Debt Management Services

Written by Kevin Smith

If you find yourself over your head in debt, there is always a light at the end of the tunnel. Credit counseling agencies, both for-profit and non-profit, exist in every state to help people build a clear, workable path back to a healthy personal financial situation.

If you do need the help of a credit counselor, this is what you can expect.

What is Credit Counselling?

Credit counseling is a service offered to help people bring their personal finances under control. A large part of what credit counselor involves is purely educational, usually with many free resources available. Just like your health, big problems are best addressed with prevention before the problem gets out of control. If you are reading this, you are already working through some course work that would be similar to what would be offered by a credit counseling agency.

Unfortunately, most people reach out for help only after debts start to spiral out of control. At this point, you will need to meet one-on-one with a credit counselor to chart a path forward and get yourself out of debt.

There are three main tools applied by credit counseling agencies before bankruptcy enters the discussion: budget building, debt management planning, and debt settlements.

Who are Credit Counselors?

Credit counseling is loosely regulated by FINRA, the Financial Industry Regulatory Agency, which sets rules for what can be advertised and advised. Reputable credit counselors have a professional certification, usually through the NFCC, the National Foundation of Credit Counselors.

There are both for-profit and non-profit credit counselors. The NFCC usually works with non-profit institutions. The cost of getting credit counseling will vary from agency to agency, but it usually starts with a flat fee for your initial consultation, plus a percentage of the total debt settled if you require more help.

Budget Building

Building a budget is the first step when working with a credit counselor. You will usually sit down for a 1 or 2 hour meeting to discuss your current financial situation. This includes reviewing your total debt load, income, expenses, and how you are currently spending your money.

our counselor will review your financial information with you and recommend some educational materials or courses that present some advanced techniques for discharging your debt as quickly and cheaply as possible. They will also work with you to build a new budget based on what you can afford.

How Is This Different from My Own Spending Plan?

If you already have a strong budget or spending plan and have simply fallen behind on payments because of emergencies or income loss, this step of the process may not tell you more than you already know.

Statistically, most people do not have a budget or a spending plan in place that gets reviewed and updated with any regularity. One of the biggest advantages of speaking to a credit counselor is that this is a completely unbiased third party who is working to get you out of debt. The counselor will help create a stronger budget, based purely on facts and figures, not influenced by emotion or panic. Working with a certified credit counselor is also a good way to learn about tax incentives, subsidies, or other debt relief programs in your state that you may not be aware of.

Debt Management Planning

If your debt problems cannot be addressed by revising your budget, the next step is creating a debt management plan.

With a debt management plan, your credit counselor will work directly with most of your creditors, usually excluding secured loans like mortgages and car loans. Your credit counselor will negotiate to get as many late fees and finance charges waived as possible and will set up regular monthly payments to pay off the debt.

Instead of paying your creditors directly, you now make one monthly payment to your credit counseling agency, who then distributes that payment to each creditor according to the terms they negotiated.

Debt Management Plan and Debt Consolidation

Debt management planning is superficially like debt consolidation, where you take out one big loan to pay off many smaller debts. Debt consolidation is often also part of the credit counselling process, and your credit counselor will be able to help decide if it should be part of your payment plan.

When you work with credit counselors, their goals are to help you repay your debt as fast and cheaply as possible. They usually discourage taking out additional loans, unless that is the only option available to preserve your credit rating.

Advantages of Debt Management Plans

In theory, your debt management plan will not be very different from something you could build yourself, if you are able to successfully negotiate with your creditors. However, it does have some distinct advantages:

Experienced Negotiators. Your credit counselor is a professional credit negotiator, and so he/she knows the right buttons to push to get your fees lowered as much as possible.
Relationship with Creditors. Your credit counselors already have established channels of communication with most creditors, so they know exactly who to talk to in order to get things moving forward. This can include things such as changing payment due dates to get everything all on one schedule.
Leverage with Negotiations. When your credit counselor is in contact with your creditors, your creditors know that you are in a tight spot financially and are not making up some story over the phone. Your creditors are not interested in driving you into bankruptcy, since that means they do not get paid. They usually are more flexible when negotiating with credit counselors compared to when you speak with them directly.
Clear Reporting. Your credit counselor will send you monthly reports about the exact status of all your debts, including how quickly each is being paid off.
Lower Total Payments. In the lesson on juggling bills, we showed that it can be cheaper to pay off some bills completely instead of making minimum payments on everything. Your credit counselor knows this too. He/she will optimize the payment schedules to pay off the most expensive debts the fastest, minimizing the total amount you need to pay.

Restrictions of Debt Management Plans

Debt management plans are not always a simple solution, and they may require some tight restrictions on what you can and cannot do.

