Archive for the ‘Levels’ Category

What’s the difference between checking and savings?

Tuesday, March 2nd, 2010

You probably see the words “checking” and “savings” most often when you’re hitting the ATM. Although both checking and savings are bank accounts that hold money you’ve deposited, when people withdraw money, they almost always take it from checking. Why?

Generally, a checking account is designed to hold spending money – money that you don’t want to carry around with you or stash under your mattress, but that you want within reach when you need to pay for your expenses. A savings account, as the name suggests, is designed for money that you want to save for later use. Because of this distinction, there are important differences between the two types of accounts.

When people or corporations cash checks you’ve written them, that money usually comes out of your checking account. You can withdraw money from either account, but people usually want to take the money from checking if they can. The logic behind this decision is that savings accounts generate interest, while checking accounts don’t necessarily (or if they do, there are usually a ton of conditions attached). The more money you leave in your savings account, the more you get paid in interest, so it makes sense not to take out any of that money unless you absolutely have to.

Checking accounts are created under the assumption that the amount of money they contain will fluctuate, while savings accounts are meant for money that you expect will stay with your bank for a while. Checking and savings differ from each other in accordance with their designated purposes, but they’re meant to complement one another.

You can postpone your taxes?

Tuesday, March 2nd, 2010

In certain situations, you can actually put off paying your taxes until later – sometimes many years later – but methods of doing so are pretty complicated. Income whose taxes you can pay later is called tax-deferred, and the most common type of tax-deferred income is the money you put into a retirement plan.

Most retirement plans (IRAs, 401(k)s, Keogh Plans, and so on) allow you to make elective deferrals up to a certain amount. What does this mean? Under a retirement plan, you set aside a portion of your income every year and put it into a retirement account for use – you guessed it – after you retire. Think of it this way: as far as the IRS is concerned, the money you put into a retirement account essentially doesn’t exist until you withdraw it, which means the IRS isn’t going to tax that money until you withdraw it.

But you still have to pay the taxes eventually, right? Why not just pay them now and get it over with? The answer has to do with tax brackets. By the time you actually start using the money in your retirement account, your income may be lower. And if you’re in a lower income tax bracket when you withdraw the money, you’ll pay less in income taxes on that money than you would if you paid up when you originally earned it all those years ago. So in some cases, putting off payment can actually pay off.

Rule of 72?

Tuesday, February 23rd, 2010

The Rule of 72 is a simplified method for calculating approximately how long it will take for an investment to double. In order for the rule to work, you have to know the rate of return on the investment, the rate of return has to stay constant, and you can’t add or take away any money from the investment.

The rule is simple: just divide 72 by whatever your rate of return is and you’ll get the number of years it’ll take the investment to double. For example, if your rate of return is 3%, you divide 72 by 3 and get 24. So your investment will double in about 24 years, assuming the rate of return doesn’t change and you leave the investment alone until then.

What’s the difference between stocks and bonds?

Wednesday, January 13th, 2010

When you buy stock, you own equity – that is, you are actually buying partial ownership of a company in the form of shares. The percentage of the company’s total shares that you own is how much of the company you own – for example, if the company has 100 shares and you buy 50 of them, you own 50% of the company. This means that you share the company’s ups and downs: if the company does well, your stock becomes worth more than what you paid for it, and you make a profit, but if the company does badly, its stock decreases in value, and you suffer a loss. Equity holders are last in line among creditors if the company’s value goes to zero. This is why the stock market always has a certain amount of risk attached: you can never know for sure what’s going to happen to your stock.

With bonds, on the other hand, you virtually always know exactly what you’re going to get. Bonds are not shares, so they don’t give you any ownership. Rather, when an institution wants to raise money, it sells bonds, which are like IOUs; they’re basically promises to pay your money back later, with interest in the meantime. The interest rates are usually fixed, so you can calculate your profits. For example, a company could sell you a bond for $1,000, and under the terms of the agreement, you’d get 5% of that $1,000 every year for the next ten years, and then your original $1,000 back at the end of that decade. Of course, this means you’re only going to make a profit of $500 over ten years, but you are guaranteed that money.  If the company goes bankrupt, bond holders are usually first in line to be paid among those owed money. So people who prefer bonds like the security they offer, and people who prefer stocks like their potential to make their owners an incredible profit in the future.

One final note – there are three main types of bond: government, municipal, and corporate. Government bonds are sold by the government, municipal bonds by cities, and corporate bonds by companies. Government bonds are the most secure, followed by municipal, then corporate (because a company is much more likely to go bankrupt than a government is). However, because corporate bonds are the most risky, they also offer the highest rates of interest.

What is the routing number on your checks?

Monday, January 11th, 2010

There are a ton of numbers and information on a check that can make it confusing to use or even to understand. One of the most important things to know about your check is the routing number. If you are looking at a check, the routing number is the 9-digit code in the bottom left corner.

