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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

APR vs APY…The lending brothers

We all know the dreaded APR. But how about the lesser known APY? When borrowing money, you should consider both.

APR – Annual Percentage Rate

The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (or EAPR), describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, but in general:

  • The nominal APR is the simple-interest rate (for a year).
  • The effective APR is the fee+compound interest rate (calculated across a year).

APY – Annual Percentage Yield

Annual percentage yield (APY) is a normalized representation of an interest rate, based on a compounding period of one year. APY figures allow for a reasonable, single-point comparison of different offerings with varying compounding schedules. However, it does not account for the possibility of account fees affecting the net gain. APY generally refers to the rate paid to a depositor by a financial institution, while the analogous annual percentage rate (APR) refers to the rate paid to a financial institution by a borrower.

To promote financial products that do not involve debt, banks and other firms will often quote the APY (as opposed to the APR because the APY represents the customer receiving a higher return at the end of the term). For example, a CD that has a 4.65 percent APR, compounded monthly, for 8-months would instead be quoted as a 4.75 percent APY.

Well, these are the definitions from wikipedia. For a more detailed write-up on the differences between APR and APY and how to consider them when borrowing money, check out this link over at lifehacker.

-Akshar Rawal

Retirement savings…OR….debt

Almost all of us have a period of our lives that we are in debt (If you think you don’t you’re probably wrong). Especially in the early stages of our careers, right out of school, we have a loan debt to pay off. But we also get all this advice about saving up for retirement from the very beginning. So where do we draw the line in deciding what to prioritize and how to do it?

There’s pros to both saving and paying off debt. While paying off debt can reduce the amount of interest you pay on the amount you originally owed, thus increasing the amount you have for yourself to leverage, saving from early on can lead up to a sound retirement. Paying off debt has short term benefits whereas, savings have long term and often require patience. So the question still stands as to how we strike the right balance.

Well there are a number of factors to consider. For instance, the interest rate on your loan as compared to the returns on your savings. Employer matching is another thing to consider. Refinancing your loans, also a valid option, if available at a lower rate. There is a lot more to consider. Lifehacker has compiled a list of items that you should consider when making this decision. You can read all about it here.

You can also check out some other tricks to savings, investments and handling your finances @

-Akshar Rawal

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