Personal Finance


What do you think of when you hear the word "budget?" Most people hear the word and cringe. If this is you, take a look at budgeting from a different angle. Think of budgeting as a process that summarizes how you spend your income and creates guidelines for your spending. In all reality, a budget is simply a tool to increase your awareness of how and where you spend your money and helps you have control as you spend money on the things that are most important to you.

We all have income. We all have expenses. Without the proper allocation of the money that comes and goes, something may fall short. The goal when creating a budget is to lay a foundation that will help you allocate what portion of your income is required to cover each expense. The purpose of this article is to help you develop a budget, and teach you what you need to know in order to do so.

Why Create a Budget

A good way to make sure you have enough money to spend and save is to use a budget. A budget helps you make sure your income matches your expenses. A budget also helps you with saving money. It's simple. Does this mean that you won't be able to have control of your financial affairs if you don't create a budget? No. Some people are able to do well financially without ever creating a budget. But if you are not one of them, you have nothing to lose (except your money/financial freedom).

Each month, you may receive income from the job you have, and the interest from the money you save. Also, each month you will have expenses. Your goal should be to get to the end of each month before the total of expenses grows bigger than the total of income. Sometimes the time frame is not the calendar month, but the pay check month. Whatever the "budget calendar" timeline is for you, setting up and using a budget will help you account for your money. It may even help you to be able to save more of it each month.

Prepare to Budget

Before you can actually create a budget, there are some things that you need to do in preparation. Failure to do these can result in unnecessary frustration later on.

Check the Attitude

If you plan to start your budgeting program with a bad attitude about it, plan right now to be frustrated, confused, and most of all, plan to fail. If your attitude is one of penny-pinching sacrifice, you have already set yourself up for a bad experience. After all, how long will you want to do something that you don't enjoy?

There are a couple of guidelines to keep in mind that will help you have the right attitude for budgeting. First of all, the budget is for you to live by, not your neighbors. If you have the mentality of needing to keep up with the Joneses, a budget will never work for you. You will continue to evaluate your budget based on what other people have and do that you would like to have and do. If you want to be able to budget in the things that your neighbors and friends do, then you need to follow the second guideline: setting goals and working toward them.

Your budget may not allow for a new boat at this time no matter how much you want it. However, by using a budget, you can actually work yourself into a position (with time) in which you can get that boat. Sure you don't want to wait, but you don't want to face the penalties should you not be able to afford all the debts you incur. Lifestyles of the rich and famous don't fit into most middle-class incomes, but properly managed finances can produce flexibility to enjoy some of that lifestyle. As long as you are willing (have the right attitude) to set financial goals and use a budget to achieve them, you will eventually get there. That doesn't mean a budget will help you become a multi-millionaire just because you created and followed a budget, but you may feel you are almost there because of the financial freedom you will create.

Gather Your Facts

You can't budget until you know exactly how much income you get and how many expenses you have. Because of this, you need to gather some personal financial data. You need to know how much income you receive. This is probably the easiest and quickest data to gather.

Next, you need to know of your expenses. This may seem easy too. After all, you will think about all the fixed expenses (expenses that occur every month, usually for the same amount) and figure that you already know all of your expenses. Well, you are wrong. There are variable expenses to be accounted for also. What are variable expenses? Well, these are the expenses that do not occur on a regular basis like utility and housing payments. Think of the occasional doctor appointment, or occasional dinner out, or the occasional sporting event, or even maintenance on your car. These are all expenses that you need to know about for your budget.

To gather this information, look at your credit card statements for the past three months. Also, look at your check book register. And don't forget about the expenses you paid for with cash. Use receipts from these expenses to help.

Ready? Go

Now that you have your facts, it is time to create the budget. Having gathered those facts will actually make the budget creation much easier. Use the following steps to create your budget and be successful in doing so.

Set Up Budgeting Categories

A successful budget will include categories that reflect the way you actually spend your money. For example you may have a "Utilities" category. However, you may have multiple utility bills (gas, electricity, telephone, etc.). Because of this, you need to create subcategories to match those. Trust me, it is better even though it is a little more work.

Make sure to include habits (smoking, drinking, etc.) and hobbies (golfing, gardening, etc.) that you maybe wouldn't think to consider including in a budget. You will be surprised how much money you will identify under these categories. You may not want to see these categories because you might just feel some guilt for spending so much money on that stuff. Well, that is part of budgeting. I will tell you right now that a budget will identify areas that you may need to cut back the spending and sacrifice the enjoyment of for a time period. You will be a better person for it. Besides, if cutting back on smoking saves you some money, you will be able to get that boat sooner and maybe be alive to use it.

Calculate Budget Amounts for Your Categories

This part is already partially done just because of your fact finding. First you need to know what your average monthly income is. Make sure that you are including not just your income from employment, but also income from interest earned on savings accounts and cashed in returns on assets.

Next you need to look at those expense categories that you created and calculate amounts that you will need for each. You can look at the billing statements from the last few months on your fixed expenses and average it out if you aren't on an equal pay plan for the item. For the variable expenses, you will need to look at receipts, check stubs, and credit card statements to calculate an average for each category over the last few months. Remember, the more precise that you can be with these calculations, the better the results you will have with budgeting. This will especially be helpful if you need to trim your expenses because you will know which categories can afford to be cut back on.

Enter a Record of Your Expenses for Your Categories

Now comes the part where reality starts to set in. You have already identified the dollar amounts associated with your income and expense categories, now you need to enter the true data. Using your checkbook and credit card statement(s), enter each expense in the corresponding category for the previous month. Don't forget to include any expenses paid for with cash. Also, make sure to enter your income for the previous month.

After entering all expenses and income, subtotal each category. This tells you how much you have spent for each individual expense over the last month. The fixed expenses shouldn't be too much of a shocker. However, more than likely, your variable expenses will shock you. Don't worry, that means you have a better understanding of your finances than you did a few minutes ago. Next total up all the income categories and see how much income you had last month. Next (and don't be scared to do this) total all the expense category subtotals to come up with one sum of all expenses. Be brave and look at the total. Is the expense number higher than the income number? If not, then congratulations. You should take that extra from the month and celebrate, right? Wrong. Congratulate yourself, pat yourself on the back, do whatever to show your pride in making it through the month without spending all of your money. Just don't do something that will spend all of your money. The best thing that you can do with any remaining money is to put it in a savings or investment account. Let your leftover money become a source of income with interest earned.

What if your total expenses were more than the total income? That means that you are probably not paying all of your bills completely. In fact, you are probably carrying a balance on your credit card. Well, you have two choices at this point. First you can turn to divine guidance and pray for a miracle (or the winning lottery ticket). Or second, you can re-evaluate you budget, specifically your variable expenses, and see what you can cut back on. You may also find ways to cut back on your fixed expenses (turn off lights in empty rooms, take shorter showers, etc.). Remember, achieving financial security and financial freedom will require some sacrifice at some point, and most likely at the beginning.

Evaluate Goals and Adjust the Budget

Remember those goals that you should have set before starting your budget? Well, now is the time to re-evaluate them, especially if you have more expenses than you have income. The first place to look is the categories with the largest spending. Are those categories for items that are necessary (housing, utilities, food, transportation, etc.). If so, you may need to look at the other categories that are not so large in spending. You may also need to look at sub-categories of those categories.

For example, you may have a food category that is broken down into a grocery sub-category and dining out sub-category. Maybe you need to cut back on the dining out. Of course this may mean that your grocery sub-category may increase but the ratios of decreased expense for dining out compared to increased expense of fixing your own meals will be in your favor.

