What is a Certificate of Deposit?

More commonly known as a C.D., a Certificate of Deposit is a non-accessible account that you can open with a bank. The depositor purchases a “CD” for a predetermined amount of money (often in hundred or thousand dollar increments). The bank then has the right to loan out the depositors money without fear of depositor withdrawal, and in exchange, the bank pays a higher interest rate.

Larger principal (amount) CD’s will yield higher interest rates. Longer term before repayment will yield higher interest rates. Penalties will be incurred if the depositor decides to cash in their C.D. before term completion.

The C.D. is also insured by the FDIC (What is the FDIC?) which makes it virtually risk free. These are great tools for investors who want more interest that would be yielded from a Savings Account, but want to remain risk free.

1. Clean up your Budgets!

This is the equivalent of a company cleaning up its balance sheets. Anytime any one (the government, investors, lenders) wants to see the true quality of a company, they go to the balance sheet.

This applies in personal finance as well. By making sure your debt and equity are in Balance, you can keep yourself solid for the hard times.

Start this process by eliminating debt. Dave Ramsey advises the Debt Snowball method that you can read more about in his book, Total Money Makeover. Think of it this way: If you were entering into this recession with no expenses except your basic utilities, wouldn’t you be seeing it in a different light? That’s why its important.

2. Build up your Savings

Now consider approaching this recession with no expenses but utilities, and enough money in the bank to cover all of your expenses for the next year. You would definitely be approaching this recession differently.

Most Financial analysts advise you to save 10% of your income; As a college student, you may want to save a little more. I’m saving 30% right now, and I’d love to be able to put away more.

3. Get a Job and Keep it

Don’t have a job? Make sure that if recession seems on the horizon, Get one.

Have a job? Excellent!

Keep it.

That’s very simple, but there’s a more important step here.
The “Keep it” part isn’t always so easy. Especially in a downsizing, recession atmosphere.

So make yourself necessary. When your company realizes it needs to cut costs-employees will be quick to be downsized. By making sure that you are important to the company, you lower your chances of being one of those downsizes immensely.

If you’re not working on an important project right now, get signed up for one.

If you can’t get signed up on one, volunteer.

What’s an important project? When a company looks to downsize; they look at people as profit generators or expenses. Be sure that you are signing on to something that makes you a profit generator.

4. Invest through the bad

The whole mentality of the stock market: Buy Low, Sell High.

So I never understood people’s mentality when we dip into a recession and no one buys?

When you know its a low in the market, why wouldn’t you buy?! Make sure, that no matter how ugly everything’s looking, that you find the solid companies out there and continue your regular investing. By doing so, you’re going to virtually guarantee a sizable return at the the following boom.

Recessions, though difficult, can be an outstanding tool if used correctly.

They aren’t fun for the majority of people; but its a Dog-eat-Dog world, and in Capitalism, someone will come out on top. Take the steps to be sure that its you.

How are you Surviving the Recession?

What steps are you taking to recession proof your finances? Do you practice anything that makes you more secure in times such as these where things aren’t looking so hot?

What are you doing now that you can carry over into the good times to improve your personal finances?

In our last post we learned what the Price to Earnings Ratio was and how it related to the Multiple of a share.

For Reviews sake, you’ll recall that the Multiple can be calculated by taking the market price of a share and dividing it by the earnings per share of the company. This is because a share’s multiple is a calculation of how many times it’s earnings you will pay for the share.

So if a share is $10 and has $2/share earnings then the multiple would be 5 and it would have a 5:1 P/E ratio.

Using the P/E Ratio in Practice

When choosing stocks, you should not be taking stabs in the dark. Do your research.

So you’ll probably remember that I also said that a P/E ratio was an important part of your homework. It is even more important for choosing a stock though. We’ll go through how to use it for both of these purposes now.

When choosing a stock, you need to be comparing different companies within the same sector. For example: to understand if I should be buying Microsoft I compare it’s multiple to Google’s, Cisco’s and several other tech companies. Now I consider whether or not Microsoft is cheaper than these other companies.

Now — this is very important — in order to justify a purchase you MUST have a reason to assume that the price will be going up. If you cannot convince a friend exactly why this stock will be growing, do not buy.

Let’s say you’ve compared your stock to your sector, found a reason to believe it will grow (be it new management, product launch, simple under-valuing), you may just have found a winner!

Monitoring the P/E Ratio

For the purpose of homework, a P/E ratio must constantly be examined and watched; just as stock prices can be under-valued or a sector’s growth can under-perform an individual stock, stock prices can be be over-valued as well. If the multiple ends up very expensive then it can be just as important to dump the stock as it is to pick up a cheap multiple.

