Personal Finance Weekend Help and Victory Thread for the week of January 28, 2022 |
- Weekend Help and Victory Thread for the week of January 28, 2022
- Paycut Due to HR Mistake
- Did I get robbed at the dealership?
- Wife getting masters in nursing worth it?
- Therapy didn’t charge insurance and now want a $2600 bill. I’m stuck.
- Negotiating salary for a new job?
- Should I take a $15000 pay cut to switch careers?
- My car is totaled but the insurance payout isn't enough to cover a purchase of a comparable car
- I have the info of a person who obtained my SSN on the dark web. Can I do anything with that?
- Am I being scammed? About to rent a new place.
- Did i just get scammed?
- Gutting an old farm house vs trying to find a new house?
- I paid off my credit cards and my score dropped 119 points Equifax and 61 Transunion.
- Cosigner on sister's student loans. She missed 2 payments and now my credit is suffering for it, what steps can I take?
- Not sure if I'm being too conservative with my finances or if it's a case of FOMO
- how is the “30% of income for rent” rule even remotely applicable anymore
- Should I buy my ideal car
- Housing market is insane
- Best Buy refuses credit for items not received
- Filing taxes for someone who became both physically and mentally disabled.
- Budget Review and Advice
- Where should I allocate my money as a fresh grad?
- Credit Freezes - how long do they take to lift?
- The Fundamental Investment Types
| Weekend Help and Victory Thread for the week of January 28, 2022 Posted: 28 Jan 2022 09:00 AM PST If you need help, please check the PF Wiki to see if your question might be answered there.This thread is for personal finance questions, discussions, and sharing your success stories:
A big thank you to the many PFers who take time to answer other people's questions! [link] [comments] |
| Posted: 28 Jan 2022 06:19 AM PST I recently accepted a job offer for a fully remote position. When I joined on I noticed that my work location was incorrect and I asked HR to correct it to my state, so that taxes etc would be properly handled. HR turned around and said, we made a mistake while making your offer and made you an offer thinking you were in a different location. We will have to re-calculate your base salary and since this is a low cost location, expect a 10 - 16% cut and a new offer letter. what are my options here? I like the team and enjoy the work for the past month but this will be a huge cut in my salary for no fault of my own. I have an email to the recruiter confirming my remote status and that I wouldn't be joining physically at their HQ. [link] [comments] |
| Did I get robbed at the dealership? Posted: 28 Jan 2022 03:42 AM PST I traded in my 2014 Hyundai Sonata with 112.8K on it for $8,100 to my local Toyota dealership and got a 2022 Toyota Prius XLE that I had been looking at for a while because of my dissatisfaction with the Sonata, the fuel efficiency, and just wanting something new. The sticker was $30.5k and I ended up going underwater by $2,100 on the Sonata I believe because of the extended contract I had purchased when I had refinanced it last year. All said and done, I ended up with a bill of about $37.6k including GAP and a contract on this at a 4.6% 84 month loan. This is costing me $553 a month and I believe I can make that comfortably. I know it's a little too late now; but did I get taken? I know I can pay down some of the loan by cancelling the contract from the old car and seeing what they give me to apply to the new loan and I can start there…..but my anxiety really needs some validation. I appreciate the time. EDIT: I had my Sonata for 2 1/2 years. I purchased it summer of 2019 for 12.5k. EDIT: The 12.5k was the sticker price on it; I believe I ended up being OTD on $14.5k EDIT 2: I wanted to acknowledge something cause I saw this in a few comments: My lack of financial literacy (either in general or just in this situation) is not a symptom of my parents. They were very responsible with their money and share a lot of the risk-aversion that many in this sub have. They even went through the Financial Peace University. But they gave me a lot of the tools that I have needed to be successful in life. If anything is to blame; I would chalk it on my desire to have nicer things than I did growing up because I'm an adult now. Consequentially, that can result in many a bad or poorly thought out decision. And that's completely fair; and this might be one of them! But I'm comfortable about my ability make the note every month even if that means sacrificing something going into savings or shaving a little more off that $5000 Discover balance. I put away $200 a month into a vacation fund and am able to make my $700 rent and other utilities and have a decent credit score to show for it. Now I might not be in the capacity for the "wealth building" that is necessary to be completely debt-free and stockpile that into more savings or further my emergency fund. But I'm not struggling… I thank everybody for their opinions though, it really means a lot that a bunch of strangers who have quite a lot more life/financial experience than I do at 23 have taken the time to give me the best advice they can though and try and steer me down the best path. But I just wanted to say that I take full ownership for any financial irresponsibility or illiteracy. That has had nothing to do with how my parents raised and taught me. [link] [comments] |