You may not want to eliminate some of those comforts that you are enjoying right now. Hobbies and habits may suffer. However, if you truly want to accomplish those goals that you set before you created your budget, you will have to sacrifice a little. But remember, sacrifice in this case is not a bad thing. Need a little more incentive? Tape a picture of a boat (if that is your goal) or the list of your goals to the bathroom mirror, bedroom mirror, refrigerator door, and car dashboard (okay, maybe not all of them) so that you can have the visual reminder of why you did all this in the first place. Think of how nice having extra money will feel. Think of how nice it will be to afford retirement. Think of what you will name your boat.

Make the necessary adjustments in your budget as well as your spending habits. It doesn't help one if you don't adjust the other. You will not only see financial benefits for this, you will be gaining more control of your life and finances.

Make Monthly Reviews of Your Budget

Once you have done all of this, you are done. That is, you are done until the next time you incur an expense or income. The fact of the matter is, with budgeting you will probably never be done. You will need to track your expenses and income each day or each week. At the end of each month, you will need to evaluate to make sure that your budget is working for you. Do this by comparing the actual expense with the amount you budget for the category. You may still need to make adjustments but after having gone through it already, it should be easier.

Your life changes daily. You may move, have kids, go back to school, or just experience the regular cost-of-living expenses that we all face. Monthly reviews of your budget will keep you ahead of these changes so that you aren't overextending yourself financially. Do not pass up this step if you truly want to be successful at accomplishing those goals.

In the End

When you create a budget, you are performing an action that demonstrates your determination to control your money so that it doesn't control you and your lifestyle. If you think of budgeting as a process that makes your life miserable, it will be just that because you won't be able to take control. Believing that a budget will help you, and keeping that in mind not only when you create it but through your daily life in keeping to it, will help you stay in control of your money. It will allow you to find some financial freedoms and help you to avoid pitfalls.

As you work to gain financial control and financial freedom, keep in mind the goals that you will be able to accomplish by sticking to it. It may take time, but you will succeed. Will it make you a millionaire? It could but it might not. Yet you can still enjoy a comfortable life with a lot less stress by knowing that you are controlling your money.

Saving Money the Right Way

(Before reading the rest of this article, you may want read the Budgeting and Financial Goals articles. Many of the principles discussed in those articles will be mentioned in this one as well.)

Saving money...we all want to do it. Some people actually are successful at it. Many think that they can do it, are fooled into thinking they are successful at it, but really aren't. And then there are those that just can't save money for one reason or another. So what happens? Why is it so hard to save money?

Many times there is something that is associated with the economy that gets in the way of all the efforts put forth to save money the right way. However, most of the time it is possible to save some money (even though it may be a few pennies) with some careful planning, a little bit of sacrifice, and a lot of financial control.

How to Save Money

Saving money is one of those things we try to do because it sounds easy and many times fail at because it isn't. Many times people think of saving money as spending less money. They don't think of what it is to actually set the money aside to be saved. Many times is it a conscious effort to spend less, which in reality turns out to be a "spend less in this area and end up spending more in this area" type of situation.

Saving money is a process that starts with a plan. The plan needs to include goals, it needs to include a budget, and most of all it needs you to have the right attitude. Following are some guidelines to help you save money the right way.

Step 1: Set Savings Goals

Setting financial goals will help you put yourself in a better financial position down the road. Using a savings goal is just one of the means to help you get there. Savings goals need to be just as detailed as financial goals. They need to be broken down into short-term and long-term lists. They need to be specific. Along with that, you need to know really what you want to achieve, because if you don't really want it, it shouldn't be a savings goal. Whether it is a new computer game, a house, or a good retirement, a savings goal will help you achieve what you aim for.

One thing that you will need to consider as you set your savings goals is that no matter how much you want to save, it may not be possible at the present time. That is the first reason for setting goals. If you are in a situation where your budget doesn't allow any leeway at all thus preventing you from being able to save money, then you need to set goals to eliminate debt first. Eliminating debt frees up that you may be able to save away.

Step 2: Establish a Timeframe

It doesn't matter what type of goal you are setting in life, just as long as you set a timeframe. A goal without a timeframe is a dream. Do you really want to turn that "I want to own a home on Cape Cod" dream into reality or just continue dreaming about it? Well, that home won't be cheap so if you really want it, stop dreaming and start working.

All savings goals need to have a start time and an end time. Make sure that the timeframe is realistic to the goal. Don't give too much time for a short-range goal and don't give too little time for certain long-range goals. If the time frame is too short and causes the goal to become unattainable, you may become discouraged. Also, be willing to be flexible on some goals. Flexibility could prove to be the thing that is most needed to achieve the goal.

Step 3: Figure Your Weekly (Monthly, Yearly, etc.) Savings Amounts

As you look at the items that you are saving for, you need to break down the calculations to see how much you should be saving now. There are many online savings calculators that you can use to help you figure this out. When you are set on an amount, it is wise to make that amount be the same for each period (week, month, pay period, etc.). When you see how much you need to save each period in order to achieve the goal, you may realize that you need to adjust the time period a little (because you can't adjust the amount you are paid nearly as easily).

Step 4: Keep a Record of Your Expenses

What you save is in essence a remainder of the income you received but didn't end up spending. You need to keep a record of those expenses so that you can know exactly how much you truly can save. Think about it, if you are trying to save $100 but aren't tracking your expenses, you may end up spending the money that you are trying to save. By tracking your expenses, you can see where your money is going and have a reminder to stay within the budget so that you can reach that $100 sooner rather than later.

To help in the tracking of your expenses, you may want to get a small notebook to keep with you at all times. You would then be able to write down each expense as it happened. Then, on a regular schedule (such as weekly) you should sit down with those notebooks and receipts and total it all up. All of this can also be done using a Palm Pilot, Franklin Planner, Blackberry, or any other device that allows you to make either written or electronic records. Software programs such as Excel and Lotus 123 can be useful in recording your expenses as well because of the ability to track your expenses by category and create totals and sub-totals.

If you want to use something like this, here is a word of caution: If you run out and buy electronic equipment and/or software to help you track your money in an effort to save money, you will put yourself in a hole that you will need to dig out from. Spending money to track expenses so that you can save money is a bit counter-productive.

Step 5: Trim Your Expenses

So a month has gone by and you have recorded all of your expenses in your new little notebook. You total up all of the expenses and realize that the expenses equal, or maybe even surpass, your income. Not a whole lot of saving is taking place in this situation. So now what?!

If your expenses are more than your income, I would like to refer you to the article on Budgeting. You have more to learn there before you start trying to save. But in the event that you have a budget that you just recently started, you are given a reprieve right now based on the fact that you are a beginner. We can handle that.

Look at the expenses that you incurred during the last month. Are any of them variable expenses? If so, you should already know where you should begin as you look for things to cut out of your spending habits. That could help create excess money that turns into savings. If cutting out some of the variable expenses is not enough, you should look at what you can do with some of your fixed expenses as well. For example, you could consolidate your debts, find alternative and cheaper ways of transportation, or if you rent your house or apartment, you may need to consider moving to a place that is cheaper. Whatever it is that you decide to do to help save money, make sure that you don't slip up and spend unwisely. Otherwise, you may never reach your goal.

Step 6: Reassess Your Savings Goals

As with any goal, take the time to reassess what you are doing. Are the goals as realistic now that you have been working on them? If not, then erase them from your goal list. You shouldn't be working toward something that you can't have. If you just can't rearrange the budget to make saving work, maybe saving money isn't what you should be working on. You should first get yourself out of debt. Don't force yourself into a large credit-card balance just because you want to have cash left over to claim as savings.

Step 7: Make a Budget

In many opinions, this should have been the first step. But in this article it isn't. Why? Well, simply put, it is because there are principles to planning for savings that you needed to learn. Besides, if you have already read the article on Budgeting, I would think that you have also started to make a budget and know what to do in this step.

