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Originally posted by KingB -
Setting Y'all straight!!! LONG....
I've been waiting to reply to this all day... Didn't want to abuse my thumbs on the PDA and r3v is blocked on my work PC (wonder why?!?!)
So lets get a few things straight for the young investors/savers out there..... First, don't go to a BMW forum to get investment advice. Second I'm not a RIA (registered investment advisor) but I did sleep at a Holiday Inn last night! I do however work at a mutual fund company which means absolutely nothing.
OK a few ground rules:
High Return = High Risk, High Risk does not always mean high return
Low Risk = Low Return, Low return does not always mean low risk
401K's and general retirement investment rule of thumb is 110 minus your age. Take the number 110, subtract your age and put a % behind it. So, for example, I am 27, 110-27=83. I should put 83% of my invested dollars into high yield (high risk) securities and split the balance (17%) between medium and low risk securities. The point is that as you get older you should have more dollars invested therefore you put les in high risk so you can't lose all your hard earned dollars.
FDIC: Federal Deposit Insurance Corporation (www.fdic.gov) does nothing more than insure each depositor, per institution, for up to $100,000 in the event of a loss.
APR or Annual Percentage Rate: APR is ANNUAL or every 12 months. For example if your APR is 1% and you have a balance of $1.00 after 12 months you will earn one penny, $0.01 or 1% of your balance. 5% APR on a dollar would be $0.05. If you have a credit card you will notice that there are two separate rates, an APR (usually the lower one) and a monthly interest charge. If an APR is paid out (pro-rated) monthly based on a monthly balance it is 1/12 of your APR rather than your APR applied per month. If you received $0.01 per month on $1.00 balance after 12 months you would have $0.12 which is 12% of one dollar which is 12% APR. Sometimes banks prorate (this was already mentioned) so you would receive 1/12 or .0833333333333... of your APR each month.
Alright...End of ground rules
PayPal... Don't call it a savings account unless it IS a savings account. PayPal is NOT a savings account, it is a cash account for which PayPal offers services such as debit and credit card linking, paper or electronic statements, possibly (i don't know) tax paperwork for businesses, interest on balances (positive or negative) and so on. The high return correlates to two (major) things. First a business trying to grow assets under management for things like capital improvements, better debt (credit) ratings (for lending purposes as well as for the shareholders), to possibly offer banking products in the future and who knows why else. So it's worth it to entice people in with a high (competitive) APR to build these assets. Second is because there is a relatively high risk involved with PayPal as an institution - Fraud, problems, false purchases, etc. If your account is wiped out you have to take an online company to court or hope they are a decent company...
As for the rate of return, it's legit and it's there to entice you into putting money into their accounts. It comes down to use of funds. There is a thing called the Fed Funds Rate (google it) which is a rate that money is lent from the Treasury to people. If PayPal has issued $100,000,000 (abbreviated $100M) in credit cards or has $100M in outstanding debt, PAYPAL the company must have the funds to back your credit card debt. What companies do is purchase dollars from the US Treasury (http://www.federalreserve.gov/fomc/fundsrate.htm) at ~5.25% (PER DAY) to cover their daily debt. By offering YOU 5.02% APR (read your lending agreements) they have use of YOUR funds to cover their debt at a rate of 5.02% APR, which divided by 365, is 0.01375342465… daily. They use your money to cover the credit card debt they have issued to other customers. This means when you have a 19.999 (20%) per month rate (20/30=0.6666667…) interest charge, they cover your debt with money that costs them 0.01375% per day and you owe it back to them at 0.666667% per day, net of 0.65291% or 19.58739% OR 238.31% APR while they pay you out 5.02%
Make sense so far?
