Think Twice Before Buying On Credit

In our previous post we talked about giving in to the temptation of buying a gadget just because it is on sale. I suggested a self-test everyone should make before considering a purchase of anything that's on sale:

Ask yourself this:  Would you still buy the gadget if it wasn’t on sale?  If the answer is yes, then you might have a legitimate reason that the item is what you really need. If the answer is no, go back home and forget about the impulsive shopping moment.

Today, I want you to consider the story of George.

    

George was at his favorite music store, having dragged along his buddy Mike just to check things out. Both snooped around the store and saw that there was this keyboard on sale at 20% off the suggested retail price. The original price was $1000, so George assumed 20% off would save him $200. Now that the sale was on, George remembered he always wanted a keyboard, even though he’s really a guitar player...

George did not have anything close to $1000 or even $800 in cash but he had a credit card and figured he could always just pay off say $40 each month by working an extra hour each week at his part-time job.  At $200 off, that keyboard looked and sounded really really tempting.  Should he go ahead and buy it on credit now while it's still on sale?

George, still a student at a music college, did not have a steady job so his income fluctuated quite a bit. Since he hadn't been too good at paying his monthly bills on time, his credit score wasn't the best either.  As a result, the credit card company charged him a very high interest of 29% on his outstanding balance.

With that in mind, Mike pulled George aside and rattled his head around a few times saying: "Wake up George", he said. "Do you realize how long it will take you to pay off the credit card balance?"  Mike, who loved math, pulled out his iPod remembering he just recently downloaded a finance app.  He punched in the following numbers:

Hit the enter button and nearly chocked when he saw this:

That keyboard “on sale” almost turned out to be an expensive and painful lesson if Mike hadn't checked things on his finance app. Not only would it take him more than 2 years to pay off the keyboard, it would end up costing George $1,106.16 ($800+$306.16 interest) – not much of a sale after all...

Lesson learned
A 20% discount can easily turn into a huge surcharge if you buy things on credit.  Always think twice and do your math before you buy anything on credit! 

 

For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com

The Lure Of “On Sale” Items

We have all been there - Browsing through your favorite store and you see that big red tag:

 
Sometimes you see a huge sign right in front of the store inviting you to come in and “save”

Who wouldn’t want to save money and get some new music gear at the same time?

As luck would have it, that new gizmo you previously looked at with a bit of disdain looks a whole lot better now with the “20% Off Sticker” attached to it.  Isn’t it strange how a “soso”, “just ok”, “maybe yes” piece of gear now becomes more like a must have item?  And the only difference being the advertized sale price?

Well, let’s dispel some myths here...

First off, the word “savings” is a complete misnomer in the context of advertising.  The only way for you to “save money” is to not spend it.  Put your money in a piggy bank or open a savings account – that is saving.  When you go shopping, you may pay a lower price on a sale item, but you are definitely not saving.

Second, prices always change buying behavior, there’s simply no way around it. But instead of letting your impulses give in, ask yourself this:  Would you still buy the gadget if it wasn’t on sale?  If the answer is yes, then you might have a legitimate reason that the item is what you really need.

If the answer is no, go back home and practice your favorite solos, arpeggios or chord progression.  That will definitely save you some money.

How To Get $1 Million

The task seems daunting, almost unreachable for many of us.  "If you could only have a Million Dollars what would you spend it on?" that is the sort of mind games most of us have been playing at some point in our lives.  How realistic is the goal of becoming a millionaire?

Whether you work as a musician, painter, banker or accountant, the goal is indeed reachable. If you start saving and investing early and you plan wisely, it does not appear such an unrealistic goal after all. 

Let's use an example to show you that the illusive $1 Million target is not all that unattainable:

If you can save about $10,000 this year and then invest another $10,000 each year at a compounded interest of 7%, you could reach that goal in about 30 years.

If you can save about $20,000 this year and then invest another $20,000 each year at a compounded interest of 7%, you could reach that Million Dollar goal in only 20 years.

Sounds unreal? Not at all – it’s all about planning. There are numerous online calculators that can help you do these types of long-term financial goal settings.  Send me an email to clemens.kownatzki@fxistrategies.com  to get your own personal savings goal calculator.

 

For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com

Please help us spread the word and promote financial literacy!