If you don't have a budget created already, make one. Part of your budget should be a portion to pay yourself for savings. Making your savings a part of the budget will actually help you to be successful in that area. If you can, pay yourself 10% of your income. If you can't, budget in what you can. By making a savings amount part of your budget, you can figure to put the money away in a savings account at the time that you are paid or are paying your bills. If you can budget it, you most likely won't spend it somewhere else.

Step 8: Stop Using Credit Cards

Yep, you read it correctly. Stop using your credit cards. Why? Well, the first reason is because credit cards create an illusion that you can spend money now and pay it off later. Okay, so that is how it works but you don't realize the danger if that is how you really think. Credit is designed to let you use money you don't have today and pay it back later. Unfortunately when you pay it back later, you will be paying back more than you spend because of a nifty little thing called interest and its good friend called finance charges.

So let's assume that you pay off your credit card each month so that you don't get those finance charges or interest charges. It is still a good idea to not use your credit card. The second reason why you shouldn't use them is because your budget will most likely NOT have a category for paying the credit card bill. That means that you will not have any money budgeted to pay for the expenses that you incur using the card. That in turn means that when you get done paying all of your bills, including the one for the credit card, money that you had hoped to put away as savings will not be there for you. This doesn't help in your quest to grow your nest egg.

This doesn't mean that you need to get rid of your credit cards. They are great to have in an emergency where you don't have cash or enough of it if you do. You may also have a card that you want to use because of the added incentives such as a percentage of cash back, or points that can be used for airline tickets and hotel rooms. These are great benefits, but you better be religious about paying them off each month so that you don't get charged those fees talked about. If you are going to use a credit card so that you can get the point/miles/cash back benefits, it would be a good practice for you to make the purchase on the credit card and deduct the expense from the expense category it falls under. You could even physically withdraw the money from your bank account and set it aside to pay the credit card bill when it comes. That way you don't have to come up with any additional money aside from what you budgeted.

Step 9: Open an Interest-bearing Savings Account

When you are trying to save money, the wallet is the last place you want to keep it. You are most likely going to spend it on something that will only bring you temporary satisfaction. Placing it in a jar on the shelf or in an envelope under the mattress is a little better, but why not choose the option that is best for you?

By opening an interest-bearing savings account at your bank, not only are you placing your money in a very secure (and very big) safe, but you are getting it out of your possession and greatly reducing the risk of spending it. Also, if the account is interest-bearing the bank will pay you money back based on the balance that you maintain in the account. As the balance in the account grows because of your savings, the bank will pay you a higher percentage.

Think of it, based on simple math, if you have a 5% interest-bearing account, then for every hundred dollars you keep in your account, the bank pays you an additional $5. This is just an example and may not be exactly how the terms of your account will work, but you get the idea. You are getting free money with the interest that is earned off of your account balance. This additional money will just help you achieve your savings goal sooner than later.

The other reason why you should keep the money you save in a savings account at the bank is because they will insure your money. If a burglar broke into your house and stole the money jar that you had your savings in, you would probably never see that money again. Same with if you lost your purse. But at a bank, your money is federally insured (usually up to $100,000 per account).

You should also consider higher-interest options such as CDs (Certificate of Deposit...not compact disc) and money-market accounts. These are great for the long-term savings goals because they receive a higher interest rate and have penalties assigned to detract you from withdrawing your money.

Step 10: Know Where Your Money Is

Keep track of your money wherever it may be; savings accounts, checking accounts, wallets, and jars. By knowing where your money is, you will know how much you have and will be less likely to spend it all. This is good to know because if you don't track it and end up overdrawing from your checking account, you will incur overdraft fees. Those fees will cut into the money you are hoping to set aside in savings.

Step 11: Pay Yourself First

This is a very important step and is usually the hardest to follow. If savings is your priority, budget some money to go into the savings account when you get your paycheck. This is the easiest way of setting aside your savings money. It is also the hardest to come to terms with because your finances may be so tight that you don't feel you can afford money for savings.

If you are able to pay yourself, 10% is a sum that you should aim to set aside. Why 10%? Well, probably because it is an easy amount to calculate (take the sum of your paycheck and move the decimal point to the left one place). However it is what many budgeting websites recommend so we will go with it in this article too. However, those same budgeting websites will also tell you that you need to make sure that all your fixed expenses are paid before you set aside money for savings. The "pay yourself first" rule really only applies when you know that you will have money to do so. Don't pay yourself some savings money when you know that you will just end up having to use the credit card to cover other bills.

Other Helpful Hints

By following these steps, you should be able to work on a regular basis to make your savings grow. Even if you can only set aside $10 per month, over time and with interest earned in a bank savings account you will be able to reach the goal that you are aiming for. It will get easier as you go along, and hopefully you will be able to work your budget in such a way that you are able to increase the amount you put into savings as time goes on.

If you don't feel that you can set money aside for savings right now, don't feel guilty about it. You need to make sure that your fixed expenses are taken care of and that even variable expenses that are mandatory are covered. Just be sure to start saving when you feel comfortable doing so. In the meantime, here are a couple of other hints on things you can do to help work into a regular savings habit.

  • Have someone that knows you (and your wardrobe) really well go shopping with you. They will help you to not buy any clothing that you might already have or don't need. Don't take friends along if they own more the 50 pairs of shoes though because they will talk you into making unnecessary purchases.
  • If you receive unexpected cash (bonus money from work, inheritance from your favorite uncle, etc.) put most or all of it into savings. Continue to set aside your regularly budgeted amount as well. The unexpected money will just help you achieve those goals quicker.
  • Make purchases with paper cash, not exact change. Take the change you get back and put it into a savings jar. When the jar is full, take it to the bank and deposit it in your savings account. You will be surprised how much money you have with a quart jar or coffee can full of coins.
  • Adopt this mindset: The more money you store away in a bank savings account, the less you have to work in your lifetime. It is the magic of interest that will help achieve those goals sooner than later.

Checking Accounts

You've seen your parents with a checkbook, and have probably even seen them trying to reconcile the check register with the bank statement. You might have even had a little bit of training in a high school class that taught about life skills, budgeting, finances, etc. And it is possible that you even have a checking account of your own. But do you really know what they are for and why you would want to have one (other than the fact that most people have them)?

By the end of this article you will know what the benefits are of having a checking account. You will also know what different types of checking accounts exist, which you might benefit most from, and how to manage that account.

What is a Checking Account?

A checking account (also known as a transactional account) is a deposit account that is held at some bank or other financial institution. The purpose of a checking account is to secure funds and make them available (rather quickly I might add) through a variety of channels. By virtue of being called a checking account, you are able to access those funds by writing checks. But as technology improves, and society looks for additional ways of convenience, using a debit card is the most common way of accessing the funds in your checking account. (For more information on using debit cards, see the next chapter of the Personal Finance section - Using Your Debit Card.

A typical checking account is handled through careful posting of deposits and withdrawals of funds. These funds are federally protected. (If your financial institution doesn't claim to be FDIC insured, you should find a new financial institution.) Generally, access of those funds is handled through the writing of checks. Use of debit cards, ATM cards, and check cards (yes, they are all different and what you get depends on what your financial institution offers) also allow you to make point-of-sale purchases and cash withdrawals from your checking account funds.

Why Would I Want One?

Maybe the question should ask why you wouldn't want one. The main reason to have one: checking accounts are a convenience. They are a safe place to store your money yet have easy access to it. After all, the funds are in the bank, not your pocket. That alone is a reason for feeling secure about your money. No school-yard bully taking your money. Instead, if someone wants your money they will have to rob the bank and if that happens, your money is insured. See, there is security in a checking account.

