Dollar-cost averaging is a passive investing strategy widely used by investors. It is the process of purchasing a fixed dollar amount of a particular investment on a schedule, regardless of the price. This means the number of shares you purchase will fluctuate depending on the market price.
If you are investing in a 401K or IRA there is a good chance you are utilizing dollar-cost averaging and contributing a set amount each month without really assessing your investment.
As an example, let say you want to use dollar-cost averaging to buy shares of Disney. You first decide how often you want to invest, let’s say once per month. You then decide the amount of money you want to invest each time, let’s say $500. As of writing this post, Disney trades at $110/share. This means you could purchase 4 shares of Disney. Let’s say next month Disney goes down to $90/share. This means you can now purchase 5 shares of Disney. You get the idea, it’s a fairly simple concept.
Timing: Accurately and consistently timing the market is near impossible. Many folks will try to time the market and most will fail. By utilizing dollar-cost averaging you just invest money monthly and don’t worry a bit about timing. That said, you don’t have to time the market 100% accurately to make a decent return. If you are investing for the long haul (I’m talking years), regardless of whether you use dollar-cost averaging or not, timing is not as big of an issue anyways.
Determining A Fair Market Price: One of the more tedious parts of stock investing is determining if the market price of a stock is a reasonable valuation. By using dollar-cost averaging you essentially ignore the price per share and just buy how ever many shares you can with the amount of money you are investing. This does not mean you should practice dollar-cost averaging with just any stock. After all, if you practice dollar-cost averaging with a terrible company you are bound to lose money in the end.
Affordable Diversity: Most people don’t have enough money to create a diverse portfolio. By using dollar cost averaging in the form of an index fund, you can get a well diversified portfolio without having to contribute much money each month.
Removes Emotions: Emotions are not usually a good thing when it comes to investing. As humans, it’s tough to not let emotions get in the way of your investing. It’s easy to get scared and sell when your stock drops 10% after a bad earnings call. Fortunately, dollar-cost averaging takes the emotional aspect out of investing. You just invest a set amount of money and forget about it.
More Fees: Depending on your brokerage, by using dollar-cost averaging (as opposed to investing a lump sum) you will likely rack up more transaction fees that will ultimately take away from your return. For this reason, dollar cost averaging makes more sense when you are investing in a 401K, IRA, or a similar fund that allows you to contribute money each month without paying a fee for every single transaction.
Over-Paying: By completely ignoring the market price of a stock via dollar-cost averaging, you run the risk of paying too much for a stock. This is especially true with some of the tech stocks that have big swings and trade at sometimes crazy valuations. This could ultimately negatively impact your return.
As a final note, dollar-cost averaging can be a great strategy for the inexperienced and experienced investor alike. Although dollar-cost averaging takes away a lot of the risks and human errors associated with investing, you should still thoroughly research each investment you make before sinking your hard earned money into it.
Once you have worked for a few years and saved up some money, you may ask yourself if you’re better off renting or owning a home. I know I have been asking myself this question a lot lately. The answer is, “it depends.”
When determining whether or not to buy a home it’s tempting to just compare your monthly rent to what your monthly mortgage might be, but this is not an accurate comparison. When comparing the cost of renting to owning there are a variety of factors to take into consideration. I will do my best to help guide you through all of these factors. Here is where I would start:
What is the total cost to rent?
Step one would be to determine exactly what you will be paying to rent. This includes monthly rent and renters insurance, which most landlords require.
What is your monthly mortgage payment?
Determining the total cost to buy a home is not as straight forward, as there are a lot more factors to take into consideration. A good place to start is to determine what your monthly mortgage will be. There are a variety of online mortgage calculators available if you want to play around with the numbers.
Your monthly mortgage payment will vary depending on the price of the house, how much money you put down towards the principle, and the current interest rates.
How much money will you put down?
Many real estate professionals recommend you put down 20% on your house if possible. Doing this prevents you from having to pay private mortgage insurance (PMI), which is a type of insurance that protects the lender. For you as the buyer, PMI is just lost money. In addition to avoiding PMI, putting 20% down often gets you a loan with a better interest rate than if you were to put 3.5%.
If you can’t afford to put 20% down on your house don’t sweat it, you won’t have to pay PMI forever. Once you have paid up to 20% you will no longer have to pay PMI each month. If you can pay 20% down by all means pay it, but if this stretches your budget too far just know that many people only pay 3.5% or 5% down.
How much is home owners insurance?
Homeowners insurance is more expensive than renters insurance since it actually covers the entire home structure, whereas renters insurance just covers your belongings. Unlike renters insurance, homeowners insurance is almost always mandatory if you have a loan for your home. That being said, a lot of landlords will likely require you to have renters insurance as well.
How much are property taxes?
Unlike renting, you have to pay property taxes when you own a home. The amount you pay will vary depending on the price and location of your home. It’s hard for me to throw out a number here because it really varies by state, city, and home price.
Is there an HOA fee?
Many communities require owners to pay a monthly home owners association (HOA) fee. This fee can vary greatly by community. From my experience, it can range from $50/mo to as much as $500/mo. The HOA often covers common areas in a community, recreation centers, sometime exterior surfaces of a home if it’s a condo/townhouse.
How long will you live there?
It’s not easy to say with 100% certainly how long you will live at a certain location. Many unpredictable factors may come into play. For example, you could be forced to relocate for a job. However, if you feel like your job is stable or that you can easily find another job commutable from where you live, there is a good chance you will have control over how long you live in your home.
In general, data shows if you purchase a home you should plan to live there at least three years. If you live there less than three years it typically makes more sense financially to rent. The three years time frame is just a generalization. There are many factors that can change this time frame, so it’s really important to crunch the numbers.
What is the monthly maintenance cost?
Maintaining a home you own is more expensive than maintaining a home you rent. When you own you are responsible for maintaining every aspect of your home from the lawn to the structure itself. If you buy an older home, unexpected repairs can rack up bills quickly.
When you rent, you really don’t have to worry about more than keeping the place clean and not destroying anything.
Are any repairs/renovations needed?
