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“You have two choices! You can work for your money, or you can have your money work for you!”.
For most this is easier said then done. I created this site to help others with their path to financial freedom. I hope to do this by proving useful tools, resources, and personal experiences. Click Here To Continue Reading...
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Understanding How to Use a Credit Card Responsibly Can Increase Your Credit Score!
The Ideal: Pay Your Credit Card Balance Each Month in Full and On Time
At its core a credit card is simply a means of borrowing money. It’s also important to understand that a credit card is an exceptionally lousy means of borrowing money if you carry a balance.
Thus any credit card strategy in that doesn’t also involve paying off your balance in full and on time each month is, at best, of limited value and, at worst, downright stupid. In short, how to use a credit card effectively entails you pay off your credit card balance each month then you can reap significant benefits from making purchases with a credit card. However, if you consistently carry a balance from month to month then your credit card issuer is the one reaping the benefits (at your expense!).
For example, let’s say that you need to buy a plane ticket that costs $1,000. You have both a credit card and $1,000 in the bank that you could use to make the purchase. Should you pay in cash or use your credit card? If you use the cash then you can purchase the ticket outright without incurring any credit card debt. Of course that’s good, but if you purchase the same $1,000 ticket with a credit card then you could automatically receive accidental death and dismemberment (“AD&D”) insurance for the flight as well as 1,000 bonus points or flight miles. Further, when your credit card statement comes the next month you can use the $1,000 you have in the bank to pay it off in full. So either way you’ll end up with no credit card debt, but if you pay in cash you’ll get no special benefits whereas if you pay with a credit card you’ll get valuable insurance for the flight with credit card bonus points to boot.
Second Prize: Make Purchases With a Credit Card as Long as You are Able to Steadily Reduce Your Debt
While it would of course be great to have your credit card fully paid off, what if you’re not in a position to do that right now? Does that mean that you should lock your credit card away and only pay for things in cash until it’s fully paid off? Not necessarily, because you can still benefit from making purchases with a credit card as long as you’re disciplined enough to continue to make meaningful progress towards paying down your credit card debt. Understanding how to use a credit card effectively may vary from situation to situation.
Danger: How To Use A Credit Card Negatively By Using Rewards & Points as an Excuse to Pile on Unsustainable Debt
While it’s true that paying by credit card offers some unique advantages that paying with a check, a debit card or cash does not, I want to again emphasize that you should never use the benefits you receive from paying with a credit card as a means to rationalize making purchases you can’t afford. For example, don’t talk yourself into buying a $1,000 plane ticket you can’t afford just because you’re going to get a few credit card bonus points or flight miles. If you choose to go down that road then it won’t take long before the deadly math behind credit card interest threatens to make financial bondage your destination. The Fidelity credit card has one of my favorite reward programs.
Summary: Credit Cards are Great Financial Tools if Used Correctly
There’s a myth among some that only those who are irresponsible, addicted to spending, or deeply in debt use credit cards on a regular basis. While there are some who do indeed fall into one or more of those categories, it’s also true that those who understand the benefits of making purchases with credit cards and pay off their balances each month use credit cards to make practically every purchase they can.
 See the article, “How Do Credit Cards Work”.
 Note that “paying in cash” means paying with cash, a check or a debit card.
 These are just examples of the types of benefits you could receive; individual credit card terms vary.
 At 22% the interest on $1,000 of credit card debt for 1 month is about $18.33 (22% divided by 12 months x $1,000) whereas 1,000 bonus points can typically be redeemed for something valued at about $10 (equal to about 1 cent per bonus point).
In order to understand why personal money management is so important consider the following questions.
- Do you ever worry about money?
- Does it ever seem like your money just disappears and you have no idea where it all went?
- Are you now on your own (or soon will be) and you have no idea how money really works?
- If you’re married, do you and your spouse ever have tense conversations (or flat-out argue) about money?
- Would you like to know how much money you can safely spend before your next paycheck and still be okay financially?
- Do you have hopes and dreams that are bigger than your bank account and you wonder if you will ever be able to achieve them?
- Do you have a tendency to spend money on things that you can’t afford?
- Despite big plans, do you always have trouble coming up extra money to save or invest? Would you like to know what it will take to make that happen?
- Does it seem like you never make any headway paying off your debts (or worse, they continue to grow)?
- Have you ever felt overwhelmed by the thought of what it would take to get your finances organized?
- Does it seem like you’re never getting ahead despite the passage of time and all of your hard work?
- Do you sometimes feel tossed about as external events crash upon you, feeling that they are in control of your financial destiny rather than you?
If the answer to any of these questions is “yes” then I would suggest that personal money management is very important to you. Then you’ve come to the right website. Keep reading!
