This week, I wanted to write about a really fun and unique alternative for learning some of the basic principles of investing and personal finance. The game (yes, I said it...GAME) is called "Cashflow 101: How to Get Out of the Rat Race," and it was created by Robert Kiyosaki, the New York Times and Wall Street Journal bestselling author of Rich Dad, Poor Dad.
The game revolves around this concept of the "rat race," which represents the typical 9-5 day job. The main objective of the game is to get out of this "rat race" by accumulating enough passive income (ex: side income from a limited partnership or rental properties that you own) to cover 100% of your periodic expenses. You are able to do this by taking the money that you earn from your day job (careers and salaries are randomly assigned) and investing it in real estate, stocks, and businesses. You move from deal to deal, building your wealth and reinvesting until you are able to earn enough passive income to get out of the rat race of your 9-5 job and retire early. With each deal that you make, the game teaches you to classify and record each transaction on your own personal balance sheet and income statement. Cashflow can be extremely fun and competitive, and allows you to play with up to 6 people at a time.
Cashflow 101 is a board game, and can be purchased on Amazon via this link; however, there is a new way to play this awesome game. Here is a link to the RichDad website where you can now sign up for a free account and play the Cashflow game online, either against the computer, or with other people just like you: http://www.richdad.com/apps-games/cashflow-classic.aspx
I hope that you will all take a moment to check out this awesome game. For anyone who is looking to hone their skills, or develop a deeper understanding of basic accounting and finance concepts, this game provides a fun and lighthearted avenue to do so. For the first time investor, the game allows you to experiment with different investment strategies and make those much needed mistakes to learn from, without losing actual money!
As always, leave me a comment with any thoughts or suggestions. Have fun!
I have been meaning to write this post for a couple of weeks now, but just haven't had the time. The idea came from a friend of mine (shout out to Mike!) who thought it would be helpful to learn a little bit more about the differences between Traditional and Roth IRA accounts. I'm going to do you one better and throw 401k's into the mix!
I want to try and keep this as simple as possible, so I'm going to start by describing the Traditional IRA account, and then use that as a basis for comparison to explain the differences with the other types of retirement accounts.
Traditional IRA:
The idea behind the Traditional IRA account is that a person can contribute money on a deferred tax basis each year. A deferred tax basis means that, although you will eventually have to pay taxes on this money, you won't have to pay them now. The money stays in the account until your retirement, during which time it has hopefully been growing. When it is time, the money is taxed as it is withdrawn from the IRA account. Here are some KEY bullets to help further explain:
You can only contribute a maximum of some specified amount each year. This number is constantly changing but, in 2013, it was a maximum of $5500 ($6500 for people over the age of 50).
Once money is contributed to the account, it cannot be cashed out until age 59.5, or else you will be charged a 10% penalty fee plus taxes.
While you cannot cash out before 59.5, you can use the contributed funds to buy and sell investments (stocks, bonds, mutual funds, etc.) within the IRA. This is how you can potentially grow your retirement savings!
While in the IRA account, you will not need to pay any capital gains taxes on investment gains.
At age 59.5, you will be eligible to withdraw your savings from the IRA without paying any penalties. The money withdrawn will be taxed based on your current tax bracket. Typically, you will be in a lower tax bracket after retirement due to a decrease in income. This is so important!!!! It means that you could potentially be paying taxes on your savings at a lower rate than you would have at the time when you contributed those funds during the peak of your career.
Phew! Okay so that is the gist of the Traditional IRA. Now lets use this basic understanding to help shed some light on the other options out there.
Roth IRA:
The Roth IRA account is very similar to the Traditional IRA. Here are the key differences:
Roth contributions (same maximum of $5500 in 2013) are made AFTER tax, and are thus NOT tax deferred.
Once contributed, you can withdraw money from a Roth IRA without paying any penalty fees like you would under a Traditional plan.
Money generated within the plan (such as interest or stock growth) is NEVER TAXED. With a traditional IRA, money is contributed before taxes, grows throughout your career, and then both the amount you contributed, plus any growth, is taxed when withdrawn. With a Roth IRA, money is taxed when earned, then contributed, and then never taxed again.
And that's pretty much it! Biggest difference is the timing of when taxes are paid.
401k Plans:
401k plans are also very similar to Traditional IRA accounts. Money is contributed on a deferred tax basis, it grows throughout your career untaxed (no capital gains taxes), and then it can be withdrawn after age 59.5 at which time it will be taxed based on your current tax bracket during retirement. Here are the big differences (there are a number of big ones so stick with me here!):
401k's have a higher maximum contribution (in 2013, the max was $17,500 per year, as opposed to the $5500 max for IRA's). This means that you have the potential to save even more money for your retirement.