Does the home you want to purchase need repairs/renovations? Don’t forget to factor these into your costs. When assessing whether or not repairs need to be made, determine if the repairs will increase the home value by more than you put into it for repairs/renovations if you were to resell it.
For example, let’s say you need to put $20,000 into the home for repairs/renovations. If you were to sell the house the next day, would this $20,000 in repairs/renovations help you to sell your house for $20,000 or more than you initially paid for it? If so, the repairs/renovations may be a good investment. If not, maybe you should look for other homes or assess whether or not these repairs/renovations are really needed.
You don’t want to get yourself in a situation where you have $200,000 in a house and all of the other houses in your neighborhood are selling for $150,000. Before putting more money into your house, be sure to assess what your house can realistically bring on the market.
Owning can be an investment.
When you purchase a home you are investing your money into it and acquiring equity over the course of your loan. This contrasts to renting in which you acquire zero equity. After reading that statement, owning sounds like a no brainer, but remember with each payment you make a lot of the money is going towards interest, not equity.
When looking at your home as an investment, don’t forget to consider realtor fees if you plan to list your house with a real estate company to sell it. The fee is generally around 7% of the price your house sells for. Also remember to factor in the closing costs you paid at the time of purchasing the home.
There are a lot of factors that can come into play that will ultimately decide whether your home is a good or bad investment. Historically, if you keep your home long enough you will more than likely be able to profit on it. How long that is will vary by market conditions. As I mentioned above, 3 years is the general rule of thumb.
Although home prices have historically risen, don’t automatically assume your home will only increase in value for the time you live there. It’s certainly possible your home will decrease in value from the time you purchased it to the time you want to sell it.
For example, you could unknowingly purchase your home at the peak of a real estate bubble and once that bubble bursts your home value could drop dramatically. That being said, if you’re able to hold onto your home during a down market you will likely come out alright in time. It may just take more time to be profitable than you hoped.
When looking from a pure investment standpoint at purchasing a home vs renting, you have to consider if putting your down payment money towards a home is really the best investment. Maybe over a 5 year period the down payment money on your home yields a 5% annual return, but if that money were invested in the stock market it may yield a 10% annual return.
This certainly isn’t the easiest factor to consider since there is always some degree of uncertainty regarding how the stock and real estate markets will behave, but it’s definitely something to think about.
Once you have all of the information gathered, it’s just a matter of comparing the total cost of renting to the total cost of owning. Don’t just compare one month of owning to one month of renting. Try to compare the cost differences over a variety of time frames to see at what point owning becomes a better financial choice than renting.
Once you determine how long you have to own a home for it to make more sense to own than rent, ask yourself if you will be able and willing to stay at this location for that period of time. If the answer is yes, owning may be the right choice for you. If the answer is no, you should consider renting for the time being.
It’s not all about the money.
So far I have only been discussing the monetary factors involved in owning vs renting, but there are other non-monetary factors to consider. For example, when own a home you are free to do with it what you please. If you want to have 10 dogs running around the house no one can tell you no. If you want to drill holes in the walls or tear down a wall completely you have the right to do that.
There are non-monetary advantages to renting as well. For example, when rent you are not typically tied down to one location for more than a year. You also don’t have to go through all of the hassles of selling a home when you move. Not having to worry about all of the maintenance associated with owning is nice as well.
It’s ultimately up to you to determine how important these non-monetary factors are in making the decision to rent or own. Maybe having the freedom to do what you want with your home is worth losing a few thousand dollars.
In todays day and age very few people, especially millennials, use a traditional stock broker to manager their investments. Thanks to the internet, trading stocks can all be done from your couch. There are tons of different online stock trading platforms and each one offers its own unique advantages. In this post I will discuss 3 popular trading platforms that I think will appeal to the average millennial or novice investor.
Scottrade is a well known brokerage that has been in business since 1980. If you watch CNBC you have likely seen one of their commercials.
Supported Devices: Scottrade is available on both desktop and mobile devices.
Trading Fees: Always look at the trading fees when choosing a brokerage. After all, trading fees take away from your return. Scottrade charges $7 per trade, but there are extra fees for stocks below $1 per share, options, and mutual funds. Do keep an eye on Scottrade’s promotions as they tend to offer special promotions from time to time in which you can receive a limited number of free trades or extra cash for trading.
Opening An Account: To open an account, Scottrade requires a minimum balance of $2,500. If you choose to open an account with Scottrade the process is very easy and can be done in less than 10 minutes.
Customer Service: This is where Scottrade shines. They have more than 500 branch locations you can stop by if you wish. In addition, they offer live chat assistance during business hours to address any problems you encounter. By doing a quick review online you will find that Scottrade receives rave reviews for their customer service.
Research Data And Tools: Another advantage of Scottrade is they offer a wide range of analytical tools, research data, and reports you can utilize to research and evaluate an investment. You can do a large majority of your stock research and analysis without ever leaving the platform.
OptionsHouse doesn’t have the longevity that Scottrade has, so unless you have researched brokerages in the past you may not have heard of it. OptionsHouse was established in 2005, but became a part of E*TRADE in 2016. As you may have guessed by the name, OptionsHouse was originally marketed towards investors interested in trading options at a low cost.
Supported Devices: OptionsHouse is available on both desktop and mobile devices.
Trading Fees: OptionsHouse charges $4.95 per trade, which may save you a lot of money in fees compared to Scottrade. As with Scottrade, there are extra fees for trading options and mutual funds.
Opening An Account: A major perk for new investors is that there is no minimum account balance to open an account with OptionsHouse, but they do offer $1,000 in free trades when you deposit $5,000 or more. If you decide to open an account with OptionsHouse the signup process can be done in a matter of minutes.
Customer Service: OptionsHouse doesn’t receive as much recognition for customer service as Scottrade, but they still offer reliable customer service in the form of live chat, email, or phone. Unlike Scottrade, OptionsHouse doesn’t offer physical locations. The lack of physical locations is really the only thing keeping OptionsHouse from being just as good as Scottrade in respect to customer service.