Related Articles and Information on Personal Money Management
If you have not already done so, reading the following articles will enhance your understanding of the concepts presented in this one.
I recently received an email from John about using a budget planner template. He wrote:
“Hello, I’m feeling a little lost and have some questions in regards to budgeting and saving. 1. Which budget planner template should I use? 2. From the total salary what percentage is ideal to spend for various needs, and how much to be saved for future? Any insight would be greatly appreciated.”
It’s a question that we all must answer. Even if some of us would prefer to ignore it! Because, with rare exceptions, we all have to deal with having just so much money to cover all our expenses. And, if we spend more than we take in for very long we get into trouble.
Let’s look at a “typical” budget planner template. Then we’ll discuss it.
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Understanding The Budget Planner Template
The first thing you’ll notice is that I didn’t include any taxes (either income or Social Security). You can choose to do that if you like (in fact, it’s a real eye opener). But for our purposes it’s easier just to deal with your ‘take home’ pay. The second thing to notice is that this is a guideline, not a straight jacket. The truth is that very few of us will fit into this exact framework. So if your spending doesn’t match, don’t despair! Analyze the situation before you panic! Try our free excel budget template!
Customize the Budget Planner Template To Fit Your Wants & Needs
For instance maybe your entertainment spending is closer to 10%. Is that a problem? Maybe not, if you’re young, single and sharing an apartment with three friends. In that case what you save on housing is going for entertainment. So overall you’re not spending more than you’re making. Or you may be a city-dweller where housing is very expensive (think NYC). But because of public transportation you don’t own a car. So the extra you spend on housing is offset by the reduced spending on transportation. You get the idea. Tailor your spending plan to your needs. And, adjust it as you go through life and your needs change. One other thing to notice is that housing, food and auto make up the lion’s share of the expenses. That’s true for almost everyone. It’s in those three areas that most families get into trouble. Most often by buying a home or vehicle that they cannot afford. But once the commitment is made it’s very hard to undo.
Categorizing Your Expenses
You might wonder where a certain expense goes. For instance, household cleaning supplies. Many people buy them at the grocery store. So are they a housing or food expense? The answer is: it doesn’t much matter. Put them wherever it seems best to you. The key is always putting them in the same place, so you can compare results from month to month.
Another common question is what should I do with charitable contributions. You can either take it off the top (like taxes) or create a separate category for it. If you believe that contributions should come before your expenses you’ll want to take it off the top. If you think that it’s part of your regular spending then include it as another expense category. For a budget planner template to be effective you must continuously follow your progress.
How Much Should You Save?
Finally, let’s look at John’s question about saving. There probably isn’t any single right answer, because saving isn’t really an expense. It’s an investment for a better future. So I prefer to think of savings in terms of priorities. Before I can put money aside for savings I need food and a reasonable shelter. Probably also need dependable transportation to get to my job. But after those basic needs are met, it’s time to begin saving some money. Not necessarily the 10% in our guidelines, but 2, 3 or 4%. Enough so that there’s some money set aside for the so-called unexpected expenses that happen to us all (dead appliances, home and auto repairs, unexpected sickness, temporary lack of work).
One other comment about savings. Paying off debt (especially credit card debt) is a little like savings. Consider payments used to reduce the amount owed as if they were savings or a Bank CD. Finally, for those of you who don’t want to bother with any of this. I know what you’re thinking: I’m fine and don’t need any help monitoring my money. Just remember that most people who are in trouble today said the same thing when everything looked good to them.
Stock Valuation – The Relationship Between A Company’s Stock Price and Cash
In another article titled Companies To Invest In, I made the point that, at its core, a well-run company is simply a money making machine. That concept – that the value of a company is ultimately tied to cash – is one of the keys to understanding how to value a company and it’s relationship stock price. Stock valuation are great to get quick snapshot of a company’s value. I’ll illustrate this point with a simple example, and then build on it in ensuing articles.
How To Value A Company – Cash Per Share Example 1
If there were a company that had $1,000 in cash with 100 shares of stock outstanding then you could calculate the value of each share of stock as follows.
How To Value A Company – Acquiring 20% Ownership Example 2
If that were the case and you wanted to own 20% of the company then how much stock would you have to buy, and how much would it cost? The answer is that you would have to pay a total of $200 for 20 shares of stock, which can be calculated as follows.