OK that’s PayPal in a nutshell. Your money is safe until everyone’s money isn’t safe. Your biggest risk is a hacker getting into your account or just keep an eye on eBay’s stock… If it plummets pull out your money – or MAX out your credit card before they shut it off – LOL… (This is my opinion ONLY)
As for what you people should be investing in, the returns you should be getting, etc… Use the “110-your age” rule and stick to it. If your company matches anything max that out – it’s free money. Other than that here it is:
You should have a FDIC insured checking account with a linked savings account. In your savings account you should have SIX (6) months of savings. Six months of savings means different things for different people. Using myself as an example, I need to have six months of rent, utilities, car insurance, cell phone, food, monthly parking, etc. in my savings account. Do the math and put it in there regardless of the return. Fight with your bank for a higher return but DO IT. If you are in college and mommy & daddy pay for everything add up six (6) months of beer, condoms, gas, clothes, etc. and put that in your savings account. Your checking account should have ONE MONTH’S worth of bills plus ONE MONTH’S worth of spending money in it. Take your paycheck, subtract bills and transfer the rest into your savings account. (As a side note total cost of housing should not exceed 25% of your gross (pre-tax) income)
Once you have six months of savings and ONLY ONCE YOU HAVE SIX MONTHS OF SAVINGS you are allowed to open up an IRA. You can choose yourself or speak to your RIA about which IRA program is best for you. Use the 110 – your age rule to choose your IRA investments. Every dollar you invest into an IRA now while you are young is two, three, four, etc. dollars you do not need to invest when you are 40, 45 or 50 years old. The key is to start putting a little in now and maintain that percentage through out your career. This way your contributions will look like a bell curve – in the beginning it will be from your contributions increasing and at the end it will be from your income leveling off and cost of living and inflation increasing. Invest your $4,000 annual contributions and make sure you max out your future retirement.
If and ONLY IF you can put six months of savings into an FDIC insured savings account, max out your IRA and your 401k, 403b or whatever then and only then are you able to open a brokerage or other investment account. I’m not trying to cut this short by not sharing the “what to do 101” regarding brokerage accounts but if you are ready to open up a brokerage account and you can fulfill all the other prerequisites then you can probably think on your own – or give your money to a qualified investor to manage. That’s it. Get your shit together and then come back for more.
I hope you guys read this and take it seriously because it took a long time to write. If you follow this you will end up ahead of many people out there in our country and in others.
BTW - BLUNT that was the funniest comment I've read in a while... Hope your sister is doing good things for your lootcakes.....Comment
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winston has some really good advice. I would also say lower your unsecured debt. Unless you can beat the interest rate of your credit card with a savings account (I can't - 5% savings vs 14% c.c.), pay down those cards all whilst keeping your savings buffer and your retirement contributions in order. On the flip side of that I'm in no hurry to pay off my school loans as my APR on the loans is fixed at 4.0% and I CAN beat that in a savings account. So my surplus monies are better served in an interest bearing account rather than paying off my school loans early. Even still I don't like that debt hanging over me so half of every bonus goes to the school loans.Comment
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Think 1940's to 1950's...
Remember when grandpa used to walk uphill to school both ways in the snow/driving rain???
Start thinking that way. I seriously doubt that none of the members here remember the 40's or early 50's - you dont need to start stocking up on non perishables & keep $10,000 under your mattress but think of debt as an enabler for bad things to come. DO NOT OPEN UP CREDIT CARDS UNLESS YOU CAN PAY THEM DOWN EVERY MONTH!
Browntown it seems like there is at least one other financially responsable person on this board :-)Comment
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winstontj's post = officially longest post in r3vlimited history. I forgot who previously held that title. :)
Your post is spot on. However, the success of the US economy depends upon people ignoring all of that advice and running up debt to eyeball level. Hahaha.
A lot of the info is geared towards maximum risk mitigation, such as housing payment <=25% of gross. That is quite difficult in certain markets.
But otherwise, you've presented a lot of great info that will maximize one's chances of accumulating wealth.
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winstontj, you forgot the first step should be to pay off you credit card debt and car, if you have debt there. The only debt you should have is a mortgage.Originally posted by KingBComment
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