Personal Profitability

Personal finance for hustlers and entrepreneurs

Education

A Financial Do Over

by

This is a special post from Penny at The Saved Quarter as part of the Yakezie blog swap. This week, we were asked, “If you had one financial do-over, what would it be and why?” You can read my post on the same topic at her site.

Remembering games in elementary school, when the ball went out of bounds, my friends and I would yell, “Do over!” and get another shot.  That is fine for the playground but obviously doesn't cross over into  financial choices. Thinking back over my financial life, there are a number of instances where I wish I could call for a “do over!”

If I had my life to do over, I would have finished college before having kids. I would have started saving and investing earlier, taking advantage of the awesomeness that is compounding interest. I would have bought a house before the bubble. But the number one financial choice I wish I could do over:  I would have started budgeting sooner!

For too many years, I spent money like water, letting it flow in and out of my life but not making any real choices about how I used it. I cringe to think of how much money I wasted in my 20's due to irresponsible overspending and overdraft fees. I can't do over those years, and that money (which could be compounding as we speak!) is gone forever. It's never too late to change habits and stop the damage, though.

It took a drastic pay cut and brush with food stamps to get my butt in gear and start really managing my money.  I had to budget out of necessity. What a revelation! Making a budget meant becoming aware of my spending, which wasn't in line with my income, and made me reevaluate what I considered needs. I started using cash envelopes. I made an envelope for each budget category so I couldn't overspend. I couldn't overdraw our account. Financial responsibility became a habit. In a little over a year, I was able to turn our situation around, even with a low income. I saved a quarter of our income, dropped the food stamps, and returned to college to finish my degree. I will graduate debt free.

Without becoming aware of my poor money habits and making deliberate choices about how I would manage our money, I would still be wishing for the do over.  I can be glad that I'm making good choices now, and try not to kick myself over the choices I didn't make sooner.

Image by Gamma Man.

Selling Out: Do Business People Have a Soul?

by

“You sell your soul for an econ degree.” –Mr. Kraft, my AP Microeconomics teacher

A long time ago in a galaxy far, far away… I mean, more like ten years ago about twenty minutes south on I-25, I took my first business and economics classes. Those classes changed my life and my outlook.

Roots in Business

I set my business roots at an early age. Investing and finance has run in my blood for generations. My Grandfather was a marketing professor and started teaching me about the stock market, personal finance, investing, and money management at a young age.

My Grandpa Joe grew up during the Great Depression and earned money the old-fashioned way. He worked hard, lived a thrifty lifestyle, and built up significant savings and investments during his life.

My Dad was in the business world my whole life as well. When I was younger, my Dad was involved in merchandise management and retail. That path led him to purchase a video store when I was about six. We had that store for nearly ten years.

I grew up exposed to the entrepreneurial world and the investing world, but I did not realize the impression it left on me until high school.

Boy Scouts and FBLA

You know those Boy Scouts that sell popcorn, Gold C books, and Entertainment books? I was the best.

I don’t mean to brag… well, yes I do… but I was the top seller in my troop every year that I put in my best effort. I would go pick up five cases of books and sell every single one. Those book sales paid for my summer camp, ski weekends, and other Scout activities.

Again, I never realized the significance of this until later in life.

My junior year at Cherry Creek High School, I took my first business class. Students were required to take either fine arts or business credits to graduate, and I spent my three semesters in the business side of the world.

My first business class, appropriately named “Introduction to Business Management,” gave me a basic view of business fundamentals. I learned about income statements and balance sheets and real-life business situations that impacted the development of the business environment in the United States. From there, I went on to join the school’s Future Business Leaders of America club, compete in the district and state competitions, and became Treasurer of the club.

Selling My Soul

It was around that time that I took Mr. Kraft’s class. That teacher, with a different tie every single day of the school year, left more of an impression on me than my fashion sense. We learned about competitive advantage through examples involving pizza, robots, and widgets. We learned about labor markets and management incentives. We discussed the Milton Friedman version of business. Friedman, of course, is famous for his view that the purpose of business is solely to create value for its shareholders.

I went on to receive an undergraduate finance degree led by those principles. The purpose of business is to make money. The purpose of charity and non-profits is to make the world a better place.