Research Data And Tools: Similar to Scottrade, OptionsHouse offers a wide range of analytical tools, research data, and reports to assist you in making wise investments.
Robinhood is a new player in the stock trading industry catered specifically towards millennials. The brokerage was founded in 2013 in Palo Alto, California by two recent Stanford graduates, who are millennials themselves.
Supported Devices: In order to keep their operating costs down, Robinhood is currently only available on iPhone, Apple Watch, and Android as an app. If you want to trade via desktop this may not be the right brokerage for you.
Trading Fees: Robinhood prides itself in being the only brokerage that offers completely free trades. Unlike Scottrade and OptionsHouse, Robinhood only allows you to trade stocks and ETF’s.
Opening An Account: Like OptionsHouse, Robinhood does not require a minimum opening balance. You can literally deposit $1 into your account if you want. Opening an account with Robinhood takes less than 5 minutes.
Customer Service: One of the biggest downfalls of Robinhood is customer service. They lack both live chat and physical locations, but do offer a phone number to call during business hours as well as an email address you can contact for support. That being said, Robinhood generally receives poor reviews for their customer service. If customer service is important to you in an online brokerage, Robinhood may not be the best option.
Research Data And Tools: Another way Robinhood keeps their operating costs down is by minimizing analytical tools, research data, and reports. They do have a news feed that pulls up articles related to each stock, but these alone are not enough information to thoroughly research an investment. Robinhood recently made earnings calls and earnings history available, but to really analyze the earnings you will still need to leave the platform and do your own online research.
From my personal experience, I have found that some of the data Robinhood does provide, such as the P/E ratio and volume, tends to be a bit off. For this reason, I suggest using Robinhood solely for the purpose of making trades and doing all of your research and analysis elsewhere.
Each platform mentioned above offers its own unique set of advantages. Choosing the best platform to trade on really comes down to personal preferences and what you value in an online brokerage.
Opt for Scottrade if you want superior customer service, analytical tools, and are able to meet the minimum balance requirement of $2,500. The major drawback of Scottrade is the $7 trading fee. If you plan to make frequent trades, you can rack up a lot of trading fees and ultimately lower your return. For the frequent trader, Scottrade is not the best option.
If physical branch locations are not important to you I would consider OptionsHouse to be a better choice than Scottrade. With OptionsHouse you still get all of the great features of Scottrade, but there is no minimum balance and the trading fee is only $4.95. For the low budget investor, having no minimum balance and a lower trading fee is very attractive in my opinion.
For the new and low budget investor I think Robinhood is the best choice assuming you have an iPhone, Apple Watch, or Android. The reason I say this is because there is no minimum balance and the trading fee is $0. The main disadvantage with Robinhood is their poor customer service, but from my 2 years of experience using Robinhood I have not had a single reason to contact customer service. Robinhood also lacks the research data, reports, and analytical tools you have with Scottrade and OptionsHouse, but I have found most of these tools can be accessed for free online. Sure, it may be more convenient to have all of the tools on your trading platform, but ultimately you are paying for those tools via trading fees. I think it’s best to avoid the trading fees and spend a little more time doing research and analysis online.
When you’re young and just beginning to earn money, developing a savings plan is key to future wealth. Let’s say you’ve developed a great savings plan and have $15,000 dollars in your savings account, now what? While I can’t stress enough how important it is to save money, it’s equally important to utilize your saved money.
Don’t Let Your Money Stagnate In A Savings Account
Money that is sitting in a savings account will be earning extremely low interest, try 0.25%. At that rate, you will earn very little money off of your saved money over time. Chances are the rate of inflation will actually make the money in your savings account even less valuable, as most savings account interest rates don’t even keep up with inflation.
Instead of allowing your saved money to stagnate in a savings account, you need to make your money work for you. Here are a few ways to do that:
Invest in Stocks
The concept of putting your hard earned money in the stock market may scare you at first. People always tell stories of stock market crashes that caused them to lose all of their money, but this is overdramatic. While it is true that a stock market crash can cause you to lose all of your money if the company you invest in goes out of business, this can be prevented by investing wisely to minimize your risks.
When investing in stocks do not invest in penny stocks unless you are willing to lose all of your money. Penny stocks may have a potentially high return in a short time, but they have an equally high risk. Choosing a penny stock that is going to sky rocket and timing the increase is like finding a needle in a haystack.
Instead, invest in stable companies with proven business models. Think Disney, Apple, Microsoft, and Google. It’s highly unlikely any of these companies are going to skyrocket overnight, buy they can produce solid returns in the long run, not to mention dividends in the meantime.
To give you an example of the power of investing in the stock market, a $1,000 investment in Disney 5 years ago would be worth around $2,850 today excluding dividends.
Depending on where you live, $15,000 may or may not be enough to begin investing in real estate. If you have good credit and a stable earning history, you can typically get a loan with only 3.5% down. With $15,000 in the bank you could purchase a home that is priced around $150,000 and pay a $5,250 down payment plus about $5,000 in closing costs (this can vary) for a total cost of $10,250. This leaves you with $4,750 in the bank for any financial emergencies.
A quick side note regarding emergency funds: Your emergency fund should be enough to cover at least 3 months of living expenses. Before making the commitment to spend a large chunk of your savings on a home, make sure you will still have enough in your savings account for unexpected expenses.
Investing in real estate can be as simple as purchasing a home and living in it. It’s considered an investment because in time homes tend to increase in value. Some would argue that a home you live in is not an investment, but a hedge against inflation. Either way, buying a home can be a way to protect your money from inflation.
Another benefit to owning is that in many real estate markets the monthly cost to own a home is slightly cheaper than the monthly cost to rent that same home, this is especially true in very hot rental markets. In comparing the cost of renting vs. owning, as a general rule of thumb, owning a home becomes cheaper than renting after you have lived there about 3 years, but this can vary by market.
Here’s something else to think about. Let’s say you purchase a home then 5 years later you decide to upgrade and purchase a new home. If your budget allows it, consider keeping your former home as a rental property, which can generate income for you once it’s paid off. If it’s not paid off, the rent can cover the payment in the meantime. By doing this you can create a stable supplemental income in the future.
