Archive for the ‘Needs Link’ 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.

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.

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.

Who says Facebook is worth $10 billion?

Tuesday, December 22nd, 2009

Valuation, the process of determining how much a corporation is really worth, is always partly objective and partly subjective. There are several different methods commonly used, but there’s going to be some guesswork involved no matter what.

The most common way to value a company is according to its earnings, which are usually calculated according to earnings per share: you simply divide the company’s net profit by the number of shares it has. (You want the earnings per share value because that makes it is a standard measure to reflect each piece of ownership in the company). You can also value a corporation according to its assets – that is, if a company paid off all its debts and added up everything of value it had left, how much money would that amount to? Another technique involves measuring cash flow, or how much money passes through a company in various transactions over the course of a quarter or fiscal year (not counting predetermined expenses like taxes and interest).

Investors compare “like” companies, as defined by industry, growth rates, or geography, based on their Price to Earnings (PE), Price to Cash Flow, or Price to Growth (PEG) ratios. Price to Growth is used for companies like Facebook, that are yet to have earnings! Higher quality companies get higher ratios, or valuations, versus lower quality earnings.  Historically, the average PE within the S&P 500 since 1936 is a PE of about 15.8x.

These are the most basic techniques, but there are many alternative techniques that are used or that some people claim are more effective. And ultimately, no matter which method you use, the “true value” of a company is only something that can ever be approximated; it’s more of an ideal than a calculable number.

Why would a company split its stock?

Tuesday, December 22nd, 2009

A company’s value is basically spread out among its shares; the more shares there are, the smaller the percentage of the company each one is worth. Think of it as a simple equation: value of one stock = value of the company ÷ number of shares. So if a company wants to try to manipulate the price of its stock, it has to change some part of this equation. You can’t change the value of your company at will, of course; that depends on your market performance. But companies can change the number of shares they offer, and hence the price per share, by using stock splits and reverse stock splits.

Stock splits are just what they sound like – splitting a single stock into multiple stocks. The most common stock splits are 2-for-1 and 3-for-2. A reverse stock split is also just what it sounds like – in, say, a 1-for-5 split, every five shares become one. Because a company can’t just suddenly generate value, a stock split means stock prices also split: for example, in a 2-for-1 split, each share becomes worth half of its original price. As a shareholder, you don’t have to worry about stock splits because the company will make sure the value of your holdings doesn’t change – if the stock goes through a 2-for-1 split, your shares just double, so you still have the same amount of money.

If the value doesn’t change, why bother fooling around with the number of stocks? If a company is doing very well, a single stock can grow to be worth a huge amount of money. You can’t buy a fraction of a share, and if you have to shell out a huge amount of money just to buy a single share, you probably won’t bother. So splitting the stock makes the price of each individual share go down, and more investors can afford to buy. A reverse stock split happens when a company’s stock prices are low; when the number of shares decrease, the price of a share increases, and the company’s stock appears more attractive to investors.

How big is your carbon footprint?

Monday, December 21st, 2009

Your carbon footprint is a measure of the greenhouse-gas emissions you produce in your everyday life. Your total carbon footprint is divided into two parts: your primary footprint, which is the emissions you directly cause (by using the stove, driving your car, running up an electricity bill, and so on), and your secondary footprint is made up of the indirect emissions which are a result of your lifestyle choices (eating at restaurants, going to the movies, buying a lot of clothes or electronic devices, etc.).

There are plenty of websites that can calculate your (primary and/or secondary) carbon footprint for you, but you have to provide some details first. For whatever period of time you want to measure (a month, six months, a year) you have to know your energy bills (gas, electricity, coal, propane, etc.), the number of miles you’ve traveled in your car and by public transport, and any airplane flights you may have taken. This information all contributes to your primary footprint. The secondary footprint is more approximate and requires you to input data like how often you eat at restaurants, how often you buy new clothes, and whether/how much you recycle. Once you know the value of your carbon footprint, you can see all the different factors that contribute to it and look for places where you can cut back.

Are scholarships taxable?

Monday, December 21st, 2009

Scholarships and fellowships are considered tax-free as long as two conditions are met:

First, (as obvious as this seems) you have to actually be enrolled at a university. Second, the scholarship or fellowship has to be used to pay for tuition or required books and supplies. Expenses due to room and board, traveling, or optional supplies don’t count (they’re considered incidental expenses, so they go towards calculating your adjusted gross income instead), and you have to report any payments you received for doing any kind of teaching or counseling that was required by your scholarship or fellowship (although there are some organizations that exempt you from this rule).

Students who receive scholarships or fellowships to do work in, say, a hospital setting may find the tax question a bit more fuzzy. If you’re ever unsure, just check with your sponsoring institution.

What happens if you don’t pay your taxes?

Monday, December 21st, 2009

Every taxpaying American citizen is required by law to file a tax return by April 15th of every year. Failing to submit your tax forms on time, or submitting them with incorrect information, is a crime that can earn you jail time if the IRS finds out, but you might wonder just how that happens. What is the process through which the IRS catches you and decides whether or not to press charges?

Businesses have to file tax returns for all their employees, so as long as you aren’t self-employed, tax infractions are relatively easy to spot. Even if you don’t work for anyone else, the IRS tends to audit the very wealthy more often, and since your tax records from years past are kept on file, the IRS can spot the discrepancy if you just stop paying taxes all of a sudden. The IRS also performs some random audits every year for statistical purposes, and every tax return that goes through gets a DIF score – basically, a measure of how suspicious it looks. If your DIF score is high enough, the computer program that evaluated your tax return will audit you automatically.

The good news is that the IRS generally won’t press charges even if they do bust you – they’ll probably just file a tax return on your behalf and then charge you for it. But anyone who files an incorrect tax return – or doesn’t file at all – is potentially at risk for jail time, so it’s worth it to keep careful records.