Saving: Be the first of your friends to try it! (Part I)

Piggy banks and jingling coins were the first things that came to mind when I heard the word “saving” as a kid and a teen. The picture above features the top 14 images from a Google search of the word. Both my early understanding and Google seem to align quite well with the common conception of what savings is – small amounts, several coins at a time, here and there that eventually amount to a useful sum of money. Saving is the essence of wealth creation.

The issue with this understanding is that it makes saving seem like an afterthought. The leftovers. The scraps of consumption. This is the case in the United States where individuals save, on average, less than 10% of their income. For some, this rate even goes subzero. In other words the average person went into debt during the year instead of saving for the future. This hasn’t always been the case though. The average used to be over 15%. Time to bring it back like the mustache.

In fact, financial advisors will tell you, that you should be saving at least 10 – 25% of your income after already having an emergency fund of 3 months to 6 months income set aside in cash.

The graph below shows how different wealth groups save. Ironically, the more money you have (money, NOT income – stagnant, piled, cash, money), the easier it is to save. The nature of interest rates (see Interest Stuff posts) makes saving exponentially easier as one’s wealth increases. This is because the money you have produces more money/income and therefore more savings potential.

This exponentially powerful reproductive quality of saving money is what is not explained to young Americans. I did not learn about this manmade phenomenon until I was out of my parents’ house, struggling with bills, and took my first economics course. (Honestly, I would recommend that every single person, at least that plans on living in contemporary society, take basic micro- and macroeconomics courses until they ace them.) When I found out, that you could truly make money with your money through investing, I decided to study business. It seemed the only logical course of study.

I am not saying that people should forego their dreams, major course of study, or whatever to study business. I was, first and foremost, a French major and when it came time to graduate, I walked with the other six French grads instead of with my Business School buddies. I guess what I am saying though, is that the conception of saving as an afterthought, a superfluity is detrimental and should be revised. Saving is a powerful tool that should be aggressively advertised. Too bad it only makes the SAVER money.

Disclaimer: This is not a scholarly blog. I am not citing any sources, rather any information has come from my personal studies and any graphs or data used or referenced is easily accessible via Google Search.

Interesting Stuff: Anything in the paper today, Joe? (Part II)

Interest rates, like any other price, change over time. The price of money just happens to be more volatile and more people pay attention to it than to most other things. This volatility is caused by “the market” or, in other words, the the generally masses that borrow and lend (essentially buy or sell the service of using money).

To round out the formula for an interest rate mentioned in the first part of this post, let me introduce the idea of Market Equilibrium – Sounds more complicated than it is; here is how it works.

† Interest Rate = General Inconvenience + Risk Premium +/- [How you feel after reading a Newspaper]

1. If more people want to lend money than borrow money . . .

Interest rates will drop. The cost to borrow will be cheaper. This is because the market is not at equilibrium. There is extra cash lying around that no one knows what to do with.

2. If fewer people want to lend money than borrow money . . .

Interest rates will rise. The cost to borrow will be more expensive. This is because the market is again not at equilibrium. Everyone is trying to get there hands on cash and there is not enough to go around.

3. If the same number of people want to lend money and borrow money . . .

The market is said to be at equilibrium. If this is the case the interest rate should rest at one level and not change. This is said to be around 5% depending on what you look at and who you ask. I think the concept is pretty much Bull Sh*t since its so hypothetical that it’s pretty much irrelevant.

This chart tracks the U.S. 10- Treasury Rate movement over the last year: one of the most internationally followed rates. Found it at BigCharts.com, its my favorite chart website.

This is how I use this idea of Market Equilibrium . . .

Read a newspaper, almost any one will do. Not just the business section. Read the international news. The weather. The stuff about politics and what not. Definitely read the front page because odds are that’s all most people hear about and act on. Think about all the articles you read and whether or not you think based on the articles, people will start buying more stuff. Then think about if anything you read made you think that Joe-down-the-block-that-owns-the-hotdog-stand would be in a worse financial situation in the near future. Then read stuff from other news providers to round out your opinion.

1. If you think people are gonna buy more stuff, odds are rates are going up. People will borrow to buy more.

2. If you think Joe is gonna be just “meh”, rates might be coming down. Lenders want to entice borrowing with lower rates and encourage Joe to spend more to help his business.

3. If you think Hotdog Joe is about to be Hobo Joe, odds are rates are really going up. No one will want to lend to Joe ‘cause the dude probably ain’t good for it (remember what I said about risk premiums!). Unless you read something else that mentions QE or “Quantitative Easing”, that means rates are coming down (if you want to know more about it QE, Wikipedia’s gotcha covered, also helps for anything business related)

For the record, this Market Equilibrium stuff is all you need to know to understand how the prices of things will change over time. And the process of analyzing prices is the same for interest rates as it is for cotton, computers, salt, water, gas, air, whatever really. Bottom line, read! Read a lot!

† This is a rough approximation. Any newspaper will do. Accuracy is absolutely directly correlated with the number of newspapers and articles you read in them.

Disclaimer: This is not a scholarly blog. I am not citing any sources, rather any information has come from my personal studies and any graphs or data used or referenced is easily accessible via Google Search.

 

 

Interesting Stuff: Risky Business (Part I)

Interest Rates are always in the news. Prime Rate. 10-Year Rate Treasury. 3-Month LIBOR. If you are the average person though, the only interest rates you care about are the near-zero one that puts $0.01 in your bank account at the end of the year, the one you charging $100 every month on your student loans, and maybe the one you forget is part of your car payment that you think is only like 10% of your payment but is probably like 40% of it. What is an interest rate though?

Interest rates at the most basic level are the price you pay someone else for the service of using their money for a period of time. Since that person has the inconvenience of not having access to their own money while you borrow it, you have to pay them a percentage of the borrowed sum. If there is no risk of you defaulting (not being able to repay), then the interest rate is considered “risk-free” and will simply cover the inconvenience of lending.

If however, you, the borrower present a risk to the lender, you will have to pay a higher rate as compensation for the risk that the lender must assume on top of the inconvenience of lending in the first place. This extra amount is called a “risk premium”, i.e. the extra amount charged because of risk factors.

            Interest Rate = General Inconvenience + Risk Premium 

Disclaimer: This is not a scholarly blog. I am not citing any sources, rather any information has come from my personal studies and any images or data used or referenced is easily accessible via Google Search.

Business Concept Series

I am finally getting started on the Business section of this blog. My aim is to make micro-finance and business in general as fun as the other parts of my blog. Challenging, I know, but I accept that. So, I am going to try and make my posts short and sweet. I want them to be helpful and interesting.

To start out, I will do a short series of posts on concepts that relate to micro-finance and will draw them in together as I move forward.

I will cover:

Interest Rates,

Savings,

Borrowing,

Spending,

Investing,

-Maybe some more if I think of them while writing these . . . on va voir.

In the mean time, I recommend checking out Investopedia for info on all things business related. Wikipedia can fill in anything else. Don’t listen to the haters.

Disclaimer: This is not a scholarly blog. I am not citing any sources, rather any information has come from my personal studies and any images or data used or referenced is easily accessible via Google Search.