10 Financial Lessons you can Learn From Credit Cards

10 Financial Lessons you can Learn From Credit Cards

There may come a point in your life when you feel the need to take a loan. This could be for various reasons, to cover expenses that you don’t have the money for right then. Taking a loan is a normal practice followed all over the world.

A loan can help you get through difficult phases in life by providing the necessary cash you need for emergencies. But there is a downside to loans as well. They come at a cost, and some sources of funds charge a lot more than others.

Credit cards give you the freedom of borrowing money up to a certain limit to pay for any purchase you deem necessary. But many users forget to pay or are unable to pay their dues on time since they don’t account for immediate repayment of the borrowed amounts.

They end up paying exorbitant amounts as penalties and interest charges. One of the financial traps that many people unwittingly fall into is credit card debt, when they’re unable to pay these extra interest charges.

Credit cards are both beneficial and dangerous, depending on how you use them. The following is a list of lessons that you can learn from these cards.

1.     Be Sure of Paying Back on Time

One of the most important things to keep in mind before charging any expense to your credit card is that you must repay the amount within a certain date as determined by the bank. Bank charge extremely high interest rates on unpaid amounts.

This point is vital. Use your card if and only you feel confident of paying off your dues on time.

If you feel you will not be able to afford your repayments at the end of the month, don’t use your card. As the saying goes, it’s better to be safe than to be sorry.

2. Budget Your Finances Every Month

Budgeting is a very important activity and you should consider making it a habit. Budgeting your expenses can help you find out exactly how much you can spend in a particular month.

In case you have to use your credit card, calculate how much you have to pay the bank at the end of the month and include this in your monthly budget.

Budgeting can help you avoid spending more than you should. With credit cards, it is easy to spend recklessly, and this is dangerous because you’re spending money that isn’t yours.

3. Be Careful When Using Money That’s Not Yours

When you have a certain amount of credit that you can use on your card, you are always tempted to use it. It almost feels like products and services are calling out to you to buy them.

But always resist the urge to spend unnecessarily. It is okay to splurge once in a while, but reckless spending using your card can get you into serious financial trouble.

Just because your bank extends you a high credit limit, you don’t have to compulsorily use it. Be wise regarding credit facilities. Use them cautiously.

4. Don’t Count Your Chickens Before They Hatch

In other words, don’t pay for something unless you already have the money for it. This doesn’t mean you should never use a credit card.

If you have a regular income, you are free to use your credit facility, but up to the extent of your monthly expense budget (and up to the credit limit you are granted).

In case you have irregular income or if you expect a certain amount of cash to flow into your bank account, don’t make purchases using your credit card till you actually get the money.

5. Good Cash Flow is Better Than Assets

Most of us make purchases based on our needs. But when it comes to our wants and products we don’t really need right away, we still convince ourselves that it is okay to buy them since we are investing and creating assets.

While this may seem to be a good argument, you should also bear in mind that a steady cash flow is much better than creating assets. You need a regular inflow of cash to pay for your daily and monthly expenses.

Buying too many things using your credit card leaves you with a high repayment amount at the end of the month. This may leave you without the money you need for other monthly expenses.

6. Use Your Card Only for Practical Purchases

If you want to spend using your credit card, make sure you use it only for practical purchases – things that you actually need. More often than not, your needs cost much lesser than your wants.

Differentiating between your needs and wants helps you spend wisely. Leave the bigger and more expensive purchases for when you actually have the money to spend.

Adopting a practical approach to finances can help you avoid getting into debt.

7. Debt can be a Vicious Cycle

With so many loan options available today, they may seem to be an attractive way of getting through financially difficult times.

Banks offer attractive credit card sign-up promotions and repayment schedules, which make them look like the best solutions to your financial problems.

While loans can help you immensely, they can also become a huge burden if you don’t handle them properly. For many people, one loan leads to another, and it continues till they’re neck-deep in the vicious cycle of debt.

Credit card debt in particular is one of the most dangerous since the interest rates are shockingly high.

8. Nothing in Life is Free

You don’t get anything for free. Everything has a cost and the cost is borne by either the seller or the buyer. Many credit card companies advertise low rates of interest or in some cases, zero percent interest.

You should remember that banks don’t offer money as charity. They are businesses, and for businesses, making profit is the main aim.

When you choose a credit card, look at the Effective Interest Rates (EIR) rather than the advertised rates. EIR shows you the actual cost of your borrowing since it accounts for other charges such as processing fees and late repayment fees. EIR is almost always higher than the advertised rates.

9. Paying Instalments on Time Improves Your Credit Score

One of the biggest advantages of paying your credit card dues on time is that it reflects well on your credit score. A good credit score makes it easier when you apply for other loans such as personal loans and home loans.

Banks consider your credit history and credit utilisation when they approve your loan applications. Keep in mind that missing out on even one monthly repayment can impact your credit rating adversely.

10. Other Loan Options are Cheaper

Credit cards charge some of the highest interest rates in the financial sector. If you need emergency cash and can wait for a day or two, look at other options such as personal loans. Personal loans carry much lower interest rates.

If you’ve accumulated a lot of debt on your credit cards, you can consider using a personal loan to pay off your card dues. Many banks also offer card balance transfer facilities to pay off these card debts.

Credit cards are a great way to pay for your expenses. But they can become a heavy burden to bear if you don’t use them wisely. Use your card wisely and make sure you spend only to the extent that you can comfortably repay.


5 Tips for Your Spring Stock Game

5 Tips for Your Spring Stock Game


If you are using the HTMW stock game for the first time, or if you’re a veteran looking for some tips, here are the Top 5 Best Practices for your late Spring stock game!

Why More Teachers Start Their Games In The Spring

The school year is entering its final stretch, and your students know it! As the snow melts away and flowers start coming out, your students’ eyes have probably been lingering out the window (or on the clock) – making this an exceptionally difficult time to keep them engaged. This is why the Spring is the most popular time to run a classroom stock game!

We at HTMW always find that longer stock games work better (and teachers agree: semester-long and year-long classroom stock games are on the rise!), but we always see a huge surge of new classes created in the second half of the Spring semester. Even if teaching about investing and the stock market is not at the top of your class agenda, mixing up the volatility of the markets, researching real companies and the economy, and good, old-fashioned class competition makes the perfect recipe for engaged students, and a Spring full of learning!

#5: Use Assignments

On HTMW, an Assignment is a list of task you can give your students to complete. This is what makes our stock game unique – Assignments reinforce the learning process while making the game easier to pick up and master.

Assignments include:

  • Watching tutorial videos, showing the students what it means to manage a portfolio and make their first trades
  • Reading educational articles, like “What is the NYSE?” or “How to use a Spending Plan”
  • Taking automatically-graded pop quizzes, embedded with each article
  • Making trades to start building their portfolio

Once you already have a spring stock game set up, it takes less than a minute to add an awesome Assignment that your students will love. If you haven’t used assignments before, click here to see how!


#4: Be Sneaky With Learning!

Students have been in school since last September, and you probably have some students that already seem tired of lectures and projects, but this is their time to shine! There is so much happening in the world that impacts the stock market, which is why the stock game is such a versatile tool for learning.

On HTMW, we have a special tool called “Trade Notes”. This means that you can require your students to make a short, 1-2 sentence note with every trade as they are building their portfolio. This is a great way to reinforce class concepts, without your students even realizing they are learning!

Kick off your class by talking about a current event in the news, and how it relates to your class topics. This works just as well for History classes as it does Personal Finance – but it plants the seed for your students as they start to trade. Next, ask students to make at least 1 trade each day relating to that topic – and write a brief note about how it affected their decision.

#3: Let Your Game Run Long

Your class might end in a month, but your stock game doesn’t have to! In fact, HTMW has a built-in “Forums” feature, where students can post messages for other students to see and reply to. You can use the Assignments feature to even set up a Summer activity for students, and use the Forum to let them continue discussing the markets even after classes end!

#4: Give Prizes


A little incentive can go a long way! If you want your students to remember what they learned in the stock game long after it ended, it can be as simple as handing out certificates to the winners or participants. We even have a handy template you can use!

Click here to download a winner’s certificate!
Alternatively, Click Here to download a participation certificate for everyone in your class!