| Wife getting masters in nursing worth it? Posted: 28 Jan 2022 07:46 AM PST My wife is on the verge of going back to school for her masters in nursing. We found out that we would have to pay out of pocket during some of the semesters because they are not covered under financial aid since she can only take one class some of the time. Not only that she would have more student loans on top of the 30,000 currently and would end up being a lot more after school. I have no student loans at all. We are also both almost 40. She would be in school for another 4 years. Currently she has a nursing job that pays $30 an hour and full benefits. I am a therapist and just started a private practice so my finances are all over the place. I just don't know if the extra debt, out of pocket payments, and time are worth it for her/us. We have just took care of $8,000 in credit card debt as well. I just feel like at this point its not worth it. It would be better to save that money towards a possible early retirement or regular retirement. What are your thoughts? [link] [comments] |
| Therapy didn’t charge insurance and now want a $2600 bill. I’m stuck. Posted: 28 Jan 2022 10:30 AM PST Hello everyone. Until August 2021, I was seeing a therapist and the group he worked through never added my at the time current insurance information. I even asked my therapist who submits the insurance information to the group and he said it was all taken care of. Same goes for their support folks. In September, I received a bill for about $2600. I read the bill and saw I was getting charged $100 a session instead of the $30 my copay I should have been charged because of insurance. I immediately filed a grievance and got in contact with them. They said it would be escalated. I never heard back. I asked them again to check with my insurance and to please rerun the charges. They did that and it only took $235 off the bill. After messaging again asking about it, I heard nothing back. I then contacted my insurance and they informed me that they only cover claims submitted within 90 days of the service performed. During that same call, they called the therapist group with me on the phone. They informed the group that they failed to submit the claims in a timely manner. After a bunch of back and forth, the my said they would have to escalate it AGAIN. They'd supposedly get back to me in a week. I ran through the whole process with my insurance company and same outcome. During this time, I am getting a billing reminder for the full bill instead of the $690 I actually owe them. Now, they've completely shut down conversation and refuse to respond any further other than to say this is their final determination and I have 30 days to pay, as of today. I don't know what to do. My insurance company can't get it done for whatever reason. This sham of a therapy group is threatening collections. I don't have a correct explanation of benefits so I'm powerless against collections. I did some research on this company and they recently changed their name after a massive amount of complaints against them for this very same thing. Hundreds of complaints. Everyone ended up having to pay because they gave up. I don't want to but I don't know what to do. [link] [comments] |
| Negotiating salary for a new job? Posted: 28 Jan 2022 07:28 AM PST I got a job offer after being out of work for a year due to having a baby. The job is in my field and looks like a great company to work for. During both interviews I was asked for my target salary and told them 60k both times and both times they indicated that was reasonable, but the offer I got is for $26/hour 40 hours a week which is a bit lower than I expected. The insurance sucks too, but that doesnt really matter since we have it through my husbands work anyway. PTO is ok I guess, 1 week/year to start, then another week after your first year of employment. Couple other perks like they pay for my cell phone and internet, free daily car washes, and $200/month childcare reimbursement. So my question is should I negotiate and if so, what should I ask for? I've never had to do this before because my only other job prior to this I got fresh out of high school and worked there for 9 years. It was known that you really didnt have the option to negotiate with