When are loans the right option?

In a world dominated by headlines about economic difficulties and large debts, it is hardly surprising that the average consumer is more than a little concerned about their personal finances. Surveys conducted over the past couple of years have routinely shown money matters as a major area of worry for Brits, with individuals doing everything in their power to manage their financial commitments efficiently.

Perhaps the most common trend embraced by the public is an attempt to reduce reliance on loans and other forms of credit ' but is this always the best course of action? Whilst taking loans unnecessarily is never recommended, for those in need of credit these products can offer a vital life line and help consumers reach a position of financial security. The trick is knowing when they are the right option.

Responsible borrowing

Ultimately, loans are designed to help you cover costs when your own financial provisions prove insufficient. The amount you borrow will vary depending on your personal situation and the type of loan which you apply for. These can range from short term instant cash loans through to 12 month loans for people with bad credit.

Accepting a loan for a higher value than you initially requested may seem like a good idea at the time but will only result in you being asked to repay more money in the long run. Taking a higher value loan can also increase the likelihood that you are unable to repay it at the end of the loan period, thus increasing your chance of falling into further debt.

The interest rate is naturally something you will want to compare when receiving offers from different creditors but it should be remembered that this rate may vary depending on your situation. Those with bad credit are often penalised with higher interest rates but this doesn't mean that loans are not a viable option for these individuals.

Instead, products which are tailored to your specific situation, such as loans for people with bad credit, should be sought. Make sure you only accept these loans if you are confident of your ability to meet the required repayment schedule, however, as failure to do so will result in your credit rating being lowered even further ' making it increasingly difficult for you to obtain credit in the future.

When not to use loans

Whilst knowing the rules around responsible borrowing is one thing, it is also important that you are aware of when borrowing money is not the right decision. If you are already struggling with debts and repayment plans, then taking another loan is only likely to add to these worries.

Instead, take independent financial advice and consider consolidating your debts. This is designed to make repayments easier to manage and makes it far easier for you to track exactly what money it is you need to pay.

Loans should also not be taken to cover trivial purchases as relying on credit in this way puts you at greater risk of entering debt. No matter what you need a loan for, always evaluate your financial situation prior to submitting an application and check that you are in a suitable position to borrow money.

Being Safe When Making Charitable Donations

As we head towards another year end, you will begin seeing more attention being given to those in need. Just look at the recent news story of the New York City Police Officer buying boots and giving them to a homeless man as proof. My blog has its own Salvation Army Red Kettle to get others in the giving spirit to make donations as well.

My guess is that there are a handful of 'events' that lead to charities getting more attention during this time of year. First off, it is getting cold outside. Most don't worry about others having warm shelter when its 70 degrees at night and you are relaxing at the beach. Secondly, people are getting their taxes in order and charitable deductions are a big write off for many. And third, it's the holidays so we focus on giving and this includes giving to those who are in need the most. As a result of all of this, December tends to be the most generous month for donations.

Americans as a whole are generous people. In 2011, we gave more than $298 billion to charities. Of this amount, $211 billion was given by individuals or household donors. The rest was made by corporations and other entities.

If you are looking to donate this year, there are some precautions you should take. After all, with so many people making donations, scammers are prevalent.

Steps to Protect Yourself

Your first step should be is to go to the IRS website and search for the charity you are looking to donate to. Note that not all charities are listed here. If a certain charity it not, it does not necessarily mean it is not legitimate. You can ask the charity for its IRS tax-exempt letter.

You can also visit the website, GuideStar, which lists close to 2 million nonprofits, all having met IRS guidelines.

If your nonprofit is not listed on any of the options above, again it does not mean they are fraudulent. In fact, many small local nonprofits don't meet the IRS tax-exempt guidelines. So the high school kids promoting a car wash for their band trip or the beef n' beer event for a fallen police officer is not a scam. Just make sure you investigate the charity before donating. For the school car wash, you can check with the school to see that it is backing the students. For the event for a police officer or firefighter, it is best to call the department and verify the event is legitimate.

If you feel as though you were targeted in a charitable scam or you made a donation to a charity that you think is a scam, you need to contact your State Attorney General. They are the ones that oversee charities in your state.