#5: Start Now

This might sound obvious, but your students can’t benefit from the HowTheMarketWorks Stock Game if you haven’t set up your class! There is a reason why we were voted the #1 stock game – we make it easy!

So if you haven’t already, take 2 minutes to set up your absolutely FREE spring stock game!

Click here to register your class


How To Build A Portfolio

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1 of 3) What is a Time Horizon?
2 of 3) What is a Diversified portfolio?
3 of 3) If you are a new investor, which approach is the safest way to start?

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What is a Stock Index?

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1 of 3) Why are stock indexes important?
2 of 3) How many stocks are in the Dow Jones Industrial Average?
3 of 3) What is the major focus of the NASDAQ index?

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What is a Stock Exchange?

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1 of 3) What is a Market?
2 of 3) What determines the price of a stock in the market?
3 of 3) Where do most stock trades happen today?

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What are Mutual Funds?

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2 of 3) What do investors call the stocks, bonds, and cash that make up a mutual fund?
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Stocks Made Easy

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2 of 3) What does a stock represent?
3 of 3) What is NOT true when a company issues stock?

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Teacher Referral Program

Teacher Referral Program

We owe our success to teachers like you using HTMW and referring us to your friends.

As our way of saying “Thank You”, we want to give all teachers who refer a friend who creates their own class contest with an Amazon Gift Card.

Program Details

Come-To-The-CommunityParticipating is simple – just ask your friend or colleague to create a class on HTMW with at least 15 students who place at least 5 trades before December 20, 2017.

Send us the name, school, and email address of your colleague to info (at) howthemarketworks.com so we can watch out for their class, and make sure you get the referral credit.

We will send both you and your colleague a $25 gift card for every new teacher you refer – use it for a classroom pizza party, cool gifts for your top class traders, or anything you want!

Fall 2017 Challenge

Win prizes in our stock market contests!

Find all of the information for any stock contests with prizes we are currently running here!

You can also find information on past contests and their winners.

Register Here To HTMW Fall Challenge

Fall overlay

Who can join?

Anyone can join! Joining our stock market contests is completely free, so Sign Up Today! If you are under 18, by joining this contest you imply that you have obtained your parent’s permission to participate.

How Can I Participate?

The only thing you need is a completely free HowTheMarketWorks account, Click Here to register! If you are already logged in to an account, clicking any of the stock market contest “join” buttons will automatically enter you into the contest – just switch to your contest portfolio and start trading.

What can I win?

There are two great ways to win prizes:

  1. The top 5 finishers with the highest portfolio returns will each win a $100 Amazon Gift Card
  2. To celebrate Economics Education Month on HTMW, everyone who completes the Economics Assignment will win free access to the Investing101 Beginners Investing Course ($99 value!)

Once I’ve Joined, How Do I Make Trades In My Contest Portfolio?

If you are joined into more than one stock contest, you can switch between your portfolios using the drop-down menu you’ll find near the top of most pages:

Just select the contest you want to start trading in, and you’re set!

Is there a cost?

Nope! No costs, everything we have is completely free! The prizes are sponsored by the brokerage industry to help promote financial literacy and early investment. However, if you do want to support our team, Buy a T-Shirt from our store!

Is there any educational value to the contests?

Of course! Everything we do is centered on education. The HowTheMarketWorks Team participates in all contests, and all of our team gives live updates on our portfolio holdings, what kinds of trades we made, and why we made them. No one on our team can win prizes, but we want to give new investors an idea of what kinds of things to look for.

Every month we also celebrate a different aspect of personal finance and economics with a different theme to the contest. We also add educational articles, videos and more to help all of our participants learn!

The top finishers from each contest are also invited to share their portfolio holdings and give some explanation for their trades to help new beginners learn how to make great trades!
Click Here To See Winning Strategies Posted By Previous Participants

Teachers can also create their own custom contests for their class, and use all HowTheMarketWorks features, research tools, and classroom perks as part of their mathematics, social studies, economics, and personal finance classes, and its all completely free!

Special Rules

  • Each individual is allowed only one portfolio in any contest
  • Winners will be contacted by email to receive their prize. This must be the email address associated with your account. If you need to change your email address, contact support@howthemarketworks.com
  • Every contest has a starting portfolio value of $100,000 USD, allows only US equities and ETFs.
  • Day trading and short selling are permitted in all contests
  • 9999 max trades per account
  • 25% position limit
  • All winners will be audited, and disqualifications will take place at our team’s sole discretion
  • Winners must claim their prize within 30 days of the results being announced
  • We may ask winners to provide a photo ID upon claiming their prize as part of our auditing process.


Trade Notes – Justify Your Trades

Trade Notes – Justify Your Trades

HowTheMarketWorks is all about education – we want students to learn about investing and personal finance by managing their virtual portfolio with carefully-selected trades.

How It Works

Every time your students place a trade, they will be prompted to enter their “Trade Notes” – a short sentence mentioning why they are placing this trade (almost like a tweet, but we allow up to 300 characters).


Students can review their Trade Notes later from their Transaction History and Order History page. They can also add a note to any trade at a later time to explain if it was a good investment, or if they took a big loss.

Help The Learning Process

Most teachers already include a writing project for students to show how their portfolio moves over time – the only drawback is that students can always look back at their portfolio with 20/20 hindsight.

To make sure students can always review their critical thinking skills, teachers have two powerful new tools with trade notes.

  1. First, you can make the notes optional or required for your class. If you require trade notes, students will need to enter a note every time they trade. If it is optional, students can enter trade notes as often as they want.
  2. To protect students from themselves, trade notes cannot be deleted. This means they cannot realize a mistake and change their reasoning later! Students can always add extra notes to the same trade, but as the teacher you will have a time stamp showing when the trade was placed, and when each note is added.

Enabling Trade Notes For Your Class

Trade Notes are optional on all classes, so your students can start taking notes right away! If you want to make Trade Notes required, create your new contest, or edit your existing contest, and set the “Trade Notes” rule to “Yes”.

trade note rule

Viewing Trade Notes

You can also see the trade notes for every student in your class. Just visit your class Rankings page and click “View” next to the student you want to review. This will show you everything about that students’ portfolio – including their trade notes!

trade notes

Happy Learning!

How To Pick Stocks

How To Pick Stocks

Picking Stocks – The Basics

The most challenging aspect of starting to invest is picking the first few stocks to add to a portfolio. Every investor has their own techniques and strategies, but we want to give you the tools you need to place your first trades, and get your portfolio off to a running start.

Establish Goals

Before choosing your first stock, the first step is deciding what your goals are for your portfolio.

Risk and Reward

The biggest choice you will make will be balancing risk and reward – investing all your cash in very risky assets with high growth (or loss) potential, or focus on companies that you believe can be strong in the long run.


Once you consider how risky you are feeling, next decide how you want to diversify your portfolio, which will help you decide how much cash to invest in each symbol. Your challenge may do this automatically – most challenges include a “position limit”, meaning you can only invest a certain percentage of your cash in any single stock. You can check if your contest has a Position Limit rule on the Account Balances page.

Once you establish the minimum number of securities you need, you can now start handpicking stock symbols by using a trading strategy. You can also create a mix of these strategies to get the best of each strategy.

Trading Strategies for Beginners

Your goal with your Trading Strategy is to get a list of stocks or ETFs that you might want to invest in. The purpose is just to get a “wish list” of stocks – at the end of the day, you will probably add half (or fewer) of your initial picks to your permanent portfolio. Once we get that initial list of possibilities, we will take a look at how to narrow the list down.

“Invest in what you know” strategy

The best way to start when buying stocks is to buy what you know, not trying to follow stock tips or read a bunch of technical analysis that you cannot follow. Think of it this way: if you already know a company, they have done well enough in the past to already become a household name today. This gives you, as the investor, a big advantage; you can see how that company is doing just by looking at their stores and reading normal business news.

Ask yourself the following questions:

  • Have they started to open new stores around me lately, or are they closing some shops?
  • Does there seem to always be a lot of people you know using their products, or are they still more obscure?
  • Does their current news look positive or negative?

If all three of these are positive, then this might be a good place to invest.