In my MBA program at the University of Denver, known nationwide for its emphasis in sustainability and responsible business management, we were given a different twist on the business world. In the feel-good world of the “Triple Bottom Line,” where we focus on profit, people, and the environment, more comes into focus than just making money.

The Middle Ground

At the end of the day, I am still a follower of Friedman’s philosophy. If a business is not making money, it goes out of business. If it makes more money than another business, the other one goes out of business. Survival of the fittest is a concept that goes far past nature.

That is why I have no problem owing stock in oil, tobacco, and other controversial industries. Someone is going to be making money; it might as well be me.

However, business does not have to be bad for the world. Corporations have solved many of the world’s biggest problems and make a major contribution to society. Walmart installed skylights and tested rooftop wind turbans on a handful of stores. The skylights have been adopted nationwide. They save electricity and make a major impact on fossil fuel use and greenhouse gasses, but also save the company millions of dollars per year in energy bills. That is a win-win. I am a proud Walmart shareholder.

There are dozens of examples like this. At the end of the day, a company’s first responsibility is to its shareholders. At the same time, however, that company can do amazing things for the planet and society. From small acts like adding recycle bins to major campaigns to cut carbon emissions and production waste, companies can make more money by “doing the right thing.”

But the next time you see a protest against a company’s policies, remember its roots. Even Walmart started as a small drug store across the street from city hall in Bentonville, Arkansas. Berkshire Hathaway was an investment fund started by an ambitious young man named Warren. Dell came from a dorm room. Amazon used to be headquartered in a garage.

Every business started somewhere. They came from an idea in the pursuit of profit.

Reader Question: Big Student Loans

by

One reader sent me an e-mail about his student loans.  He asks:

“I’ve had bad financial education in the past and now trying to fix all of these errors which I’ve made. Currently I have 4 loans from Sallie Mae which are total to $30000. Two of these loans have APR of 7.75%, one loan has 9.25% and one has 10.25%. This is quite ridiculous in my opinion, and I need some advice on how to fix it. What would you suggest?”

Loan 1: $4,988.61, 10.25%, $57.30 per month

Loan 2: $8,351.01, 9.25%, $90.85 per month

Loan 3: $11,878.93, 7.75%, $118.82 per month

Loan 4: $6,730.09, 7.75%, $67.32 per month

Total: $31,948.64 owed, $334.29 monthly payments

Option 1: The Debt Snowball

The debt snowball is the most popular debt repayment method around.  In the debt snowball, make your minimum payment on every loan to maintain a good credit score.  Any extra cash at the end of the month should go to the highest interest loan to pay it off as quickly as possible.  In this case, an extra couple hundred dollars each month could mean paying off the most expensive loan years sooner than the minimum payment alone. 

The loan balance does not matter in the debt snowball.  The 10.25% loan is the smallest in dollars owed and payments, but each dollar costs more than the other loans.

If you were paying the minimum plus about $200 per month, you are putting $257 into Loan 1 per month.  Once it is paid, put that $257 plus $90.85 per month into Loan 2 as you are already used to living without that $257 per month.  Paying $348 per month into Loan 2 will increase the payoff speed greatly, as the extra $200 did in Loan 1.  After Loan 2 is paid off, put the extra $348 per month into Loan 3 or Loan 4 (it doesn’t matter which, they have the same interest rate) until they are all paid off.

Option 2: Refinance

You are allowed to refinance student loans once over their lifetime.  If you have not done that yet, it might save you a bunch of money.  The current federal subsidized Stafford loan rate is 6.8%.  You can only take a Stafford loan if you qualify for financial aid after filling out the FAFSA.  At this point, assuming you are out of school, you probably can’t get 6.8%.  You can probably beat 10.25% and 9.25% though.  Do a little shopping around and try to do a debt consolidation refinance to lower your interest rate.

Do not just consolidate for the sake of it.  Consolidating generally makes your payoff period longer and raises your monthly payment for the life of the loan unlike with the snowball.

Option 3: Collateralized Refinance

If you have a mortgage or other valuable asset that can be used as loan collateral, you can refinance the student debt as a secondary lien on that asset, or a mortgage loan if the asset is already paid for.  This is the most cost effective method, but it has risks.

