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?

1. Wordle.net

According to their website, “Wordle is a toy for generating “word clouds” from text that you provide.”
With wordle, you can either type a bunch of words in a field that the website will work with or type in a website URL and the site will automatically take the main words from that page.

For UseTheDollar.com- Wordle yielded this:

or

 Wordle.net makes this sort of project so mind-numbingly simple, its incredible.

Print it out, Throw one of these into a cheap or self made frame, and voila! Gift ready!

2. Bake Cookies

I’ll tell you what- I don’t think you could make me a whole lot happier than to hand me a batch of fresh snickerdoodles.  I’m a sucker for those things.

Throw some shredded paper in the bottom, bake a few different types of cookies, and put them in a basket and you’ve got a killer gift for any friend or family member!

Coupon Book

Make your own coupon book.  These can be filled with things like “one free backrub”, “5 rooms vacuumed”, etc.

If you really want to make a killer one, mix it with your own home made coupons and coupons for different stores, restaurants and anything else that the receiver might be interested in.

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!

Wachovia offers a great savings program called Way2Save that competes with Bank of Americas Keep the Change Program

One of Wachovia’s newest services, the Way2Save account offers unbelievable interest rates and incredible ease of use.

I have been a customer of Wachovia for over 5 years now.  I signed up for their Way2Save account over six months ago, and I am a very pleased customer.  This account is Wachovia’s way of competing with Bank of America’s Keep the Change program.

Why is it Better?

Way2Save differs from other Savings programs in that it is only a three year program.

With a 5.00% APY it already exceeds anything else you’re going to find in this market!  In year one of the program you can earn a BONUS 5.00% on all money up to $300!  So at the end of year one, you can earn up to 10.00% INTEREST on your money up to $300.00 and %5.00 on anything above that!

Before you think you’re going to run to the nearest Wachovia Branch and deposit your entire life savings,
here is the catch:

I told you that it was Wachovia’s competition with Bank of America’s Keep the Change program.  As opposed to rounding up to the nearest dollar amount with each use of your checking card like Bank of America does, Wachovia adds $1.00 to every transaction total and deposits it from your checking account to your Way2Save account.  In addition to this you are able to set up your checking account to automatically deposit up to $100.00 every month.

So the two ways to get money into this high yield account are:

1. Use your checking card- with each swipe you get a dollar put into the account
2. Set up your checking account to auto-transfer up to $100 each month

So as you can see, you’ll not only be yielding far more interest than you would in any conventional savings account, but through it’s methods of auto-transfers using your checking card and your manually set up transfer, the Way2Save account is a great way to keep yourself accountable to your savings.

This graphic from Wachovia’s website illustrates your potential savings:

Apply Online!

If this account still sounds as good to you as I have found it to be for me, you can check it out and even apply Here!

Monday- November 3, 2008

Open: 9,326.04 Close: 9319.83
“Rescue Cash Lures Thousands of Banks”
As the new rescue plan continues to be presented, even banks that are not in need of further funding are seeking it because of fear that if they don’t, the market will view them as having been too unhealthy to qualify.

Tuesday- November 4, 2008

Open: 9323.89 Close:9625.28
“US weighs Purchasing Stakes in more Firms”
While the economy continues to sour, the Feds begin to consider purchasing stakes in companies aside from just the banking industry.

Wednesday- November 5, 2008

Open: 9616.60 Close: 9086.06
“Denmark pushes vote to Adopt Euro”
As the economy falls further- the world view on stronger currencies like the Euro begin to grow sweeter.  Denmark began pushing for a vote to adopt the Euro as their new currency.

Thursday- November 6, 2008

Open: 9134.01 Close: 8695.79
“New Debt could Hamstring Obama”
As the coming weeks unfold, American debt is skyrocketing to record levels and may have a negative effect on Obama’s economic plans.

Friday- November 7, 2008

Open: 8696.03 Close: 8943.81
“Securities Firms Tackle Pay Issue”
Europe began slashing its rates- the Bank of England dropping their rates a full 1.5% - and American Democrats begin putting together a plan to inject a further $100 Billion into the economy.

Monday- October 27, 2008

Open:8,375.92 Close:8,175.77
“Bankruptcy fears rise as GM and Chrysler seek US aid”
General Motors and Chrysler begin to explore a merger between their companies to try and save themselves.  A Michigan task force works to curb the potential job losses from car manufacturer layoffs.

Tuesday- October 28, 2008

Open: 8,178.72 Close:9,065.12
“The Buck is Back”
As the world economy falls, the Dollar is back!  Around the globe, as people sell off their investments they are working to shove all of their money into the Dollar.