Another security feature comes in the use of writing checks. Yes, it is true that if someone gets one of your checks in a fraudulent way (or just by stealing them) they may gain access to your money. But, if you notice that checks have been lost or stolen, you can call the financial institution and ask them to cancel those checks so that they can not be used by the thief.

Another benefit of a checking account is the convenience of paying bills. With technology moving the transaction of information and money on-line, you can set up automatic transactions between your financial institution and your utility, mortgage, or financial loan accounts. This will allow you to have your bills paid directly from your checking account without you having to do a single thing (other than make sure the money is in the account). If you don't want to go this route, it is still cheaper to write a check than to get a money order to pay your bills.

As mentioned earlier, your financial institution most likely offers some sort of a card (ATM, Debit, and Check Debit) that looks and acts like a credit card but works like a check. You can use ATM and Debit cards anywhere that point-of-sale purchases take place (drug stores, grocery stores, gas stations, etc.). As long as there are funds available in the checking account you can make the purchase. You also use those cards at ATM's to withdraw cash. Check Debit cards work where regular credit cards do because they will have the Visa or MasterCard logo on them. However, just like ATM and Debit cards, they will only work on a transaction if the funds exist in the account.

What Are My Options For Checking Accounts?

There are different types of checking accounts. What is available for you depends on the financial institution you bank with. For this reason, research what you want out of an account and research what the banks in your area offer. Here are some basic tips to help you decide on what type of account you should look for:

  • What will you use the checking account for?
  • How much money will you be able to keep in your account each month?
  • How often are you going to write checks

Your answers to these questions will point you in the direction you need to go in selecting the type of checking account you want. You also need to be open to the idea of going to a different bank than you had been planning on if it means getting the right account for you.

So what is the right type of account for you? Look at the following descriptions and see what you like. If some of them aren't even available to you at any of the financial institutions that are in your area then you won't have as big of a choice. But you also need to be willing to ask, because sometimes the bank won't advertise that they allow certain types of accounts because they are trying to steer consumers to a specific type (which generally means it benefits them more as well).

Below is described a number of various types of accounts. Not all financial institutions will call them by the same name, but the characteristic will be similar.

Basic Checking

A basic checking account will let you deposit and withdraw money and write checks. They are perfect if you don't plan on keeping a high balance. If you want to pursue this type of checking account, keep in mind that every financial institution handles these a little bit different. You need to be aware of fees and rules that accompany these types of accounts. Most commonly you need to know if there is a monthly service fee, do they limit the number of checks you can write and charge a fee if you go over that number, do they require a minimum balance and charge a fee if it drops below that, do they require direct deposit from your employer, and do they pay interest on the balance (most banks don't).

"Free Checking"

This type of checking account usually (but not always) requires that you maintain a minimum balance. What changes here is that they will not charge you the fees as listed for Basic Checking. That is what their definition of "free" is.

Interest-Bearing Accounts

Interest-bearing accounts pay interest on the money you have in that account. The amount of interest will vary. It could be based on the balance at the first of the month, the last day of the month, the highest balance during the period, or the lowest balance during the period. They could have rules that state you must keep a minimum balance or you don't get to earn any interest.

In order to open one of these accounts, the financial institution may also require that you make a larger deposit to open the account and maintain a larger minimum balance to avoid fees, You want to make sure that you are aware of all of these facts before you open the account so that you aren't surprised by a fee if you default on a requirement.

NOW Accounts

A NOW (Negotiable Order of Withdrawal) account is the combination of a "free checking" account and an interest-bearing account, only this type of account is usually offered at a savings and loan or "thrift" institution. The specifics of how a NOW account works is that there is a minimum balance requirement with an accompanying fee (if the balance drops below the minimum) but if you keep your balance above that minimum you can earn interest every year.

Super NOW Accounts

This type of account is the NOW Account with a higher interest rate and a higher minimum balance requirement.

Express Checking

If you are a person that is constantly on the move, doing most of your banking by ATM, telephone, or computer, this may be the type of account for you. Express checking customers usually don't spend much time in the bank using the bank employee resources. Because of this, the benefits that the account owner enjoys are unlimited check writing, low minimum balance requirement, and low or no monthly fees. Unfortunately, if you have one of these accounts and decide to go inside and speak with an employee, you may get charged a service fee.

Lifeline or Starter Checking

These checking accounts are a great place to start for people with a low income. They could also be a good option for a teenager that wants to have their own account. The bank already knows to expect smaller deposits and probably fewer withdrawals. Because of this the account will probably have much lower deposit and balance minimums and smaller monthly fees (possible none). However, because of the lower amounts, there could also be a limit on the number of checks that can be written each month.

Using the Accounts

Once you have decided on the type of account, the financial institution that will hold it, and have actually opened the account, you are ready to experience the benefits of having a checking account. Remember, there are rules that go with that checking account and penalties if you violate those rules. If you can follow the rules, you will be much better off. However, before you get busy spending your money, let's go over some guidelines that will help you to better manage your checking account.

First, make sure that when you write checks, you write legibly. These aren't doctors' prescription pads, and since money is involved you want the bankers to be able to read the correct amount. Next, always use a pen. Fraud artists want you to use pencil so that they can change payee and amount information. Pen ink messes up their plans and keeps your money safe.

Also, don't sign a blank check. If you want to do that, you might as well give some stranger your ATM card and PIN so that they can take your money without having to go inside the bank. (And no, mistakes like this don't count as charitable contributions on your tax return nor does it help your account balance or even credit score.) For additional security with your check, use a restrictive endorsement (such as "for deposit only" written on the back of the check with your signature below) so that the bank doesn't cash the check mistakenly or under fraudulent pretenses. Destroy checks that have been voided along with all unused deposit slips.

Keep your checks in a safe place and don't let other people use them (not even that teenage daughter that you love so much who wants to go shopping at the mall). Someone that you know may not perform check fraud because of you lending them your checkbook, but if they were to lose it you could be in a world of problems.

Want more tips on writing checks? Well, first of all, enter the correct date. Speaking of the date, be very cautious on post-dating a check, especially when paying bills. If you need to postdate a check, notify the recipient that it is postdated and why so that they aren't shocked when the bank won't post the check.

Lastly, record every transaction in your checkbook register. This means not only checks that you write, but every time you use the ATM or debit card. If you do this and keep a running balance, you will have better control on your finances. You will also know when you are coming close to the minimum balance that you are supposed to maintain.

If you can follow the suggestions and use the information given in this article, you will be pretty well prepared to have a checking account. If you already have one, try to follow the guidelines mentioned here to manage the account. Your financial health will definitely be in better shape and it will be one less thing for you to worry so much about.

What is a debit card?

More than two-thirds of American households have debit cards (also referred to as ATM cards or checking cards). But does everyone really know what a debit card is and how to use it? Are you aware of the pros and cons of having one?

Debit cards look and, in some ways, act like credit cards. They allow you to make purchases without carrying cash or the check book. They allow you to withdraw money from ATM machines. And if they have the Visa or MasterCard logo on them, they are accepted anywhere Visa and MasterCard credit cards are accepted. So what's the difference?

Using Your Card Responsibly

Debit cards are truly a convenience. But if you don't keep track of your purchases, your checking account balance and, most of all, the card itself, you could face some major problems. For example, overdraft fees occur when you use the debit card to make purchases that total more than what you have in your checking account. This must be disclosed to you so that you can opt in or out. Also, purchases made with a debit card can't be disputed or refunded as easily as those made with credit cards. This is especially important to understand should you accidentally lose the debit card or have it stolen.

Because the card is tied directly to a checking account that is debited as the card is used, it is important that you don't lose the card.