No New Credit. When you enter a debt management plan, it appears on your credit report. (It doesn’t affect your credit history or your credit score. It just shows that you agreed to a debt management plan.) This serves as a warning to creditors that you should not be extended any new credit. If you do get a new line of credit anyway, your credit counselor will terminate your debt management plan, putting you back at square one.
Cancel All Credit Cards. Most household debt that requires credit counseling comes from credit cards. Debt management plans require you cancel all open credit cards and stipulate that you cannot open new ones until your current debt is paid off.
Tricky Relationship with Creditors. Just because you are using a debt management service does not mean your creditors will stop calling. Once you are on a plan, most credit counselors will advise you to cease all communication with your creditors. If one calls, you should provide the creditor with the credit counselor’s name and number and let him/her handle it. If you do speak with your creditors and say something that conflicts with the negotiations your counselor has been working on, it could sink your whole plan.

Debt Settlement

If your level of income will not allow you to pay off your debt reasonably by using a debt management plan, the next step is debt settlement. With debt settlement, your credit counselor will set up a monthly payment plan for you, but instead of paying your creditors, the money they receive from you goes into a separate savings account. Then the counselor enters into “hardball” negotiations. The position they take with your creditors is that you are on the verge of bankruptcy, and your creditors can either reduce the total amount owed to something you can afford or risk not getting paid at all if you go bankrupt. Once your creditor and your counselor come to an agreement on that new lower amount, your creditor gets paid from that savings account you have been paying into.

Advantages of Debt Settlement

Debt settlement is the end of the road when it comes to paying off your debts. The only step farther is declaring bankruptcy.

The major advantage debt settlement has over a regular debt management plan is that the total amount you must pay will be significantly reduced. This includes reducing or eliminating the finance charges. It can also reduce the principal owed. No other non-bankruptcy solution will reduce your principal owed. At this point, your creditors are trying to take whatever they can get, hoping to not be left with zero dollars in payments if you go bankrupt.

Disadvantages of Debt Settlement

Every other debt management solution works to preserve your credit rating, keep your creditors happy, and keep your budget on track. Debt settlement does not. It comes with some unique disadvantages, making debt settlement your last option.

Immediate Damage to Your Credit. With debt settlement, you immediately stop paying all creditors while the negotiations are in progress. This means your creditors will immediately start reporting you as delinquent on all of your accounts. This will do a lot of damage to your credit.
Long-Term Damage to Your Credit. Your credit report shows one of three statuses for each of your credit accounts: OK/Paid, Late/Delinquent, and “Settled.” A “settled” status means the amount owed was discharged through a debt settlement negotiation. This is better than an unpaid account, but it is nowhere near as good as “OK/Paid”. This will remain on your credit report for at least 7 years.
Increased Harassment. Your creditors will not be happy when you stop making monthly payments, they and will try to bounce claims off you and your credit counselor at the same time, trying to “catch” inconsistencies in the way you are managing your debt. This will improve their bargaining position. Your credit counselor will usually advise you NOT to answer your creditors at all while debt settlement negotiations are in progress.
Credit Restrictions of Debt Management. You will be required to close your credit cards and will be prevented from opening new lines of credit while the negotiations are in progress.

Predatory Credit Counselling Services

If you enter debt settlement proceedings, your credit counselors will usually be paid a fee based on a percentage of the total amount of debt that they are able to get “cancelled”. For example, if they negotiate a $1000 debt down to $700, they may charge you $150 as a fee for the service.

For large debt loads, this can be a real money-maker. This opens the door to potential predatory practices. A predatory credit counselor will usually advise debt settlement as a first step, or suggest it before exploring other alternatives. There are plenty of cases where debt settlement is the best option, but if it is the first suggestion, you should get a second opinion.

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[qsm quiz=144]

Challenge Questions

What do you understand by the term credit counselling?
Using the internet, research the two credit counselling bodies mentioned in the text, providing an overview of what they do and how they help people?
What restrictions do people take when addressing their debt?
What are the advantages and disadvantages of debt settlement?

Accounting, Finance

Cash Flow Analysis

Written by James Monroe

Cash flow is a concept in accounting that refers to the spending or receiving of cash by an organization. For a given period, cash flow is calculated by ending cash balance less starting cash balance. It is important not to confuse cash flow with earnings, as cash flow is related to solvency (or how well a business can pay its immediate debts) and not necessarily profitability. For example, a firm may have millions in revenue, but if accounts receivable are not collected, it is not realized as a cash inflow. Good management and financial modeling are crucial to a firm having healthy cash flows and remaining solvent.

Cash Flow in Financial Statements

There are different types of cash flow concepts, used for different purposes. Cash flow items are laid out in the Income Statement and Cash Flow Statements.

Income Statement

In an income statement, Operating Cash Flow (OCF) is similar to Earnings Before Interest and Taxes (EBIT). Both show how much cash a business can generate from normal operations. It excludes other major items in an income statement that impact net income (interest and taxes). These items are excluded because they are not operational expenses.