These plans are organized BY YOUR EMPLOYER, which has a couple of different ramifications:
The employer will often match a percentage of the employee's contribution. Meaning, if you contribute $17,500 in 2013, your company may also contribute an additional percentage of that $17,500.
The employer can specify (read: limit) the investments available to the employee to build and grow their savings. For some people, this could be a really positive thing. For those of you that are really confident in your trading abilities, it may feel a little invasive.
Contributions come directly from your paycheck. With an IRA account, you are taxed on your income. Then you deposit a portion of that money into the IRA, and you subsequently receive a tax credit on the amount contributed (thus "tax deferred"). With the 401k, you are saved the trouble, as the contributions come out of your paycheck before income is taxed.
Finally, you have the ability to BORROW MONEY from your 401k prior to age 59.5. You will still be charged a fee on the money withdrawn; however you will pay this fee in interest TO YOURSELF. You essentially borrow the money from your own retirement plan, and then pay it back with interest.
Okay, so that is pretty much it. Couple quick notes: 401k's also come in the "Roth" variety. They are less common (a relatively new option), and are different from Traditional 401k's in the same ways that Roth IRA's are different from Traditional IRA's. In general, the 401k tends to be the more attractive option (higher contribution maximums, employee matching, ability to borrow); however, some people would prefer the IRA options simply for the freedom to invest in whatever they choose (as opposed to the limited options of an employer organized 401k).
Now, I think that was a pretty decent description of some of the key differences between the big retirement plan options out there, if I do say so myself. Having said that, simple descriptions will not (or at least, should not) be sufficient to make an investment decision. To help those of you faced with this issue, I have included several fantastic videos below, compliments of the Khan Academy. They really break down the nuances between the three big options, and demonstrate how they would affect your savings in practice. When I first signed my job offer and began taking a look at the big boy decisions I would soon need to make, I turned to Khan Academy to help clarify my options.
I hope you have all found this helpful! Let me know your thoughts.
For many people, managing their finances does not come so naturally; creating a spreadsheet on excel and trying to work through each of the separate mobile banking sites for their individual accounts may not always cut it! Luckily for all of you broke college students, there is another way!
For this post, I wanted to talk a little bit about a neat tool that can help you to manage your finances effectively through a number of awesome features. The site is called Mint.com and it will:
Compile all of your accounts in one place (checking, savings, credit, loan, etc.)
Help you to create and stick to a budget that can be as basic or meticulous as you would like
Send you email/mobile alerts for things like upcoming payments, nearing a credit limit, suspicious activity, and more
Categorize your expenses in a pie chart to show you how much money you spend on things like gas, food, clothes, transportation, bills, etc.
Make some personal recommendations based off of your spending history and financial position to help you save money
Help you set legitimate goals, and track your progress from start to finish. Examples: paying off your credit card debt or saving money for a new car
The bottom line is that Mint.com will help you to organize your finances in a way that you can understand, and then provide you with the tools to get on the right track, make smarter financial decisions, and plan for your future. The site is very user-friendly, clean, and customizable. Mint also offers a super convenient mobile app available on apple and android devices! For more information about how the website works, check out this link: https://www.mint.com/how-it-works/
If you happen to be one of those people that just can't seem to get on top of your spending, or you are chronically late on your credit card or student loan payments, this is a really simple way to take control of your life and avoid damaging your credit score. Also....did I mention that the service is COMPLETELY FREE?
Here is a quick video to explain some of the basic functions of the site -- if you like what you hear, I definitely encourage you all to sign up on the main site, and connect all of your accounts (have no fear! Mint uses bank-grade security on it's website).
I could sit here and try to think of some clever and original way to put this, but I really think that the guys and gals over at myFICO.com had it right when they said that, "repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score." While this can surely be upsetting and disconcerting, it is a fact of life, and if anything, it should only serve to further emphasize the point of my last post, which was that establishing credit, and doing it responsibly, is OH SO important.
If, like many Americans across the nation, you happen to find yourself with a less-than desirable score, there are definitely some ways to (slowly but surely) rebuild your profile, and demonstrate to potential lenders that you are a creditworthy and responsible young adult. Luckily for all of you broke college students out there, you proooobably have another couple of years left living within the collegiate bubble to set some positive changes into motion before it's time to do fun big boy and girl things like, say, support yourself and like...I don't know...sign a mortgage?