Good Money Habits That Work: Living Below Your Means

As any seasoned entrepreneur can tell you: There is no single formula or recipe to become rich. Most successful musicians will tell you the same story: It takes a lot of hard work to arrive at a point where you are financially on a sound footing. There is however one way to increase your financial net worth over time by simply living below your means. Spend less than you earn and you will increase your wealth over time.

To meet some role models for the notion of living well within your means, please consider this insightful article: Five Billionaires Who Live Below Their Means.

Topping the list is Warren Buffett, one of the wealthiest self-made billionaires and also one of the most successful investors of our time.  Mr. Buffett is the most un-assuming, low profile person you could ever meet.  As legend goes, he still lives in the same house he bought decades ago for only $31,500.  How is that for an example of dealing with real-estate bubbles. 

Mr. Buffet may be the epitome of the "living below your means" school of thought and he may have taken things to an extreme.  But the lesson is clear: Spending less than you earn could be the single most important habit ensuring a sound financial future.

New Credit Card Rules & The Time Value Of Money

Every now and then, governments implement useful new regulations.  It was the case when Tobacco companies were required to put health risk warnings on all their products and advertisements and here is another one which has been long overdue IMHO. The Federal Reserve's new rules for credit card companies mean greater protections for consumers.  On their Website, the Federal Reserve lists some key changes you should expect from your credit card company beginning on February 22, 2010.

There are various new rules which all make sense in terms of limiting the shark-like behavior of some of the more notorious credit card companies.  Perhaps the most relevant changes that could affect you positively are the new rules for late payments and minimum payments.

Have you looked at your credit card statement recently? The first page should now look something like this:

The prominent displays of late payment and minimum payment warnings should provide some deterrent for all of us credit hungry musicians. 

As an exercise, hopefully creating some form of an “aha” effect, use the 2 examples above to truly understand the difference of paying something today versus delaying payment. This is a perfect illustration of the time value of money, a concept we will be spending a lot of time with in the future. Meanwhile, take out your calculators and run through some calculations. 

You can also see a great cartoon on the subject at our previous post Funny Money.

As we concluded then, it’s always best to pay off your credit card balance in full!

For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com

Please help us spread the word and promote financial literacy!

Funny Money, the fun site to learn about money

This is an excellent concept I just came across: Funny Money is a website based in Canada using cartoons and interactive tools to teach kids and  about basic concepts of money.  As they put it: North America's #1 fun-ancial seminar.

Please check out this excellent cartoon: Get it on Credit

The cartoon teaches you some basics about credit cards. While being entertained they also learning about credit cards, payment terms, compound interest and credit scores.

Enjoy the cartoon and remember to pay off your credit card balance in full!

Click here to watch the video

Why Teach Basic Finance Skills To Musicians?

A recent national survey by the Financial Industry Regulatory Authority (FINRA), the largest independent regulator for US securities firms, reveals a disturbing lack of competence when it comes to basic financial literacy among US individuals. 

The study also suggests, among many other alarming trends, that younger individuals display a much lower financial literacy than older individuals.

Source: Financial Capability in the United States. FINRA Investor Education Foundation, December 2009

Many musicians, particularly the younger and upcoming talents, are somewhat clueless when it comes to handling their own personal finances. This needs to change - now more so than ever that tougher economic times are looming upon us all.

Financial literacy is not an art form nor is it an innate ability or talent.  Most of the concepts of understanding finance are based on simple math skills (Middle School level) and a bit of common sense, all of which can be taught at any age.  These fundamental skills need to be taught and practiced just as a musician would need to practice many years before embarking on a career in music.

A musician needs to build up the motor skills as well as the musical understanding and likewise do students need to learn, understand, and practice basic financial skills to better manage their personal finances.  Here's a simple rule:  It's not how much you make but how much you keep that defines your financial future!

Most importantly, by teaching musicians (and artists in general) to understand their own personal financial situation and enabling them to live within their financial means, we can elevate a much larger group of musicians to the ranks of “working musicians” and “working artist”.  All those musicians who would otherwise be forced to wait tables or work odd jobs could devote much more time towards developing their craft.  Music and art in general might experience a whole new renaissance.

Please help us spread the word and promote financial literacy!

For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com