Beating Broke

Personal Finance from the Broke Perspective

Personal Finance is a Life Skill

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ChristianPF posted a very thought provoking article a while back.  In it, he talks about how spending money wisely is a life skill.  The choices that we make in spending our money are the root of how we live our lives and can bleed through into the businesses that we run or work for.  Basically, the way that you spend money is a very important.

I think I would take it one further.  Not only is the way that you spend your money a very important skill, but, as the title of this article states, the entirety of your personal finance management is a life skill.

Schools all around the world concern themselves with teaching children life skills.  Skills like writing.  Reading.  Wood Working.  Mathematics.  Science.  And even Cooking (0ne of my favorites).  Perhaps personal finance isn’t as important as things like mathematics, writing and reading (the three Rs), but I would argue that it’s just as important (or more so) than the rest. I would argue that personal finance is a life skill.

Improper management of your personal finances can lead to some pretty dire circumstances in your life.  You can find yourself falling into a trap of revolving debt and upside-down mortgages.  Too easily, you can find yourself making the choice between ramen and gas to go to work.  And yet, people continue to put personal finances aside as something that isn’t all that important.

Over the last decade, I’ve spent my time learning many of the tenets of personal finance management.  Even with the knowledge I had gained, it was a very difficult trip to take.  I started as close to the bottom as I cared to get.  I’m still a long ways from the top, but I’m getting there.  And most of that is owed to learning to manage personal finances properly.

Take the time today to learn something about taking care of your finances.  Teach it to your children.  Teach it to your friends.  If we all learn a little bit more each day, week, and month, we can turn our situations around and help more people.  The more people we help with this, the less likely that our economy will ever find itself in this situation again.

The Case for Buy and Hold Investing (#AAPL)

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I’ve always been a proponent of the buy and hold method of investing.  If you’re unfamiliar with the concept, it’s basically the method of buying a stock (or bond, mutual fund, etc) and holding it forever.  Well, maybe not quite forever, but certainly for as long as you don’t need any liquidity.  For most, that’s pretty much right up until retirement.

I’ve been playing at investing for many years.  Over a decade.  To say that I’m successful would be stretching the truth just a bit.  I remain a buy and hold method advocate however.  Let me give you a couple of examples.

My investing history goes a bit further back than this example, but these are both examples from when I got a bit more serious about investing.  But, also a time when I was still very new to real investing and learning the world of investing the hard way; by trial and error.

Let’s start with what could be one of the strongest reasons why you should do your research, pick a stock, buy it, then hold on to it.

Buy and Hold AAPL

In October of  2000, I bought 3.95 shares of stock in a company you might be familiar with.  Apple Computers.  (AAPL)  For those 3.95 shares, I paid a grand total of $47.25 (including $5.98 in trading fees).  The stock had recently split, so the price was down.  As an IT professional (or at least a future one at the time), I was pretty familiar with Apple and thought well of the company.  I bought the stock with the idea that it was a company that I liked, and wasn’t likely to disappear.  That’s about the extent of the research I had done.  Back then, I invested with a company called BuyandHold (define irony, eh?)  but I mostly invest in stocks through Sharebuilder and Kapitall today.

Somewhere around April of 2001, I began thinking that I really should be buying stocks that paid a dividend if I wanted my portfolio to grow.  Note: I still believe that the majority of your portfolio should be giving you income in the form of passive income (e.g. dividends).  At the same time, the Apple stock that I had purchased not only didn’t pay any dividends, but it’s price per share really wasn’t going anywhere at all.

Of course, all of this was before the coming of the iPod, iPhone, and iPad.  Those didn’t come around until a few years later.  At the time, Apple was just a computer company that made some pretty cool machines, but not much else to speak of.  On May 1st, 2001, I sold my entire position in Apple for a grand total of $47.25 (after $2.99 in trading fees).  If you do the math (I have), I sold it for a profit… of $0.29.  Yep.  Not even thirty cents.

