Personal Finance- Saving & Investing

You will hopefully achieve the situation where- owing to your earnings exceeding your total expenses over an extended period- you begin to amass some savings. You then will have options as to what to do with your savings. In general, there is a direct correlation between risk and expected returns. You can fairly accurately describe the situation visually by drawing an upward sloping line, represented on a graph such that risk is along the horizontal axis and expected returns on the vertical axis. Low risk/low return investments include savings accounts and investment CDs at the extreme lower left, with a risk of virtually zero (if under $250,000 at an FDIC-insured bank). Moving slightly up on the line, we have money market funds; money that has been deposited into investment banks and not presently invested in stocks, bonds, etc. is often automatically held in money market funds when being held on the sidelines. While superficially almost indistinguishable from savings account and almost equally liquid, they do involve investment in short-term notes and bonds, and thus have a slight risk. Returns are better than most savings accounts, commensurate with CDs of several months (with the benefit that your money is not tied up for several months with these funds). Higher returns come with the price of slight risk; losses are rare, but possible. In 2008, at the height of the recent financial crisis, some money market funds lost as much as 3% in value. Although significant, this is far less than the losses of 50% or more faced by investors and retirees highly invested in the stock market. Moving further up this line, highly rated "safe" bonds, such as municipal and government bonds, offer higher returns, well over 2%. (Being tax-free, this usually converts to over 3% on taxable bonds). The government being unlikely to collapse and default, we consider these bonds safe. Corporate bonds of large companies are a bit further up, as there is the potential of even such large companies failing unexpectedly; thus, we would expect higher interest rates from such corporate bonds. Moving up further still, we reach "junk bonds"- bonds with low ratings, usually owing to uncertainty regarding a company's stability. For accepting such uncertainty, investors expect the highest returns among bonds. Approaching the upper right area of this line, high risk/high returns, we find stocks. Moving up along the line, we first pass conservative stocks (large companies unlikely to fail), and then progressively speculative stocks, with progressively risky stocks valued to provide increasing expected returns. Finally, at the upper right end we find the most speculative investments, such as venture capital, money offered by investors in return for equity in companies with an at-best shaky likelihood of success. Venture capitalist demand extremely high returns, with 40-50% being reasonable, given the strong possibility they will lose their entire investment. The decision of how to invest is ultimately up to you. You must decide how much risk you are willing to accept in order to increase your expected returns. Investment firms managing large portfolios, such as family trusts, tend to diversify and hold a mixture of bond and stock funds, a "moderate" approach allowing for moderate returns with moderate risk; you might find such an approach for savings you want to have appreciate in the long-term without excessive risk. Use of stockbrokers in brokerage firms for purchasing individual stocks or stock indices has fallen drastically over the past decade. In lieu of paying stockbrokers hundreds of dollars per trade, investors can invest with online investment firms, with commissions as low as $10 per trade, and financial information once provided by stockbrokers is now easily accessible online.

Personal Finance- Banking

Upon reaching your 18th birthday, one of your first actions should be to open bank account(s) (unless you already have minor or custodian accounts which will fall under your control the day you turn 18). You will find a bank account essential for several purposes- writing checks or transferring funds to pay bills, depositing paychecks, safely storing your savings and withdrawing cash when needed, and establishing a financial history in your own name prior to applying for credit. The so-called "Big 4" banks (the huge, 4 largest banks)- namely Bank of America, Citibank, Wells Fargo, and Chase- are usually the most convenient ones to establish accounts, given the easy access to these banks, ATM machines, online banking, etc. throughout the country. However, since these banks have minimum balance requirements often as high as $300 for even basic accounts, with monthly service fees assessed if ever your balance falls under this amount, if your savings are less than this you may be better off starting off at a credit union or other smaller bank with lower minimum balance requirements. You may have noticed that I omitted what was traditionally a strong motivation for opening bank accounts- namely, interest payments. In response to the recent "Great Recession", the Fed opted to lower the interest rates to barely above zero, and hold them there for an extended period. Thus, banks nowadays pay us a ridiculously low interest rate of 0.01% to 0.1% (not a typo), even though they still make at least 4% interest on home loans and over 15% on credit card interest charges. The interest we are paid is surely more than eaten up by the cost of gas to drive to the nearest bank or even corner ATM machine. Thus, for the past 6 years interest has practically vanished as a benefit to holding bank accounts. The other benefits to opening personal accounts still apply, however. Traditionally, however, it has been advisable to maintain a checking account with funds to which you may need immediate access, and perhaps a combination of savings account and/or investment CD's to provide significant income from interest. CD's offer the highest return, as compensation for agreeing to not touch the CD account prior to the maturity date, or face stiff penalties (typically the entire amount of the interest paid) for withdrawing early; use of CD's and high-interest savings accounts should be adequate to provide returns slightly higher than the inflation rate, thus preventing inflation from eating away at your savings.. All of the above-described accounts are considered low-risk, low-return investments. The Big 4 banks (or any other bank you use) should protect your accounts up to $250,000 per person per account type through the FDIC, meaning that if the bank fails the government will reimburse your money, up to $250,000. You should see a sign in the bank itself advertising this fact; if not, the bank should be avoided. If your assets exceed $250,000, you should spread out your funds amongst multiple banks and/or account types, or perhaps in a money market fund or other investment in an investment account (to be discussed later). Many banks do offer a high-risk, high-return investment option. They will offer to invest your savings (if sufficiently high in amount, usually several thousand dollars or more) in mutual fund accounts- basically, in the stock market(s). These accounts are not FDIC insured, and may lose value; they will tend to fluctuate with the stock market. There is, for example, a 529 fund which will invest money to be used for your kids' education, with the idea that the stock markets should appreciate substantially by the time any current kids reach college age. While on average the return will be higher from such an investment, there is a strong element of gambling involved; you need to decide whether you are willing to risk losing money to potentially reap the benefits from such speculative investments. The bank, by the way, takes a percentage of this investment, even if they lose money for you.