them, they offered a yearly raise and you took it and that was it. My husband says not to ask for more money because he thinks it makes you look greedy and just in it for the money, but it's a job of course I'm there for the money. He says if they say no then wouldn't I feel awkward accepting this offer and that now they'll think I'm not happy with it and he doesn't want me to start out on the wrong foot with them, etc. Yes I would accept this offer if it comes down to it because this company checks off all the other boxes, but obviously my salary is the main box I need checked and I'm afraid I wouldn't be as happy working for what I feel like is less than I deserve. All advice is appreciated. Edit: I sent an email asking for $31/hour, plus another week of PTO. I'll update this with any news! Thanks everyone. Edit 2: They responded in less than 5 mins and said they would let me know by 3pm. Fingers crossed! Edit 3: Was offered $29/hour and the additional week of PTO so I accepted that! Thank you everyone for your input it was invaluable! Husband is also happy I didn't listen to him and got reddits opinion instead. [link] [comments] |
| Should I take a $15000 pay cut to switch careers? Posted: 28 Jan 2022 02:42 AM PST I've been cooking for 10 years and have been wanting to get out of the industry. I currently make $60k but am working 60-70 hours a week with a 45 min commute. The job would be a lot easier if we were fully staffed but I feel as if the company is being shady and purposely not filling positions. (I keep getting different answers on what my Labor budget is and they won't actually show me my budget) I've only been here for 3 months but am pretty fed up with these hours and being given the run around from my boss. I have a new job offer as an entry level accountant making 45k a year and only a 25 min commute. I'm just nervous because this job seems kind of boring to me and it's a pay cut but the quality of life sounds a whole lot better and at max I would only be working 50 hours a week but realistically it would be around 45 and the job seems a lot less stressful. I am also $6000 in debt so I feel taking this job would be a bad idea considering my current finances but I don't want to give up my opportunity to try and switch industries I've been trying for years to get out and this is the first non food service company in 4 years willing to give me a shot. Also I've been wanting to go back to school, this new job will give me the time to do that but not the pay, my current job gives me the money to go to school but no time. There is a lot of play in this decision and am torn between the two jobs, any one have done input or advice? [link] [comments] |
| My car is totaled but the insurance payout isn't enough to cover a purchase of a comparable car Posted: 27 Jan 2022 02:46 PM PST I recently was in an accident and my car is deemed a total loss. Insurance is paying out 6k total (7k less 1k deductible) 7k is not nearly enough to purchase a similarly used vehicle in this market. Carvana is showing my make, model, and 20k more mileage for ~12k. How can I get payout to be adjusted to actual market value? [EDIT]: Thanks for all the replies and help! To add some more info:
My next steps are to get the information from the adjuster to understand how they made this judgement on cost. With this info, I'll start negotiation process. In this process I'll
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| I have the info of a person who obtained my SSN on the dark web. Can I do anything with that? Posted: 28 Jan 2022 06:44 AM PST I was notified via an ID protection service and one of my credit cards that my SSN was being used somewhere and they provided the name, phone number and state of the person. I followed all of the instructions on the Identity Theft post here and on IdentityTheft.gov (checked all agencies, froze accounts, generated IRS Pin). Fortunately they hadn't done anything with it yet and I hope I'm pretty well locked down. I did a background check on the person and found an extensive criminal record (fraud, bad checks, petty theft, grand theft). Is it illegal for this person to be in possession of my SSN? I don't feel like I have much to go on, but I would not mind making life tough for them by notifying the police if that's even something I could do. You know they have more than just my number. [link] [comments] |
| Am I being scammed? About to rent a new place. Posted: 27 Jan 2022 02:04 PM PST Hello, I'm in the process of getting a new apartment, and we have a planned move planned move date, cost of rent, I've given then proof of income, I.D, we're in the final process, they asked for a money order for last month's rent but I asked for a lease agreement first however they have just said "I would need a money order to allow you to fill out the application. The deposit Is just used to hold the suite." What do ya"ll think? [link] [comments] |
