Archive for the ‘Question of the Day’ Category

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Why can deflation be bad?

Tuesday, July 7th, 2009

Deflation is when an entire economy of people stop buying as much as they once did, forcing the price of goods to drop. When people see prices falling, they tend to hold out longer hoping to buy at the bottom. Think about it this way: if a 2009 car was selling for $30,000, the 2010 model for $15,000, and 2011 model for $7,500, what consumer in their right mind would buy a vehicle today instead of waiting to buy in the future? So while all this watching and waiting is going on, all economic activity slows and slows—which is bad.

This is when an economy would start to enter a deflationary spiral. When the inflation rate (normally 3%) drops below 0, the real value of money increases (prices drop, you get more bang for your buck). Though that sounds attractive, it’s not in the long term. Profit margins shrink, businesses fail, and unemployment rises right alongside the real value of debt. So once caught in the spiral, it’s extremely difficult for an economy to pull itself up by its bootstraps.

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Where do they use the Euro?

Sunday, July 5th, 2009

While the answer may seem obvious – they use the euro in Europe – it’s actually not. They do use it in Europe, but not in all of Europe, and not even in the whole of the European Union. As of 2009, 16 of the 27 EU member countries have adopted the euro as their national currency. It began in 1999 with Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland switching their currencies over. Greece followed suit in 2001, Slovenia in 2007, Cyprus and Malta in 2008, and Slovakia in 2009. Combined, these areas are called the “eurozone.” A country must meet strict criteria in order to qualify for the euro standard. That’s why countries gradually join the eurozone instead of all at once.

329 million people living in these 16 countries use the euro daily. Additionally, some neighbor countries and former colonies use the euro as an unofficial currency as well. For these reasons, the euro has become the second most important international currency just behind the dollar.

What’s so hostile about a corporate takeover?

Tuesday, June 23rd, 2009

Normally, someone can’t buy something from you without your permission – a guy can’t just walk into your living room, throw down a wad of cash, and make off with your sofa. You’d expect the same principle to apply to corporations: if you own a company, how can someone else buy it if you won’t sell it to him? But depending on the type of company you own, another individual or corporation can actually buy it without your permission, in a maneuver called a hostile takeover.

If your company is private, you don’t have to worry about hostile takeovers, because the company’s owners (you/your partners/your fellow members on the board of directors) have a controlling interest in the stock. But in a public company, although the board of directors may have the single biggest chunk of shares, the majority of the shares are dispersed among the general public. Think of each share as something like a vote. If someone wants to become the owner of your company, all he has to do is collect the most votes – it doesn’t matter if he has your votes or not, as long as he has more votes than you do. So what he can do is appeal to the public, and offer to buy their votes (their shares) for a higher price than they could get for those shares on the stock market. If enough shareholders take him up on his offer, the company becomes his – in other words, he’s completed a hostile takeover. So it turns out that in the world of finance, people can actually buy something of yours… whether you like it or not.

How can you make sure the charity you’re donating to is legit?

Tuesday, June 23rd, 2009

It isn’t wise to trust a stranger with anything of value, and charities are no exception. The most basic way to investigate a charity’s legitimacy is to research it–by checking the Internet, looking for mentions of your chosen organization in the news, asking for pamphlets detailing the charity’s purpose and goals, and so on. In addition, there are several web sites where you can check a charity’s legitimacy (or even just how well it’s putting donations to use).

If the organization doesn’t make its purpose clear or tell you what the money you give is actually being used for, there may be cause for concern. A legitimate charity should always be willing to provide you with more information and should never try to obtain donations by pressuring or intimidating you, so any representative of a charity who is vague or aggressive is highly suspect. The bottom line: it’s your money that’s going to the charity, so if you don’t feel comfortable with an organization you’ve chosen, you can always find another better suited to your needs and interests.

Why should you take money out of your check for a 401k when you won’t be retiring for a long time?

Monday, June 15th, 2009

If you just started earning your own money recently, don’t you deserve to spend it all?  Although you did earn it and certainly can do whatever you want, it may not be the wisest decision to spend every last dime. Lucky for you, there’s an incredibly easy alternative, and it’s called a 401k.

When you participate in a 401k plan, it basically takes money out of your paycheck and puts it into an account for your retirement fund.  401ks are part of a group of retirement plans known as “defined contribution plans,” because the amount that can be contributed to your retirement is defined either by you (the employee) or your boss.  A great thing about the 401k is that when a certain percentage is deducted from your paycheck to put into that retirement savings account, it reduces your take-home pay before taxes are calculated. This means that instead of giving a portion of today’s salary away to taxes, you are putting some of it away in a retirement account instead. Then you pay taxes after you retire when your income and tax bracket is lower.

Sounds too good to be true? 401ks are great, but a main drawback is that if you do want to withdraw the money in your retirement account before you are 59.5 years old, you’ll have to pay taxes on it PLUS a 10% penalty fine to the IRS. Although retirement may sound like something in the very distant future for you, it is something to think about, and having a 401k Plan is an effective and pretty effortless way to have a long-term plan.

