Investing on a Shoestring

The number one reason I hear from people for not investing is "But I just can't afford it."

Despite what many people think, it is possible to invest for the future effectively while still living on a low income. There are a few strategies that can help you to invest consistently and responsibly and build your future.

 Make it automatic

The easiest way to get over the investing mental hurdle is to make your investments automatic. But wait! Your income is low enough as it is, right? How can you lower your income and still live?

The answer is that if you never see the money you will never miss it. When you get a raise, your spending habits increase to meet the new income. It works the same way in reverse. If your paycheck is smaller, you find a way to live on it.

Obviously, if you are having severe money problems and can't support yourself on your income at all it is time to get financial help. Investing is not appropriate for you at this time. Contact a financial councilor.

But otherwise, having a small amount of money come out of your paycheck automatically so you never see it is the best way to build up your investing money. Having this money go directly into an investment is ideal.

Retirement savings

The first place that investments should be made is into retirement plans like a 401(k). With employer sponsored plans they can take this right out of your pay and make this very easy. What's even better is that with many plans your contribution is tax deductible. This means that while you may be investing $100 a paycheck into your retirement fund, your paycheck is only $70, or so, less than it was.
With a 401(k) there is also frequently an employer match. This should be understood for what it is, free money.

Investing in this way will allow you to put money away, automatically, and potentially make you a profit, even on a low income.

Dollar cost averaging

Dollar coast averaging is the strategy of investing a specific amount of money into a specific security or fund over a specific time period. This is a great way to invest on a low income because you can put any amount into this strategy, as long as you do so consistently. So you could, for example, invest ten dollars a paycheck.

The strategy with this is to be consistent. As the price of the security or fund changes you will acquire a different number of shares each time you invest, but over time you will be building your portfolio and investing for your future.

Investing is important to securing your financial future. No matter what your level of income, it is possible to invest. Look into these investment strategies and begin saving for your financial goals and dreams.

What is the FDIC?

With the stream of bank failures more and more people are becoming concerned about the stability of their bank. Also, people are starting to rely upon the guarantees made by the FDIC to protect their money. But what exactly is the FDIC? And what does the FDIC protect anyone against?

The FDIC is the Federal Depositors Insurance Corporation. And that is exactly what it is, an insurance corporation. Contrary to popular belief, the FDIC is not a government institution. It is backed by the US Federal Government, but it is not an obligation of the government.

It is an insurance company that insurers deposits in a participating bank. In order to receive this insurance a depositor does not need to pay a premium, the bank pays that. The depositors only concern is to be sure that their financial institution is a member of the FDIC.

How does someone tell if their bank is a member of the FDIC?

Every bank insured by the FDIC must display a sign advertising FDIC coverage beside the teller window.

What institutions are covered by the FDIC?

Most banks are covered by the FDIC. This means that credit unions, insurance companies, investment firms, and some smaller banks are not covered.

The FDIC protects depositors against the loss of their money in the event of a bank failure. It does not insure against monetary loss at an institution, therefore it does not cover any variable investments.

The FDIC was created to reassure depositors and strengthen the banking system. It was not created to insure against a collapse of the banking system on a widespread scale. This is why there is concern every time a bank fails over how much it cost the FDIC. The FDIC does not have an unlimited amount of money to cover banks.

The FDIC only keeps a very small amount of money in reserves to back up all the deposits that it is insuring. If several large banks fail at once, causing a collapse of the banking system, the FDIC would not be able to cover all of its insured deposits.

Being backed by the Federal government means that the FDIC will likely eventually return all of that insured money to its depositors, but it could take quite some time.

In the final analysis, many people have been encouraged by the government to believe that the FDIC is a foolproof system to guarantee the banking system. Also, many people have come under the impression that the FDIC is government run, also incorrect.

The FDIC is not perfect, but it is a system that has worked in the past, has even worked recently to return money into the hands of depositors. It is very important that people understand how the system works and not put an unreasonable amount of faith in the system.

How to Pay for College

Colleges and universities enjoy a unique position in the American economy. Normally as prices rise fresh products hit the market. The new products provide competition that keeps prices in check. In the world of higher education, however, supply stays relatively constant, prices go up and there is very little to keep prices in check.

So what does that mean? College is expensive, and it is only going to become more expensive. So how do you pay for a college education?