Anyways, the first step to improving your credit score is, obviously, to pull a copy of your credit report and gain an understanding of the factors that have contributed to your particular score (Duh!). Due to the fact that you have already read through my last post, I am confident that the areas for improvement will be relatively apparent once you start taking a look.
Here are just a few tips that can really help to set you on the right track toward credit score repair:
If you don't already have a credit card, get one! If you're truly broke, you shouldn't open a card with the intent of going on a really exciting and over the top shopping spree. Instead, do yourself a favor and do something responsible like buy your groceries each week with the credit card and then pay it off in full when you get your bill using the cash you would have otherwise spent in the first place. A good rule when you're starting out is to try to never charge more than the cash you have in your bank account.
The older a card is on your credit profile, the more of a positive impact that card can have on your score -- don't think that closing all of your old credit cards will help to improve your situation. I know from my own experience, my oldest card (and thus most valuable to my credit score), is also the card with the most egregious interest rate. I NEVER carry a balance on this card, but I keep it active by throwing small charges on every once in awhile (and then paying them off in full). This leads into the next tip...
Unused credit cards on your profile will have a negative impact on your score: While you don't want to go and close out all of your accounts, you also don't want to have cards that are just sitting stagnant for long periods of time. If you have 2 or 3 credit cards, make sure you show them ALL a little bit of love. I have two cards with fan-freakin-tastic interest rates, so if I am going to carry a balance on any card, it will be one of those two; however, even my nastiest card deserves a charge from time to time.
Pay your bills ON TIME!!!! This one should go without saying, but payment history can make or break you. Lenders want to see that you are capable of making regular payments on your debt, and that they will be on time. If you struggle with time commitments, do yourself the abso greatest favor and set some google calendar reminders, or sign up for auto-pay with your credit card company. So worth it!
Finally, don't over do it: having 2-4 credit cards, each with a different type of rewards program, is pretty normal. Having 5..6...7+ credit cards is definitely not okay, and if you find yourself with that many than I would suggest seeking out a legitimate credit counselor because you may have a serious problemo on your hands. Also, you never want to be maxing out these cards. If you have a total credit limit of $5,000, this does not mean that you are in the clear to go buy $5,000 worth of nonsense. You want to keep your debt around 20-30% of your total limit (and never more than 50%).
So anyways, sorry for the lengthy post. What can I say? I just get so excited about credit scores!!!!! As always, please leave me a comment or drop me a message via the contact box in the right sidebar. Next week I'll be reviewing slash promoting a really cool online tool to help you build a budget, and keep track of your finances.
Okay so, before we jump into talking a little bit more about one of the easiest ways for a broke college student to survive, while simultaneously building a good credit profile, I wanted to give a little crash course on the ever-mystical Credit Score.
As I mentioned in my last post, we will all one day need to rely on our credit score for one thing or another, whether it's applying for a car loan, undergoing a credit check for a new apartment lease, or buying your first home; a good credit score can be the difference between a really manageable interest rate, and one that could really cramp the style of your chic, new, post-graduate lifestyle.
So, what is a credit score? Well, basically, it's a score derived using a formula developed by the Fair Isaac Corporation (hence the name, FICO score). The score is calculated for the three U.S. credit bureaus (Experian, Equifax, TransUnion) using information from your credit report (a summary of your credit accounts and payment history). Every person receives a credit score from each of the three credit bureaus which, due to minor differences in the credit profile information collected, can differ slightly. The scores are used by lenders as a predictor of the level of risk and creditworthiness associated with a given borrower.
Okay, well what information is used to calculate the scores? This is a more difficult question to answer. There are many factors that are taken into consideration when calculating a score, and below are the relative weights associated with each [oversimplified] description of the inputs into the equation:
35%: payment history -- do you pay your bills and fees on time?
30%: the ratio of the amount owed to creditors, and the total credit available to you. As a general rule, you want to be using about 30 percent or less of your total credit limit (and definitely no more than 50 percent).
15%: the length of credit history. Borrowers who have longer credit history are considered less risky because lenders have more information about their borrowing patterns and more assurance that payments will be made on time.
10%: the number of accounts recently opened compared to the total number of credit accounts, and the number of recent inquiries into the borrowers credit profile (Ex: a borrower applies for a new credit card so the lender check's the individual's credit report to dictate credit limits and interest rates. Too many of these credit checks in a short period of time will have a negative impact on a score).
10%: the types of credit used -- revolving credit (like a credit card account) vs. a mortgage with fixed monthly payments. Each type of credit can tell lenders something different about the risk associated with a given borrower.