  • If the card is lost or stolen, call the bank immediately so that they can close the card and prevent unauthorized use of your money
  • If you do not do this immediately, someone else (should they find it or steal it) can use all the money you have in your checking account. And with federal regulations being different for debit cards than they are with credit cards, you may be the one that suffers the consequences.

Here are some tips for responsible use of debit cards:

  • Always protect your debit card and keep it in a safe place, just as you would cash, credit cards or checks.
  • Do not leave your debit card lying around the house or on your desk at work.
  • If your card is lost or stolen, or you suspect it is being used fraudulently, report it immediately to your bank.
  • Hold on to your receipts from your debit transactions. Don't throw them in public trash cans or even in your own trash without first shredding them.
  • Always know how much money you have in your account, and review bank statements carefully. Don't forget that your debit card may allow you to access money that you have set aside to cover a check that has not yet cleared your bank.
  • Never give your debit card number over the phone unless you initiated the call and are certain that the recipient is legitimate.
  • If you have a PIN number that you use with the debit card, memorize it. Do not keep your PIN number with your card. Do not choose a PIN number that a clever thief may be able to figure out (i.e. your birthday or phone number).
  • Never give your PIN number to anyone. Keep your PIN private.
  • New give your card to anyone else to use. Your financial institution has issued that card to you and no one else. You could jeopardize any dispute right if you willingly gave your card to another.

Buying a Car

Decided it is time to buy a car and not sure of what to do? Whether you are buying for the first time or have gone through the process a few times before, there are a few things that you should be aware of from beginning to end to make sure that you end up with what you want (or at least what you can afford and happen to like) and have it be a successful purchase.

What Should I Know to Begin the Process?

The first thing that you need to know to begin the process is whether you want a new or used car. There are pros and cons to each, and they aren't just financially related. Let's look at some facts that will help you decide on that answer.

There are more than 2 million car accidents annually. Most of those accidents include more than one automobile. When you study out those numbers and consider that many owners replace their wrecked car with a new (or newer but used) car, it is very possible that you could end up with a used car that has already been dinged or smashed. Because of this, you need to be ready to find out the history of any car you consider for purchase. Information that you should find out about any used car you are considering should include (but not be limited to) the following: the number of previous owners, if the car was involved in any previous accidents, any previous mechanical problems, and the maintenance history of the car. Fortunately, much of this information is available by running a Carfax report.

One of the biggest benefits of buying a used car is that you can often get a great deal and in many cases, the car may even be relatively new. This is because of the increased number of people that choose to lease a new car rather than purchase it. Unfortunately for every good deal, there is a bad one. The most common car-buying horror stories involve the purchase of a used car. What does all this mean to you? It means that before you can decide whether you want new or used, you need to decide what you need and what you can afford. Guaranteed, those two decisions will narrow down your search before the search has even started.

Buying a Used Car

So you have decided or are seriously considering a used car. Here are some tasks that you should complete to increase the odds of a good purchase:

  1. Have a mechanic check the car. Not just the engine and inside. Have them put it on a lift and check underneath. He will be able to notice what is original and what has been replaced, what damage has occurred to the undercarriage, and anything else that may be of concern.
  2. Run a Vehicle History Report (available at so that you can get a full history on the car. Many times the dealership that is selling the car will do this for you. Make sure to see a copy if they have already done it so that you can see for yourself. The report will be able to tell you if it was ever salvaged, stolen or recalled, failed inspection, had more than one owner, and whether or not the odometer has a fraudulent reading.
  3. Never sign an "As Is" statement. Dealers try to mix these in with all of the other paperwork you have to sign. What this does is make the car yours when you drive off the lot, even if you discover a problem one block down the road. Make sure that you have the option of returning the car within 30 days.
  4. Have your financing and loan approvals ready before you go to buy the car. You will already know what your limits are. You can also use this in your favor if it comes down to negotiating a price.

If you follow these instructions, your used car buying experience should go well and you will be satisfied with your purchase.

What to Know About You Before Shopping for a Car

Before you start thinking about what fun features you want (convertible, four-wheel drive, etc.) you need to do some self-examination to be prepared. First (and most importantly) look at your budget. It won't be much fun driving a powerful sports car or sport utility vehicle (SUV) if you can't afford the gas to drive it. Set a reasonable price range. This will help you to narrow the search. If you get your financing and loan approvals ready prior to shopping, you won't have a hard time setting the price range: the loan approval amount will set the limit for you.

You should also know about your credit history. Any good dealer will ask because he may be able to offer you some promotions it your credit score is above a particular number. You can receive your credit report from the three national credit bureaus - Equifax, Experian, and Transunion—by going to their websites. It's not a bad idea to take that credit report with you when you're shopping.

Finally, what are your real needs? Do you haul equipment? If so you should consider trucks. Do you have a family with more than two kids? If so, you may need to consider a minivan or large SUV. Do you commute long distances? You will want to look at something that gets good gas mileage. Do you have a towing requirement? Consider something with a tow hitch so that you can get that boat to the lake or the camper up in the mountains. And make sure the vehicle has the power to make the hitch worth it.

By knowing what you really need and what you can actually afford will simplify the car shopping experience you are about to have. Your options will be narrowed down and the search will become a lot easier.

After Choosing the Car, What Should You Know

Once you have decided on a car, there is still more information that you will want to know before you finalize a purchase. First of all, how does it drive? You should learn about this by doing a test drive. And make sure that you are the one doing the driving. If you have a spouse or friend with you, let them drive as well. They may notice something that you didn't and you get the perspective of how comfortable your passengers will be.

Next, how much would the car cost if you were to buy it from another dealership. Shop around and compare what the same car would cost you at another dealership. Keep in mind that accessories, mileage, and wear will most likely factor into the differences you find. If you find two cars that are identical in every way except the color, but one is $5,000 less than the other, it shouldn't be a hard decision...unless you really like that metallic pea green paint job with wood panel accents (is your name Clark Griswold?).

Next, what kind of ratings and reviews has that model of car received? Learn what you can about the car away from the dealership. Ask friends and family who have driven or even own that type of car what they think about it. Make sure to get the pros and cons so that you can make a clear decision. You can also read up on professional and consumer reviews about the car. Places to look for those are MotorTrend Magazine, Automobile Magazine, or online at, or Car

Finally, are you trading in your old car? If so, you need to know the facts on the trade-in value of that car. For used cars, you can see what the averages are (based on age, mileage, options, condition, etc.) by looking up those values. Look online at the N.A.D.A. Official Used Car Guide, the Kelley Blue Book, and the Consumer Reports Used Car Buying Guide. These sites will give you an idea of the value of the car and whether or not you would be paying too much.

Purchasing the Car

One thing that you need to remember is that car dealerships are a business and need to make money like any other business. Also, the salesperson is most likely working on commissions and will constantly be thinking of how much he will get paid from the sale of the car. There is only so much leeway that they will be willing to give when it comes to the price. This is where you need to show what you have learned and avoid pitfalls that come with buying a car. Here are some tips that will help you with the purchase while avoiding such pitfalls.

  • There are two times during the year in which you will get better pricing: the last two weeks of December and July to October
  • Know the competition. If you shopped around like mentioned earlier, you will be able to negotiate.
  • Don't be afraid to negotiate. In fact, don't be afraid to walk away from the dealership. The salesperson doesn't want to lose out on a sale. On the same line, realize that they can negotiate to a certain point.
  • Don't let a dealer run a credit report on you without your permission. Many do and are able to use the report against the buyer if the score is not outstanding or the report shows delinquency. This is another reason why it is important to get your report before shopping.
  • Don't give your license or social security number to the dealer. They may ask for it as collateral while you test drive the car. This is one way they can run your credit report (conveniently while you are on the test drive).
  • If you are buying new and the car needs to be ordered from the factory, it should NOT cost any more than the ones on the lot. The only reason for a price change should be because of options and features, not color and trim.
  • If the dealership doesn't have the car you want, they may call around to other dealerships. If they are getting the car from someone else, maybe you should too, so that you don't get additional fees.
  • It is illegal for a car to have a missing MSRP or price invoice sticker. Don't let decals advertising the price be the only thing in the window when buying from a licensed dealership.
  • Don't let the dealer start charging you for extra charges that weren't disclosed in the negotiating. You should have agreed to a price before starting the paperwork and you shouldn't have to pay more than that. This is the area that dealers work on you the most. Undercoating in Phoenix, AZ is not a necessity like it might be in Buffalo, NY.