Final Thoughts

There are many great charities out there and all rely on your generosity to continue running. This post was not intended to scare anyone away from making donations, but rather to educate you so that you know your donations are going to the good of others and not into some scammer's pockets. While it is great to donate to large, well-known charities (most of which can be found on the IRS website above), most prefer to donate to local causes. Just be prepared to do your homework before making the donation.

Investing in Real Estate vs. Stock Market

Retail investors often flock to two very different asset classes to reach their retirement goals. Two common investments seem to be real estate and publicly-traded stocks. Let's look at these two different asset classes to compare their pros and cons.

Investing in Real Estate

Real estate has a few advantages that makes it attractive for individual investors:

1. Leverage ' Real estate is an investment that performs best when leveraged. As an individual investor, real estate can be levered 5:1 with a traditional loan with 20% down. Enterprising investors who can make use of FHA lending programs can borrow with only 3.5% down to purchase a live-in four-plex, offering far more leverage to the investor.
2. Cash flow ' Real estate is all about cash flow. Unlike dividend stocks, which might yield 3-4% at the most, real estate brings impressive cash-on-cash returns to the investor. Depreciation tax benefits are most beneficial to investors in a high tax bracket, seeing as property is depreciated over 27.5 years, which creates a tax shield for high-income individuals.
3. Control ' Real estate investors have much more control over their investment than an investor in a public company. Whereas you have full control to set rental prices, make new investments, and select tenants, minority owners of public companies have very little control over the day to day decisions to be made in publicly-traded companies.

Real estate also has disadvantages:

1. Time ' You can't passively invest in real estate like you might stocks. Real estate investing requires time and energy to find good properties and tenants. Investing in real estate is much more like running a business than investing in stocks.
2. Operating leverage ' The effects of real estate spill directly into your personal finances. Each dollar you borrow to buy real estate is a dollar of debt for which you, as an individual, are 100% responsible to repay. Furthermore, if rental units go without tenants, you have to cover the cost of debt service and maintenance out of your own pocket.

Investing in the Stock Market

The stock market has its own upsides, as well:

1. Less active ' It is significantly easier to be a passive stock investor as the day to day operations of the businesses you invest in are handled by someone else.
2. More liquid ' It's much easier to sell $100,000 in stock than it is to sell a $100,000 home. The stock market is far more liquid of a market, making it a better investment for people who will need to make principle withdrawals in the future to cover living costs or immediate cash needs.
3. No credit needed ' There are plenty of companies on the stock market that are just as leveraged as your average real estate investor. However, these companies borrow on their own balance sheets, meaning that the investor isn't required to carry debt themselves. When you buy into a public company you are not liable for losses should it go bankrupt. The same can't be said of an individual investment in real estate.

Of course, the stock market isn't perfect, either:

1. It's all correlated ' In the short-term, stocks move up and down with each other. The real estate market moves very differently, and home prices do not follow the ups and downs of the stock market on a day-to-day basis.
2. You have no control ' Unless you own 51% of a public company, or can persuade 51% of stockholders to agree with you, you have little to no impact on how a company performs or what it does going forward. This is very different from real estate, where the cash goes directly to the individual for reinvestment or deployment elsewhere. Shareholders are at the mercy of executives to make decisions that favor shareholder interests. No one stands in the way of a real estate investor who owns his or her own properties.

Real Estate vs. Stocks: The Biggest Factor

All in all, the biggest difference between real estate and stocks isn't in the returns, the leverage, or even the correlation. I think the biggest difference is the amount of time you'll need to invest in either one.

As a real estate investor, you are a business owner who has to set prices, deal with customers, and hire employees (contractors when necessary) to take care of your inventory (homes.) As an investor in the public stock markets, your only requirement is capital ' you won't have to listen to customers, hire workers, or manage your own business. You're just a partner in a much bigger entity when you own stock in a company.

Are there any investors out there who invest in stocks and real estate? What's the biggest difference between the two that you see?