| Posted: 28 Jan 2022 02:01 PM PST Got a text wells fargo stating that someone tried accessing my account and that i need to sign in and fix it. https://securityalert@springtitles.com/wells This was the website that i got. It asked for social, id, mother's maiden name, the works. Im terrified that i got scammed so i quickly changed my wells fargo password and username. Im pretty sure i got scammed so now i dont know what to do [link] [comments] |
| Gutting an old farm house vs trying to find a new house? Posted: 28 Jan 2022 02:41 PM PST My in laws have an old farm house that's totally paid off, but completely falling apart. It would need to be gutted down to the beams, new pipes, new well, new everything. I'm not super crazy about the location (it's peaceful but I don't like the closest city), but I'm starting to wonder if we're ever going to be able to afford anything else. My spouse is ALL about living there as it's their childhood home, but I know it'll cost a helluva lot of money to fix it up. I don't really want to change up the floorplan at least, as that'll save us some money. Maybe add a half bath or something. I think it's about 2000-3000 square foot, two stories, unfinished basement. The worst will be the bathroom as it's carpeted and rotted to hell. My spouse has mentioned getting a home equity loan, and I wouldnt be surprised if it cost a good $100k to fix up that house, but you can't find a cardboard box in an alley for that price anymore. We live off one income until our kid enters full day kindergarten, but we both have our bachelors and we have over $50k saved up. We watch our money and squirrel away what we can. I'm feeling... Inspired? As I've gotten notice that our apartment owner is looking to sell so I'm expecting our rent to skyrocket. So to quell my incessant anxiety I'm looking at options. Any advice on how to go about looking into this? Things to worry about, programs to take advantage of, etc? [link] [comments] |
| I paid off my credit cards and my score dropped 119 points Equifax and 61 Transunion. Posted: 27 Jan 2022 03:22 PM PST On Credit Karma the only change to my report indicated is I payed off the $500 balance on my last card, which brought my credit utilization to zero. Am I being punished for carrying no balance? Can someone explain this sorcery? [link] [comments] |
| Posted: 28 Jan 2022 01:03 PM PST Hi r/personalfinance, like the title says, I cosigned on one of my younger sister's student loans back in 2018 because both my parents had poor credit and I had excellent credit (was ~740 back then and still was up until this most recent incident) and, being the big brother, wanted to help in any way I could. A little backstory: my credit has always been good despite not making tons of money, except for in early 2020 I fell on financial hard times and myself was late on 3 separate accounts (read 3 late payments, but each less than 30 days) which brought my credit down to the high 680s. Since then my financial situation has improved and with it my credit, climbing to nearly 750 recently. I suspect it hasn't gotten higher since I myself am also paying around 15k in student loans, and my credit history isn't super old at around 9 years. Fast forward to today and I receive a notification from credit karma detailing new activity on my trans union report: my score had dropped from high 740s to high 660s. After investigating further I see that my sister was more than 30 days late on the November 2021 payment as well as more than 30 days late for the December 2021 payment. I cosigned for her because she has always been trustworthy but recently seems to completely shirk responsibility and accountability for her actions. She still refuses to apologize and didn't mention anything to me even though she was fully aware that she was late both times. I have been planning to buy a new car and am also in the market for a new apartment and can't help but feel that I'm now totally fucked, either I'll be denied on loan applications or have to pay insane interest rates or rent all through no fault of my own. Is there anything I or my sister can do to fix my credit? I've already called the loan custodian and they have completely rebuffed my requests and I've had my sister write a 'letter of good intent' as I've heard that recommended before for situations like mine. Is there anything else I can do? Please tell me everything is going to be ok, humble users of r/peronalfinance as I'm extremely stressed out about this. Thanks in advance for any advice you all can provide! I hope everyone has an excellent day! [link] [comments] |
