s probably best to start small with minimal investments and low risk options.

Ways to Invest

There are really only two ways to invest. You can either do it yourself or hire professionals to help you make decisions and manage your accounts. These days, plenty of people think they can go it alone with platforms like E-Trade, but this is a risky venture since the average adult knows relatively little about investing.

If you hire professional help, however, you have a much better opportunity to succeed. Should you hire a financial advisor? A stockbroker? Who can offer the best advice? In truth, you may want to look into a variety of options before you start investing.

  • Brokerage accounts. This traditional investing arrangement involves working with a brokerage firm, and often with a specific stockbroker, to create and manage an investment portfolio. Under this arrangement you would deposit funds with the firm and allow the company to complete transactions (i.e. trades) on your behalf. Many people choose this option because of the expert advice and the convenience associated with collaborating with an experienced broker. Popular brokerage accounts include Charles Schwab, Fidelity and E*TRADE.
  • Robo-Advisors. Many brokers simply use algorithms designed to identify the best places to invest your money. You can cut out the middle man and save some money in the process by selecting a robo-advisor. These online investment firms limit human intervention and recommend opportunities based purely on the numbers.

The robo-advisor field is blossoming these days with niche markets available based on your investment goals and strategies. If you have a low risk tolerance and prefer a conservative approach, especially where your retirement savings, is concerned, you may want to consider Betterment accounts. Betterment accounts offer diversified (yet conservative) stock and bond portfolios, automatic reinvestment, and straightforward pricing, among other benefits, allowing investors a simple way to manage their own investments.

If, however, you have a passion for a certain industry then you may want to consider a robo-advisor firm like Motif. Motif also uses computer algorithms to automate the investment process, but what sets them apart is that they provide investors with customizable portfolios all aligned under a common theme, or motif. These motifs fall into one of six overarching categories: asset allocation, global opportunities, income strategies, sectors, trading strategies, and values-based. Investors can use pre-set motifs or modify them to reflect their own interests.

Why Invest?

There are so many reasons to invest, but the main one is to plan for a stable financial future. With costs increasing, social security on the decline, and people enjoying longer lifespans, it is now more important than ever to ensure that you have enough money set aside to live comfortably after the age of retirement, and possibly leave something behind for loved ones.

You’ve got a great idea for a business, a real golden goose, and you’re ready to leave the 9-to-5 to be your own boss. While deciding to become an entrepreneur might be easy, the actual execution is a lot more complex.

If you want to launch a successful enterprise, you’ll not only have to figure out logistics like suppliers and production (or alternately, hiring professional service providers), but you’ll also have to consider branding, marketing, and scalability, just for starters. Owning and operating a business requires you to wear many hats, at least in the beginning.

However, you’re not exactly reinventing the wheel. Many business owners have already done the heavy lifting and there is no shortage of available resources to provide you with the guidance needed to get your ducks in a row.

Still, you may not even know where to begin when it comes to finding the help you need. Here are just a few basics to put you on the right path when it comes to starting your new business venture.

Business Plan

A solid business plan is arguably the most important component of launching a new enterprise. If you’ve attended business school, you are likely well aware of how crucial your business plan is for achieving success. This document will outline the viability of your idea, persuade investors to fund your undertaking, and provide a roadmap for the first one to five years of operations.

Those who do not hold an MBA can find online tutorials and templates for creating a business plan. This vital document will not only help you secure funding to launch your business, but the strategies it outlines will also give you the best opportunity to realize success, earn speedy profits, and build a sustainable and profitable business.

Consulting

If you’re launching your first business you will face a steep learning curve and common blunders could completely derail your progress. For example, do you know how to register a business and ensure that no one else has your name? Do you have any idea how to apply for licenses or permits you need to start and run your business? Do you know what types of insurance you need?

In some cases, you won’t even know what you need to know to get started. For this reason, you should consider hiring a business consulting firm that specializes in advising startups. These experts can offer the guidance you need to avoid the most common pitfalls entrepreneurs face. With their help you will be well prepared for success when you finally open your doors.