Invest In A Roth IRA
For young people, a Roth IRA is a great and safe way to invest your money. A Roth IRA is a type of retirement account in which you pay taxes on the money you put in, but don’t pay taxes on the money you take out in the future. This makes a lot of sense if you think there is a good chance you will be in a higher tax bracket at the time you plan to start withdrawing money.
So what kind of annual return can you expect? The money you invest in a Roth IRA doesn’t stagnate like it does in a savings account, but will likely average a 7% return per year over time.
There are limits on who can contribute to a Roth IRA. First off, you have to have earned income to contribute to a Roth IRA. Therefore if you simply have money in the bank but no earned income from a job, you cannot contribute.
As of 2016, the maximum yearly contribution if you are single or head of household is $5,500 and your income has to be less than $117,000. If you are married and filing jointly your combined income must be less than $184,000. These income limits tend to go up every year.
One perk of a Roth IRA is you can withdraw your contributions (not your earnings) tax-free at anytime without penalty. To withdraw your earnings you must have had the account for at least five years and be 59 1/2 years of age or older. One exception to the rule is you can use up to $10,000 of your earnings and contributions both tax and penalty free to purchase your first home, assuming you have had the account for at least five years.
I would like to start off by noting that I have been using Robinhood for almost two years now. That being said, I feel I am qualified to review this platform as I have had plenty of time to really assess the platform firsthand and determine the downfalls and benefits. Now, let’s get started!
Robinhood is a new player in the stock trading industry marketed specifically towards millennials. The brokerage was founded in 2013 in Palo Alto, California by two recent Stanford graduates, who are millennials themselves.
Robinhood’s big selling point is completely free trades with no minimum balance. As you can imagine, this appeals to the low budget investor who is just getting started with stock trading.
Which Devices Are Supported?
Offering free trades isn’t easy, so in order to keep their operating costs down Robinhood is currently only available on iPhone, Apple Watch, and Android as an app. If you want to be one of those traders with five monitors running at once you are out of luck.
Robinhood takes pride in being the only brokerage that offers completely free trades with no minimum balance. You can literally deposit $1 into your account if you want. This is really what sold me on the app. When people first hear that Robinhood offers free trades they often suspect there is some kind of catch. I promise you there is not, trades are completely free!
For the low budget investor, having free trades is huge in my opinion. This allows you to buy 1 share of stock at a time to slowly accumulate a position in a company. Buying 1 share at a time wouldn’t make much sense if you had to pay a $4-$10 fee every time you trade, as you may have to get a 5-10% return just to cover the trading fee!
Limited Investment Options
Unlike most online brokerages, Robinhood only allows you to trade stocks and ETF’s. The ability to trade options and mutual funds is not yet available to investors.
One of the biggest downfalls to Robinhood is customer service. They lack both live chat and physical locations, but do offer a phone number to call during business hours as well as an email address you can contact for support.
Robinhood generally receives poor reviews for their customer service. If customer service is important to you in an online brokerage, Robinhood may not be the best option. That being said, in the 2 years I have been using Robinhood I have not had a single reason to contact customer service.
Limited Analytical Tools And Research Data
Another way Robinhood keeps their operating costs down is by minimizing the availability of analytical tools, research data, and reports. They do have a news feed that pulls up articles related to each stock, but these alone are not enough information to thoroughly research an investment.
In addition to news articles, Robinhood lists some data under each stock. This includes highs, lows, volume, market cap, P/E ratio, dividend yield, and earnings data among a few other things. From my experience, all of this data can be a bit off in terms of accuracy. I personally would advise against using any of this data in your investing decisions.
Do Stock Analysis And Research Elsewhere
When you do research and analysis on an investment you will definitely have to leave the platform and do the research online. Although this may seem inconvenient, it hasn’t really bothered me in the 2 years I have been using Robinhood. I would much rather have free trades and have to leave the app to do my research and analysis than pay a $7/trade fee just to have all of the tools and data available on the platform.
In the end, it’s all about the return on your investment. So why let a trading fee lower that return?
In 2016, Robinhood added a new type of account you can register for called Robinhood Gold. This account offers pre and post market trading and is also a margin account.
For those unfamiliar, a margin account allows you to borrow money from your broker to trade with. One risk associated with borrowing money to trade with is that you can lose money you don’t have and eventually you are going to have to pay that money back. For this reason, I strongly advise against the use of a margin account for beginning investors.
To be eligible for Robinhood Gold a minimum account balance of $2,000 is required. Unlike the traditional Robinhood account, Robinhood Gold charges a monthly fee based on the size of your account. As with all Robinhood accounts, all trades are completely free with Robinhood Gold.
How Does Robinhood Make Money?
Seeing that Robinhood is a for-profit business, at this point you’re probably wondering how Robinhood makes money if they offer free trades. There are two main ways they make money.
They get paid interest from uninvested cash in your account.
They charge a monthly subscription fee for Robinhood Gold accounts.
Only time will tell if Robinhood is a successful business. I personally think in the long run they will have to find other ways to monetize the app. Perhaps by offering $1.00 trades or incorporating advertising into the app.
The Take Home Message
For the new and low budget investor I think Robinhood is an excellent brokerage assuming you have an iPhone, Apple Watch, or Android. The main reasons for this are because there is no minimum balance and the trading fee is $0.
The main disadvantage with Robinhood is their poor customer service, but as I previously mentioned, I have been using Robinhood for about 2 years and haven’t once had to contact customer service. Robinhood also lacks sufficient research data, reports, and analytical tools. That said, all of these tools, data, and reports can be found online for free. Sure, it may be more convenient to have all of the tools on your trading platform, but ultimately you are paying for these tools via trading fees. I say it’s best to avoid the trading fees and spend a little more time doing research and analysis online.
If you’re young and have yet to start investing, the stock market may seem daunting at first. I’ve found many people have preconceived notions when it comes to investing in stocks. We’ve all heard stories of people who struck it rich in the stock market as well as those who lost everything they had.