But, that’s not the lesson.  Here’s the real lesson.

In 2005, riding the success of the iPod, iPod Shuffle, and iPod Mini, and the iPod Nano, the stock of Apple began to rise. And then they released the iPhone in 2008.  And the iPad in 2010.  And their stock has never looked back.

The Buy and Hold Lesson:

If I had held on to those 3.95 shares of AAPL, and reinvested the dividends that Apple began paying in 2012 (bringing the total to 3.978 shares), they would be worth $2227.83.  The difference?  $2180.58.

It’s no small amount.  And a painful (to the wallet and ego) lesson.

Of course, hindsight is 20/20.  There was no way, back in 2001, that I could have possibly foreseen the successes that Apple would have nearly 5 years later.  But, if I had stuck to my buy and hold policy, and not worried about the details, I’d have a better looking portfolio now.

What about you?  What stock did you sell that you shouldn’t have?

Separate Your Business Accounts

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I don’t think it’s any secret, in this online world, that just about everyone is trying to make a little bit of money with a website.  After all, it’s not terribly difficult.  It’s not necessarily easy, but it is far from hard.  Throw up a website, put some work into it, and start bringing in money.  I do it with this site and others.  There’s work involved, but you can make money.

If you’re going to do it, you’ve got to treat it like a business from the start.  I don’t mean that you have to create a company, license it with your state and the IRS, and create a board of directors.  What I do mean, is that you need to have the business assets and accounting separate from your personal assets and accounting.  Using your own personal checking account, savings account, and trying to keep them separate come tax time (and you’ll want to) can be very difficult.  So difficult that you almost have to be a CPA in order to keep it all straight.

Keep your business accounts separateWhen I first began making money with blogs and websites, I didn’t separate anything.  The money to buy the domains came directly from my personal checking account.  The money to pay for the hosting of the websites came directly from my personal checking account.  And then tax season came around.  While I hadn’t made much money from the sites, I did make some.  I wanted to be able to use the expenses of the sites to reduce the income from the sites, so I needed to figure all of that out and get totals for my taxes.  Instead of just going into my accounting software, pulling up the business accounts, and running a profit loss statement, I had to go through each months’ statement of my checking account, and single out the transactions that were related to the sites.  After I’d pulled them all out, I had to compile them into a spreadsheet and create a profit loss statement from them.  It easily took twice as long as it should have.  And that was when things were simple and I only had a couple of sites with a couple of transactions every other month or so.  It would be much more difficult now.

How should you separate your business accounts?

I’m still a fan of keeping things as simple as you can.  I don’t think you need to go through the whole filing process to create a company.   That’s something that can wait until you’re making a decent amount of money.  Ask your CPA if you want a more accurate number.  You can keep it simple.  What you really need is separate accounts and separate bookkeeping.

Start with setting up separate accounts for the business funds to flow into.  You’ll need your own business savings account. Add a checking too if you think you’ll have need of a debit card or actual checks to write out.  I’ve got a checking account and several savings accounts set up that are used solely for the business funds.  If you’re not going to use the business account debit card for online purchases (it’s probably safer not to), you’ll also want a credit card that is used only for business transactions.  Again, it doesn’t have to be in the business’ name, it just has to only be used for business use.  I use one that has a 1-5% cash back feature to save a little extra on expenses.

When it comes to keeping your books, you probably don’t need anything too fancy for your personal accounts.  Just enough to create your budget, and keep track of accounts.  For business, you really need something a little bit more.  I prefer a full on business accounting software.  There’s a couple out there, and you can probably pick one up cheap off of eBay.  They’re a little more complex than the software created for personal accounts, but I like the detail the complexity gives me.  Maybe you can get by with a robust spreadsheet.  But, something that you can use to give your CPA (even if that’s you) a full detail of the profit/loss of the company including all sources of income and expenses.

It may sound a little difficult, but it’s not any more difficult that it would be if you didn’t separate them first and then tried to separate them after you need to.  You’ll thank yourself later.