| Not sure if I'm being too conservative with my finances or if it's a case of FOMO Posted: 28 Jan 2022 09:53 AM PST I'm a 24 year old teacher who makes around $60,000 a year. Typically I put $1,000 into savings each month. I have about $22k in student loans, but no other debt. I utilize 2 credit cards, but pay them off in a timely fashion and have a credit score of around 730. Currently I have $31k in savings (about 10k of that makes up my emergency fund), 2k in assorted investments (crypto/ agressive stocks), and am contributing the maximum 4% to my 403b for cash match by my employer. I'm holding off on repaying my student loans on the off-chance some forgiveness might come my way, but I plan to pay it off in larger payments before interest starts to accumulate again in May. It feels like I should do something beneficial with my savings rather than let it sit around in the bank, but I don't know if that is just my FOMO talking versus a good fiancial decision. [link] [comments] |
| how is the “30% of income for rent” rule even remotely applicable anymore Posted: 27 Jan 2022 07:04 AM PST how many people are even actually following this rule? i'm confused at how this 30% income rule is even remotely applicable anymore. it's literally impossible in most us cities with average middle class income to manage this. if you make 50,000 that's really 33,000 after taxes. and that makes your available rent price to be $825. which doesn't exist in any cities your only options is to have roommates or live in a sketchy area. which like when you're moving to a completely new area is hard to find. and i also don't want roommates i just lived with other people for 4 years i thought i was supposed to be done with this a year ago i ran my own business online. and i was making 71,000 on my own. and was able to easily afford rent in my one bedroom Houston apartment for $980. i always made sure i was within 30% this business proved to be unstable and i've begun applying for entry level jobs with my degree. and i'm shocked at how this 30% rule is even possible. it's impossible to find rent in any major city that wouldn't at least be 45% of your income. wouldn't it make more sense for the rule to be like 40% instead? [link] [comments] |
| Posted: 27 Jan 2022 07:28 PM PST Hey guys. I have the chance to buy a car I've always wanted. It costs 25k. I have a loan in my house for 60k. I have a vehicle I could sell for 12-14k. I have another I could sell for 2k. And a jet ski I could sell for 2200. I make at minimum 70k a year. My credit score is 800. I've never had a car loan. I funnel all my purchases through a credit card that I pay off weekly. The car isn't the most practical thing, but it's what I've always wanted. I'm almost 32, and I'm a car enthusiast, and I'm tired of the lame cars I've driven and been forced to work in my entire life. I just want something that's fairly new and my style, and not what I have been driving. I'm a hard worker, and I want to reward myslef. Am I jumping the gun? I really wan the is very but I'm afraid to take the leap. I have plenty of other stuff I could also sell to supplement. I don't know what to do. Edit: alright everyone. So for starters, I didn't Theo I there would be so many car enthusiasts in this group… but it makes sense because being a car enthusiast and wanting the vehicle of your desires often needs careful financial planning. Secondly, you have all given very good reasonings, as to why I should, or should not buy the vehicle. I believe that I am actually going to hold off. As awesome and as fun as the car would be, you have all brought up very good points as to why this would not be the best decision, as I would be daily driving the vehicle. I think my best bet is to hold off, maybe buy a used, newer model, with lower miles, or wait just a little longer and get a new 86. I appreciate all of your awesome input. I love the car, and the thought of owning a track car, but I don't think it's a practical decision to buy a caged car for the street. [link] [comments] |
| Posted: 27 Jan 2022 07:42 PM PST Live in rural wi. Went to an auction in June? and was going to bid on the house with my bf. Our max bid was the starting bid someone yelled out in the crowd. The owners who were doing the auction couldn't get anyone to buy for 120k but at auction it sold for 187k. It had 3 acres as well. New listing this month on it... The house sold with .7 acre for over 200k. If you look at the listing it is appraised at 87k. The person who bought it at auction only painted and updated the flooring. Is the market really that insane right now that someone thought that rip off was a good deal? The person sold the almost 3 acres separate from the house. Oh and the area has almost no phone signal and isn't really close to anything are people that desperate for houses? [link] [comments] |