Legal Help

There are several legal issues you’ll have to consider when starting your business. These range from setting up your corporate structure, to creating contracts for employees and freelance workers, to obtaining essential liability, workers compensation, and other insurance policies. Unless you have a background in the law, you may be unaware of the many legal elements involved in launching a business.

Hiring an attorney is not without expense, but the last thing you want to deal with when you’re trying to launch a business is legal hassles. An experienced lawyer can set you up not only to launch your business, but to move forward with plans for growth and expansion, putting all of the legal pieces in place in advance.

Funding

You’ve no doubt heard the saying “a fool and his money are soon parted”. Unfortunately, lenders and investors are no fools. You’re going to have to wow potential funders if you want them to provide the capital you need to launch your business venture.

There are many avenues to explore when it comes to funding. Most entrepreneurs start with traditional lenders, but you could also consider a variety of different types of investors, as well as the prospect of crowdfunding.

There are benefits and drawbacks to each opportunity, so take the time to understand your options before you seek startup funding. Don’t forget, you’ll need to throw some money in the pot as well. If you’re not willing to take a financial risk on your business, nobody else is likely to, either.

Location

These days there are plenty of businesses that operate solely in the online arena. This may or may not work with your planned undertaking. If you decide to open a brick-and-mortar location and an online store simultaneously, you’ll have to find a suitable location for your real-world storefront.

In addition to complying with zoning laws applicable to your business, there are several other factors to consider when selecting a location. Is it easily accessible? Is it visible to passing traffic (both foot and automotive)?

Of course, you’ll also need to balance the cost of leasing with the other elements listed since you’re probably working with a limited budget and you can’t begin to forecast sales and profits until you’ve been in business for at least several months (likely more than a year). Choosing the right location means taking all of your goals and limitations into account.

Marketing and Sales Strategy

It’s not enough to have an appealing and useful product or service that can improve the lives of consumers – you need to make the prospective customers aware of your presence and what you have to offer. This is where a strong marketing and sales strategy will serve you well.

Whether you’re dealing with the consumer public, business clientele, or government contracts, your marketing and sales efforts should increase your visibility, facilitate interaction, engage your audience, and compel action. This is no easy feat, but with a marriage of real-world and online marketing efforts paired with SEO and social media, you should have all your bases covered.

Although you can do a lot on your own these days where online marketing is concerned, you may be better off hiring professional help to ramp up your campaigns early on.

Useful Applications

Long gone are the days when business owners had to keep paper ledgers, advertise in newspapers to fill open positions, and call the office of the Secretary of State to register a business. Modern business owners can now do almost everything via computer or even smartphone with the right programs and applications.

For example, you can now register your business in minutes online through LegalZoom. You can also partner with a site such as OneVest to crowdfund your venture or AngelList to find compatible angel investors.

Search freelance websites like Toptal, Freelancer, and Upwork if you are looking to employ qualified contractors in lieu of full time employees. Whether you need engineers, bloggers, or IT specialists, these websites can help you hire new employees without having to offer an expensive annual salary and benefits package.

In addition, you can use a site like Bluehost for web hosting and gain access to affordable stock images through Shutterstock. Quickbooks, or other small business financial software, can not only act as your bookkeeper and help you to manage accounts and pay vendors; it can also be used to keep tax records for easier quarterly or annual filing.

In short, there is a wide variety of programs and applications designed to cut costs and make your life easier. You simply have to choose the tools that are most likely to make your operation more efficient and profitable.

Passion and Perseverance

Starting your own business is tough, no doubt about it. With proper planning you can make the road less bumpy, but there will be frustrations and setbacks along the way. Success requires you to be passionate about your undertaking and to commit yourself to persevering no matter what comes your way.

Without these two essential elements, even the best business plan may not see you through. If you don’t love what you’re doing and you lack the stamina to endure, you can’t hope to succeed in the long term.

Credit Cards 101

More and more, our society is moving toward a system where credit reigns supreme. Whereas cash used to be king, credit now dominates our purchasing habits, especially with the growth of e-commerce operations.