There are many options when it comes to paying for college. In most cases college expenses are covered through several sources in addition to savings and earning; scholarships, loans, grants, in addition to several popular programs.

Still, the best strategy when planning for college is to assume that no aid is forthcoming and start putting the money away. The longer you have until college the more reasonable options you'll have.

Three primary methods of college funding are investments, financial aid, and loans. They are not exclusive and most people use all three.

Investments

The more time you have before college the more attractive this method is. There are several investment options for saving for college.

* Dollar Cost Averaging in Funds

A college savings portfolio should be well diversified. The further away college is the more of the portfolio that should contain stock oriented funds. Dollar cost averaging works particularly well here as college funds are generally saved over time.

Of course, the general rules of dollar cost averaging should be kept in mind, if using mutual funds avoid those with high front-end loads.

* Tuition Savings Plans (also known as 529 plans)

These typically come in two varieties, Pre-paid Tuition Plans and College Savings Plans.

Pre-paid tuition plans:

These guarantee that if you pay the price of tuition today, in a lump sum or in payments, the state will cover the cost of tuition when your child is ready to attend a state university.

College savings plans:

These are essentially state sponsored investment accounts. The state invests the money and participants share in the profit. There is no guarantee and you could actually lose money.

* Zero-Coupon Bonds

These bonds get their name from the fact that they pay their interest only at maturity. There is no interest or income until then. They are attractive to conservative investors for college education expenses because you can buy them to time them to mature when college expenses should begin.
For example, if your 2-year-old son will be starting college in 13 years (Harvard?) you can purchase a 13-year maturity zero. The longer time until maturity the cheaper the bond, so a 13 year maturity $1000 zero may sell for somewhere around $600. That same bond maturing in 5 years may cost you over $800. In both cases when Junior is ready for college that bond can be exchanged for $1000.
The big catch? You have to pay taxes on that income that you are not earning every year. Even though you get "zero" from the bond the "ghost" interest is still taxable.

* Savings Bonds

These are popular, especially to conservative investors and grandparents. When purchased in the parent's name, when the parent is at least 24 years old, and used for college tuition or fees the bond's interest can be tax-free.

There are certain income provisions to qualify, contact a tax advisor.

Financial Aid

There are several places to get specific information about available financial aid programs: high school guidance councilors, financial aid officers at the college, and the Federal Aid Information Center.

Here are a few major sources of Federal assistance:

* Pell Grants
These are reserved for the most needy students and vary greatly in amount.

* Stafford Loans
These are loans directly from the government, often through banks. The interest rate is tied to Treasury rates and usually has a 10-year pay back period.

* Perkins Loans
These are also limited to students with great need. They typically have very low interest rates and certain jobs after graduation could result in the canceling of the loan altogether. If your child takes specific jobs the government might actually pay back the loan for him or her.

* Private Loans
And of course you can always take out a private loan to help pay your child's college expenses.
Scholarships

For information on scholarships talk with guidance councilor or a college financial aid officer. Other excellent sources for scholarship information include: your employer, professional organizations, religious associations, local civics group, unions, state agencies, and social groups. You should also go to the library and look through scholarship guides.

Finally, use the Internet to search for scholarships. Try:

The College Board:
www.collegeboard.com

FastWeb:
www.fastweb.com

And finally, for more information visit:

Seven Mistakes Made When Saving For College:
http://www.e-personalfinance.com/article/7-Mistakes-Made-when-Saving-for-College.html

What is a 529 Savings Plan:
http://www.e-personalfinance.com/article/What-Is-a-529-Savings-Plan.html

College Scholarships 101:
http://www.e-personalfinance.com/article/College-Scholarships-101.html

Why Checks are Becoming Obsolete

Everyday there are bills to be paid and things to be purchased. Money transfers hands in stores, at banks, for services and goods. For many years a check was the preferred method for transferring money between two parties.

Checks were far safer than carrying or sending cash. They also provided a convenient way to move funds and pay bills. In more recent times other forms of payment have eclipsed the benefits of checks and have rendered checks obsolete.

Amid the aftermath of the September 11th 2001 terrorist attacks on the United States no planes were permitted to fly over US soil. This crippled the system of checks clearing vital to the transfer of money through checks.

For a check to clear it needs to physically be transported to the other bank that has the funds so that the funds can be pulled from that bank. With no planes flying there was no way to clear checks. In response the US government instituted Check 21 legislation.