Financial Carnival for Young Adults ' 40th Edition

Welcome to the fortieth edition of the Financial Carnival for Young Adults. My purpose with this carnival is to create an easy-to-find place for information about finances for young adults. The carnival is hosted here at 20's Finances almost every week and features the most recent articles from around the web. I hope you enjoy this edition of the carnival. I made sure to add in my own commentary to make it a little more interesting. I can't believe I've been doing this carnival for almost an entire year.

This first article is one that I can relate to. We still have most of our emergency fund and it's nice to have one, but it's always painful when you have to tap into it. Jennifer Lynn @ Broke-Ass Mommy writes Cripes. Nearly Our Entire Family Emergency Savings Got Gobbled Up - We just depleted our emergency fund, and thank goodness. If we didn't have one we'd be hurting. Read more on how my Emergency fund got gobbled up!

Maybe this is the time for tapping into emergency funds, because Little House @ Little House in the Valley writes Squeaking By Without an Emergency Fund - Good financial, common sense tells us that we should be saving 5 ' 10% of our income for emergencies, let alone another 10 ' 15% for retirement or large purchases, like a house. But when you compare everyday expenses to modest incomes, sometimes it's hard to find that extra cash to stash away.

Lance @ Money Life and More writes using the pros and cons of the American Express credit card. It's been a while since I've seen such an elaborate review. Be sure to check it out.

Tushar @ Start Investing Money writes Get the Most Back ' Benjamin Franklin once said that there are only two things in life that are certain- death and taxes. To many people, the thought of paying their taxes at the end of the year is a mind-numbing, heartbreaking prospect.

Daniel @ Sweating the Big Stuff writes How an Internship Abroad Helped Shape My Career Path ' Most internships don't have a profound effect on the future, but mine helped propel me to choose my future career and the way I think.

Jester @ The Ultimate Juggle writes Frugal Family Christmas Activities ' Enjoy a glimpse into our frugal family Christmas activities. These activities is why Christmas is my favorite time of the year.

The following submission was just too good to ignore: Ashley @ Money Talks Coaching writes I Don't Just Want a Nest Egg' I Want Nest Chickens ' My husband grew up on his grandpa's farm. From this experience we have several grandpa-isms in our house. One of them is I don't count my eggs'

After spending a lot of money this month, I also started asking myself how much I need and whether buying stuff makes me happy. Of course it doesn't, but sometimes I think I am tricked into believing it. Similarly, Young @ Young And Thrifty writes How Much House Do You Really Need? ' As a fairly lazy dude who isn't a big fun of seeing his Saturdays spent doing housecleaning (and yes ladies, I am a modern man and do my fair share), all I could see in a large house was endless dusting and vacuuming.

 

Buying a Used Car: Why Older is Better

This past week, I announced that I got a new job. The job comes with a lot of potential advancement in addition to it being a direct application of my unique skill set. This is not to mention the slight pay increase as well. In many ways, it was a 'no-brainer' for me to accept the new job. One of the few downsides to accepting this position is that it meant that I could no longer take the train to work. Taking the train to my old job was in no way enjoyable. The walk through the snow, rain, and cold during the winters challenged my resolve to be a one-car-family almost every day. But, as I have come to find out, it was much more affordable to take the train than to own a second car.

I definitely didn't want a car THIS old'

Cars are expensive. New cars and old cars alike. While many people will argue that you should buy a certain car over others (as I will do later in this post), the important thing to first realize when looking to buy a new car (whether it's used or new) is that it is EXPENSIVE! Since I am unable to take the train to my new office, the search began. I knew of this likely expense ahead of time, but I had to wait until I was offered that job before I purchased a car. This mean that I missed a couple great deals. But, the important thing to remember is that there are always more deals to be found. You just have to wait for them.

New vs. Used ' Which is Better?

When I was starting to narrow my search, I came to learn that there were very few cars that are being sold in the in-between stage. There are a few that are 4-5 years old, but most of the cars being sold are either almost-new (1-2 years old) or well used (8-15 years old). I had a choice to make: should I buy a car that is practically new OR should I buy a car that is old (approx. 10 years old)? Despite what people may tell you, this isn't an easy choice. Yet, there are distinct advantages to each one.

Pros of Buying Almost New Car

• New Car Feel - That means no mystery smells or excessive dirt anywhere.
• Significantly Lower Chances of Necessary Repairs - Newer cars are unlikely to need large repairs. This also means a higher sense of trust that you wont break down on the side of the road.

