Personal Finance- The Business World

Owning and/or managing a business can be highly profitable, but requires accepting the risk of failure with the accompanying heavy financial losses owing to any of a number of factors. A successful business follows such practices (not all-inclusive) as a clearly defined set of short- and long-term goals, effective marketing to attract the business's target market, responsible financial decision-making, differentiating one's product from that offered by one's competitors. Given the potential of accidents and/or lawsuits owing to numerous unanticipated incidents, purchasing of liability insurance is essential. The smallest businesses are typically sole proprietorships, owned by a single person and essentially inseparable from the owner. Sole owners can enjoy huge profits, but also assume full personal and financial liability for the company. In lieu of being the sole owner, small firms can be owned by 2 or more partners, sharing the profits but also the liability. Large companies, "corporations", are usually owned primarily by a large number of investors who own equity in the company in the form of shares of stock, each representing a tiny piece of the company. Corporations have an existence separate from that of the owners; thus, although the owners share the profits or losses sustained by the company as a whole, personal liability attached to the company does not apply to the owners directly. Thus, fraud within a company does not implicate each of the individual owners of that company.

Personal Finance- Careers

The very nature of the "career" has changed over the past generation. Loyalty of employers to employees, and vice versa, declined during the 1980s and 1990s. With the exception of government positions, teaching, military careers, or the like, it became increasingly common for people to switch companies a few times or more during the course of their careers. Unfortunately, during the boom of the late 1990s, new college graduates, even with math or math-related degrees from highly rated universities were informed they were at a disadvantage when applying for the entry to junior level positions they were targeting owing to their lack of "experience." These companies were not interested in investing any significant amount of training into these highly intelligent young people who had followed society's "rules" and focused on their well-rounded studies while in college. Ironically, the young people who ultimately had the advantage were the less studious C-level college students, who barely passed their humanities classes, but stayed awake extremely late in their dorm rooms, engaging in such activities as computer games, experimenting with various cutting-edge computer technology and software, or other similar endeavors. Meanwhile, the very process of applying for employment changed rapidly. Up through the early 1990s, a motivated qualified job-seeker (especially with a strong college degree) who scanned through the Sunday classified section of the newspaper, cutting out all relevant job postings, and applied by sending an updated resume with appropriate cover letter to every job for which he was a good match could reasonably expect to be called in for interviews and secure employment within weeks to perhaps a few months. Each such job posting attracted perhaps a few dozen applicants, if that. By the late 1990s, online job postings replaced newspapers as the more effective method of accessing job openings. A single search engine had the capability of immediately accessing many individual newspapers or job listings, combined with the convenience of allowing keyword searches. This initially seemed to simplify the job search process. However, from 1999 on, as the internet increasingly became the primary method of applying for employment, employers became less receptive to being contacted by job seekers through any other means. "No phone calls" appeared frequently on job postings. Even at job fairs, recruiters could increasingly be heard to advise most job seekers to "apply online" and provide them with the company's career website. The "Great Recession" or "Not So Great Depression" (however you prefer to term it) struck in full force from 2007 through 2009, severely affecting the careers, job prospects, and financial well-being of a large proportion of the American population. An overly simplistic analysis would attribute the resulting and subsequent long-term unemployment and underemployment- 2 to 5 years in many cases- of even highly educated Americans to this period of extreme economic weakness. However, a more thorough analysis- as pointed out by spokespeople in the National Employment Council- would consider the developments of the prior 15 years, particularly the factors enumerated above.