Earnings Strategy

An investor can always handpick stocks based on the earnings calendar. To do so, you would have to know your investment time horizons, and flip through the earnings calendar to find gems (i.e. stocks that you can buy and that will soar during its earning season, or stocks that will tank and that can be shorted beforehand).

The Earning Strategy is somewhat of an evolution of the “Invest in what you know” strategy – you will be looking for companies that you believe will have high earnings announcements coming up soon, which can cause their stock price to rise.

Once you have found your stocks, it is very important to analyze them and back-up your assumption of how the market will react to their earnings report.

An example of a well executed trade based on the earnings’ expectations would be Nvidia (). Before the presentation, NVDA was trading around 102 and soared continuously every since to 149.44 on the 7th of June 2017!


You can compare with other stocks with recently-released earnings using our Quotes Tool.

The Passive strategy

If you are not sure which specific stock to select, you can always invest in ETFs and market indices. These products are already diversified for you and will track a specific market for you.

As an example, let’s say you want to invest in a gaming company, but don’t know which company in specific. You can always invest in an ETF that will track the gaming market for you. In this situation, you can invest in the PureFunds Video Game Tech ETF (), which tracks this market for you. Based on their website, they have invested in gaming software firms such as Ubisoft, Activision, Konami, etc., which means the stock picking and allocation tasks has been already taken care of by the Fund Managers of this ETF.

You can find a specific ETF here.

Many investors also start with a passive strategy, and slowly break out. This would mean starting your portfolio by picking ETFs in 5 industries you want to invest in, then looking at each of those industries in detail using some of the other strategies here. Once you identify some stocks within those industries, you can sell off some of the ETF holding, and use the cash to invest in the stocks you have researched.

Stock screeners strategy

You can also use stock screeners to find good purchases and short sales. A Stock Screener is a program or website that will ask you some questions about what you are looking for in a stock, and return a list of stocks that match your criteria. You can then do extra research on these stocks to determine if they should be added to your portfolio.

One of the best stock screeners is Chaikin Analytics, which offers free 90 day usage for beginners (but the free period expires after that). Check it out here.

Getting Trading Ideas

We also have a “Trading Ideas” page that will help you review the overall market’s health and help you adjust your stock picks. The Trading Ideas page has the following information:

Today’s Market Summary

This page is very useful for the start of your research. It presents the day’s market summary. It is useful because it tells you how the overall market is doing today. As an example, on May 17th, 2017, you would notice that indices such as SPY dropped 5 points due to the “Trump-Russia” investigation. This can be used as a signal to certain investors to buy more. If an investor purchased SPY during the dip, he/she would have gained more than $5 per share! It is always important to review how the overall market is doing and the market news today. This can help you to capture the perfect timing to buy stocks at their lowest price (or to short sale them at their peak).


Earnings Release

This page presents stocks’ quarterly earnings pre-announcements with the current estimate and new range. A stock’s volatility increases when it is near the earnings report.

Analyst Ratings:

The Analyst Ratings page presents the recommendations given by brokerage firms and financial analysts. This page will be useful to analyze a stock’s recommendation trend and the current average recommendation.

Best/Worst ETFs

Looking for an ETF? This page is a great place to see what ETF is currently doing well and what ETF is not well performing. These ETF can signal current market trends and help you make choices based on that.

Popular Stocks

Wondering what other users are trading? This page presents our popular stocks and mutual funds. We also present top gainers and losers and hot stories that is moving the market today. You can also find our random stock generator, which generates 3 random stock ideas!


The Upgrade/Downgrade page presents all the changes in analysts’ recommendation of symbols.

Investing Newsletters

The last common strategy for beginners is to sign up for investing newsletters to get trading tips from professionals. You can sign up for one of the newsletters below:

Picking Stocks – Intermediate Analysis

Now that you have a couple of stocks in mind, you should perform a more advanced analysis of your stock picks. This extra step of your research will be useful for two major reasons:

  • You will verify if these stocks are truly good investments. They can be rejected if you discover that they are in fact not good investments.
  • You will back up your assumptions about these stocks. If your Investors, Professor or Classmates has any questions about the reasoning behind your stock picks, you will be able to elaborate a robust and solid argument.

This is where you can pick the stocks that actually go into your portfolio for the long-run. If you started with a Passive strategy, your portfolio might already have some industry ETFs, but now we will be looking at specific companies to replace part of those investments.

We will explore a couple of basic research methods that will complement your findings on your stock picks.


Technical Analysis

Technical analysis is the process of determining patterns and trends with the use of historical data for a security and charts of a specific timeframe. Charts are clearly an efficient way to visually notice a pattern and act upon a specific trend. We will visit a couple of basic chart patterns and put them in real-life situation context as well. Most of the technical analysis tools make use of the charts you can find in the Quotes Tool.

Trends & Trend lines

A trendline is a straight line that connects the stock’s price movement together and creates an upward or downward pattern. It is often recommended to connect more than 2 points to have a stronger trend line.


Trendlines are useful to give you a general idea of how the stock’s price is generally moving. A positive trendline does not mean it will keep going up forever, but can be an indication that there are some strong underlying business foundations.

Support & Resistance

A support line represents a price level at which the stock never went below. In other words, it is the point at which the stock struggles to go under. On the other side, a resistance line represents the price level for which the stock cannot breakthrough.


Stocks near their Support lines tend to rebound, so they might make a good investment (at least in the short term). Stocks near their resistance line tend to fall back down, so they might signal a shorting opportunity.

When a stock breaks through their support or resistance lines, it is called a “Breakout”.

Symmetrical Triangle

This pattern consists of two trend lines which are symmetrical to the horizontal and are convergent. To prove a symmetrical triangle, one must have oscillation between the two lines.

sym triangle

A triangle pattern indicates that the price is about to move – but a symmetrical triangle does not give a clear indication that the price will go up or down.

Ascending Triangle

The Ascending Triangle pattern refers to two converging trend lines. The first line is an upward slant which is the support and the other is a horizontal resistance line. To validate the ascending triangle, there must be an oscillation between the two lines.

ascending t

This triangle implies a bullish continuation pattern.

Descending Triangle

The Descending Triangle pattern refers to two converging trend lines. The first line is an downward slant which is the support and the other is a horizontal resistance line. To validate the ascending triangle, there must be an oscillation between the two lines.

descending t

This triangle implies a bearish continuation pattern.

Fundamental Analysis

Fundamental analysis is the process of examining the fundamental aspects of a firm. It involves reviewing key ratios and sections of a company’s financial statements to define its health and attractiveness – since financial statements are standard between companies, this can help compare two potential investments apples-to-apples. To make things easier, you can directly find most of the ratios by clicking on “Key Ratios” in the Quotes Tool.

key ratios HTMW

One of the most popular and simple fundamental analysis is the DuPont model. The DuPont Analysis breaks down the firm’s Return on Equity (ROE) based on its profitability decisions, how efficiently their assets are utilized and their financial leverage. The model focuses on the profitability of a firm using the following equation:


This equation can be re-written as:


net income

To analyze a company using the Dupont Model, you can use the following tables:

Analysis of Company XYZ from 2014 to 2017

DuPont Model Components 2014 2015 2016 2017
Net Income
Net Sales
Average Total Assets
Average Shareholders’ Equity
Profit Margin
Asset Turnover
Equity Multiplier


Analysis of Company XYZ with Industry Competitors

DuPont Model Components   Company XYZ Company A Company B
Net Income
Net Sales
Average Total Assets
Average Shareholders’ Equity
Profit Margin
Asset Turnover
Equity Multiplier


These tables will allow you to see the evolution of the firm in terms of their profitability. This can be useful for you to conclude that your company is profitable over the long-term. You will also have the bird’s eye view of your firm and its competitors in the same industry. By doing this, you might find a competitor that would be a better stock pick or reassure yourself that your stock pick is the best in its category.

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1 of 3) If you choose a Passive investing strategy, how will your portfolio look with its first allocation?
2 of 3) What does it mean if a stock is near its Resistance line?
3 of 3) Why do investors use financial statements when conducting fundamental analysis?

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Basic Investing Strategies

An “Investing Strategy” is a plan for how to save money to help it grow. Sometimes an “investing strategy” can just mean “plan for trading stocks”, but it really means a lot more.