| Best Buy refuses credit for items not received Posted: 28 Jan 2022 01:29 PM PST I ordered an item from Best Buy that I never received. Best Buy was supposed to issue a credit to my Best Buy credit card. I repurchased the item in the meantime as it was an Xmas present. When the Best Buy statement arrived I paid the bill. After one month waiting for the credit I opened a dispute with Citibank (Best Buy's credit card company). Citibank has resolved the dispute saying I owe the money anyway despite not receiving the first item. Do I have any recourse here other than paying for the item twice. I'm not sure if it's significant but I've had the Best Buy credit card over 12 years without any missed payments and the balance on the account is the amount of the item I never received. [link] [comments] |
| Filing taxes for someone who became both physically and mentally disabled. Posted: 28 Jan 2022 10:41 AM PST Hi all, so a family member of mine had a stroke, and unfortunately he has been left in a vegetative state. So, we're trying to apply for the hospital's financial assistance program, that requires a few documents, including tax documents. (other documents include proof of residence, assets and family income. We're not able to get those. We figured that applying with tax documents would be easier.) So my question is, can I file taxes for someone who was able to work last year, but recently became disabled both mentally and physically. If so, how would I go about it? Edit: located in Chicago, Illinois [link] [comments] |
| Posted: 28 Jan 2022 01:04 PM PST I saw a post earlier and OP mentioned it would be nice if there was a place to upload budgets for the community to critique. The overwhelming answers were something along the lines of 'Upload it here!' and so I submit my budget to everyone here who have a much better grasp on this than I do. I am very new to budgeting and financial planning. I've always gotten by with ups and downs but I realize it is not sustainable and so I have been learning how to budget and trying to get into the discipline of it. I used inspiration of other budget templates I have seen and made my own version. Any tips, advice or guidance on how I could make it better would be appreciated. Aside from the template, I am also open to advice, critique or guidance on my spending also. Thanks everyone who takes the time! Household Breakdown:
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| Where should I allocate my money as a fresh grad? Posted: 28 Jan 2022 03:16 PM PST I am currently a new grad with a salary of 70K. Where would you put your money to set yourself up for success for the future? (401k?, new house? roth ira?). Plus how much would you try to save/spend on a monthly basis? [link] [comments] |
| Credit Freezes - how long do they take to lift? Posted: 28 Jan 2022 03:08 PM PST Hi all, I've had a credit freeze in-place on the main 3 bureaus since the Equifax debacle a few years back. I recently lifted the freeze temporarily across all 3 to apply for a credit card, yet still getting denied 2 days later due to "insufficient credit history" (aka blocked inquiry). Has anyone else run into these issues? Does it simply take longer than a few days to kick in, or is there something else I need to consider? Thanks for the help! [link] [comments] |
| The Fundamental Investment Types Posted: 28 Jan 2022 10:08 AM PST IntroductionEveryone talks about what to invest in, but they often skip a step when talking to beginners. What to invest in starts with knowing what is available. Here are the fundamental investment types I will be covering today:
Each of these have their own unique set of attributes and uses. They're differentiated based on risk, specialization, and ease of use. This post is aimed at people who have little to no knowledge about one of these investment types. I know there are a lot of people here who are already very well versed when it comes to investing, but there are also a lot of people who are just finding this place and looking to learn. StocksLet's say you own a business. You currently only have one location but would like to open another. You know your business is worth about $1 million dollars and that it costs $100,000 to open a new store. You decide to create 10,000 shares and attempt to sell them for $100 each. Each share represents a 0.01% ownership stake in the company. Let's say you sell 2,000 of the shares. Now you own 8,000 shares and the person or people you sold the shares to own 2,000. This means you own 80% of the company and the others own 20%. They paid you $200,000 for those shares which you can now use to open two new stores. So why did the people in the example buy $200,000 worth of your business's stock? People buy stocks for two primary reasons. The first is that they expect the business to do well. A business that does well will grow and increase the value of its shares. This is called capital appreciation. If you go ahead and build two more stores that generate the same income as the first, the value of the business will have roughly tripled. Now this is a bit