Personal Finance- Credit and Loans

We previously examined the case of accumulation and investment of savings. However, most of us- even those who are fortunate enough to secure well-paying jobs- would find it inconvenient to delaying purchasing cars, a house, or have our kids delay college until amassing enough savings to pay the entire cost outright. This is the purpose of credit and loans; it allows people with a solid income and history of responsible financial conduct to borrow large amounts of money from banks to purchase high-ticket items, and subsequently repay the bank the amount owed plus interest. Interest rates are typically 5% or higher for home loans. Credit cards are essentially loans, in which the borrower (credit card holder) controls the balance owed by paying off the credit card in part or in whole every month. This degree of control comes with a price; typical credit card interest charges are 18% of the unpaid credit card balance, and penalties are levied every month in which the minimum payment is not made. One's ability to qualify for loans, especially home and car loans, is largely determined by one's credit score, a numerical score as calculated by the 3 major credit bureaus, whose value is based on a person's financial/credit history. A person with many cases of defaults, late payments, etc. will have a low credit rating, with harsher penalties for severe and/or repeated defaults. A person with a clear or nearly clear credit history will tend to have a high credit score, and thus be most likely to be approved when applying for a loan. A normal credit score is in the 600-700 range; anything above 700 is considered "good", with anything below 600 considered "poor." A person with a poor credit score is considered a risky investment for a bank or other lender; thus, such a person who does find a means for securing a loan can expect to have high interest payments. This is a natural consequence of the direct correlation between risk and return; in a similar sense as when you might invest in a risky stock, a person with a poor credit score is considered a high-risk investment for a bank, and thus should entitle a bank to demand a high return rate in consequence of approving such a risky individual for a loan. If you should find yourself with a low credit score owing to a history of default, please beware of companies offering to "repair" your credit score for a price in order to help you qualify for a loan. Such an arrangement is a waste of your money, which is more effectively spent in paying off your debts directly. Any errors on your report can be corrected by you directly contacting the credit bureaus and sending documentation to correct such erroneous data. Credit scores based on accurate data cannot be "repaired" except through paying off your creditors and proving financial responsibility (no additional defaults) over time.

Personal Finance- Financial Planning

As a member of a household- whether as an individual or a man or woman of a nuclear family unit- it is advisable to make financial plans based on current income and expenses, as well as projections of future income and expenses. Income is usually in the form of job wages/salary, though unearned income from investments may also occur, especially for those fortunate enough to own stock or receive interest from bank or other accounts or other sources. A portion of one's income must be paid (by law) to the U.S. federal government as well as one's state government on an annual basis; you- perhaps (recommended) with an accountant's assistance- are required to complete the required paperwork, including a 1040EZ or equivalent form, in calculating taxes owed to the government (or refund owed to you if more money was already withheld than was needed). In general, expenses consist of anything requiring payment of money, including planned expenses such as food, utilities, insurance, etc. as well as unplanned expenses such as unplanned repairs, replacement of broken items, etc. The amount of money you/your household is able to save towards long-term goals (i.e. college tuition for kids, retirement, etc.) equals after-tax income minus the sum of all expenses for the year. (There are various options for investing these savings to possibly obtain a substantial return over time). There are possible objections to the notion of making long-term goals. Examples are: "How can I accurately anticipate unplanned expenses?" "How can I know what my salary will be at any future point in time? What if I am laid off and unemployed or underemployed for a long period of time?" This last question might be posed much more frequently in this day and age, following the recent and present situation of highly educated people facing extended unemployment despite their best efforts. The trauma of the recent economic "Great Recession" (or "not-so-great Depression", as others have termed it) should have taught us to save more given the unanticipated setbacks that may strike in the future; however, recent surveys and news reports indicate a general return to complacency and perhaps excessive spending. If this assessment is accurate, we may expect to pay the price as the effects of the next recession are magnified due to current poor financial planning.

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.

Personal Finance- Economic Basics

The modern economic system, using money as the means of exchanging goods, is seen to provide the greatest total amount of utility to humanity as a whole, by creating the most efficient distribution of resources and level of activity in every area. While a pure market economy allows the "invisible hand" to guide this allocation of resources, and allows the severely impoverished to literally perish if their insufficient means prevent their affording the basic necessities of life, a socialist/welfare state imposes government control of economic activity to both provide sufficient means for all citizens to maintain a reasonable standard of life while preventing extravagance among the wealthiest members of society. The United States is essentially a "mixed economy" which is a balance or compromise between these two extremes; socioeconomic classes continue to exist, but the government manages and subsidizes programs to provide even the poorest Americans with access to food, clothing, education, etc. Gross Domestic Product (GDP), total value of all resources in the country, is seen to increase at a healthy rate (perhaps 3-5%) when the economy is strong, at an anemic pace (0-2%) in a sluggish economy, and to decrease during recessions. The distinction between "recession" and "depression" is unclear. The economy is cyclical, with periodic recessions being normal and necessary to direct readjustments needed for the economy's long-term growth.