Liquidity, Risk, and Potential Returns

All investments balance liquidity (how easily it can be converted into cash for other use), risk (the chance of the investment to lose value), and potential returns (how fast your investment can grow).

The balance between these three items is up to your own individual taste, but it is this balance that will determine what kinds of investments you choose.

Security Types

The “Security Type” is what you are holding as an investment. These can be a very wide range, but every full portfolio should have a mix of a couple.

Cash And Bank Deposits

moneyLiquidity: Very High
Risk: Low
Potential Growth: Zero or Negative

Cash, believe it or not, is an investment in and of itself. Cash, and bank deposits you can withdraw right away, are the most liquid assets, since liquidity is basically how quickly you can convert any investment into cash.

Being able to always use cash for whatever you want is something valuable – this is why “Emergency Funds” exist as cash and bank deposits, not as bars of gold. On the other hand, cash does not grow, and loses value over time due to inflation.

Certificates of Deposit

Liquidity: LowCds
Risk: Low
Potential Growth: Low

A Certificate of Deposit is like a savings account with a locked-in interest rate, but you cannot withdraw the cash for a certain period of time. These are very safe investments, but on the other hand they have a very low potential for growth.


preferred-stockLiquidity: High
Risk: Medium
Potential Growth: High

“Stocks” is usually what comes to mind when thinking about investments. As far as an investment strategy is concerned, mutual funds and ETFs which hold stocks are all the same thing – buying a piece of one or many companies in exchange for a share of their profits.

For more information on why to invest in stocks, Click Here.


Liquidity: MediumBonds
Risk: Low
Potential Growth: Medium

Bonds come in three “Flavors” – Corporate Bonds, Treasury Bonds, and other Government Bonds. Unlike stocks, a bond is a loan that you make to a company or government, and they need to pay it back plus interest. Corporate bonds from large companies and treasury bonds are usually very safe investments (and so there is a lower return), but there are also “Junk Bonds”, or bonds which have a higher risk of not being paid back in full. In exchange for the higher risk, organizations who sell Junk Bonds offer higher interest rates to people who buy them.

Real Estate

houseLiquidity: Low
Risk: Medium
Potential Growth: Medium

Real Estate includes land and buildings. Until fairly recently, the bulk of “retirement savings” was in the form of the house you lived in. People would buy a house and hope that the value grew enough over the next 30-40 years to sell it and use the profits for retirement. Others buy damaged or discounted houses and do repairs, then sell them for profit (this is known as ‘house flipping’).

Since the housing marked crash in 2007, people are more wary of real estate investing, but owning a home is still a very popular investment.

Precious Metals

goldLiquidity: High
Risk: Medium
Potential Growth: Medium

This includes buying Gold and Silver. Many investors try to buy gold and other precious metals as an investment (and to protect against inflation), but this has also backfired in recent years as a “Gold Bubble” popped, making the prices of the metals more volatile than before. Holding precious metals as a safeguard against market uncertainty in other security types is still very popular, however.


callLiquidity: Medium
Risk: High
Potential Growth: High

Derivatives that normal investors can purchase include stock options and futures. Being a “Derivative” means that it “derives” its value from something else – a stock option has value because the stock that it lets you buy has value (but the contract itself is useless unless you use it). Futures are good for commodities like oil delivered at a future date.

Derivatives are most useful for hedging (such as buying a stock option for a stock you think will go up in value, but you don’t want to necessarily buy right now).

Tips and Tricks

Many years ago, a common piece of investment advice was that if you are building an investment strategy for retirement, a large chunk of your “Nest Egg” would be held in your house, which will mature with the market rates.

For the rest of the assets, financial planners would recommend a “rule of thumb” to balance your assets between stocks and bonds according to your age. Basically take 100, subtract your age, and that should be the percentage of your portfolio in stocks (with the rest in bonds). This means an 18 year old would have 82% of their savings with 18% in bonds.

This advice is a bit out-dated, but it does have a couple important kernels of wisdom that all investors should be aware of.

Don’t Keep All Your Eggs In One Basket

Diversify at a few different levels. Split your assets between a few different security types. In the classic example, the saver would have about 50% of their savings stored in Real Estate, with the remaining 50% divided between Stocks and Bonds. This means that if there is a fall in housing prices, they are protected by having lots of savings in stocks and bonds. If the stock market starts to fall, they’re still OK because they have their house and bonds. The value of bonds is determined by the prevailing interest rates, so they are insulated from this as well with their other security types.

On the other hand, they also benefit if there is a surge in housing prices, stock prices, and interest rates.

Use An Evolving Portfolio

The old suggestion of “more bonds as you get older” is based on the idea that as you get closer to retirement, your portfolio should get more conservative. If you have lots of stock that lose value when you’re 25, you still have 40 years of income to make up for it. If you have lots of stocks that lose value when you’re 62, it becomes a lot more difficult to make up that income.

Common Investing Strategies

If you’re ready to start investing, there are a couple big ones to keep in mind. Most long-term investing strategies are based on one, or a combination, of these.

Buy And Hold

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffet

The “Buy and Hold” strategy is based on the idea that you do extensive research on what you’re buying, choosing your investments for solid long-term reasoning, then buy it and hold on to it, regardless of what its market price does. The only time to sell for a “Buy and Hold” investor is either:

  • When the underlying reasons why you bought the stock change (such as the company’s management changing to a team with a different business strategy you don’t like), or
  • When you plan on exiting the market entirely

Warren Buffet is generally considered the most famous Buy and Hold investor.


“The market can stay irrational longer than you can stay solvent.” – John Maynard Keynes

Even if all your research is great, and even if what you invested in does regain all its value in the long run, you still have a deadline of when you need that money to live on in retirement. You also have a very real chance of just being wrong in your choice, and with a Buy and Hold strategy you might take a huge loss before admitting defeat.

Value Investing

“Know what you own, and know why you own it.” – Peter Lynch

“Value Investing” is looking for stocks that are under-valued compared to the rest of the market. This means looking for companies that seem to be growing strongly but have not yet attracted much market attention, or new players with solid foundations and the potential for growth. You will buy and sell stocks more often with value investing – as soon as your picks start looking “priced in” or “over-valued”, you’ll start thinking about selling and moving on.

Peter Lynch was made famous by his use of Value Investing while acting as the primary manager of the Magellan Fund Fidelity Investments.


“The four most expensive words in the English language are, ‘This time it’s different.’” – Sir John Templeton

Value investing requires you to pay close attention to companies and re-evaluate how much you think they’re worth regularly. If you’re wrong a few times in a row, you could have trouble ”bouncing back”.

Active Trading

“Understanding the value of a security and whether it’s trading above or below that value is the difference between investing and speculating.” – Coreen T. Sol

“Active Trading” is when you are buying and selling stock regularly (“Day Trading” is when you buy or sell in the same day), trying to take advantage of market swings to earn a profit. Active trading requires more advanced knowledge of chart patterns, fundamental and technical analysis, and an appetite for risk. In exchange, you can make huge returns with active trading by riding market trends.


“The individual investor should act consistently as an investor and not as a speculator.”  – Ben Graham

Active trading can get big returns quickly, but it can get big losses even faster. Most professional investors and financial advisers suggest using only a very small portion of your portfolio for active trading, since the damage can be hard to undo.

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Income Tax Filing and the 1040 EZ

Income Tax Filing and the 1040 EZ

What is income tax?

tax incentivesIncome is more than just wages and salaries too. If you earn rents from rental properties, investment income, interest on your savings account or bonds, or any other revenue stream, you will probably owe some income tax on it.

How are income taxes paid?

For most people, income taxes are straightforward – employers are required to withhold the appropriate income tax amount from your paycheck, which is then paid to the government without any extra steps.

If you are self-employed or work as an independent contractor (like a driver for Uber), it can be a bit more complicated. In this case you are required to report your income and pay any taxes owed at the same time.

Who needs to file an income tax return?

All US citizens and everyone working and living in the United States needs to file an income tax return each year. By extension, all citizens and workers in the US need to report their income, even if that income is earned in another country. US citizens use their Social Security Number to file their taxes.