Check 21 allowed any institution that receives a check to convert it into an electronic transaction and clear the check electronically. This allows for checks to clear without actually physically needed the check to be transported.

Check 21 delivered the crushing blow to checks, making them completely obsolete. If a check can be converted into an electronic transaction there is no need for a physical check any longer/

While Check 21 finally made checks obsolete they were already becoming obsolete for many other reasons:

* Cost

Many banks still charge a fee to purchase checks. This fee can range anywhere from a few dollars up to over one hundred dollars for some types of business checks. If the checks on an account cost money then it becomes more cost effective to use fewer checks, or cease using them altogether.

* Security

When giving someone a check you are providing them with access to a lot of information. On the face of the check is your account number, your name, address, sometimes even your phone number or drivers license number.

All this personal information can be used by potential identity thieves This information is best kept strict control over, by giving out a check you jeopardize the security of your personal information. Using a check card or a debit card limits this information and keeps your personal data out of potentially dishonest hands.

* Convenience

Carrying a checkbook around can be clumsy and burdensome. While they easily fit into a purse they do not fit anywhere into a wallet and can be uncomfortable to carry in a pocket. In addition, having to pull out the checkbook, find a pen, and make out the checks at a point of sale can be time consuming.

Having a check card on hand will allow access to the money in a checking account without requiring the space, the pen, or the time involved in writing out the check. A little card will easily fit into a wallet or pocket, easily replacing the burdensome checkbook.

* Liability

When a merchant received a check there is no way to guarantee that the funds will be available when the merchant comes to collect. There are millions of bad checks out there, written by people that had no intention of actually honoring the check.

Even if a check is verified by the merchant with the bank it is drawn on there is no guarantee that the money will still be in the bank when the merchant comes to collect.

When a check card is authorized the merchant has an extremely good chance of actually receiving payment for that transaction. This makes checks a far greater liability than other forms of payment.

Checks are quickly becoming obsolete. On many fronts checks are proving unreliable and burdensome. Check cards offer a safer, more convenient alternative and make checks outdated.

Understanding Checks: The basics

Checks are so rarely used these days that a lot of people just don't understand them anymore. But if you get paid from an employer, chances are that you will receive a paper check at some point.

There are five parts to the front of the check that are important to its negotiability, that is, to its ability to be used as a way to exchange money.

1. The date-- The date must be current. After six months the check is stale dated and cannot be deposited or cashed. If the check is written for a date in the future, it is post-dated and no good until that date. That is not to say that a bank won't accept the check early; banks are not breaking any laws in negotiating a post dated check. But as  a courtesy to the account holder who wrote the check, if the bank notices the post date it probably won't accept it.
2. The Pay to the Order of line-- this is who the check is made payable to. No one else has the legal right to the money. NO ONE. Not the parent, not the spouse, not a neighbor. Only the person named in the check has the right to negotiate it. Sometimes a bank will cash a check for a parent or spouse IF both the person the check is made payable to and the person negotiating it are on the same account. This is an exception. Even if the person that the check is made payable signs the check over to someone else, a bank may require that both parties appear in person in order to negotiate the check.
3. The numeric amount of the check-- this is where the amount of the check is written in numbers like: 100.00. This is for convenience only and must match the legal line.
4. The legal line-- this is where the amount of the check is written out in words like: one hundred dollars. This is the amount that the check is legally made out for. If it doesn't match the numeric amount, it is the legal amount that the bank must use. The bank can, alternately, refuse to negotiate a check where the numeric and legal amounts don't match.
5. The authorized signature-- a check is a contract. If the check is not signed by the account holder on the bottom right hand corner, the check is not authorized and not legal. Only the owner of the account from which the check is drawn can sign the check.

These are the things that make the front of a check legal. Endorsement (signing the back of the check) is a completely different matter that I will touch upon in the near future.

What is a Money Market Account?

There are so many different types of financial products in the market that sometimes it can be difficult understanding the right one for you. Most banks offer the typical checking accounts and savings accounts - and money market accounts.

Very often you will see a rate sheet or board advertising the bank's current rates on CD's and money market accounts. The money market rates are higher than the savings account rates, but typically lower than the CD rates. But what exactly is a money market account?

The first thing you may notice about a money market account, after the higher interest rate, is the high minimum balance. Depending on the bank the minimum balance for a money market may be anywhere from $2500 to $10,000. And just because that is the minimum balance on the account doesn't mean that that is the minimum balance to get that great advertised rate.