If you feel that the dealer is being unfair with you or trying to charge you for things that you did not agree on, don't hesitate to walk out of the dealership without the new car. They will miss out on making some money and you will benefit by not spending more than you bargained for. The bottom line is that you are the one that will be spending money and driving the car. You need to be happy with what you purchase.

Buying a House

On average, homeowners in the United States move to new homes every seven years. With many homes available, many people looking for a new home, and many factors that effect home buying, it can make what would seem to be a fun adventure turn in to a difficult task. Whether you are a first time homebuyer or a homeowner deciding to make a change, there is a lot to know about buying a house. With the help of this article, you will be better prepared to make that giant leap and assume a responsibility that you may not have felt before.

That is shopping and buying brings about a great responsibility. You probably wouldn't like to have such a big responsibility and not know how to assume it correctly. For example, some people would rather go it alone when shopping for a house. How about you, do you need a realtor? If so, who would you go with? And what about a loan? Can you get enough to buy the house, and if not, can you negotiate down the price of the house? So much to know and do. Just make sure you start out right.

Where to Start

The most important step in purchasing a house, and the place you should start from, is to look at the financial side of the adventure. There are three specific factors: 1) How much can I afford, 2) How much will it cost, and 3) Can I get the loan. Let's start with the first factor.

You really need to figure out how much you can afford to spend on a new home. Don't think of purchase price either. Think about what the monthly payments will be. Be sure to figure in the principle, interest, insurance, and taxes when calculating a monthly payment. You may also need to figure in mortgage insurance as well if you are putting less than 20% down on the house. But we will talk more about this later. What you need to focus on now is creating a budget to afford that house. If you haven't set up a budget that shows how much you are spending on everyday things, now is the time to do it. If you need some help creating a budget, or would at least like some information on creating and maintaining budgets, refer to the article on Budgeting.

A good budget will help settle on the price range that you can work with as well as help you stay clear of spending more than you can really afford. This is extremely important because many lenders will say that you qualify for a certain amount, but that when broken down to the monthly payments, is more than you can really afford. Do not be fooled by this...instead, have a budget created so that you know what you can afford to get into. That way you will be able to control the process, and may end up in a better situation than you could possibly imagine.

Pre-approval for the Loan

After you get an indication from your budget of what you can afford, you need to know if you can even get a loan for that amount. This will put you one step closer to getting into a house, and it might just speed up the process a little bit.

You will hear two similar sounding terms: pre-approval and pre-qualified. Do not let your mind be tricked into thinking that these are the same. Pre-qualified means that you have told the lender how much income and debt you have. With these numbers the lender can give you an estimation of what you can afford.

Pre-approval is actually a lot more than pre-qualification. With pre-approval you will provide income and debt information as you do for pre-qualifications, but for pre-approval the lender will request your credit report. Checking the credit report tells the lender what your debt-to-income ratio is. If the debt-to-income ratio is too high, you may be limited on the amount or you may have a higher interest rate. Worse yet, you may not even get the loan.

The lender will also look at your credit report to see your history and determine the likelihood that you will make the monthly payments on time. If they see from your history that you are frequently late on other debt payments, you may not get the loan and if you do the interest rate will be higher.

Because of emphasis that is placed on your credit report, you should request a copy and check it yourself before you visit a lender. This way you can know a little bit of what to expect in response from them. Review the articles under the "World of Credit" section for help on understanding your credit score and credit report.

So why is pre-approval so important? First, you will already know what you can afford before you look at any houses. This will narrow down your search before it begins. Second, if you are pre-approved for a loan and make an offer on a house, while another homebuyer that is not pre-approved makes a higher offer on the same house, it is likely that your offer will be accepted. The seller will see that you are pre-approved and can secure the loan while he will have to wait on the other person to get approved for a loan..something that might not happen. Most sellers won't want to take a chance on losing the sale, especially at a time when real estate is considered to be a buyer's market.

Let the Search Begin

Now that you know what you can afford, you are armed and ready to go out and find that house. Right? Actually, there is one more item for consideration: what do you need and what do you want. Fortunately, this can be part of the search process. As you get ready to look at houses, create a list with two columns; one column for needs and the other for wants. For example, having a minimum of four bedrooms is a need while central vacuums may be a want. Don't be surprised if during your search you end up moving something from the need column to the want column, such as walk in closets or that extra bathroom.

When you are looking for a house that fits what you can afford, you will realize what truly is needed and can be left out. If you don't get all those wants, don't worry. Like the opening line said, Americans move to a new home every seven years. Maybe the next one will have those things you didn't get this time.

As you create the needs vs. wants list, and as you are looking at houses and the neighborhoods they are in, keep in mind the fact that your life could change quite a bit over the course of time. What will the future bring, and will this house adapt for those future needs? You most likely don't have a crystal ball to tell you what you will be doing ten years from now so planning that accurately will be difficult. But if you have ideas about what changes may have taken place in your personal life, it could effect the decision you make on the house you buy.

Considering your wants, needs, and possible future requirements, you then need to take in one of the most key items in buying a house: location. We have heard that location is the most important thing to some people when buying a home. Interestingly, location requirements are about as different as each person looking to buy a house. Something to consider if you have kids is the proximity to schools and parks. You may also want to consider the quality of the schools and the education your kids will receive. This could completely change your mind on location.

Maybe you don't have kids and have a very social life. You may want to look in areas that are close to restaurants and shopping malls. Something else for every homebuyer to consider is proximity to employment and the transportation system to get there. Do you give up proximity to restaurants and work to enjoy a quieter lifestyle in the suburbs? Do you choose the suburbs to get more home for the price? Now you know why people say it is all about location, location, location.

A few other location-related items that you will also want to consider while shopping around are the crime rate for the area, the tax rate for properties, homeowner associations (and related fees), noise, restrictive covenants (nope, you can't have that yapping Chihuahua outdoors between 8:00 pm and 8:00 am), zoning (this is especially important if there is a lot of undeveloped area near the house that could be made commercial shopping malls...or it is good to know in case you would like to build an addition to the house ten years from now), and the neighbors (insert your favorite redneck joke here).

You may find more success in the house search by using a real estate agent. They have access to information that you will not get from a flyer on the "For Sale" sign or the internet. As you decide on whom to go with, there are a couple of things to remember. First, even though you are the one asking the agent to help you, the agent is always working for the seller, even if the agent has no clue who the seller is. Why? Because the seller pays the commission of the buyer's agent when the house sells. This is tough to swallow for some people but is good information to know as you work with them. But don't let this deter you from approaching an agent. Just be careful not to divulge information to the agent (such as the maximum you would offer for a house, what concessions you would be willing to make, etc.) that will work against you during negotiation. Since the agent is a representative of the seller, he/she must divulge all information you share with them that may help the seller in decision-making.