Even US residents who do not work need to file income taxes if they received some sort of income or compensation over the previous year. This includes things like rental earnings and even unemployment benefits.

Immigrant Workers

Workers who work in the United States without a Social Security Number (both legal immigrants and undocumented workers) are still required to pay income taxes. Since some of these workers may not have Social Security Numbers, they can request an Individual Tax Identification Number (ITIN) from the IRS to use to file their taxes.

ITIN numbers can only be used for tax reporting purposes, and undocumented workers can avoid breaking income tax evasion laws by obtaining a ITIN number and filing their income tax returns.

US Citizens Living Abroad

US Citizens who live and work in other countries are also required to file their US income taxes each year or risk heavy fines. While citizens do need to file their taxes, most citizens living and working outside the US are exempt from actually owing any tax, unless they have exceptionally high incomes.

What do I need to file my income taxes?

In addition to a Social Security Number or Tax Identification Number, there are additional forms needed at the minimum to file your income tax.

Form W2

w2The W-2 form is a document all hourly and salaried employees will receive from their employer at the end of the year (usually in January, covering the previous year). The W-2 form is a fairly basic form outlining the total wages earned in the previous year, along with how much Social Security and Income Tax was already withheld by the employer and paid. Employees receive their W-2 form already filled out from their employer.

You will usually receive 3 copies of your W-2 form – one for your personal records, one to be submitted with your federal tax return, and one for your state tax return.

You can file your income taxes with just a W-2 form if you received no other income or compensation in the previous year.

Form 1099

Form 1099 is used when a person needs to self-report income. This includes independent contractors, and anyone receiving income from a source that did not provide a W-2.

Form 1099 is more complicated than the W-2, both because there are many more types of income that can be reported, and because anyone who uses it may need to fill out all the information themselves (although whoever pays you might provide you with a pre-filled version). This requires more skills at keeping detailed financial records than the basic W-2.

The 1040 Income Tax Return Form

1040 formsThe basic income tax return form in the United States is known as the Form 1040. The basic use of the form is to add up all your income from the year from all sources, calculate how much tax you have already paid, subtract any deductions you qualify for, and see how much of a tax return you should receive or how much tax you currently owe.

The Form 1040 can be long and complicated as you have more sources of income to report and more deductions to claim. To make the process of filing a tax return easier for people with no dependents and few investments, the simplified 1040 EZ form was developed.

The 1040 EZ

“EZ” is short for “easy” – the 1040 EZ is a simple one-page tax return, designed to make filing taxes as fast and painless as possible for young people and those with few deductions.

Parts of the EZ


There are four basic parts of the 1040 EZ

  • Contact Information – This will include your name, address, and Social Security Number. You can file the 1040 EZ form jointly with your spouse if you are married, in which case you would provide his or her information as well.
  • Income – This information should come directly off of your W-2 form any any interest tax forms your bank sends you for savings accounts. This also includes any unemployment compensation you may have received.
  • Payments – This also comes from your W-2, which lists how much tax was already withheld and paid by your employer. This is also where you can calculate the total amount of tax owed.
  • Refund or Tax Owed – The final calculations show how much refund you should receive, or how much income tax you need to pay. If you should be getting a refund, you can provide your bank routing number for a direct deposit. If you owe tax, there are instructions included on how to pay it.

When not to use the EZ

The Form 1040-EZ is a simple and attractive way for many people to file their taxes, but there are many situations where it is not accepted.

  • Income from a Form 1099 – If you have income to report on a form 1099, you need to use the full Form 1040
  • Dividend or Investment income
  • Filing with dependents
  • Earned interest over $1,500
  • Filing with a ITIN instead of a SSN

Collecting your return

It is easy to collect your return. All income tax return forms include a place where you can put your bank routing information to get your return direct deposited to your bank account with no extra steps.

If you prefer receiving a check, the IRS will mail a check to the address you posted at the top of the form.

Income Tax Corrections

Taxpayers have 7 years in the United States to file any corrections. Usually this would be to claim deductions you may have missed, or report income later to avoid tax evasion penalties.

To file an amended tax return, use the Form 1040-X, which is designed specifically for later corrections on a previous return.

IRS Corrections

calculatorThe IRS may also apply corrections directly based on their own calculations of your taxes owed. If this is the case, they will generally mail you a letter explaining how their calculation differs from theirs, along with a method to dispute their calculation.

The IRS has been known to adjust returns both up and down – they are mainly checking for errors in the deduction amounts and arithmetic to ensure the returns are processed correctly.


There is a small chance that your income tax could be audited by the IRS, in which case they will ask you to bring in supporting documents. Audits are designed both to ensure the tax returns are using all the correct values, and to prevent fraudulent claims. Audits can happen up to 6 years after your taxes have been filed, so you should be sure to keep all your supporting documents for at least that long.

State income taxes

Most states also levy an income tax, but the actual tax amount and thresholds will vary quite a lot from state to state. Steps for filing state income taxes are very similar to the federal taxes, and generally require the same documentation (which is why you will typically receive 3 copies of a W-2 form).

There are currently seven states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. States that do not charge income tax make up for the lost revenue through other channels, usually sales taxes and use taxes (in fact, states with no income tax typically charge their citizens higher total taxes than those who do have income taxes).

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Types of Business Ownership

Types of Business Ownership

A key first step for any entrepreneur is setting up an organization that will be used to formally embark on the business journey, but many new business owners struggle to identify the best way to move forward. These are the most common ways to organize a business, from the simplest through the most complex.

Sole Proprietorship

Small shops are often owned and operated by one person
Small shops are often owned and operated by one person

A sole proprietorship is the most basic form of business ownership, where there is one sole owner who is responsible for the business. It is not a legal entity that separates the owner from the business, meaning that the owner is responsible for all of the debts and obligations of the business on a personal level. In exchange for that liability, the owner keeps all the profits gained from the business. This form of business ownership is easy and inexpensive to create and has few government regulations, making it a more flexible type of ownership with complete control at the discretion of the owner. In addition, profits are taxed once, and there are some tax breaks available if the business is struggling. Sole proprietorships often are limited to the resources the owner can bring to the business. For these reasons, sole proprietorships are often most appropriate during the early stages of a business where the owner has little capital/resources to work with but also has few debts to pay.


Partnerships are very common with friends going into business together
Partnerships are very common with friends going into business together

Partnerships are a form of business ownership where two or more people act as co-owners. There are two forms of partnerships, which are General Partnerships and Limited partnerships, differentiated primarily by the liability coverage by the owners.  In a general partnership, all owners of the business have an unlimited liability in the business (the same as a Sole Proprietorship). For a limited partnership, at least one of the partners has a limited liability, meaning they are not personally responsible for the debts of the business. Regardless of the type of partnership, they are relatively easy and cheap to create, have few government regulations and are only taxed once, like a sole proprietorship. The added benefit of a partnership is the combination of knowledge and resources that are brought to the table thanks to the additional owners. Profits do have to be shared between owners and there is always the potential for conflicts to arise between partners over business decisions. This type of ownership is often useful in the early stages of the business where multiple people are involved. Due to the sharing of profits and the additional resources, this type of ownership is often expected to yield higher growth rates then a sole proprietorship.


Walmart logo
Walmart is currently the world’s largest corporation by revenue

Unlike the previous two examples, Corporations are a form of ownership that is a legal entity separate from its owners. This creates a limited liability for all owners, but results in a double taxation on profits (first as a corporate income tax, then as a personal income tax when the owners take their profits). Corporations tend to have an easier time raising capital then sole proprietors or partners in large part due to the greater sources of funding made available to them, such as selling stock. However, this does result in greater government regulations for corporations, such as requirements for more extensive record keeping. In addition, setting up a corporation is much more difficult, requiring more resources and capital to cover expenses and create legal documentation. This ownership form is best suited for fast growing or mature organizations that have owners looking for limited liability.

Limited Liability Company

doctorsA form of business ownership that is taxed like a partnership but enjoys the benefits of a limited liability like a corporation is a “limited liability company”. In comparison to a corporation, it is simpler to organize and does not receive double taxation. While simultaneously receiving more credibility then a partnership or sole proprietor when it comes to gathering resources such as working capital. Unfortunately, this form of ownership is usually reserved for a group of professionals such as accountants, doctors and lawyers.