How To Value A Company – 10:1 Stock Split Example 3
What if the company did a 10 for 1 stock split, meaning instead of having 100 shares outstanding, it had 1,000 shares outstanding? Would that change the value of the company? The answer is no. The company’s only asset is $1,000 of cash, and no amount of stock splitting (or combining) can change that. However, by doing a 10 for 1 stock split the value of each individual share is diluted, going from $10 to $1 per share. So in summary, a stock split affects the value of each share of stock, not the value of the company itself, which can be illustrated as follows.
Now, what if our little company went public and was traded on the New York Stock Exchange? Wow, that’s big time! Wouldn’t that would boost its stock price above the $1 it’s now trading at after the stock split? Not at all! The stock could be traded on the moon, and that still wouldn’t alter the fact that the total assets of the company are worth $1,000, making the value of each of those 1,000 shares equal to $1.
How To Value A Company Using The Terminal Valuation Method
But wait, isn’t just focusing on a company’s cash overly simplistic? After all, there’s no company of any size or consequence whose only asset is cash. While that may be true, at the end of the day, determining how to value a company is ultimately measured in money (or cash) – nothing else. This is known as the terminal value of a company.
The application of this concept is known as the Terminal Valuation Method. To illustrate how it works, say a company’s stock price is trading at a value that suggests the total worth of the company is $10,000,000. How can you tell if this stock valuation is reasonable? One way to go about it is by to pretending that the company sold everything off: its inventory, furniture and fixtures, real property, and so on, until it converted all of its assets to cash. After going through exercise you estimate that upon liquidating all of its assets and settling all of its outstanding debts (or “liabilities”) that the company would end up with $4,000,000.
“It’s Important To Note Stock Valuation Can Vary Greatly Depending On A Number Of Factors Such As: Industry, Maturity Level of Company, Ect.”
What…$4,000,000? Didn’t we say that the value of the company’s stock suggested that it was worth $10,000,000? Does this mean that the company’s stock price is vastly over inflated relative to its true worth? Perhaps, but not necessarily. For example, aside from tangible assets (assets that you can touch) that could be converted into cash, an established company might have valuable intangible assets that would substantially contribute to its ability to make money: established business relationships, a highly skilled workforce, an efficient supply chain, secret formulas and patents, widely recognized brands and trademarks, etc. In short, there can be a lot more to the value of a company than just its “hard assets” such as cash, inventory, property, etc.
However (and this is a BIG however), if a company is being valued at $10,000,000 and yet it would only be worth $4,000,000 upon liquidation, there still has to be a financial explanation for where that remaining $6,000,000 of value is coming from. In other words, what is it about the company that makes it worth more than sum of its tangible assets? If there is a compelling story there – a story that explains how the company’s business prospects, activities and operations are worth an extra $6,000,000 – then the stock valuation of the company can be justified. If not then the company’s stock price is being pumped up by hype and hot air.
While it’s true that you cannot you cannot fully measure the value of a company based on its hard assets (cash, inventory, buildings, etc.), it’s also true that a company’s value is ultimately measured in dollars. That means when it comes to a company’s stock valuation, cash is king!
 This would be the case if, for example, a company’s stock was trading at $50 a share and there were 200,000 total shares outstanding ($50 x 200,000 shares = $10,000,000).
Investing means giving up some of your money now with the expectation of getting even more money in return in the future. Did you catch that? Money. Investing is about money. The bottom line when it comes to investing in stock (or anything else for that matter) is that you want a company that can profitably convert its goods and/or services into cash, lots and lots of cash. Well, isn’t that incredibly obvious? You would think so, but when it comes to identifying companies to invest in, it can be oh so easy to take your eye off the ball. Following are 3 principles that can help you to avoid getting distracted and maintain an investment-oriented focus for deciding which companies to invest in.
3 Principles For Finding Companies To Invest In
Principle #1 – Don’t Confuse Investing With Donating to a Cause
When considering investing in a company’s stock it’s vitally important to distinguish between evaluating the company vs. considering its valuation. To evaluate a company means to consider its overall suitability as an investment and to otherwise determine whether you’re comfortable with it. In other words, I don’t ever recommend investing in a company if you have a problem with the kind of business they’re in, or the goods and services they produce. For example, if you think smoking is bad for society then by all means don’t invest in a cigarette company, no matter how well you might think the stock will perform. Having said that, once you’ve evaluated a company and determined that you don’t have any ethical or moral problems with its business, it’s then time to consider the valuation of the company, or how much it’s stock is actually worth in dollars.