An alternative is to use a Buyers Agent. These are agents that work with your best interest in mind. They also will show you homes that are for sale by owner, something that traditional real estate agents won't do. Keep in mind, using a buyer's agent could have its down sides too. You may have to pay an hourly rate for the time they spend with you, or at least a flat fee. These are things that you don't pay to real estate agents. If you choose this route, make sure to sign an agreement of services provided and pay close attention to the terms of the agreement. You may decide to go with a real estate agent instead of the buyer's agent if you aren't comfortable with the terms of the agreement.

A third alternative is to go it alone. This is an okay route to go if you aren't in a rush. However, you miss out on information about the house that the agent can have access to. Also, unless you are qualified to do so, you will need to hire someone that can file the proper paperwork from submitting the offer to closing on the house. Even more, unless you can negotiate well, going this route won't save you any money.

Selecting the House

Based on the criteria that you established earlier with needs vs. wants, along with what you can afford, the agent will create a list of homes in the area you are looking that meet those criteria. You need to realize though that sometimes a house that you could potentially be interested in may not be on the list because it doesn't match your criteria 100%. Because of this, you may want to tell the agent to be flexible on sticking to the criteria. You may also want to do some searching on your own.

As you start to tour homes, make sure to take notes about things you like and don't like. This will be more helpful as time goes on and you walk through more and more homes. You will eventually become confused about features you liked in homes that you have looked at. Sketching the floor plan may be useful to you as well to more easily remember the layout of each home. If the homeowner will let you, you could even take pictures. All of these things are ways that you can help yourself as you are deciding which houses to remove from consideration.

Another thing to consider doing is visiting the house more than once. You will find that after you have seen a house, if it is one that you are really interested in, you will want to see it again. You will start to wonder more detailed things like how your furniture will fit in the rooms, how much "remodeling" you will need to do to have it match the look you want, etc. You should make sure that you visit it at different times of the day as well. Daylight can show off blemishes that you didn't see at night. It can also help you know what the true colors of paint are. Something else that is equally important: if the homeowner was present when you went through the house the first time, go back at a time when the homeowner isn't there so that you can look around more freely without feeling like an intruder. It will also allow you to talk more freely with the agent.

As you start focusing in on a house and narrowing the choice to just a few, make sure to get information about restrictive covenants and homeowners associations. Don't buy a house without this knowledge or you may have an unpleasant surprise when unknown association fees are due.

Make the Offer

Well, the search is over and you have found the house you want. What are you waiting for? Make an offer. It's simple right? Wrong. There are several steps that need to be taken; one of them is to start drawing up contracts that include the initial offer. This is where having a real estate agent comes in handy. If you decided to go it alone, you can hire a real estate attorney to do this for you.

Your offer isn't going to be just a number written down of what you are willing to pay for the house. Generally you will also include contingencies (based on the home inspection, financing, and title status) so that you can back out if deal breaking problems arise, timelines, and inclusions (like that built-in firehouse pole going from kids loft on the second floor to the first floor family room).

Once the contract is drawn up with the offer, contingencies, and inclusions, you can expect a counter-offer. What is the counter-offer? It is a chance for the seller to say in essence, "You can't have all the stuff you want included for the price you offered, but you can have it all if you are willing to pay more money." And you may respond with, "Okay, I will pay a little bit more but not what you want me to pay." And this can go on a couple more times until you have agreed with the seller on the price and inclusions. Keep in mind, that firehouse pole is probably worth a lot less than thousands in price that you will negotiate about. Let the seller have the pole (or whatever the inclusion in question is), save some money, and buy your own pole (as well as new furniture, carpeting, etc.) with the money you save on the sale price. The main thing to remember is that the seller doesn't ever have to accept your offer. If you really want the house, make a realistic offer or be prepared to walk away from it.

From the Offer to the Closing

So you made the offer and now you just have to wait for 30 days for the loan to process. Easy sailing from here now, right? Not quite. If you are getting an FHA or VA loan, a professional inspection of the house is required before the government will fund the loan. Even if you aren't getting one of those loans, having a professional inspection is a good idea. It may identify some things about the house that may change your mind about having it. And remember that inspection contingency you put in the offer contract (and if you didn't you are kicking yourself about now)? That contingency gets you out of the contract if there are significant problems with the house. Or, it could be that the problem is not a major one and the offer contract states that the seller has to fix it before the funding can go through. At this point, it becomes the seller's responsibility to make sure the sale finalizes. They won't want to back out just because they can't fix it, because they may end up facing the problem with the next interested homebuyer.

Go on the inspection with the inspector and don't be afraid to ask questions. Also, make sure to get a copy of the results. You don't want to be stuck with a lemon of a house because you didn't go through all the steps that have been suggested here.

After you have completed all that has been suggested (either here in this article or by your real estate agent), you are ready to close. Here is how you proceed. First, if you have kids, get a babysitter. You do not want to delay or extend the process because Junior needs you to read a book to him. Second, rest your writing hand for a few hours previous. Sound goofy? Wait until to you see the stack of papers that you will be signing. You will get writers cramp just thinking about it. Next, get a cashier's check from the bank with the amount you will have to pay for the closing costs and down payment. Lastly, plan to be there over an hour. You are probably thinking this sounds absurd because you are only signing your name, right? Well, you are correct, in a naive way. You will be signing your name 235 times (give or take a few). Then there will be the times you have to print your name, sign your initials, etc. And if you have someone co-signing (spouse, parent, friend, etc.) they get to do it all as well.

After you have signed on the final dotted line you are now a homeowner. Congratulations. You may decide that this was an ordeal you never want to go through again. If not, and if you are an average American, see you again in seven years.


You have heard it talked about in social circles, at work, and on the news. One way or another you are hearing about investing. If so many people are investing, it must be a good idea. So ask yourself, "Why is investing such a good idea, and what should I do about it?"

The simplest answer to why investing is such a good idea is because it is a way for you to create wealth. It is a process that is painless (no physical labor involved other than typing on your keyboard or dialing a phone number). Also, the rewards can be plentiful. By investing your money in the stock market you can end up with a lot more money for retirement. What?! Take money and buy stock and it will turn into more money? Not exactly. There is a lot to know about investing. This article will introduce you to what investing is all about and what you should know as you get into the game.

What Is Investing?

Investing is devoting your time, resources or effort to achieve a desired goal that you have planned for. Investing money is the same process, but with a focus only on growing that money. When you invest money, you are taking that money and putting it into some form of a "security" (a term used to identify anything that is secured by other assets) such as stocks, bonds, mutual funds, certificates of deposit, etc.

Where to Start

Don't jump ahead and think we are ready to start investing just yet. There are a few things that you should know before to actually spend that first dollar. This first bit of information could help you understand how investing works and how it will benefit you.

To start with, you need to know your goals. Remember those goals you have to someday retire, have the house paid for, and be able to travel the world without financial worry? Okay, so maybe your goals are a little bit different, but we all have them, and they are all somehow influenced by our financial situation.

Also, you need to know that time is your ally when you are investing money. This doesn't mean you can take your time to invest. It means that you need to invest as soon as you can and let time go to work for you. With time, stock prices tend to go up (even when there may be a drop in the price, it will generally rebound and go up). Also, with time, you accrue interest which will continue to multiply.

That leads us to a term that you need to become familiar with: compounding. Compounding is what happens when you have a sum of money that sits and earns interest. For example, if you have $100 that earns 5% interest each year, at the end of the year you would have $105. If it continues to earn 5% interest, at the end of the fifth year you would have $128. Continuing on at 5% interest, at the end of 25 years you would have $339. And you aren't adding any money other than the original $100. The additional $239 is money that is earned over time because the interest is compounding. Want to know something really cool? If you can find an investment that give you a 20% return, at the end of the 25 years, your $100 will have grown to $9,540. Imagine if you could invest $10,000 at that rate.