S Corporation

A lesser known ownership style, an S corporation is a type of business ownership that allows its owners to avoid double taxation because the organization is not required to pay corporate taxes. Instead, all profits or losses are passed on to owners of the organization to report on their personal income tax. This form of ownership does allow for limited liability, similar to a corporation, but without the double taxation. The disadvantages of this organization’s special nature is the increased level of government regulations and the restrictions on the number and type of shareholders it may have. This type of ownership is used in the mature stage of a businesses lifecycle and often by private organizations due to the restrictions on ownership.


mcdonalds logoFranchising is a form of ownership far different from the ones previously mentioned. This form of ownership allows a franchisee to borrow the franchisor’s business model and brand for a specified period. It comes with a list of advantages including: training on how to operate your franchise, systems and technologies for day-to-day operations, guidance on marketing, advertising and other business needs, and a network of franchise owners to share experiences with.

The main disadvantages to this ownership structure are franchising fees, royalties on sales or profits, and tight restrictions to maintain ownership. Franchise owners also have limited control over their suppliers they can purchase from, are forced to contribute to a marketing fund they have little control over. If a franchisee wants to sell their business, the franchisor must approve the new buyer. Despite these disadvantages, franchises are great for owners who are looking for an ‘out of the box’ to owning their own business.


Cooperatives are organizations that are owned and controlled by an association of members. This form of ownership allows for a more democratic approach to control where each share is worth the same amount of votes, similar to a corporation with common stock. It also offers limited liability to its owners and equal profit distribution based on ownership percentage. Disappointingly, the democratic approach to decision making results in a longer decision making process as participation from all association members is required. Conflicts between members can also arise that can have a big impact on the efficiency of the business. Co-operatives are often used when individuals or businesses decide to pool resources to achieve a common goal or satisfy a common need, such as employment needs or a delivery service.


Type of Corporation Advantages Disadvantages
Sole Proprietorship ·         Easy and inexpensive to create

·         Flexibility and control to your liking

·         Few Government regulations

·         Tax advantages if struggling

·         Profits taxed once

·         Unlimited liability, meaning business debts are personal debts

·         Limited source of financing

·         Limited resources

Partnerships (General/Limited Partnerships) ·         Easy to organize

·         Combined knowledge, skills and resources

·         Few Government regulations

·         Taxed once

·         Unlimited liability for some partners*

·         Possible conflict development between partners

·         Shared profits

Corporation ·         Limited liability

·         Easier to raise capital due to greater sources of funding

·         Being taxed twice (as a legal entity and as an owner)

·         Greater Government regulations to adhere to

·         More expensive to set up

·         Extensive record keeping required

Limited Liability Company ·         Simple to organize and operate

·         Flexible in nature

·         Taxed as a partnership

·         Generally only available to a group of professionals such as lawyers or accountants
S Corporation ·         Limited liability for owners

·         Greater credibility for financing

·         No double taxation

·         Greater Government regulations to adhere to

·         Restrictions on number and type of shareholders


Franchise ·         Superior training and systems offered

·         Guidance on marketing, advertising, financing, accounting etc.

·         Franchise networks to share experiences (great knowledge base)

·         One-time Franchising Fee for owning a franchise location

·         Recurring royalty fees as a percentage of sales or profits

·         Tight restrictions that limit control

·         Purchases must be made from specific suppliers

·         Contributing to marketing fund, but having no control over it

·         Selling franchise location requires approval from franchisor

Co-operative ·         Democratic control

·         Limited liability

·         Equal profit distribution

·         Longer decision making process

·         Participation of all members required

·         Conflict possibility between members

·         Extensive record keeping required

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Price Controls

Price Controls


“Price Controls” are artificial limits that are put on prices. If the limit is put in place to prevent prices from getting too high, they are called Ceilings. If they are in place to prevent the price from getting too low, they are called “Floors”.

Price Ceilings

price ceilingPrice Ceilings are controls put in place to prevent the price of some good or service from getting too high. This type of control is most common with food, where there might be a maximum price that businesses can charge for things like flour or electricity.

These controls are put in place to protect consumers and to prevent price gouging, particularly so the poor are able to afford basic goods and services. When there is a price ceiling, suppliers cannot sell above a certain price, and this creates a Market Shortage.

With a Market Shortage, the quantity producers are willing to supply is less than the total quantity that consumers demand at the given price. This can result in rationing, or lottery systems to determine which consumers are able to buy.

In extreme cases, it can result in “Bread Lines”, where essential goods are not supplied in sufficient amounts, so consumers need to join waiting lists to get their necessary share.

Price Floors

price floorPrice Floors are the opposite – a control put in place to ensure that a certain amount of something is produced by making sure producers are guaranteed at least a certain price for what they supply. These types of control are common for milk.

These controls exist to prevent shortages, by making sure suppliers get at least a certain price, it encourages production. When there is a price floor, the producers are willing to supply more than consumers demand at a given price, creating a Market Surplus.

With a Market Surplus, the government needs to buy the excess production, or else the market price will collapse back down. In the case of milk, the government typically buys the excess production and stores it, uses it as part of disaster relief, or tries to sell it on international markets.

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The Business Cycle

The Business Cycle

What Is The Business Cycle?

The Business Cycle is the broad, over-stretching cycle of expansion and recession in an economy.

The Business Cycle is concerned with many things – unemployment, industrial expansion, inflation rates, but the most important indicator is GDP (Gross Domestic Product) growth. Below you can see a graph of the GDP growth rate in the United States since 1946 – the grey bars highlight periods of a recession.

GDP growth

The Business Cycle can also be thought of as how Real GDP moves above and below its Potential Levels.

What Is Real GDP?

GDP, or “Gross Domestic Product”, is the total amount of finished goods and services produced in an economy during a given year (for more information, read our full article on Common Economic Indicators). If you just add up the value of all the finished goods and services in one year, you will have the Nominal GDP.

Unfortunately, you cannot directly compare the Nominal GDP of one year with the Nominal GDP of another year, because the same goods and services change price over time. If we want to compare the GDP of different years, we need to adjust the Nominal GDP by the Inflation Rate. Once you adjust your Nominal GDP by the Inflation Rate between years, you have the Real GDP, which you can use to directly compare different years.

What is the Potential Level of GDP?

The “Potential Level” of GDP is the total output an economy can sustainably produce in a year.  This is the potential output if every laborer is using their skills the most efficiently, with businesses using their capital goods to the best of their design at the current levels of technology, and public institutions are operating at their peak efficiency. Every time workers learn new skills, technology increases that allows us to make new goods (or the same goods but more efficiently), or changes to the government or culture take place that promote economic growth, the Potential Level of GDP increases.

The Real GDP growth rate swings above and below the Potential GDP growth rate, which is called the Business Cycle.

Running Below Potential Levels

It is easy to see how an economy can be running below the potential levels – if workers are not matched with jobs that make the best use of their skills, or if machines are not properly maintained, or even if the government has poor leaders that make less-than-optimal laws and policies, it will cause the Real GDP growth rate to fall below the potential level. If it falls too far below, the economy could enter a Recession. Inflation is usually low when an economy is running below its potential levels.

Running Above Potential Levels

The economy can also run above Potential Levels. Remember – the Potential Level is based on what can be sustainably produced. This means that if current growth levels are the result of over-borrowing, or asset bubbles, output might actually be growing at a higher-than-sustainable rate. Economies very often run above their potential levels for short periods of time with no problems, but going too far above for too long can result in a crash. Inflation is usually higher when the economy is running above its potential, which serves to bring the Real GDP back down to its potential levels.

Expansions and Recessions

When the GDP growth rate is positive and unemployment is relatively low, it is called an Expansion. If the GDP growth rate is very low or negative, with higher unemployment, it is called a Recession.

Economic Expansions

stock broker
This part-time lifeguard would prefer to be a full-time stock broker

Most of the time, the economy is an “Expansion” phase. This does not mean everyone is doing well – even during very strong expansions, the unemployment rate usually stays around 5% (meaning 1 out of every 20 people who wants a job can’t find one), with the underemployment rate (people who are working part-time but want a better job) is usually much higher.