“Find Companies To Invest In That You Don’t Have Any Ethical or Moral Problems With It’s Business”
This is an important concept, because people sometimes confuse investing with donating to a worthwhile cause. For example, if a company is pursuing green initiatives such as clean energy, there are certain people who will almost blindly pour money into it. Is that a wise or unwise use of money? It depends. If your intention is to “invest” in a clean energy company without a thorough analysis of its business prospects then you’re acting unwisely because remember, when investing, the question you’re asking is not whether a company can save the world, but whether they can bring their products to market and generate a pile of cash in the process. On the other hand, funding a clean energy company can be a good use of your money even though it may be years away from producing a commercially viable prototype if your primary intention is to help the environment and profit is an afterthought (or not a
consideration at all).
In summary, when looking for companies to invest in I think we would all like to invest in companies that both benefit society and would make us a lot of money in the process, but the reality is that such investment opportunities are few and far between. In other words, most companies aren’t out there saving the world, but they’re not destroying it either. Instead, they’re usually somewhere in between, trying to make as much money as they reasonably can by selling their products and services within the confines of the law and their business practices. For that reason, my recommendation is that if you intend to use your money to donate to a cause that will help society then by all means do so, but temper your expectations of getting anything (or even nothing) in return. On the other hand, if your intention is to invest in a company’s stock with the expectation of a solid financial return, make sure to keep your focus on the profit generating aspects of the company.
Principle #2 – Investing is About More Than Products, Services and Technology
Again, investing is about making money; it’s not about products, services, or technological advances in and of themselves, no matter how groundbreaking, novel, beneficial or noteworthy they may be. To illustrate, I was once doing onsite professional work at a company during the late 90’s while the dot.com boom was in full froth. During one visit I noticed that an employee had a yellow sticky affixed to their computer on which they had written the most popular, trendy dot.com companies of the day – companies whose stock had skyrocketed even though they had no proven profit-making business models. We talked for a minute and I said, “I noticed you’re a big fan of dot.com companies.” The person said yes, and that they were an enthusiastic investor in them, to which I said, “Aren’t you concerned about the high valuations of these companies, even though they’re not making money?” To that the person said, “It’s not about valuation, it’s about revolution.” Upon hearing that my immediate thought was, “SELL! Everybody sell your dot.com stocks now!”
Why my reaction? Because it became clear to me that the whole dot.com-induced investment mentality had become so enamored with the life-changing technologies bringing on the Information Age that it had become unhinged from financial reality. But like any other law, financial reality cannot be defied forever, and not that long afterwards the vast majority of the dot.com’s burned through the remainder of their cash and crashed in spectacular fashion, leaving only those companies that had focused on realistic, workable, and sustainable profit-generating activities (Amazon and eBay, for example). The lesson? Remember that investing is not-about the products, technology, or services of a company, but whether a company can covert its products, services, or technology into more money (profit) than it costs to generate those products, services or technology!
Principle #3 – Don’t Buy into the Hype (or sell due to a lack of it)
When deciding which companies to invest in you may begin to notice that companies can be hip one day with a high-flying stock price and fall out of favor the next leaving their stock in the tank. Does that make sense? Does the financial outlook of companies really rise and fall so quickly? While it is possible, in the short-term a company’s stock (and the market itself) can frequently be driven by a herd mentality. Warren Buffet has a great quote that summarizes this concept: “In the short run, the market’s a voting machine, and sometimes people vote very non-intelligently. In the long run, it’s a weighing machine, and the weight of business and how it does is what affects values over time.”
In other words, over the long haul investing isn’t a popularity contest. No, in the end investing is about substance (or “weight”), or how much profit a company can churn out over time. So don’t get caught up in the hype and buy into a company just because it’s the latest market darling (you’ll likely buy too high), and don’t abandon ship just because a company is getting beat up in the media for making an understandable mistake (you’ll likely sell too low). Instead, step back, get some perspective, consider the big picture, and base your investment decisions on a company’s medium and long-term profit potential.
Summary of Companies to Invest In
When you boil it all down, all well-run companies have at least one thing in common: they’re trying convert their goods, services, and/or technology into as much cash profit as they can in accordance with the law and their overall business principles. In other words, at their core, companies (or any other kind of investment) are capitalistic, profit-centered money-making machines. If you don’t remember that then I don’t think you can ever properly judge the actual monetary value of a company’s stock. So, to maintain that investor-oriented focus, keep the following 3 things in mind:
- While reviewing companies to invest in don’t invest in companies that you have moral or ethical problems with, but don’t confuse investing (making money) with donating to a cause (benefiting society).
- Investing is about more than products, services or technology; it’s about efficiently converting products, services and technology into cash.
- Investing isn’t a popularity contest; it’s about substance in the form of profits.
 Also, don’t automatically dismiss as an investment opportunity what may on the surface appear to be mundane or “boring” company. Fortunes have been made in the garbage collection business, and Gillette has made billions by cranking out massive quantities of sharp little strips of steel called razor blades!