Hopefully this gives you a better understanding of how to go about using the multiple. I can promise you- this is not the last you’ll hear of it!

The P/E Ratio is an Important Tool that Every Investor Should Look Into Before Making Decisions.

If you’ve ever wandered onto Yahoo! Finance, read the Wall Street Journal or watched CNBC then you have definitely heard things like “Walmart’s price to earnings ratio is…”, “Home Depot’s multiple…”, or “Caterpillar is trading at 10 times earnings.”

It may surprise you to know that each of these phrases is actually describing the same thing. Each statement is keeping up with a company’s Multiple, or the amount of times that an annual earnings per share can be divided into the market share price.

You are calculating how much more, in times, you are paying for a share than the company’s earnings for that share.

Example of a P/E Ratio

Why is this important? I will use an imaginary example to illustrate.

Let’s say that Caldwell Inc.’s shares are trading at $10.00 per share, and Leggett Co.’s shares are trading at $45.00.

Which one is more expensive?

At first glance you would say that Leggett Co. Is the more expensive share, but this is inaccurate and the multiple can show us why.

You see, the earnings per share at Caldwell Inc. was $2.00 per share last year. So that means Caldwell Inc. has a 5:1 P/E ratio ($10 divided by $2). It is trading at 5 times earnings.

Leggett Co. had earnings per share of $10.00 last year ($45 divided by $10). So Leggett Co. is trading at 4.5 times earnings.

What Does it Mean?

So let’s put this into perspective: would you prefer to pay 5 times what a car is worth or 4.5 times what a car is worth? Of course, 4.5 times is cheaper!

So even though numerically Leggett Co. appears to be more expensive than Caldwell Inc. when you utilize the Price to Earnings Ratio you see that it is actually quite the opposite!

And this is Important because…

When you are looking to purchase shares of any company, you should ALWAYS be comparing them to the industry and sector you find them in, as well as all of its major competitors. The P/E Ratio is a great starter’s tool for comparing companies’ prices.

Photo Credit: justonlysteve

Income Allocation is the splitting up of your income. It’s the discipline of dividing your cash into multiple areas for unique spending, saving, and investment.

That doesn’t sound very fun now does it. It is an INCREDIBLY important principle though… One that each and every person who strives to manage their own finances should utilize.

What Should I Be Doing?

Before you throw all of your income into a single spending account, consider the consequences of immediate spending… It

Discipline is necessary to any kind of expertise, and allocating your income is no exception. I’ll use my own as my example for this particular lesson, laying out how I allocate my income using percentages for every dollar of that comes into my possession.

Whenever I receive any kind of income — and like I said, DISCIPLINE, so this means ANY kind of income, from my monthly paycheck to a birthday check — I immediately deposit it into a free checking account I have with Wachovia labeled “Spending Account”. From there it is immediately disbursed among several other accounts, each labeled as follows:

• 30% remains in my Spending Account
• 30% is transferred into my Bills Account
• 30% is transferred into my Investment Account
• 10% is withdrawn in Cash and placed into envelopes for my Tithe

Spending Account Example

It’s very simple — My spending Account goes many more places though.

For example, For every purchase that I make with my spending Debit Card, I have one dollar removed from the Spending account and automatically transferred into a Wachovia Way2Save high yield Savings account.

I also use this for longer term accumulation for large spending that doesn’t qualify as an “investment”. What is an example of this? Well, I hope that in the next five years I’ll be blessed enough to ask someone to marry me. So, to prepare for this sort of a purchase, I dedicate 10% of my spending account to an envelope on my desk with a circle drawn on it and no label, so that no one walking in will think I’m jumping the gun… but now you all know. Shoot.

Bills Account

My Bills account gets used for things like gasoline, groceries, etc.

This account is ONLY used for paying off bills. No tapping into this account to cover personal expenses. It’s all a part of that disciplinary lifestyle I keep referring back to.

Investment Account

My investment account is widespread, but ONLY used for purposes that will yield some sort of return. This could range anywhere from purchasing a domain for a website (not a fun website but one I think could yield a return) to a business flight.

Overview of MY Income Allocation

If there’s anything I would encourage you to do before doing ANYTHING else — Set up an income allocation procedure for yourself. This discipline is important because without it, none of these important fields of your personal finance will see a dime of your income. Each of the things that I account for within my list are important and necessary to devote a portion of my income to. If I didn’t make a point to move money into those accounts each and every time I received an income check, I would probably spend it before I could ever place it where it needed to be.

I believe that most Americans are more similar to myself in their irresponsible spending habits than those who can keep all their money together and still manage to plan for retirement and investments.

So to counter my irresponsible tendencies, I force myself to divide the checks immediately. It’s a surefire way to get things done automatically, saving me time, and saving me money.