While it’s certainly true that some people have lost all of their money or made fortunes in the stock market, the outcome is usually not so extreme. Good investing is said to be very boring. What I mean by this is parking your money in a stock for years at a time and not constantly trading. In other words, long term investing.
I have also heard people compare investing in the stock market to gambling. Can investing in the stock market be considered gambling? Absolutely, but it doesn’t have to be. Your investing strategy or lack thereof will determine whether you are gambling or investing. Investing in a stock without having any knowledge of the company and why you’re investing in it would be in line with gambling, as you are just buying a stock and hoping it goes up in value. Learning about the company and having a clear reason as to why you’re investing in their stock would not be gambling. That being said, there is always some degree of uncertainty with any investment you make.
Now that we have discussed some common stock investing misconceptions, let’s get into the details about what a stock actually is and how to invest.
Simply put, a stock is a portion of the ownership in a company. Therefore, as you purchase more stock you own a greater portion of the company. It’s fun to think that for a mere $153 (the price per share of Apple when I wrote this article) you could be a partial owner of Apple. In reality, if you walk into the Apple headquarters in Cupertino, CA you likely won’t be treated like an owner, probably more like a trespasser if you’re able to get in at all. This is because one share of stock is a minuscule amount relative to the total number of shares Apple has issued, which is around 5.2 billion.
While owning a few shares in a company may not give you the right to mosey on into their headquarters, it does give you voting rights within the company for electing the board of directors. The power of your vote is based on the number of shares you own, so if you only own a handful of shares your vote won’t have much leverage.
When discussing stocks people always refer to the stock market. As you can probably guess from the name, the stock market is a place where stocks are bought and sold. It’s literally a market place for stocks.
There are different ways you can make money investing in stocks. The most common way is to buy low and sell high. Pretty simple, right? For example, let’s say you buy 1 share of Netflix at $140 per share. Fast forward 2 years and let’s say Netflix is now worth $200 per share and you decide to sell it. You would make a total profit of $60 per share.
Another popular way to make money is by shorting stocks. When you short a stock you make money when the stock decreases in value. When you short a stock you don’t actually own the stock, instead the stock is lent to you by a broker. Once the broker lends you the stock, you immediately sell it and keep the proceeds. Eventually, you have to actually buy the stock back and return it to the broker who lent it to you.
For example, let’s say the broker lent a stock to you at a price of $100 per share, which you sell immediately and pocket the money. Let’s say 1 month later the stock decreases in value to $75 per share. You can then buy back the shares at $75 per share to return to the broker and make a profit of $25 per share. The reason you make $25 per share is because you were lent the stock at $100 per share then returned it to the broker at $75 per share and pocketed the $25 difference. Alternatively, if the stock goes up in value you will have to buy back the shares at a higher price and lose money.
I admit that shorting stocks is not as straightforward as the buy low sell high strategy. It can definitely be confusing at first. If you’re a first time investor, I do not recommend shorting stocks as you run the risk of losing an infinite amount of money if the stock you short keeps rising in value and you never sell it.
Another common way to make money is through dividends. A dividend is simply a cash payment a company gives you for every share of their stock you own. Not all stocks pay dividends, but it’s easy to finds ones that do. Dividends can be paid out quarterly, biannually, or annually.
These are not all of the ways you can make money investing and trading stocks, just some of the more common ways.
Who can trade stocks?
The main limitation to being able to trade stocks is age. In the U.S., the required minimum age to trade stocks ranges from 18 to 21 years old depending on the state you live in.
To start trading stocks you will need to open an account with a brokerage. In the past this meant calling or going into an actual brick and mortar brokerage firm. Nowadays most stock investors use online brokerages and trading platforms. The only disadvantage to using online brokerages is that you typically don’t have access to investing advice from a stock broker as you would with a traditional brick and mortar brokerage. The advantage of online brokerages is that trading fees are often much lower.
There are loads of online brokerages to choose from. Some of the most popular are:
Capital One Investing
All of these online brokerages offer their own unique advantages depending on the types of investments you want to make, your investing style, and how much money you plan to invest. For example, if you’re making frequent trades you likely want to choose a brokerage that has low trading fees.
One of main barriers that prevents many people from saving money is having too many expenses. Some expenses are unavoidable, but they can often times be reduced. Listed below are 4 common expenses in which you can likely reduce your spending.
While we all need food to survive, many people overspend on food. Here are a few ways to reduce your food expenses.
Stop Dining Out
One of the most common ways to overspend on food is dining out. When you dine out, you are paying a premium to have the food prepared and served. You may pay $20 for a meal at a restaurant that you could prepare at home for $10 or less. If you’re feeding an entire family or dining out multiple times a week this can really add up.
Be A Bargain Shopper
Bargain shopping at the grocery store is also a great way to reduce food expenses. Most grocery stores have some sort of free membership that gives you discounts on select items and often times money off gas if the grocery store has a gas station. Utilize these memberships and buy the items that are discounted. They tend to switch up the discounted items weekly, so it’s not like you’re going to be buying the same food every week.
Avoid Upscale Stores
In addition to buying items on sale, avoid shopping at high-end grocery stores like Whole Foods and Fresh Market. There is a reason you typically find Whole Foods and Fresh Market near expensive neighborhoods, they are upscale grocery chains that charge upscale prices.
Paying rent or a mortgage is pretty much an unavoidable expense unless you live with your parents or couch surf at a friends house. Although this expense is unavoidable, it doesn’t mean you can’t reduce this expense without drastically sacrificing your quality of life.
Sure, you can always cut down on your rent/mortgage by living in a crime-ridden neighborhood where home prices are depressed, but I’m guessing you don’t want to worry about getting mugged while you’re mowing your lawn, so I won’t consider this option.
Get A Roommate
One reasonable option to lower your rent/mortgage is to have a roommate who pays rent. This doesn’t mean you have to share the same bedroom. In most areas it cost more per person to rent a one bedroom apartment for yourself than it does to split the rent with a roommate on a two bedroom apartment. Although a two bedroom apartment is made to accommodate twice as many people as a one bedroom apartment, it is typically not twice the price.
