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Part 2:
Basic Tools of Personal Finance
Four classes of assets form the majority of most investment
portfolios:
- cash and cash equivalents,
- bonds,
- stocks, and
- tangible assets (e.g., real estate, gold, oil).
Cash denotes your current stash of legal tender and,
in a financial planning context, generally includes money deposited with
financial institutions that can be withdrawn without notice. Checking
and passbook savings accounts are examples of such deposits.
Cash equivalents are defined as short-term
investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.
Such investments are often referred to as "liquid."
Liquidity refers to how quickly an asset can be converted
into cash. Your house is not a liquid asset because it could take months
to sell it. Stocks are somewhat more liquid than real estate, but you can
lose money on stocks if you're forced to sell at a time when the market
for your stock is less than favorable. Even though interest on liquid investments
may barely keep up with inflation, the lower risk is worth the lower return
when you may need the money quickly.
Deborah Fowles suggests that checking accounts, saving accounts, money
market accounts, certificates of deposit, money market funds, and short-term
bonds are all good places to stash the cash you may need on short notice.
These are the most liquid investments.
Checking accounts pay infamously low interest
and may come with monthly service charges, so these are not the first choice
for emergency funds. Another reason to avoid mingling your emergency fund
with your regular checking account is that money in your checking account
is too easily spent.
Savings accounts usually pay somewhat higher
interest and segregate your savings from the money that covers your living
expenses. They're less likely to have monthly fees.
Money market accounts offered by banks
(not to be confused with money market funds) may pay a little higher
interest than either checking or savings accounts but limit the number of
transactions you can make without a fee.
Money market funds, offered by brokerage
houses and mutual fund companies, are NOT FDIC-insured like money market
accounts are, so they're not as safe.
Certificates of Deposit (CDs) are funds you
lend to the bank for a specific period of time in return for a guaranteed,
pre-determined interest rate. They come in different maturities, such as
three months, six months, one year, five years, etc., and cashing them in
early will result in a penalty, so they are not quite as liquid as the other
investments mentioned. However, if you
ladder your CDs you can avoid this problem.
Here are some resources you may find useful:
Recent changes to
student
loan programs.
MSN helps you
evaluate your credit.
More calculators ...
Student
Loan Advisor - Undergraduate Students
This Student Loan Advisor provides
you with an estimate of the amount of educational debt you can reasonably
afford, given the expected starting salary for your major. This advisor
is for Undergraduate students; there are other versions for
Master's
and
Doctoral
students.
The debt-to-income ratio is a standard tool for assessing whether
a borrower will have difficulty meeting his or her repayment obligations.
For example, most banks will refuse to issue a loan if the total of
your monthly debt payments (i.e., mortgages, credit cards, auto loans,
educational loans, etc.) exceeds 37% of your income. It is recommended
that your educational loan payments represent no more than 10% to 15%
of your income. This calculator uses the debt-to-income ratio and a
projection of your starting salary to derive a manageable debt load
for you.
A good rule of thumb is that for the Stafford Loan, the manageable
debt load is about the same as your starting salary.
The following are from
about.com:
Compound Interest Calculator
The compound interest calculator is intended to show you how how much
you'll have saved after a given number of years. You'll know how much
of your final balance is due to interest earnings, and you can use the
compound interest calculator to see how different interest rates affect
the outcome.
Generic Loan Amortization Calculator
The loan amortization calculator is intended to show you how your loan
will work month-by-month. You'll get an idea of how much interest you
pay over the years, and how much of your balance is paid off at any
given time. The loan amortization calculator includes an amortization
table for your reference.
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 Long-Term Loans
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