Interest rates on money market accounts are typically tiered, the more money you have in the account the higher the yield. So in order to capture the interest rate you are looking for you may have to maintain a significant balance.

Once the money is in this account you have greater liquidity than you would in a savings account. Savings accounts, by law, are restricted in the number of withdraws you may make in a monthly statement cycle. While Federal Regulation D allows six withdrawals from any savings-type accounts, banks typically limit regular savings accounts further.  Money Market accounts, however, are usually not limited by banks in this way and are permitted the six withdrawals.

Even more surprising, three of those six withdraws can be by check. Yes, this is a savings vehicle that allows you to write checks. You do not, however, have the ability to use a check card on this account for point of sale purchases, although you may have ATM access.

A money market account gives you a higher yield on your money, gives you greater access to your funds and allows you to write checks, but it requires a high balance. Sounds good, but is it safe?

Unlike a money market fund, a money market account is FDIC insured up to the maximum legal limit. The money in a money market account is completely safe. The higher interest rate can be provided to you because the bank is not as restricted in how it can safely invest these funds as it is in a savings account. The bank has the ability to better diversify money market deposits, allowing it to make more money. While no risk is placed upon your money the bank can pay you more.

Also, money in a money market account is likely to remain with the bank for a longer period of time than money in a savings account. This allows the bank a greater return on their investment of your funds, allowing them to pay you better.

A money market account offers may great advantages over a regular savings account. If meeting the minimum balance requirements is not a problem consider placing some of your liquid capital into this account type.

Dollar Cost Averaging: A painless way to start investing

Particularly when you are young, learning how to get started investing can seen impossible. Chances are good that you don't have money socked away to drop into the stock market, but you've probably heard about the incredible potential of growing your money through the market.

Dollar cost averaging is a popular investment strategy that can be used by almost anyone. It allows for investments using small amounts of money over long periods of time. Dollar cost averaging reduces risk, makes investing more manageable and grows your investments over the long term.

How does Dollar Cost Averaging work?

Dollar cost averaging is simply the strategy of investing a predetermined amount of money into a specific investment or investments over a specific period of time. For a beginning investor this may look like investing $50 every paycheck into an index fund or Exchange Traded Fund (ETF).

That $50 would be automatically invested into that fund every other week, buying however many shares that can be bought for that price. As the share price fluctuates the number of shares purchased will also fluctuate. For example, if one week the price is $10 this investor would have purchased five shares. If the next investment date the share price was $5 ten shares will have been purchased.

Reducing Risk

Dollar cost averaging reduces risk for an investor by spreading their investment out over a long period of time. The full investment amount is not used to purchase the shares at one time, risking potentially volatile price changes.

Using this system there is no worry that the money was used to purchase shares at a point when the price was particularly high. Since the price at which the shares are purchased keeps changing the focus in on share accumulation.

Making Investing Easy

Dollar cost averaging makes investing easy for anyone. Once the automatic investments are established there is no worry about making sure the shares are purchased at the correct times and since the investments are going into the same securities there is no worrying about picking the right investment.

Better yet, the stress of watching your portfolio go up and down is reduced as when prices are down the investor can rest assured that they are going to get a good deal on picking up a few more shares.

Then it is just a matter of time until the share price grows and the added number of shares will multiply the earnings.

Grow Your Investment!

As the price of the security goes up and down, the one constant is that the number of shares in the portfolio will continue to increase. This is an excellent way to grow an investment, as the number of shares, if not the share value, goes up and up.

Investing into an index fund or ETF helps to make sure you are well diversified and reduces the risk of major loss. Dollar cost averaging allows the investor the peace of mind of knowing that value is being built as the number of shares increases.

Dollar cost averaging provides many great benefits to investors of all levels of experience. It grants peace of mind, spreads out risk, and promotes portfolio growth. It is an effective strategy that can work for anyone, and that can work in your investment portfolio!

Introducing Youth Cent

Youth Cent is a new blog, brought to you by The Wicked Googly. We explore personal finance for teens and young adults, delving into such things as saving for a car and retirement, how to write a check, how to invest, and everything in between.

If you have questions about personal finance, feel free to reach out to us! Otherwise, check back with us often and we'll explore topics relevant to you and your money.