exaggerated, but you get the idea. The $200,000 that was invested could now easily be worth $600,000. On the other hand, what if you tried to open two new stores and they both failed? Everyone would see that you're bad at running this business and those shares might only be worth $100,000 now. The second reason people buy stock is to collect dividend payments from the business. A dividend is when a company takes a portion of its earnings and pays them out to its shareholders. These are more common among older well established businesses that have consistent income. Stocks are most commonly traded on stock exchanges. The United States is home to the two largest exchanges in the world, the New York Stock Exchange, and the Nasdaq Stock Market. To buy or sell stocks yourself on the exchanges you need to go through a brokerage. This might sound like a daunting process but can usually be set up in less than 15 minutes. Once you have an account set up and money deposited buying and selling shares is nearly instantaneous. BondsWhen you need to make a large purchase like a new car you don't typically pay it all up front. You might not have enough money at the moment or want a way to spread the purchase out over time. To do this you get a loan. Let's say you want to buy a $20,000 car. You spend $4,000 on the down payment and agree to pay the rest over the next three years. You get to take the car home today because the loan pays the dealership the remaining amount owed. In return for lending you this money the bank is going to charge interest as you pay the loan back. Let's assume the interest rate is 3% per year. At this rate you'll end up paying the bank back about $16,751. The additional $751 is their payment for taking on the risk of loaning you that money. A company or government will issue bonds for the same reason you went and got a car loan, you either can't or don't want to pay the full amount in the present moment. Say instead of a new car, you're a car manufacturer and want to build a new factory. You could issue a bunch of bonds, sell them to investors with the promise of 5% interest, and build your factory without needing to have the cash up front. The hope of the company is that this factory will generate enough revenue that when it comes time to pay off the bonds they will be able to do so quite easily. Governments sell bonds for similar reasons. Bonds and loans have a lot in common. They're both used to finance expensive purchases, have interest rates, and cover a set period of time. There are some differences though. The car loan was paid off in monthly payments over the course of three years. Each monthly payment pays some of the interest as well as some of the initial $16,000 principal. Let's say you're that same bank. Instead of writing a car loan you use the money to buy a bond worth $16,000 at the same 3% interest rate over the same three year period. As the holder of the bond you would be entitled to interest rate payments, twice per year, for three years. Each semiannual payment would be 1.5% of $16,000 or $240. After three years the bond would mature, you would receive your last interest payment, and you would receive your entire $16,000 back. In this case, using the numbers I made up, which one should the bank buy? The car loan brings in $751 over three years while the bond brings in $1,484 over the same three years. The bond is also likely backed by an institution more reliable than a single person, so the choice is obvious, buy the bond. Let's take a look at how stocks and bonds compare. Both of them can be used to raise money, but they do so in significantly different ways. When you buy stock you are buying a fractional ownership in the business. You do not get your initial investment back unless the company pays dividends, or you sell your shares and give up ownership. Bonds can also be used to raise money, but they do not offer any ownership. When a company sells bonds it knows that it will have to pay them back in the future which can be costly. When it sells stock its current shareholders lose some of their ownership and therefore value which can also be unpopular. Let's say there are 100 shares of company XYZ and they decided to issue 20 more. Previously every share was worth 1% of the company, now every share is only worth 0.83% of the company, but the value of the company hasn't increased. This is only the tip of the iceberg when it comes to understanding what stocks and bonds are and how they compare and interact with each other. CommoditiesStocks and bonds are each considered to be an asset class. An asset class is a group of investments that have similar characteristics and have to follow the same regulations. Stock in Apple is not the exact same as stock in Visa, but they serve the same purpose, can be traded the same way, and follow the same rules. The same can be said about