Wednesday- October 29, 2008

Open: 9,062.33 Close: 8,990.96
“Stocks take Big Leap as Investors Await Fed”
The dow leaped over 10% (nearly 900 points) to break the $9000.00 threshold again due to hopes of a potential rate cut.

Thursday- October 30, 2008

Open: 9,004.66 Close: 9,180.69
“Fed Steps up Assault on Slump”
The Feds return to a 1% interest rate, unseens since 2003.  China and Norway joined the Feds in their rate cuts.

Friday- October 31, 2008

Open: 9,198.73 Close: 9,336.93
“Securities Firms Tackle Pay Issue”
Wall street’s top executives are in talks to possibly cap their own compensation.

What a Beautiful Paper

Above is a picture of the copy of the Journal that arrived on my doorstep this morning. 
Though it appears to be just as cluttered and jampacked as the average paper, the Journal’s writers actually take into consideration your time constraints and make it a bit easier to digest.

The Efficiency of the Front Page

Cliche as it is, the Journal does a great job with the front page.  Ordinarily, the Front page houses the most meaningful and useful articles.  If you’re sure to atleast glance through the headlines on the front page, you’ll be sure to hit up the majority of news from the previous day.

What’s News-

This is my favorite part of the Journal.  The Wall Street Journal gives small summaries of almost every important article in the paper in the “What’s News-” section on the front page. 

This is an Incredible tool for the average busy skimmer!  The Journal removes the need to go searching for articles.  It gives a boldened headline and one to two sentence summary of each article on the front left of the page.  It will almost always be above the fold, so it is increidbly easy to find.

If you glance over the “What’s News-” section every day,  you should be broadly updated on the previous day’s news.

Using the Different Sections

First off, I’ll say that these are my opinions about the usefulness of each section- some have disagreed with me, and I’m sure more will in the future.

 The Wall Street Journal is divided into Four Sections in the Monday through Friday Issues: The Front Section, MARKETPLACE, MONEY & INVESTING, and THE JOURNAL REPORT.

The first section covers the main headlines of the day.  If you are going to read only one section, read the first section.  That’s why its the first section.

MARKETPLACE

I call this section Main Street, because overall- that’s what this one covers.  It covers articles about the actual fundamentals and infrastructures of a company.  Main Street covers the actual companies.

MONEY & INVESTING

This one is Wall Street.  It covers where to invest, what to buy, etc.  It’s more about the shares, earnings, and Wall Street related topics.

The Journal Report

My Honest Opinion: unnecessary.  This one covers things like Google’s new G-Phone, or new products, etc- which if important enough will be covered much more briefly in the Marketplace section, and in all seriousness- you’ll hear about on the radio, fox news, CNN, or anywhere else that you turn.

So How can this Help me?

This is all nice and good, but how can I use this?

The Wall Street Journal is probably the most reputable paper in the world for Finance.  They hire only the most credible, educated, and up to date writers and editors in the world.

If you keep up to date on the topics and headlines that these influential writers find important, you should be caught up on all of the important financial news for the previous day.

Monday- October 20, 2008

Open:8,852.30 Close:9265.43
“Europeans Step Up Bank Bailout”
Between the Netherlands’ agreement to inject $13.4 Billion into ING and Germany’s decision to rush to put together some sort of Financial Rescue package, Europe continues their fight against the crisis.

Tuesday- October 21, 2008

Open: 9179.11 Close:9045.21
“U.S. Rescue Fund is Likely to Foster Bank Takeovers”
As banks begin planning around the new US capital injection, larger banks begin to consider using the funds to purchase smaller banks.  This could cause some serious controversy as the takeovers would not yield nearly the boost as new lending would, and it would all be at the taxpayer’s expense.

Wednesday- October 22, 2008

Open: 9027.84 Close: 8519.21
“Fed offers More help to Money Funds”
As the credit markets continue to crumble, the Federal government attempts another resolution by considering an additional $540 Billion injection to the Money Market Mutual Fund industry.
“Europe adds to Bank plans in bid to blunt likely Recession”
As the crisis continues its spread into Europe, France has commited to inject $14 billion into six of Europe’s large banks and Italy is now considering taking stimulus measures themselves.

Thursday- October 23, 2008

Open: 8519.77 Close: 8691.25
“Plans to aid Borrowers gain steam”
The administration is considering a $40billion plan to eliminate the mass amounts of foreclosures.

Friday- October 24, 2008

Open: 8683.21 Close: ?
“Greenspan Admits Errors to Hostile house panel”
Greenspan, under questioning, admitted to mistakes in judgement that he had made that could have added to the current economic slump.

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