What an Expansion does mean is that new jobs are being created, and the total value being produced by an economy is going up. Growth also promotes growth – the more resources that are available, the more resources can be allocated towards researching new technologies and building new skills.

Economic Recessions

Recessions typically occur every 7-15 years, often following an asset bubble bursting, followed by a large loss of value in an economy. Recessions typically have higher levels of unemployment, with low or negative GDP growth. Even if GDP growth is never negative, recessions hurt. Other than GDP, the biggest indicator of a recession is a sharp decrease in consumer spending, and inflation tends to fall.

Higher unemployment rates mean that people lose their jobs, and new workers have a hard time finding their first position. Losses in the financial sector hurt retirement accounts and individual savings and investments, which can severely disrupt life plans. Thankfully, recessions are temporary, and the business cycle can usually move back into an expansion phase fairly quickly.

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Credit Cards

Credit Cards

What are Credit Cards?

Credit cards is a form of unsecured credit (meaning a loan without collateral) that you can use to make everyday purchases. All credit card purchases are made using a loan – you borrow money from your credit card issuer, and later pay it back with interest.

Credit Cards Vs Debit Cards

credit cardCredit cards can be used at all the same places as debit cards. In fact, some business only take credit cards (like most car rental companies and many hotels) specifically because it works as a line of credit – a business accepting a transaction from a credit card knows it will be paid immediately. If you have both a debit card and a credit card, you should choose carefully which you use most for your everyday transactions.

Advantages over Debit Cards

There are some good reasons to use credit cards for every-day purchases instead of your debit card:

  • Your debit card may have a transaction limit or transaction fees – credit cards typically do not
  • Credit cards often offer “Cash back” and other rewards programs for most purchases
  • Credit cards are accepted more widely than debit cards (especially if you are travelling overseas)
  • Using your credit card will build your credit history, which can lower your interest rate and increase your credit limit on other loans
  • You can “Float” credit card purchases, using it as a short-term loan before your next paycheck

Disadvantages over Debit Cards

There are also some good reasons to use your debit card instead of a credit card:

  • If you miss your grace period, your purchases will be charged interest with a credit card, making them more expensive
  • Since you do not need to pay the full balance on credit card purchases every month, it makes it easier to over-spend
  • If you start to fall behind on your payments, it can be very difficult to fully escape credit card debt
  • Credit card billing cycles are usually 20-25 days instead of one month, making it more difficult to schedule payments compared to other types of bills.

Credit Balance Types

When you use your credit card, there are several different types of balances that will appear on your credit card statement:

New Purchasespurchase

Your new purchases are the things you’ve bought using your credit card during the current billing cycle. You will not be charged interest on this balance until the end of your grace period, so it is usually a good idea to pay off this balance first and avoid finance fees. If you miss your grace period, you will be charged interest on the balance for every day you had it.

Balance Transfers

If you don’t pay off all your purchases in a month, the remaining balance will carry over to the next month as a Balance Transfer. Balance transfers do not have a grace period, so they will accumulate interest for the entire billing cycle.

Cash Advancesincome

This is the most expensive type of charge you can make on your credit card. Cash advances are when you take money out of an ATM using your credit card. Cash advances also typically do not have a grace period, and they usually have a higher interest rate than balance transfers.

Finance Charges and Interest Rates

Credit card companies have finance charges as a condition to using the credit card – the most important one is your interest rate.  Each one of your balance types has a different way interest is charged

How Interest is Calculated

Different credit cards may calculate the interest you owe differently, and this difference might make a big difference on your bill. The two most common methods are “Daily Balance” and “Average Daily Balance”.

Previous Balance

The previous balance method uses your balance at the beginning of the billing cycle to calculate your interest. This means that payments you make during the billing cycle will not lower your total interest payment, but will only impact your bill next month.

Adjusted Balance

This method is similar to the previous balance, but also subtracts any payments you make. This method gets you the lowest total interest charges, but is very rare for credit card companies to offer it.

Ending Balance

totalsThe ending balance adds your balance transfer to all the charges you made during this billing cycle, and subtracts any payments you made. The interest is then calculated based on that final total.

Average Daily Balance

This method is the most common. Your credit card company takes the average balance of all days and multiplies that by your daily interest rate, then adds it together for every day in the billing cycle.

Grace Period

card billEvery credit card has a grace period, usually about 21 days. If you pay off any new purchases within 21 days of making them, you will not get an interest charge for those purchases. If you miss the grace period, you will be charged the full interest amount. There is no grace period for balance transfers and cash advances, so you will be charged for every day you have a balance outstanding on these balances.

Minimum Payments

Your credit card will have a minimum payment every month, which is the absolute least you can pay to keep your account in good standing. Your minimum payment is based on your outstanding balance. The payment is generally enough to pay off new interest, plus some of the principle balance.

Just making the minimum payments is the absolute longest way to pay off credit card debt, and it will result in the absolute highest possible amount you pay in interest.

Note that there are some conditions that can cause your minimum payment to be less than interest, in which case you will never fully pay off the debt. If your minimum payment is lower than or equal to your interest charge, you can continue making payments on interest forever without ever paying off your debt.

credit card debt

Missing Payments

Missing your credit card payments can result in defaulting on your account. Defaulting on your account has a few impacts:

  • If you had any promotional interest rate, you will retroactively lose it (meaning all your previous outstanding balances will now use the higher interest rate instead of the promotional rate, making your bill even higher)
  • You will get “Late Payment” fees, which is added to your balance transfer into the next billing cycle
  • Missed payments are reported to the credit reporting agencies and will lower your credit score
  • Your credit card may also lower your credit limit and increase your interest rate

If you miss a certain number of payments, your credit card may cancel your line of credit entirely, and send your case to a collections agency. This will further damage your credit score, and make it extremely difficult to get any new credit cards or loans for the next several years.

The CARD Act of 2009

In 2009, the federal government passed the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, which bans certain types of behavior from credit card companies. It also gives credit card holders more tools to help keep their credit cards in good standing.

The CARD act bans credit card companies from:

  • Increasing your interest rate on existing balances (so if your rate goes up, it only applies to new purchases). This doesn’t apply to removing promotional rates
  • Your interest rate cannot go up in the first year of holding your account (except if you have a variable rate credit card, then your base rate can’t do up but the variable rate can)
  • Processing your payments late (all payments must be processed on the day they are received)
  • Charging fees for different methods of payment
  • Using a double billing cycle (where you would be charged interest based on the last period’s balances instead of just the current period)
  • Issue credit cards to people under 21 without a co-signer

As the card holder, you also get new rights with your credit card:

  • If you default on one credit card, credit card companies can’t automatically charge you a higher “penalty rate” on other cards you have
  • You have at least 21 days after your bill is mailed to pay it without any interest charge
  • If you pay more than the minimum payment, all the extra is paid towards your balance with the highest interest charges first (so if you make higher than the minimum payment, the extra would go towards your cash advances before your balance transfer)
  • You can opt-out of over-the-limit fees. If you do, trying to charge more than your credit limit would result in a declined transaction instead of letting it go through with a fee
  • You can opt-out of interest rate increases. If you do, your credit card will be cancelled once you pay off your balance (this might impact your credit score).

Pop Quiz

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1 of 5) Which business would likely only accept a credit card payment?
2 of 5) Which of the following is an advantage credit cards have over debit cards?
3 of 5) Which type of balance typically carries the highest interest rate?
4 of 5) What is the most common method of interest calculation?
5 of 5) Which of the following is prohibited under the CARD Act?

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All About Budgeting

All About Budgeting

If you want to start building your first workable budget, it is important to know exactly what should be in it, how to keep it updated, and the specific reason you want to have this budget.

What does a budget look like?

spreadsheetA budget is usually a spreadsheet or table. On one side or column, you will list your planned expenses, while on the other side you list your planned income.

You can use a budget for many different things, depending on the budget type. Using a mix of different budget types, as each situation finds appropriate, can be one of the most effective ways to reach your short term financial goals.

Budget Types

There are two types of budgets, each of which has its own place in your personal finance toolkit.