The last thing we will mention here that you need to know and do prior to investing is in regards to your debts. It is okay to invest when you have certain debts but not with others. Why? Well, to answer that just look at two different types of debt. First we will look at a mortgage debt. If you have a mortgage that was secured at the time this article was written you would be paying approximately 6% in interest on that loan. You most likely won't pay off the loan in one payment (if you can, you are welcome to pay mine as well). It will get paid off over time. But the amount you owe won't go up, it will instead go down. What you get in return is a house that will be an asset you own when the mortgage is paid off. And if you are lucky, the value of that house will appreciate (grow) while you are living there and paying off the loan. A mortgage, auto, or student loan is a debt that is okay to have while investing.

Next we will look at a credit card debt. If you have a credit card in this day and age, you may have an interest rate as low as 9.9% but most cards are looking at interest rates around 18.9%. If you have $10,000 debt on that credit card and cannot pay it off, interest will accrue and be added to your balance. This will cause the balance to go up which means you will have more to pay off.

Now looking at these two debts, which would be better to have? Obviously the mortgage is a better debt to have. This is one that you can continue to work on while you are investing. The credit card on the other hand is charging you more interest than you are likely to make on your investments. The interest on the credit card is compounding just like your investment interest earned is compounding. But the interest rate on the credit card compounds at a higher and faster rate than your investment would. This is a debt that you want to get paid off before you invest money. In fact, this is a situation where you could say it is your best interest to invest your money in paying off the debt before you invest it in stocks and bonds. Get yourself free and clear of these kinds of debts before you invest. When you get that done, you are ready to make some money like a savvy investor.

How Do I Invest?

Before you have started physically investing your money in some sort of security, you can begin to be a successful investor just by making investing part of your daily life. Think of it this way, every decision that you make that involves money (or can at least have a monetary value placed on it) is an investment decision. Do you need to eat out every day for lunch or can you save some money by brown-bagging it? Would it be better to carpool or use public transportation rather than commuting 30 miles to work? When you look at your life and every decision you make to be either a help or a deterrent from gaining financial wealth, you will find yourself making different decisions so that you can save money for investing. This is good. Before long you will ask yourself why you didn't change that habit a long time ago.

Does this mean that you should go back to the wishing well and get every penny you tossed in? No, but it does mean that by making good decisions on financial matters you won't have to. Even if you don't have any kind of an investment account started, you can begin your investing by paying yourself. Take the money you want to invest and pay yourself this money by putting it in a savings account. Guess what? If you do this you are already investing. Savings accounts will pay interest earned on the balance. The savings account will recognize profits due to compounding.

When you are ready to invest in other securities, you will basically do the same thing. The difference is that you won't be putting it in your savings account. Instead, you will be purchasing stocks and bonds, or putting it in a different kind of savings account called IRAs and 401Ks. To help you decide what method of investing is best for you let's look at the different types of savings vehicles (we'll use the word "vehicle" because these accounts take you from one financial position to another like a car takes you from one place to another).

What Should I Invest In?

There are several categories of investment vehicles to look at. Within each category are thousands of choices. Since we want time to work for your investments, we won't take all of your time right now going over every choice you have. Instead you will learn some basics and make your move from there.

Short-term Savings

There are basically three types of Short-term Savings investment vehicles: savings accounts, money market funds, and certificates of deposit (CDs). These are great vehicles to use if you need to invest your money for a short time frame, such as three years or less. The returns will not be as good as with other investment vehicles but they are still better than the coffee can under your bed.

Long-term Investing

Long-term investing can actually come in different forms which will be termed in this article as "fun money" and "retirement money". Let's look at options that fall under the classification of "fun money".

There are three basic vehicles you can use for long-term investing of your fun money. They are Bonds, Stocks, and Mutual Funds. Bonds are safer than stocks but also have smaller returns. They are issued by the government rather than banks and operate in much the same way as a CD that you get open at a bank.

Stocks give you ownership in a company which means they are only as good as the company. If the company is losing business or not making enough profit, your return on the stock will go down. If you aren't careful with these, you could actually lose money. However, if you happen to invest in the next Berkshire Hathaway (the company owned by Warren Buffet), you are likely to see a tremendous return on your stocks. (On a side note, one share of stock in Berkshire Hathaway was trading on Oct. 3, 2008, for as high as $140,900. In 1965 that same share of stock would have sold for $19. See what the potentials are for your investments?)

Mutual funds are a way for you to invest in both stocks and bonds. These are controlled by a fund manager instead of you. If there is something that the fund manager wants to invest in beside stocks and bonds, say for instance real estate, he has the power to do that. While this is sometimes thought of as the easier way to invest long term, you are also relying on someone that may not have your best interest in mind. Many kinds of mutual funds exist you need to make sure you analyze your options before you choose so that you are getting what is best for your goals.

"Retirement money" may be invested through stocks and bonds just as you would invest your "fun money", but you may want to look at more traditional ways. It is likely that you have received some information from your employer about something called a 401K. This is just one type of retirement plan that exists. How it works (when you do it through your employer) is that you will contribute a percentage of your salary to the account. Your employer will likely match your donation up to 5% of your salary. That means if you sign up for a 401K through your employer and contribute $100 each month, your employer will also donate $100 each month to your account. Two for the price of one sounds pretty good. You might take a retail shoe salesman up on this offer so why not your employer?

Money contributed to a 401K account is withdrawn from your paycheck before taxes are calculated and withdrawn. There are other retirement plans that you should look at as well to determine what works best for you. Most commonly used along with 401K are Individual Retirement Accounts (IRAs), Roth IRAs, and 403Bs (which you get if you work for a non-profit organization). If you work for the government you get a 457 plan.

You may have also heard of Keogh accounts and Simplified Employee Pension (SEP) plans. These apply to self-employed people and small business companies. They are similar to IRAs in the way they are governed for contributing and withdrawing.

Retirement plans are governed differently from stocks and bond. With stocks you can sell shares and get a paycheck without any problems. With IRAs and 401Ks you have rules that limit when and for what reasons you can withdraw money. You may even have to pay back what you withdraw (with interest). The reason for the rules is to help keep plan management costs down. They also help deter you from withdrawing money for frivolous reasons.

As you can see, it is well worth your time and effort to research all of your options. If you get into the investment game with some of these plans without knowing just what you are doing, you could get yourself into a world of problems that won't help you achieve your financial goals. There are many websites that offer information to help educate you on what your options are. A great place to start is on the Motley Fool website (

When Is The Best Time To Invest?

Since time is an ally when it comes to investing your money, the sooner you can do it the better. The longer you debate what to invest in, when to invest, and how much to invest, the longer it will take you to amass the fortunes that await you. This doesn't mean that you don't just jump in to the deep end and get in over your head. You should start out with what feels comfortable to you, unless you are a risk-taker. If you like the risk, good luck and make sure to wear a life jacket.

Educating yourself on investment opportunities will be one of the best time investments that you can make. Working with a broker or account manager will be valuable as well. You will be able to learn the ins and outs of trading in the stock market, moving mutual funds, redistributing retirement money, and other ways that you can be successful with investing. When you encounter a time of economic downturn, they can advise you on what you should do. But you shouldn't rely on them alone.

When you hear rumblings happening with Wall Street, it may be tempting to get out of your stock investments. However, be careful to fall into the flow of gloom and doom that the media portrays. Monitor the market on your own and with the account manager you work with. Also, review your investments. If you invest in stocks you need to review them regularly to see if they are beating the market. If you have invested in bonds you don't have to worry because those have a guaranteed rate of return. Set aside time to review your portfolio. If you can do it weekly, that is great. At minimum you should do it every three months.

Following the advice and using the information given in the article is just the beginning. Look at what you want to accomplish, research what will get you there, and get working on it. Now is the time, and time is on your side.