bonds. A bond that takes seven years to mature is not the exact same as one that takes ten years, but they are both going to be structured the same. The third asset class we will be covering are commodities. A commodity is a raw material or primary agricultural product. These products are essentially the same regardless of where they come from. Copper, gold, oil, iron, and lumber are all examples of raw material commodities. Corn, soybeans, meat, and milk are all agricultural commodities. There may be minor fluctuations in quality, but in order to be traded on exchanges they need to meet a minimum requirement. These materials form the foundation of almost everything our economy produces. Unlike with stocks or bonds, commodities are not used as a way to raise money. They're traded as a way to protect the producer from risk. Let's say you can grow 10,000 bushels of wheat in a good year. You would like to get at least $8 per bushel once it's harvested. What happens if there is a perfect year for crops and everyone else has produced more than expected. This increase in supply pushes the price lower because buyers have more to choose from. The price per bushel is now only $5. In this situation you would only earn 63% as much as you were forecasting which can be hard to handle as a business. In order to protect yourself from this situation you might want to create a contract with a wheat buyer on an exchange. This contract could include you agreeing to sell your wheat for $7 per bushel at the end of the summer. This is less than the $8 you are hoping for, but it will be guaranteed. Assuming the person buying the contract was also expecting wheat to be worth $8 per bushel, they will see this as a good deal. When prices for materials are known in advance it's easier to budget and plan which is a benefit for both parties. Odds are you aren't looking to buy or sell massive quantities of wheat, or any other raw materials. If you're looking at investing in commodities it's probably going to be in oil, gold, or common metals like copper. Thankfully you don't need to be directly trading contracts with the producers to do this. There are shares that can be bought and sold like stocks on a stock exchange. Each share represents a fixed amount of the commodity, such as an ounce of gold or a barrel of oil. The primary reason people buy commodities is to protect themselves from inflation. This works because as the price of things increase, the price of the raw materials likely also increase. Mutual Funds and Exchange Traded FundsNow that you have an idea of what the three most popular asset classes are, let's take a look at a couple of the tools associated with them. Mutual funds and ETFs are both collections of stocks, bonds, or commodities that can be traded. Instead of hand selecting companies, bonds, or commodities these collections allow you to purchase a fraction of many of them all at once. The S&P 500 is an index that tracks 500 of the largest companies in the United States. It's often used as a general gauge for the US economy. If the economy is doing well and growing, this index will also be growing. Instead of having to purchase shares in all 500 businesses by hand there are numerous ETFs that will do that for you. The most popular one has a ticker name of SPY. When you buy a share of SPY, 5.9% of your money is being put in Apple stock, 2.29% is put into Facebook stock, and so on. The larger the company the larger the fraction of your money they get. This is called a market cap weighed fund. SPY is an ETF which means you can buy or sell it at any time with ease. FXAIX also covers the companies of the S&P 500, but it is a mutual fund. What is the difference between the two? Well there's not much. The most noticeable one is that mutual funds cannot be traded throughout the day. They can only be purchased at the end of the day. Although not a rule, mutual funds are much more likely to be actively managed than an ETF. Active management means there is a professional portfolio manager in charge of selecting when to buy or sell the things the mutual fund holds. ETFs are much more likely to be passively managed. This means they track a set list of stocks automatically. ConclusionThese four categories make up a vast majority of investments. Being able to understand how each of them work is crucial in making your own investment choices. Hopefully this post was able to bring up even more questions than it answered if you're new. Now that you know what the major fundamental asset classes are you might ask yourself why you would choose one over the other. This was touched on, but I never went into detail on the risk, return, history, or combination of them. All of these ideas warrant their own posts which may come in the future. Thank you for reading. [link] [comments] |
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