Why would you donate your old car?

Monday, June 15th, 2009

Donating your used car is a win-win situation, and who doesn’t like to win?

If you have a car just sitting in the driveway that may not be worth the hassle of selling, donation is a very good option. Many different kinds of charities accept cars – even if they don’t use the cars themselves, they can sell each vehicle at auction and keep the profit as a monetary donation. If you don’t want to go through a big charity, you can look around in your community and think about where a donated car could make a difference.

Not only will you get the great feeling of helping out a person or an organization in need, but there’s a simple incentive for you as well: donations to many charities are tax-deductible, which means you may be able to write off the value of your automobile donation and save money on your taxes this year!

How does a bank make money?

Friday, June 12th, 2009

Once you deposit your money in a bank, it doesn’t just sit in a big vault until you decide to hit the ATM. Your bank uses those funds to offer financial products (such as loans and mortgages) to their customers, for a profit to the bank. Although banks often pay you interest for depositing your money with them, they find ways to earn more with your money than they are paying you. An example of this would be mortgages, where they lend money to a consumer for a relatively higher interest rate.

Banks also make a lot of money on the fees they charge their customers. Examples of these would be: late fees, overdraft fees, ATM fees, interest rates on credit cards, or checking account fees.

The combination of interest rates and fees allows a bank to run profitable businesses while also offering services to its clients.

Why do people have bank accounts in Switzerland?

Wednesday, June 10th, 2009

Swiss bank accounts are world-renowned for their security, but it’s a different kind of security than what you’d see in a heist movie. The protection that applies here has nothing to do with maximum-security vaults and armed guards giving body checks; it’s about the unique privacy provided by Swiss banking law.

Most of the perks of having a Swiss bank account come from the fact that, under Swiss law, no banker can reveal anything about your account (including its existence) to anyone else without your permission. Any banker who violates this agreement is prosecuted by the state and can face fines and jail time. So once you put money in a Swiss bank account, the only people who know that money even exists are you and your banker.

Why is this anonymity so desirable? Some people just want privacy and believe that their financial situation is their own business. Others, however, try to hide their financial information from the government to avoid higher taxes. This is called tax evasion and it’s illegal. When the government tries to figure out how much money to tax you, it first needs to know how much you have. Generally, the more you have, the more taxes you pay. When the government can’t see the money you have in a Swiss bank account, they can’t include it when they calculate your taxes and you end up getting taxed for less than you’re actually worth.

Swiss banks are so popular – and so notorious – not for their physical security systems, but for the anonymity they provide to their clients. Just remember, if you live in a country like the U.S., you need to report how much money you have in a Swiss bank account to avoid getting in trouble.

Why is a bank better than your mattress?

Wednesday, June 10th, 2009

Carving out a secret hole in the side of your mattress may seem pretty cool, but it’s really not a practical place to store your money (it doesn’t sound too comfortable either).

Mattresses, along with stuffed animals and shoeboxes, all seem like safe places to store your money (supposing no one else knows where it is), but you’re actually putting yourself in a financially bad position. By storing your money in places like these and not a bank, you are slowly losing money and risking all of it too. How does that happen?

Banks are not just money storage facilities; they use your money to offer financial services (at a cost) to other customers and in turn pay you interest on a regular basis. By keeping your money in a bank, you are actually earning money as opposed to just hiding it away. Banks also keep your money safe; your money is guaranteed up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), a government organization, in case something happens to the bank. No one has ever lost a penny of covered funds from a bank failure since the FDIC was created in 1933. Compare that to losing your wallet or your sister raiding your mattress – you are not getting that money back.

What does this mean for you? Well, you can either be sure about the safety of your money (while earning a little extra at the same time) or you can hide it away under a mattress and hope no one ever peeks under the sheet.

How can spending money save you money?

Wednesday, June 10th, 2009

No one likes having to pay bills, but some things that cost you money have a silver lining. When tax season rolls around, some of your expenses from the past year can actually help lower your taxes.

Everyone who makes money has to pay income taxes, which are generally higher the more money you make. But when the government figures out how much to charge you in income taxes, they use a measure called the adjusted gross income, which is an attempt to better represent the portion of the money you make that you actually get to use. For example, you may make $1,000 a month at your job, but that doesn’t mean you can actually put $1,000 in the bank at the end of every month: you’re spending at least some of that money on various things that the government views as tax deductible (or the amount you “adjust” your income by).

Tax deductible items are things like donations to certified charities, work expenses, and certain educational expenses. On the other hand, if you spend money on, say, an iPod or a pair of jeans, that’s money you could technically save, and you’re spending it for your own enjoyment, so it doesn’t lower your adjusted gross income. While tax deductible expenses usually don’t come from things you’d enjoy spending your money on, there is a consolation prize: those items you’re paying for now mean more money that’s yours to keep later on.

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