When was the last time you bought an airline ticket by going to the airport and paying for it at the Delta or United Airlines gate? Nowadays you simply peruse tickets online and punch in your credit card information to order.

Unfortunately, very few adults have a formal education when it comes to managing credit. It is a travesty that most young adults graduate from high school and enter the adult world never having had a single lesson in basic finance, including writing checks, keeping books, or creating a budget, much less investing or using credit cards wisely.

Most of us have to figure it out the hard way, which is perhaps why problems with debt are so prevalent in this country. The good news is that you can learn plenty from the foibles of others and get on track for good credit from the start. Here is a basic rundown of what you need to know about having, using, and getting the most out of your credit cards.

What is a Credit Card?

In the most basic sense, a credit card is simply a piece of plastic that contains a magnetic strip. It features your name, a unique credit card number assigned to your credit account, an expiration date, and sometimes an additional code for security purposes.

The magnetic strip holds information about your account, and when it is swiped in a card reader, vendors can access funds to pay for your purchases. The money available in your account is not yours, though. It is on loan and the amount of credit you maintain is based on your credit score, which is calculated by your spending and payment history.

Spending on credit is essentially taking a short-term loan, although there is no deadline attached to paying it off. You simply have to make minimum monthly payments based on the amount you borrow and the interest tacked on. It sounds simple enough, but there’s still a lot more you need to know before you start accepting credit card offers.

What is Interest?

When credit card companies approach you with offers (or you approach them to open a credit account), they will calculate your relative creditworthiness. This means they look at your credit score and your history to determine the risks involved in lending you money. Will they get it back?

If you have a top tier credit rating, it shows that you have a strong history of repayment when you borrow funds, and/or that you pay your bills on time. If you haven’t been very prompt with payments, you fail to pay with some frequency, or you’ve filed for bankruptcy, just for example, your credit score is bound to be a lot lower and your risk factors go up.

This information is used to determine whether you are eligible for a credit card, as well as the amount of interest you’ll be charged. Those with top tier credit tend to have the lowest interest rates, while those with poor credit ratings are charged more interest for the privilege of having a credit card.

Interest rates could range from, say, 5% up to 20% or more on average. In addition, there are often stipulations regarding late or missed payments. Not only could you face penalties for paying late or missing payments, but most companies reserve the right to increase your interest rate to a prearranged percentage for such failures.

You might start at 8% interest and if you miss a payment your interest could go up to 18%, just for example. You should also speak with your credit card company about how interest is accrued. Models vary by company and there are often stipulations about late or missed payments here, as well.

Your best bet where interest is concerned is to pay your credit card in full and on time each month to avoid interest payments and penalties altogether. If you must pay over the course of several months, try not to add more charges or you can easily fall into a cycle of revolving credit that’s difficult to escape. Then you’re paying a lot more money for every purchase thanks to accruing interest.

Who Offers Credit Cards?

While all credit cards perform the same essential function, you might be surprised by the variety of options available to you when you begin shopping for the right card. Not only are there a number of credit card companies (VISA, MasterCard, American Express, etc.), but you can also get cards through countless partner organizations such as airlines, hotels, and retail stores.

Most credit card accounts these days come with some kind of rewards program whereby you earn points or “miles” for every dollar spent. The main reason to sign up for a card through a partner business is to gain access to additional rewards associated with the brands you patronize most.

Types of Credit cards

Travel and Retail Rewards Cards

You’d be hard pressed to find a credit card these days that has no rewards. Before you decide on a card willy-nilly, you need to shop around to find the rewards program that’s going to provide you with the greatest personal benefit.

For example, a Delta Airlines rewards card confers “miles” with every purchase, and you’re bound to get additional rewards for travel or other related purchases. These miles can generally be redeemed for travel with Delta, allowing you to purchase discounted or free tickets at set intervals (when you earn enough miles). You could also get free seat upgrades or other perks as part of your membership.