Wow. Now that I am completely overwhelmed, how can I go about checking my credit report and scores? Fortunately, you are allowed one completely free credit report from EACH of the three credit bureaus every year. This means that, every four months, you can check your credit score for free! To order your report, use annualcreditreport.com which is the only authorized website under federal law. There are other services to help monitor your credit score, but they cost $$ that broke college students like us would much prefer to spend on important things like the latest iphone, new designer work out leggings, natty light, or tickets to that musical festival you have been DYING to go to.
Scores range from 300-850, and with a score of around 700+, you are in great shape. For those of us that may be suffering from a less than desirable credit score (or even worse...NO credit score!), I will detail some tips and tricks to slowly building that bad boy back up in a later post.
I hope you all found this post to be informative and helpful! Much of the information was simplified to make it more digestible, so please please please comment, or use the contact box in the sidebar, to let me know of any questions you may have, or topics that I can clarify!
I am going to just throw this out there -- I love my credit cards! They have certainly helped me out of a number of jams, and we really do have a lot of...well...history! Each one is different, with their own unique look and personality, but I take the time to get to know each of them very well. All of the varied and nuanced details are relevant when choosing how and when to use them: interest rates, credit limits, annual fees, and possibly most interesting and exciting, rewards programs!
Not everyone feels this way about credit cards. In fact, I would say that a large number of college-aged students that I have spoken to are either abusing their credit cards (with shopping addictions and haphazard charging) or are too terrified to even consider opening an account.
I think a big part of this fear is due to the fact that, in movies, television, books, and magazines, we often see credit cards portrayed in such a negative light: it's always the shopping addicts, hopelessly drowning in debt that they will never be able to pay back in the foreseeable future.
To be sure, there is a reason that we have this villainous image of credit in our heads -- there ARE people out there who abuse their credit cards and find themselves in terrible situations like the ones we hear about in movies and tv shows; however, it doesn't have to be like this. There is another way!
Through writing this blog, my hope is to help provide my readers with the necessary information and tools to make good decisions regarding their credit cards. As college students, it is easy to forget to think about the future; however, one day, you will all need to rely on your credit profile for things like applying for car loans, mortgages, or apartment rentals. Your credit score plays such a huge role in whether or not you will be approved for these necessary loans and applications, and will also dictate what types of interest rates you will be paying. Opening credit card accounts and using them in a smart and responsible way, is one of the easiest ways to build up your credit score and prove to lenders that you are credit worthy!
Over the next couple of weeks, I am going to focus my blog posts around this topic of credit cards. Topics will include:
Importance of building a credit profile
What is a credit score?
Why should you care about your credit report and score?
How is your credit score calculated?
Positive influences
Negative influences
Applying for your first credit card
Best and worst types of credit cards
Rewards programs
Interest rates
Annual fees
As always, please leave a comment, or use the contact form in the right sidebar, to leave me some feedback! Let me know your thoughts about this post, and definitely let me know of any topics you would like me to cover!
As a 24 year-old recently graduated master's student, I have experienced my fair share of financial struggles. While my years at Lehigh University have surely been some of my greatest, they have also been very, very expensive! Tuition, room & board, books, fraternity dues, clothing, beer money, spring break -- it can really add up! Thus, with the incurrence of such big expenses, and the looming threat of the "real world" as it approaches, the days of simply saving some extra cash in your room are long gone, and with that comes the death of the piggy bank.
As a student I learned, very quickly, to expand upon my already decent fiscal responsibility and begin to live on a budget. I have held at least one job since I was 16, and became more and more fiscally independent from my parents from that point on. In college I majored in accounting, and that has certainly provided an additional layer to my ability to have a really great time, while also living within my means.
I have created this blog for other broke college students, much like my former self, that are ready to begin managing their money effectively. Within it I will provide lots of personal finance tips and tricks that I have learned (often the hard way) over my past 6 years as a college student. I will discuss an array of topics such as: creating a budget, building credit (and why it's important!), managing debt, checking your credit score, leveraging rewards points, using online tools, etc.
Please feel free to post comments, or use the contact form on the right sidebar, to ask any questions or to suggest topics of interest. I hope you enjoy my blog, and I'd love to hear your feedback.
This week, I wanted to write about a really fun and unique alternative for learning some of the basic principles of investing and personal finance. The game (yes, I said it...GAME) is called "Cashflow 101: How to Get Out of the Rat Race," and it was created by Robert Kiyosaki, the New York Times and Wall Street Journal bestselling author of Rich Dad, Poor Dad.