Pros of Buying a Well-Used Car

• Less Expensive - One of the huge perks with buying a well used car is that it isn't as expensive. This is true not only for the sticker price (or how much you pay for it), but also the depreciation value. Older cars decrease in value significantly less than newer cars as long as they continue to run.
• Track Record - While it's highly unlikely that you will buy a lemon, with an older car, there is an even lower chance of this happening. The older the car is, the larger track record you have and a better understanding of what type of repairs to expect.

In addition to the obvious perks to each option, I wanted to make sure that I was buying the best option. One of the deciding factors for my decision was the fact that I only need the car for a little over a year. In a year's time, my wife and I are planning to move to the new location and return to being a 1 car family. This made the choice even more distinct. Either buy a cheap car now and sell it in a year, OR buy a pretty nice car that will be the family car that we keep even when we move (and sell our other car).

Why I Chose to Buy an Older Car

While I don't have a lot of money sitting around, I did have a large enough emergency fund to buy either option. There was a huge part of me that wanted to splurge for the comfort of having a reliable, new car. I hated the idea of playing the odds, crossing my fingers, and hoping that the well-used car that I would purchase would not break down on me. But, that is what I ended up doing. I ended up buying a 10 year old Jetta with just under 100,000 miles on it because I was able to get it for cheap. When I say cheap, I mean $1,000 under blue book value on it. Part of that is because there is some pretty large preventative maintenance that I will have to do on it in the next 6 months (i.e. timing belt, water pump, etc.) This won't be cheap, so I was able to negotiate down for those two expenses.

While I desperately wanted the security of a newer car, I knew that buying an older car was a better decision because of one reason. Opportunity Cost. In other words, the money that I could save by buying an older car could be invested and earn more money. So, not only would I have less money invested in an asset that appreciates, but I would also have more money invested, earning a positive return. Let me show you how this works. Assuming a standard 15% depreciation, here is how much money I can save by buying an older car.

Newer Car:

Purchase Price: $12,000

Depreciation: $1800 (12,000 x 0.15)

Older Car:

Purchase Price: $4500 (including expected maintenance)

Depreciation: $675 (4,500 x 0.15)

Return on Savings: $750 (12,000-4,500 = 7,500 x .10)

As you can tell, not only am I paying less money upfront even with the expected/necessary maintenance, but I am also earning money (in addition to losing less money in depreciation). In this example I am estimating a 10% return on my investment because I have several investments that are earning a larger return than 10%. In fact, the money earned is larger than the estimated loss from depreciation. Again, this is just an estimation, but regardless of the fact of whether my estimates are inflated, it still highlights how buying a used car (within reason of course) is the better decision for me since I only need the car for 1 year. Again, while my comparison between the two cars is limited and this general rule of thumb that older cars are the better decision, there is always an exception to this rule. It should also not be confused to say that older is always better. I think a car that is 15-20 years old is not the best investment unless it is in immaculate condition. But, this shouldn't take away from the value in the generalization that older is better.

Best Jobs 2012

According to US News and World Report, the best jobs for 2012 are listed as follows with their salary range in parenthesis:

Occupational Therapist ($49,000 ' $103,000)
Computer Programmer ($41,000 ' $118,000)
Physical Therapist ($53,000 ' $108,000)
Computer Systems Analyst ($48,000 ' $119,000)
Web Developer ($43,000 ' $120,000)
Database Administrator (41,000 ' $116,000)
Medical Assistant ($21,000 ' $40,000)
Pharmacist ($82,000 ' $138,000)
Software Developer ($54,000 ' $88,000)
Registered Nurse ($44,000 ' $95,000)

US News came up with the list based on the Labor Department's employment projections and then applied their own formula that weighted this along with their analysis for projected growth of future employment in the industry, salary growth and job satisfaction.

I think that anyone looking to go to college or even back to college should give this list some attention, but do not rely on it solely. The reason for utilizing the list is to understand where jobs are most likely going to be in the future. As you can see, a good number of the jobs are related to the medical profession. This should not come as a surprise since the Baby Boomers are nearing retirement and this is a large segment of out population.