The best part of this method is that you will surely get a lower interest rate.  If you use a car as collateral, you may be able to get a loan rate around 5%.  However, your car has to be worth more than you consolidate.  If you own a car worth more than $13,000 outright, I would seriously consider consolidating Loan 1 and Loan 2.  If you own a house that has $30,000 in untapped equity, you can refinance the entire amount as a second mortgage or wrap up the old mortgage and student loans into one big mortgage payment.  There are fees and costs, but it could save you money in the long run.

The biggest risk to a collateralized refinance is that you are putting your asset on the line.  If you stop paying the loans, the bank can take the car or house (or boat, etc).  Think seriously about your ability to pay before taking this step.  You have to pay either way, in the long run, so it could be a good idea to save money by refinancing with collateral.

The Bottom Line:

Each person’s situation is different.  Anyone can do a debt snowball, so it is the logical best option for the average person.  If you can, doing a student loan refinance can save you money on interest but only works if you have a bank, or the Department of Education, that is willing to work with you.  If you are far enough in life that you have a valuable asset, you can save interest costs but have to risk an asset for that savings.

Now it is time for the readers to chime in:  Would you rather take option 1, option 2, or option 3?  Did I miss something completely?  Please help our student loan debtor make the best decisions to get out of debt.

College Fees You Didn’t Think About

by

If you are about to head to college or have a future student in the house, it is a good idea to understand all of the extra fees you might be getting yourself into.  This is no surprise too me, a six year student (four undergrad, two grad), that college costs a lot more than the sticker price.

Smart Money did a great report on the topic.  One fee that you might not expect is a student activity fee.  At CU, I had to pay some pretty steep fees.  You can see a schedule of fees at the bursar's website.  Here is what Smart Money found:

Student activities: $270
The extracurricular activities on campus look free, in that students don’t have to pay to attend them. Instead, there’s a student union fee tacked on to tuition bills to help pay for the student newspapers and activities like dances. At the Massachusetts Institute of Technology and the University of Maryland, it’s $272 for the year. At California State University, Fresno, it’s up to $109 per semester to pay for the recreation center, plus a $34.50 student body fee for support of on-campus student organizations.

How the New Student Loan Law Impacts You

by

On March 30, President Obama signed a new law that redefines the roles of much of the student loan industry.  The law appears to be better for the government and better for those taking out student loans.  Big banks are going to take a hit, however.

In the old world, students (or parents) would apply for the student loan through a major bank approved for student lending.  When I needed to apply, I found the best long term deal applying through Citi Group.  In exchange for processing and lending, the government subsidized the bank to keep rates fixed at 6.8% with no application or origination fees.

The savings for the US Government will be about $68 billion over the next ten years.  Some of the savings will go to increase subsidized Pell Grants, for student demonstrating financial needs, and other scholarship programs.

For existing loan holders, it doesn’t look like you will see any major changes.  I am expecting to keep paying my loans as usual, which means new servicers every year or so that screw up my account and take over a month to fix it.

For anyone with a new student loan starting in July, 2014, there are some great new provisions.  Student loan payments will be capped at 10% of annual income above a defined living allowance, where it was 15% before.  If you make regular payments at that rate for 20 years, your loans will be forgiven, rather than 25 years under the old law.  The forgiveness period is still ten years for certain government employees, teachers, health care workers, and the military.

If you are reading this, it is probably to late for the new laws to effect you directly, but your kids might have a much easier time dealing with student debt than you.

What Student Loan Consolidation Really Means

by

If you have taken out loans to go to school, you most likely have Federal Stafford loans from at least one bank.  If you ended up with more than one bank, you have to make two sets of payments every month for those loans.

I have two sets of loans, and in about 7 months they will come due.  When that happens, I will probably find a consolidation loan.  There are a few important things to know about consolidation loans if you are planning to consolidate.

First, do not get the impression that a consolidation loan will save you money.  Federal Stafford loans, the most popular type of student loans, are fixed at 6.8% by the government.  If you have two loans with minimum payments of $100 each and you consolidate, you will just have one payment of $200.

If you do not get the same kind of loan when you consolidate, the process can actually cost you more money.  Make sure that if you have student loans to consolidate you continue with a Federally backed loan with the same fixed interest rate.

Consolidation can also impact your credit score.  The impact should not be big depending on when you got the first loan.  When you consolidate, you close two loans with history and replace them with one brand new loan.  This lowers your average account age and can impact your credit.

Exit mobile version