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Finance for the uninitiated

I’ve always wondered why schools don’t have a course on the basics of real-life finance. It doesn’t even have to be too detailed, just the essentials, like basics of investment, saving, retirement, loans, equity etc. Anytime during the 12 long years of schooling, anytime, or at least sometime. There is so much that people can do right, from the beginning, that would essentially help them better budget their assets. It’s the lack of this information to the masses that needs to be addressed. And this post is just another attempt at highlighting some of that information out there. So here goes.

Three rules to live by:

  1. Spend less than you earn (Don’t we all know that.). The problem is we keep forgetting this or we just overlook which causes problems. This brings us to budgeting. More on that later.
  2. Always plan for the future. Not just retirement, all along the way. Plan for tomorrow, and the next week, and the next month. If you are to buy something that let’s you pay off in installments, you should know that you’ll be able off those installments.
  3. Make your money make more money. Save for emergencies. But let the rest of the money work while you sleep. Invest it.

Three tools to help you on the way

  1. Bank Accounts: If you don’t have one, get one right now. What’s stopping you? You can keep track of your money. You have some level of satisfaction of not having to worry about a basement full of dollar bills. Banking is a highly regulated industry and working with banks insured by the regulatory body insures your holdings for loss. Providers are required to maintain security standards to be insured. They are audited on a regular basis for inconsistencies. So working with insured banks is as safe as it gets. You can find the insured banks in your area using the search here.
  2. Budgeting: A simple way to describe budgeting, it is a logging and evaluation system for your finances. In that, you compare your spending and earning. Based on the outcomes from the comparison you plan how the money needs to be adjusted, whether the earning needs to be increased or the spending needs to be reduced. Ever so often, you have the opportunity to spend more. This is when you plan to categorize and allocate your earning to a set of buckets for spending. A simple categorization could be recurring costs (in-house, insurance, etc.), savings (retirement, emergency, etc.), investments (stocks, mutual funds, etc.) and fun (guilt-free spending). There are a number of budgeting tools out there. Mint is a good one. Work through tutorials that can help you get started. You do not have to be a finance expert to maintain your own budget. In it’s simplest form, all you need is a piece of paper, a pen and a calculator, if need be. From there on, all you have to do is keep track of your earning and spending and evaluate every now and then.
  3. Credit cards: You might be wondering, “Debt? Really?”. Debt is a good thing if managed well. If you are on top of it, managing it all along the way, you can make it work for you. A lot of businesses evaluate you on your ability to manage debt. And credit cards are a wonderful resource to do just that. The important part here is to have complete control over your credit cards. They basically lend you money which you have to then pay off. Most credit cards won’t charge you any interest as long as you pay off what you spend during the statement period within the specified time period. And paying a “little interest” also helps your credit. Your paying a little interest shows that the lenders can earn off of you. Now you don’t need to pay a lot of interest to fall in that bracket and all of this falls under you being on top of managing it. As a bonus, there’s always the opportunity to earn cashback or travel miles. It’s like money for spending money. (Use wisely though.)

Which brings us to the last topic Credit Reports. Credit reports are the tool used by lenders to verify your credibility for managing your finances. They are centrally managed by three independent entitites viz. Equifax, TransUnion and Experian. They monitor your financial activities and provide a score that determines your ability to handle your finances. There can be another blog post entirely about this. But not today :).

There is a lot more information on these issues over at Lifehacker. I strongly suggest you check that out if you were interested in this post. This is only the tip of the iceberg. They have done a far detailed job of explaining Personal Finance 101.

-Akshar Rawal

Employer stock plans: The Blueprint

Every company offers it’s stock as a bonus in lieu of cash benefits. While some offer it at employee level, others limit it to higher positions within the organization hierarchy. So even if you are not being offered anything at the moment, it does;t hurt to know a little bit about how they work.

There’s two types of plans ESPP (Employee stock purchase plan) and ESOP (Employee stock ownership plan). ESPP allows employees to purchase company stocks in a tax efficient manner, often at a discounted rate. ESOP, on the other hand, provides employees an ownership in the company’s stock, often at no cost. Both plans are a way for the company to foster employee loyalty by offering them a share in the company’s success. One of the major differences in the two types of plans is their funding. While with an ESOP, the company buys the stocks for the employee, the stocks cannot usually be cashed until the employee retires or leaves the company. There is also a period before the benefits kick in, before which, the stocks are as good as useless to the employee. ESPP on the other hand, is funded by the employees themselves, usually through payroll deduction. But, the stocks are available to cash as soon as the benefits kick in, rather than waiting to retire or changing employers.

While both plans have their pros and cons, companies offer at least one as you move higher up the ladder, in lieu of monetary compensation. But if you had the option to choose what kind of benefits you receive, it helps to know when choosing stock plans would pay off over choosing other kinds of benefits. Listed below are some of the things to consider when crossing stock based plans.

PROS

1. Depending on the plan, you could save about 15% on your stock which translates big when the stock grows.

2. Some plans have the “lookback” option, which is essentially you buying the stock when it was the lowest in a given period.

3. ESOP are just FREE stocks.

4. Some ESPP plans have a employer match. The employer adds to a part of your stock. Again, more FREE stock.

5. Even the most basic of plans offer around 10% discount, which can account to more as the stock grows.

Things to think about before buying

1. High potential = high risk. So you don’t want to be over-invested.

2. A diversified stock is a safe stock. ESPP or ESOP contributions should be limited to about 10% of your entire portfolio.

3. If you’re investing 10% of your diversified portfolio in one company, you will need to monitor that company. This applies to any stock that you own.

4. Know when to sell. Keep on top of news items that could be red lights to stock prices. And not just that. You might also benefit from selling your ESPP stocks as soon as your benefits start. So, whether or not the stock prices rise, you’ll have cashed in on the free stocks that you received with the discounted prices.

These are only a few of the points that you should consider and keep in mind when working with ESOP and ESPP. And as always, it never hurts to research a bit more. For starters, you can head on over to Two cents @ Lifehacker. They have a number of embedded links to further information.

-Akshar Rawal

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