From my personal experience, when I lived in a one bedroom apartment the rent was about $800/month. Prior to that I lived in a two bedroom apartment with a roommate and the rent was about $1,200/month, with my portion being $600/month. Therefore I saved $200/month by splitting a two bedroom apartment with a roommate. On top of splitting rent you are also able to split utilities when you have a roommate, which may help you to save an extra $50 or so.
Cable & Internet
Everyone, and I mean EVERYONE, I know complains about their cable/internet bill. We live in a world where you need to be able to access the internet whether it be for your job or to connect with friends and family. That being said, I am not going to go as far as to say cancel your cable and internet and try to find an apartment as close as possible to a Starbucks so you can freeload off their wifi. What I will say is…
Cancel Your Cable
Depending on your provider and plan, it may save you a lot or it may save you very little. Either way, it’s a luxury you can go without and save money as a result. If you think you can go without internet as well, more to power to you! Although I hope not everyone cancels their internet because I will have no one to read my blog.
Don’t Rent The Modem
Many cable/internet providers offer a modem you can rent. From my experience, they charge around $10-$15/month to rent it. Instead of renting, go out and buy a modem from Amazon or Best Buy. It will cost you $50-$60 initially, but this pays for itself in 4-6 months.
If you absolutely need some kind of programming consider Netflix, Hulu, or Amazon Prime. All of these offer a huge selection of on demand entertainment. The monthly cost is also much less expensive than cable in most cases.
Unless you live in an urban area with reliable public transportation or the ability to easily walk or bike to everything, you will likely need to purchase a car. Remember that a car is not an investment as cars always depreciate in value. Just like with everything else, you should shop around to get the best car for your money. When you purchase a car you want something that’s reliable, inexpensive, and practical.
Look For Reliability
To determine the reliability of a particular car, check out car reviews online or consumer reports (my personal favorite). Try to avoid cars that have low reliability and low overall ratings. If you have the budget to buy a new car in the $15,000-$20,000 range, you can often get a long term warranty.
Several inexpensive car manufacturers offer 10 year 100,000 miles powertrain and 5 year 60,000 miles bumper to bumper warranties. I highly recommend looking for brands that offer these types of warranties. Warranties like these give you a sort of guarantee that you won’t have to make any major repairs to your car for the duration of the warranty.
Buy Something Inexpensive
When I say to purchase a car that is inexpensive, that may be relative to the amount of money you make. For example, an inexpensive car for someone who makes $100,000/year will likely not be considered an inexpensive car for someone who makes $50,000/year.
Let’s say you make $35,000/year and want to purchase a car. Purchasing a car that is $20,000 or more is probably too expensive even if it’s brand new. If you want something brand new with a long warranty look for something around $15,000. At this price you will likely have to make monthly payments, but if it’s brand new and has a long warranty you won’t have to worry about paying for repairs for the duration of the warranty. Alternatively, consider something slightly used with good reliability ratings if it will save you even more money.
Unless you absolutely have to, try to avoid buying an old car that may be unreliable. Although it may cost less initially, you run the risk of having to invest major money into repairs and it could ultimately end up costing you more money in the long run than buying an inexpensive new car with a warranty.
Choose Something Practical
Lastly, you want to choose a car that is practical for your needs. What’s practical for a banker might not be practical for a farmer. When I say practical I am not referring to money, I am referring to what you will be using the car for. For example, a sports cars might be practical to get a banker to and from work, but a pick-up truck might be more practical for a farmer who may have to haul supplies around his farm.
In choosing a car that is practical determine how you will be using the car most of the time. If you are just driving to and from work choose something small and fuel efficient. If you have a family, choose something four door and fuel efficient. If you have to haul stuff regularly that won’t fit into a small car or if you live in an area that receives snow regularly choose something like a pick-up truck or SUV.
A Few Expenses Among Many
These a just a few common expenses that can easily be minimized. It ultimately comes down to being a bargain shopper for every expense in your life, as well as developing the ability to distinguish between your wants and needs. Next time you are making a purchase ask yourself, “do I need this?” If the answer is yes, look at all of the options available and make sure you are choosing the most affordable option.
Let me start off by saying whether you’re in high school, college, or a recent college graduate, it’s never too early to start investing. Even if you have just $500 saved that you don’t anticipate needing to use in the next year, that is plenty of money to get you started on the path of investing. In fact, the earlier you start investing the greater your returns can be over time.
If you invest $500 in the stock market at age 20 and get an average annual return of 7%, which is the average annual return of the stock market according to most data, by the time you are 40 years old your initial $500 investment will be worth approximately $1,900. That’s almost 4x what you started with!
These calculations don’t even take dividends into consideration. Chances are as you get older and your income grows you will invest more and more money. Overtime these investments can add up to give you substantial returns later in life. The take home message is that the time to start investing is now!
There are many different options you can choose to invest in, but I will discuss some of the more popular options for low budget investors. Keep in mind not all investments are created equal, some are more risky than others. It’s ultimately up to you to thoroughly research a potential investment before you sink your hard earned money into it.
Here are a few common investments you can do on a low budget:
When you purchase a stock you are literally purchasing a portion of a company. Stocks range in price from less than a penny to thousands of dollars per share. One of the most basic ways to trade stocks is to buy low and sell high. This isn’t to say that everything you buy will eventually increase in price as some stocks decrease, stay flat, or the company can even go out of business.
Not only can you buy low and sell high to make a profit on stocks, you can also earn dividends from some stocks. A dividend is a set amount of money you receive for every share you own. When a company pays a dividend they are essentially distributing a portion of the profits to shareholders. Dividends are typically paid two to four times a year. If you own a small number of shares of a particular stock, dividends won’t do much for you. If you own hundreds of shares of a stock or more the dividend is enough that it can almost act as a source of income in some cases.