The Project Budget

A project budget is something you make just once for a specific purpose. For example, you might make a single-use budget when evaluating apartments you might move to (outlining costs of rent and transportation between a few different alternatives).

The project budget is the easiest budget to make because you do not necessarily need to keep managing it in the long term – this is a “one and done” way to address a specific problem.

The first budget most people make is a project budget to help look at their current expenses and see what adjustments need to be made. The problem with this approach is that project budgets work very well for short-term thinking, but tend to be difficult to follow for longer periods of time.

Project Budget Components

Your project budget is looking at a snapshot in time. This means you are comparing some known fixed expenses to a specific amount of income or money you can dedicate towards paying for it. The specific components are:

  • Itemized list of known expenses for this period in time
  • Total expected income or starting cash you have to allocate to this period in time
  • Surplus – the total income minus the total expenses.

The purpose of the Project Budget is to maximize that surplus, or the money you have left over to allocate to other things.

Common uses for a Project Budget

  • Comparing alternative apartments (building a sample budget for each alternative to compare)
  • Planning a vacation
  • Paying off short-term debt
  • Other short-term crisis or goals

The Living Budget

Unlike the Project Budget, a Living Budget is meant to “grow” and adjust over time. These budgets are not designed for a specific goal or purpose, but instead to help you keep a general idea of where your money is going from month to month, and help you adjust your spending to reach your financial goals.

One of the major differences with a Living Budget is that while you make them looking forward, you also should look back regularly and make adjustments (not start over as needed).

Living Budget Components

grocery billYour living budget needs to be regularly adjusted and updated. To set up an effective living budget, you will need the following components:

  • Regular monthly income (things like your paycheck)
  • Variable income (gifts, one-off payments, ect)
  • Regular monthly expenses
  • Regular contributions to savings or other financial goals
  • Expected variable expenses

Using Your Living Budget

Unlike the Project Budget, the goal of the living budget is not necessarily to maximize your surplus. Instead, your Living Budget has your savings and other financial goals built in, and you can adjust these every month or two along with your variable expenses.

With your Living Budget, having a big surplus every month is not necessarily a good thing, since that might be a sign that your financial goals might be set too low.

Expense Categories

With the Living Budget, you will notice that there is a difference between “regular”, or fixed, income and expenses with the “variable” income and expenses. When you set out to outline your budget, it is important to keep these distinctions separate.

There are 2 types of expenses, which each have 2 flavors.

  • costsTypes:
    • Fixed Expenses
    • Variable Expenses
  • Flavors:
    • Needs
    • Wants

Most people new to budgeting only consider needs and wants, but without fully breaking down where your money is going, it will be much harder to build a workable budget.

Category Breakdown

Each category has its own place in your budget, and when you want to reach a specific savings goal, these separations make it much easier to hit your targets.

Fixed Needs

Your “Fixed Needs” are things like paying rent, utilities, car payments, and groceries. These costs should not change very much from month to month.

When you are engaging in short-term financial planning, there is not much you can do to change your Fixed Needs expenses. With mid-term and long-term planning, finding ways to cut down or reduce these costs (or any increases to them, like getting a better apartment or car) will likely make the biggest changes impacting your long-term goals.

Fixed Wants

coffeeYour “Fixed Wants” are the costs that add up quickly over time, but most beginners frequently forget to include in their budgets. This includes things like morning coffee from Starbucks, going out for lunch with your friends or co-workers instead of bringing lunch from home, having dessert after dinner, and any other regularly-occurring expenses.

Your “Fixed Wants” include all the little pleasures or extras that you normally get in your day-to-day life – things that you know you could probably live without, but removing them would really sour your days.

Variable Needs

Your “Variable Needs” are expenses that are important, but you may not have them every month. This includes the extra money you will probably spend on heating in the winter, or semi-annual visits to the dentist, or Christmas/birthday gifts for friends and family.

Unlike your Fixed Needs, even with long-term financial planning, there probably will not be very much you can do to change your Variable Needs costs in the long run – you will always need heat in the Winter, always need your teeth fixed when they break, and always need oil changes on your car.

Variable Wants

“Variable Wants” are your expenses that come more “spur of the moment” – things like a night out for drinks with friends, shopping for some new clothes, or buying a new video game.

You usually will not be able to make a line-item budget for your variable wants, but you can estimate how much you spend each month based on your receipts and account reconciliation from the previous month. Once you know how much your Variable Wants are costing you, the next step is taking steps to make sure those costs are under control.

How To Use Your Living Budget

When you are making your Living Budget, you should do so shortly after your latest account reconciliation, where you lay out your 10 or 20 biggest purchases over the last month and consult your bank account. You may know off hand how much you spend on rent and electricity, but building realistic estimates for your variable expenses (both wants and needs) means you need to look at exactly how much you are already spending.

Once you have your expense breakdown from the previous month, you can build your budget for moving forward. This means setting some specific financial goals:

  • Deposit $300 per month into your savings account
    • This means you need to already have a surplus of $300, or make a separate goal to get this money from somewhere else
  • Reduce Fixed Wants costs by $50 per month by brewing your own morning coffee 3 times per week
  • Increase surplus by $100 per month to afford a nicer apartment
  • Reduce Variable Wants costs by $75 per month, and apply that savings towards a yearly vacation savings fund

Putting Your First Goals Into Practice

coins-currency-investment-insurance-128867To help make sure you hit your savings goals, split your “Savings Targets” in half for your budget. One half should go into your “Fixed Needs” category – this is money you are setting aside as soon as you get paid. The other half should be filed as a “Variable Want”, meaning a target you are setting, but until you have a few months of practice adjusting your budget, you might not be able to reach.

One common problem beginners face is combing both of these items together, then simply trying to increase their surplus by the amount they want to save per month. This tends not to work, simply because there is no concrete line item that you can admit to not reaching – it becomes easy to just roll over that goal by saying “I can just save more next month to make up for it!”.

By separating your first goal into smaller parts, it makes both parts easier to obtain. Having the fixed necessary savings means that you will make progress towards your goal even if everything else goes poorly, while the second half works as an extra incentive showing you have effective money management.

As you become more experienced building your Living Budget, you can shift a bigger percentage of your savings goals into your Fixed Needs category to have more stability, and more effective planning for the future.

If you want to start building your first budget, click here to try the Home Budget Calculator!

If reading this article was an Assignment, get all 5 of these questions right to get credit!

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1 of 5) What makes a Project budget different from a Living budget?
2 of 5) Which of the following is best suited for a Project budget?
3 of 5) What type of expense is holiday shopping for gifts?
4 of 5) How can you budget your Variable Wants?
5 of 5) Which of the following will make the biggest impact on your long-term financial goals?

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Trailing Stops Have Arrived!

Trailing Stops Have Arrived!

If you have ever wanted to protect your portfolio on HowTheMarketWorks from losses, you have definitely used Stop Orders. The biggest downside of stop orders is, of course, the fact that you have to constantly update them as your investments grow to “lock in” your gains…

What are Trailing Stop Orders?

Trailing Stop orders work a lot like regular stop orders evolve with the market. This means you can set a Trailing Stop sell order to sell if your stock’s price falls by $2.00, or even 2%. As your stock’s price grows, the trailing stop price goes up with it. It will only execute when the stock’s price falls by your Trailing Stop threshold from its peak – meaning you lock in your gains without constantly updating your stop orders.

How Does It Work?

Good question! Check out our tutorial video below to see how to use Trailing Stops with your portfolio.

The Dashboard Has Arrived!

The Dashboard Has Arrived!

Do your students have a hard time getting started with their portfolio? Do you want a place where you can see all your tools in one place? Us too, which is why we added the new Dashboard to HowTheMarketWorks!


The dashboard is just the newest addition to our new design, with your entire suite of tools at your fingertips.

We have divided up all the tools into 5 categories:

  • My Portfolio – here you can find things you own, your assignments, account balances, and graphs
  • Trading – Make a trade, or see your transaction histories
  • Contests – See your ranking, join a new contest, or create your own
  • Research Tools – Start doing some investment research, with a wide range of tools to choose from
  • Trading Ideas – See the most popular stocks and mutual funds, what the brokers are saying, and a lot more

We have more great new features coming, so stay tuned!