The routing number is important because it is used to set up direct deposits and other electronic transfers into your checking account. It identifies the banking institution where your money is held, as well as your specific account.  This can be getting a paycheck directly deposited into your account (as opposed to having to deposit it yourself… manually… at a bank…) or having someone (like your parents) transfer a monthly allowance. In essence, it is the number that makes sure the money gets to the right place!

Why are so many companies incorporated in Delaware?

Friday, January 8th, 2010

More than half of the Fortune 500 companies are incorporated in the great, tiny state of Delaware; but how is this possible? Certainly most of these companies are not based in Deleware, but there are a number of reasons why a company would choose to become a corporation there:

  • Delaware is one of the states with the least expensive incorporating fees.
  • Whether you are a shareholder, officer, or director, you do not have to be a resident of Delaware.
  • Just because your company is incorporated in Delaware, that does not mean you actually have to do business in Delaware, and if you don’t do business there, then you do not have to pay the Delaware state corporate taxes.
  • In Delaware, one individual can have all the officer positions and be the only director, which is particularly advantageous to smaller business.

Basically, the laws in Delaware make it cheaper and easier for a company to be legally incorporated there than anywhere else. It is business friendly, plain and simple.

Can we do this thing on an installment plan?

Friday, January 8th, 2010

Maybe you like the idea of supporting your favorite cause on a regular basis, but you don’t want the hassle of sending them a check every four weeks. Luckily, some organizations have taken this complaint into consideration. With recurring donations, you can make sure your charity of choice gets a steady flow of aid without constantly having to remember to shell out the cash.

Recurring donations can be set up over the Internet, and they just require a credit card number, an email account, and a billing address. You select a charity and enter the amount you want to give each month (which can be changed or canceled at any time) and that amount is charged to your card. If you choose to give money to an organization with a set monetary goal and that goal is reached (i.e., the organization doesn’t need donations anymore), you’ll receive a notification via email, and you can select a new charity if you wish. What’s more, with recurring donations you set up an account where an online record is kept of all your transactions to date, so it’s simple to find appropriate documentation when you’re applying for tax deductions.

So if you have one favorite charity and you just want to keep sending your money there, recurring donations can be a quick, easy, and convenient way to keep giving.

Why does the price of a plane ticket change so much?

Friday, January 8th, 2010

Have you ever gone online to find that the price of an airline ticket has doubled since last night? Airline prices remain a mystery to most, but there are basically three major factors that influence the variable price tag:

Yield Management - This is a complicated computer-based model that constantly adjusts the prices of the remaining inventory of tickets to yield the greatest dollar amount for the remaining seats. (Pretty smart, huh?) The program uses many inputs including historical booking patterns, demand, market competition and events in the market to squeeze as much revenue as possible from every seat.

Competition - If American Airlines is competing against U.S. Air, or Delta, their prices will stay similar because all of these major airlines use similar yield management software. But if they’re up against a low-cost provider like JetBlue, they’ll have to adjust their prices for the effected flight routes in order to stay competitive.

Cost - This is lowest priority in setting prices since the going rate for seats, availability of aircraft, and customer demand are all ultra-sensitive to fluctuating markets. Often, airlines are not able to pass their costs onto customers because, well, there are always other means of transportation if flying is too expensive.

While airline prices are going to fluctuate dramatically, understanding the fluctuations can help you book the best plane ticket, and get a good deal. You can also try sites like kayak.com and others, which show you the average prices over time for the flight you’re planning.

Why does your mocha frapp cost more in New York than in Pittsburgh?

Friday, January 8th, 2010

It just seems to make sense that a drink from a chain like Starbucks should cost the same amount no matter where you are when you order it. The menus are the same and the coffee all comes from the same place — so what’s the difference? To understand, you need to realize that you’re paying for much more than just espresso and the Barista’s snazzy signature green apron. While some operational costs are the same for all stores in a megachain like Starbucks — the coffee itself, for instance — other costs vary depending on the location of the individual store.

The cost to hire the best Baristas, or wages, varies from state to state. Taxes are much higher in some states than others. The cost of renting space in a city like New York is simply much higher than renting space in Pittsburgh. Even the price of milk varies greatly depending on where you are. When you pay a few cents or a dollar more for your drink in New York than you would Pittsburgh, you’re really paying for the heightened costs of running a business there.

Paul McCartney is involved with PETA?

Thursday, January 7th, 2010

Yes, that is right, the former Beatle is a spokesperson for PETA (People for the Ethical Treatment of Animals).  There are many reasons why celebrities would get with a involved a charity, foundation, or organization.

The most important reason is that celebrities can bring attention to a cause that may otherwise be ignored – ordinary people tend to notice when famous people do things, including an advertisement or a commercial for a specific charity. Charities will often ask a high-profile individual to attend a benefit or a function for these purposes.

The celebrity has his or her reasons also. Any PR rep would tell you that having your name attached to a charitable cause is good press and good exposure.  Additionally, a lot of celebrities do not want to seem one-dimensional, and being part of a charity or foundation shows their multi-dimensionality.  Finally, for some it is a personal issue: Sheryl Crow, a survivor of breast cancer, is one of the main proponents for the nonprofit Stand Up To Cancer.