The return you can expect to see from investing in stocks can vary greatly. For example, you could buy a volatile penny stock (I don’t recommend this) that shoots up 500% overnight, or it could completely tank and the company goes out of business. If you invest in a more stable company (I recommend this), you could expect an average annual return of about 7% according to most historical data. This isn’t to say stocks will go up 7% every year. They may be down 20% one year then up 27% the next year, but the the average annual return of the stock market has averaged about 7% for long term investments. In all honesty it’s hard to say what kind of return you can expect as there are so many different stocks you can invest in and the timing of your investment can play a crucial role.
When you purchase a bond you are essentially lending money to the company or government you purchased it from. In return, they pay you interest on the money and will eventually pay you back the face value of the bond at a specified time.
One advantage of investing in bonds versus stocks is that bonds are generally a lower risk. If your bond is with the government it is practically risk-free. The downside to investing is bonds is that the return on your investment is often much smaller than what you can get investing in stocks. As of 2017, the current rates for U.S. savings bonds ranges from 0.10%-2.76%. At these rates, an investment in bonds at this point in time may not even keep up with inflation.
When you buy a mutual fund you are buying a group of stocks or bonds. The group of stocks or bonds in the fund are selected by the fund managers. The different types of funds include money market funds, bond funds, and stock funds.
The advantage of mutual funds is that you don’t need a lot of money to invest. This is also one of the most cost effective ways to create a diverse portfolio that way you aren’t hinging your entire investment on one stock or bond. Another advantage of a mutual fund is that if you are a novice investor it provides a professional management team that take care of choosing the stocks or bonds to include in the fund.
So how do make money from mutual funds? Just like investing in stocks, you can receive dividends from funds that hold dividend paying stocks. Likewise, bond funds will pay you interest. For stock funds, when the fund managers sell a particular stock for a profit, the profit gets distributed to fund owners at the end of the year minus any losses. Another way you can make money is to sell your shares in the fund after the fund has increased in value.
The main risk of mutual funds is that just like stocks, they can go down in value.
Many investment options are available.
Stock, bonds, and mutual funds are only a few of the many investment options available. Other popular investments include real estate, annuities, savings accounts, 401K’s, IRA’s, and stock options. What you choose to invest in is ultimately up to you. The amount of money you have to invest and the risks you are willing to take will help to determine which investments may be right for you.
Before choosing what to invest in it’s beneficial to look at the current state of the economy. For example, in past years you could get a decent interest rate on a savings account, but now the rate is so low that the interest you earn will hardly amount to anything relative to what you invest in it.
The take home message is that you should thoroughly research a potential investment before actually making the decision to invest. After all, you worked hard for that money. Happy investing!
So you’re earning a decent salary but for some reason your bank account balance never seems to increase. This situation is all too familiar for many people. We all know someone who earns a six figure salary but doesn’t have a dime to show for it.
Here’s a scary statistic, studies have shown that approximately 44% of lottery winners go broke within five years. This is an insane scenario for me to imagine. If you earn millions in the lottery and invest it properly you shouldn’t have to work another 9-5 job the rest of your life. The reason this scary statistic holds true is because of poor money management and planning.
Here are 3 common money management habits to avoid if you want your bank account to grow every month:
Not having a budget
If you don’t have a set budget, start one right now! A budget is important to have because it helps you to determine how much money you can potentially save each month and how much money you can afford to spend on various things. In figuring your budget start with determining how much money you earn each month. Then determine your monthly expenses including housing, utilities, car payment, gas, food, insurance, cell phone, and any debt you may have (student loans, credit card, etc). Subtract all of these expenses from your monthly take home paycheck and see how much is left over. The amount left over is how much you can save each month.
If there is very little money left over for you to save each month consider finding a way to lower one or more of your expenses. Housing, utilities, insurance, and debt are difficult to lower in the near term, but your car payment, gas, and food have more flexibility.
To decrease your car payment consider selling your car to buy a less expensive car. If you live somewhere with reliable public transportation, consider getting rid of your car altogether.
To decrease your gas expenses consider selling your car and buying one that is more fuel efficient, but make sure this doesn’t increase your monthly car payment. If the place you are traveling is close enough for you to walk, then by all means walk and save the gas.
To decrease your food expenses eat out less and be a smart shopper. Buying groceries is an unavoidable expense. That being said, you can still limit this expense by being a bargain shopper. Try to do most of your shopping at discount grocery stores as opposed to high-end stores like The Fresh Market and Whole Foods. Additionally, don’t buy so much food at a time that half of it ends up expiring before you can eat it.
I touched on this above, but I think this matter deserves it’s own section because this is a financial mistake all too many people make. Unless you live in an urban area with reliable public transportation or the ability to easily walk or bike to everything, you will likely need to purchase a car, so that expense is unavoidable. That being said, you should make sure the monthly payment for your car fits within your budget.
As with anything else, when you’re shopping for a car always shop around to get the most for your money. What you want in a car is something that’s reliable, inexpensive, and practical.
To determine the reliability of a particular car check out car reviews online or consumer reports (my personal favorite). Try to avoid cars that have low reliability and low overall ratings. If you have the budget to buy a new car in the $15,000-$20,000 range you can often get a long term warranty. Several inexpensive car manufacturers offer 10 year 100,000 miles powertrain and 5 year 60,000 miles bumper to bumper warranties. I highly recommend looking for brands that offer these types of warranties. Warranties like these give you a sort of guarantee that you won’t have to make any major repairs to your car for the duration of the warranty.
Purchase a car that is inexpensive. When I say inexpensive that is relative to the amount of money you make. For example, an inexpensive car for someone who makes $100,000/year will likely not be considered an inexpensive car for someone who makes $50,000/year.
Let’s say you make $35,000/year and want to purchase a car. Purchasing a car that is $20,000 or more is probably too expensive even if it’s brand new. If you want something brand new with a long warranty look for something around $15,000. At this price you will likely have to make monthly payments, but if it’s brand new and has a long warranty you won’t have to worry about paying for repairs for the duration of the warranty.
If a new car doesn’t fit into your budget consider something slightly used with good reliability ratings. Unless you absolutely have to, try to avoid buying an old car that may be unreliable. Although it may cost less initially, you run the risk of having to invest major money into repairs and it could ultimately end up costing you more money in the long run than buying an inexpensive new car with a warranty.