The same is true for credit cards obtained through hotels, gas stations, retails stores, grocery stores, and more. Think about where you spend most of your money and take the time to look at benefits and bonuses. This should help you to select the card with the rewards program that best suits your lifestyle and your spending habits.

Cash Back Credit Cards

Who doesn’t like free money? When you open a cash back rewards card you earn cash for each purchase you make. It’s not exactly as great and easy as it sounds, however. These cards often have annual fees and tend to come with a high APR, so if you carry a balance forward each month you will quickly be paying more in interest than any amount of “free money” you make from your rewards.

Cash back cards are great if you have excellent credit and can secure the lowest possible interest rate. If you pay off your balance in full at the end of each month then you can reap true rewards.

Secured Credit Cards

The easiest way to get started with your first credit card, is to take out a secured, or essentially prepaid, credit card. You can often get them through your bank and all you have to do is offer collateral in the amount of the credit limit granted (say, $500.00).

This money is held by the lender for a set period of time (6-12 months, usually) in case you fail to pay for your credit card purchases. At the end of the term you will get your collateral back with interest, provided you’ve paid off your card, and you’ll also get to keep the card, unsecured. This is a great way to begin building credit.

Credit Cards for College Students

Your credit worthiness and overall risk factor determines if you are approved for a credit card, and at what interest rate. These risk factors are compiled in your credit report, along with a score that rates your risk of defaulting on a loan or credit card against average borrowers.

If you are a college student and never had the occasion to borrow money, then you might not have any credit history at all or, if you do, a rock-bottom credit score. Some lenders have created credit cards specifically for college students in this situation to provide easy access to credit. This allows young adults the ability to prove their financial acumen and develop a strong credit score as a full-time student.

These credit cards often require a co-signer, such as a parent, before an application is approved. This way, if the student stops paying their bills on time then the co-signer will become equally responsible for paying the debt. This helps assure the credit card companies that they will limit their exposure to losses by holding another party accountable for unpaid charges.

Balance Transfers

As mentioned, a credit card, in essence, is an open line of credit that allows you to borrow money from a lender to make purchases and repay at a later date. You can also use your credit card as a more traditional way of loaning yourself money, commonly to pay off existing debt that you accrued from past purchases, with a balance transfer.

Instead of swiping your card at the local grocery store to pay for cereal and milk, you would use a designated balance transfer check (or the digital equivalent) to pay off an outstanding loan, such as another credit card bill. You can even write the check to yourself and add extra cash to your bank account for other financial priorities.

There are a few reasons why a balance transfer could make good financial sense. The most appealing benefit to a balance transfer is the promotional interest rates and discounts credit card companies commonly advertise. You might see an offer for 0% APR for 6 months. If, for example, you have another credit card with a $2,000 balance and 16%APR, then you could save a considerable amount of money in interest payments by taking advantage of this promotional rate.

As with anything else related to personal finance and money, it’s not quite so simple. If you don’t repay the full balance transfer by the end of the promotional period, then you could be faced with an interest rate far higher then the 16% you were trying to eliminate in the first place.

Credit card companies don’t offer these promotions out of the kindness of their hearts to try to help their customers save money. They exist as a way to encourage consumers to accumulate more debt that is subject to a profitable interest rate. Be aware of what your are committing to if you hope to save money with these types of transactions.

How to Use Credit Responsibly?

One of the most important concepts to understand when using credit is that it is NOT cash in your pocket, even though it can feel that way. Just because you have a $1,000.00 credit limit does not mean you have a thousand extra dollars to spend. Taking this money is like taking out a bank loan, one that you have to pay back with interest, and you should think about this every time you swipe your card.

When used responsibly, credit cards can help you to build credit and improve your credit score. When used improperly they can have the opposite effect. For this reason, you should keep a low credit limit that you can manage on your salary and you should try to pay off your card in full each month.

In addition, make sure to check your credit report at least annually. Fraud and identity theft are a very real threat, so keep your card safe, don’t let others use it, and use online banking to check your charges each month so that you can report any fraudulent activity immediately. Responsible behavior will help you to gain the most benefits when using credit cards.