You will also see on this list a handful of jobs related to computers. Again, as we move more towards tablets and smartphones, websites and technology will be changing. With all of this change comes the need for jobs.

The reason why I suggest to not rely solely on this list is because in my eyes, it is incomplete. Not because US News did anything malicious with the findings, but because it only lists the top 10. I would guess that financial planners would rank relatively high on the list, again given the fact that the Baby Boomers are nearing retirement and will need help living through their golden years on the nest egg that they have accumulated.

It does not surprise me that teachers do not show up on this list. My guess they do not is because of a lower salary than the other professions listed. While I think that teaching is a solid career choice, I think we are on the edge of changing our school systems. I think that teachers in private and charter schools will be more in demand in the years to come.

I think that researching possible careers before you decide on your major is a great first step for college students. While I think everyone has the right to do whatever you want to in life, you have to be realistic about your chosen professions job prospects and salary. There is no point in going to a great private college where you rack up $80,000 in student debt to pursue a career in a field that has limited job opportunities and a small salary. That doesn't mean you cannot pursue it, but maybe it can be a hobby as opposed to a full time job.

One last point about the list above, don't pick a career based on the salary alone or think that you will be making close to six figures the day after you graduate. Earning a high salary is going to take time and picking a career based only on salary will most likely leave you miserable. Find a happy medium between a career you will enjoy and that has good future prospects. That is the win-win situation you are looking for.

Different Types of Stocks

It's easy to think of the stock market as a place to buy and sell a single type of stock, but there are many different types of stocks to buy, sell, and invest in. Let's look at a few of the kinds of stock on the stock market as well as their unique advantages or disadvantages.

The 3 Major Types of Stocks

Three major divisions divvy up the stock market into smaller pieces. Here are the three main types of stocks:

1. Common stock ' Common stocks make up the majority of the buzz on Wall Street. A common stock is a simple piece of ownership in a company. Common stock holders have a right to a company's profits and value, as well as a vote in major decisions and board elections. These are the shares that you see quoted prices for online, in newspapers, or financial publications. Common stocks may or may not pay a dividend, and are considered riskier than preferred stock.
2. Preferred stock ' Preferred stock is more like a bond than common stock. Preferred shares give investors some level of ownership in a company, but preferred shareholders do not have voting rights. Preferred stocks are issued with known dividends much higher than the common stock. Preferred shareholders are subordinate to debt investors and senior to common stockholders in the event of a liquidation or bankruptcy, making them generally safer than common stocks. Preferred stocks can be callable, meaning that the issuing company can buy back issued preferred stocks at a premium on its own accord. Shares can also be convertible, allowing a preferred stockholder to convert their preferred shares into common stock at some point in the future.
3. Share classes ' Within the boundaries of common or preferred shares there are different share classes. For example, Facebook has a dual-class system that allows Mark Zuckerburg to own 28% of Facebook's stock but control more than 50% of all voting power. A dual-class structure is nothing new; Ford Motors has two classes that allow the Ford family to elect 40% of the board of directors, while Berkshire Hathaway has two share classes that give class A shareholders more than six times more voting power than class B shareholders.

New Ways to Divide the Market

You really can slice and dice the market as much as you want. Some would say there are other ways to divide the market by looking at a stock's style:

1. Value stocks ' Value stocks tend to be companies in slow-growing industries that trade for lower multiples of their earnings power. Examples of value stocks might include railroads, utilities, consumer staple producers (Coke or Clorox), and other industries that are simply'well, boring and unexciting.
2. Growth stocks ' Growth stocks are companies that are expected to grow significantly in the future and therefore trade for higher earnings multiples. Growth companies can be found in any industry, but they are most synonymous with the ecommerce, consumer technology, services, as well as restaurant brands and franchises.

Divisions by style are much more subjective than divisions by legal type of stock. Common stocks are obviously different than preferred stock. The lines between growth and value stocks, for instance, aren't always so clear.

Having some kind of knowledge about the different types of stocks should lead to deeper thinking about diversification. A really truly 100% diversified portfolio would include all different kinds of stocks ' class A or class B common stocks, preferred stocks, or convertible preferred stocks.