Choose a car that is practical for your needs. What’s practical for a banker might not be practical for a farmer. When I say practical I am not referring to money, I am referring to what you will be using the car for. For example, a sports cars might be practical to get a banker to and from work but a pick-up truck might be more practical for a farmer who may have to haul supplies around his farm.
In choosing a car that is practical determine how you will be using the car most of the time. If you are just driving to and from work choose something small and fuel efficient. If you have a family, choose something four door and fuel efficient. If you have to haul stuff regularly that won’t fit into a small car or if you live in an area that receives snow regularly choose something like a pick-up truck or SUV.
Not paying off your credit card in full each month
There is nothing wrong with charging things to your credit card. In fact, I recommend doing it to help build a good credit history. Plus, many credit cards offer cash back rewards that aren’t available if you pay with cash. The one caveat that outweighs all of these benefits is not paying off your credit card balance in full each month.
Paying off your balance in full each month is important because it prevents you from having to pay interest on your remaining balance. The average interest rate on a credit card is around 15%, but can be as high as 25%. This means if you don’t pay your balance off in full each month you are literally paying interest on everything you purchased with your credit card for that month or even past months if you had a remaining balance.
Use your credit card wisely. Before you make a major purchase on your credit card always ask yourself if you would be willing and able to pay cash for this purchase right now. If you answered yes, then you can likely afford to charge it to your credit card. If you answered no, you should reevaluate if you can actually afford this purchase. By sticking to this strategy you should never have to worry about not being able to pay off your credit card in full each month.
I cannot emphasize enough how important it is to have a good credit history. If you have plans to buy a home or rent an apartment, you will need to have a good credit history. A good credit history takes time to develop, so make sure you plan ahead.
One of the best ways to start developing a good credit history is through a credit card. You can develop a decent credit history in about 6 months by using your credit card to make purchases and paying off the balance in full every month. The longer you have a credit card and consistently pay off your balances in full, the better your credit history will be.
Who is eligible for a credit card?
To apply for a credit card you have to be 21 years of age or older, but you can apply when you’re 18 years old if you have a parent willing to cosign or if you have proof of a steady income. Before applying for a credit card, know that not all credit cards are created equally. Listed below are a few things to consider when choosing a credit card.
Is there an annual fee?
If this is your first credit card you will want to find one that does not charge an annual fee, which is really not that hard to find. Most major credit card companies offer a few options with no annual fees. Cards that do have fees generally have a lot of rewards associated with them, which can outweigh the fee but you typically have to make a lot of charges and always pay it off in full for the fees to be worthwhile.
Credit cards with annual fees typically work best for people who have high earnings and can afford to pay for several thousand dollars or more worth of charges every month.
What is the interest rate?
Credit card companies will charge you interest, also known as APR, on any remaining balance that is not paid off by the due date. These interest rates can be as high as 25%. It may be hard to find interest rates below 20% if this is your first credit card.
That being said, if you pay your balance in full every month you will not be charged interest. Therefore, the interest rate doesn’t even matter. The reason I say to at least look at the interest rate is because who knows what could happen in your life that may render you unable to pay off your balance in full. Since we can’t plan for the unexpected, it’s always a good idea to take a look at the interest rate on the card.
The best approach when using a credit card is to always pay off your balance in full every month. Before you make a major purchase on your credit card, ask yourself if you would be willing and able to pay cash for the purchase right now. If you answered yes, then you can likely afford to charge it to your card. If you answered no, maybe you should reevaluate if you can actually afford this purchase. By sticking to this strategy you should never have to worry about interest rates, ruining your credit, or accumulating credit card debt.
What is the spending limit?
When you apply for a credit card they will offer you a spending limit. As you can probably guess, this is the maximum amount you are allowed to charge to your credit card each month. If this is your first credit card don’t expect to have a crazy high limit. The limit they give you will vary based on your income, credit history, and the credit card company.
When assessing the spending limit try to determine what your expenses are each month and what portion of it you plan to put on your credit card. Then see if the spending limit aligns with your estimated expenses. Again, if this is your first credit card you probably won’t be able to command a large spending limit, so you might not have a lot of choices. That being said, most credit card companies will issue a limit that is beyond what you should spend each month.
My first credit card had a spending limit just under $1,000, which was more than enough at the time. Once you have built a good credit history your spending limit will increase dramatically. Remember, don’t spend what you don’t have. Just because your credit card has a $5,000 limit doesn’t mean you should hit that limit.
What are the rewards?
Most credit cards offer some kind of rewards program where you receive points/credits for every dollar you spend. These points can be used to get all kinds of different consumer products, gift cards, vacations, and cash back. The best option to choose is cash back. Furthermore, you should receive the cash back as a credit towards your balance. This means the cash you are rewarded will go towards paying off your balance.
For your first credit card the rewards program probably won’t be so great. You can expect to get around 1% cash back for all purchases. This means for every $100 you charge and pay off each month you get $1 back. This doesn’t sound like a lot, but it adds up over time. Plus, think about this:
Let’s assume you pay your balance off in full every month, receive 1% cash back for all purchases, and don’t have an annual fee. Now let’s say you charge $1,000 per month to your credit card. At a rate of 1% cash back you will receive $10 cash back every month, which is $120 per year. What I am trying to show is that if you use your credit card responsibly you are literally getting paid to spend money. By using your credit card instead of cash you are saving an extra $120 per year.
Once you have built a good credit history you can get even better rewards programs. For example, American Express offers a card without annual fees that gives 3% cash back on grocery purchases, 2% cash back at gas stations and select department stores, and 1% cash back on all other purchases.
In todays world, where a good credit history is needed to rent an apartment or take out a loan, you are eventually going to need a credit card. I hope that I have not only given you the knowledge to choose the credit card that’s right for you, but also the knowledge to spend responsibly.
If you have already forgotten everything you just read in this article, remember this one thing and you will already be on the way to a good credit history: Don’t spend what you don’t have.