OCF provides perspective when analyzing a business by stripping away non-operational activities. By only incorporating costs closely associated with the selling of product or services, such as inventory expense, manufacturing expense, or selling expense one can evaluate how potentially profitable a business can be. For example, if the firm has a huge debt load, it may be wiser to focus on something like OCF to determine future profitability instead of looking at current net income. The limitations of OCF is that the number does include non-cash items such as accounts receivable and deprecation.

Sample Income Statement

Revenue	100,000
Cost of Goods Sold	25,000
Gross Profit	75,000

Operating Expenses
Advertising	8,000
Administrative	10,000
Commissions	10,000
Rent	15,000
Utilities	5,000

Operating Cash Flow	27,000

Cash Flow Statement

The Cash Flow Statement digs deeper into incoming and outgoing cash, and when used with the income statement and balance sheet gives a more complete picture of a company.

There are three main elements to this statement: cash flow from operations, from investing and from financing.

This statement begins with the last item from the income statement, net income. Each line adds back or subtracts the change in non-cash items that impacted net income. The rule for non-cash items on the income statement is: add if initially subtracted, and subtract if initially added.

For example, in the cash flow from operations portion, if the change in accounts receivable (ending AR – beginning AR) is positive, it means that net income was positively impacted, but no cash was received. Thus, you subtract the increase. Likewise, if accounts payable increase in the reporting period, you add the increase to net income because it positively impacted cash. Think of the Cash Flow Statement as a mirror of the income statement – including only non-cash items.

Sample Statement of Cash Flows

Net Income	10,000

Cash Flow from Operating Activities
Add: depreciation expense	3000
Increase in accounts receivable	-400
Increase in inventory	2000
Increase in accounts payable	350
Cash used in operating activities	4,950

Cash Flow from Investing Activities
Capital expenditures	-10,000
Cash used in investing activities	-10,000

Cash Flow from Financing Activities
Borrowing of short-term debt	2500
Dividends	-450
Cash used in financing activities	2050

Net change in cash	7,000
Beginning cash	2,000
Ending cash	9,000

In this sample, we can see that the firm reports a net income of 10,000 but only receives 7,000 in cash for the period. This is why a single financial statement cannot capture the activities or status of a firm. If the case were such that net income was healthy but cash flows were negative, before looking at cash flow from financing (the firm is borrowing to stay solvent), that could potentially raise some red flags or call for a decrease in value due to increased risk.

Cash Flow and Valuation

Free Cash Flow (FCF) is another important metric, and better yet for determining the value of a firm based on cash flow. FCF is calculated by taking EBIT and subtracting taxes. After that, subtract capital expenditures, add back depreciation (a non-cash item subtracted while getting EBIT), and then lastly add or subtract the change in working capital.

EBIT

Less: Taxes

Less: Capital Expenditures

Plus: Depreciation

+/- Change in Net Working Capital

Free Cash Flow

Free cash flow is useful because it is the amount of cash that a firm can use to pay dividends, reduce debt, reinvest, or use for acquisitions. In other words, this number shows a more fundamental earning potential for a firm. Unlike net income, free cash flow is not skewed by tax deferments, adjustments or other uncertain factors, such as risk of collecting receivables. Free cash flow is often used in a discounted cash flow analysis to find the net present value of all cash flows which theoretically represents enterprise value (Equity + debt – cash), helping determine the value of equity.

Cash Flow and Decision Making

Cash flow is extensively used in financial decision making. To see how, start by looking at Terminal Value, Net Present Value, Internal Rate of Return, and Payback.

Terminal Value

Terminal value is the present value of all future cash flows beyond the projection period. It can be calculated with the simple Gordon Growth Model:

CF₀= CF₁ / (r – g)

Where r is the discount rate, g is the growth rate and CF₁= CF₀ * (1 + g). In other words, multiply the last cash flow by (1 + g), and then divide it by the discount rate less the growth rate. This is just like the present value of a perpetuity.

Net Present Value

Net present value (NPV) is a crucial concept in finance. To calculate NPV, you simply sum the present value of all positive and negative cash flows for a given investment. If NPV is positive, that means that an investment is worthwhile, and if it is negative, it is not worthwhile. The NPV incorporates the appropriate discount rate to determine if returns are high enough.

You can use our Net Present Value calculator to find the NPV of a stream of income.

Internal Rate of Return

Internal rate of return (IRR) is a metric closely related to NPV and the discount rate. Internal rate of return is defined as the discount rate required to make NPV equal to 0. For example, in this project if IRR were 10% due to lower cash flows, the NPV would equal 0. IRR must be calculated by trial and error, or with a software program like excel. All else being equal, you want to choose to invest in higher IRR projects, but if deciding between a 20% IRR and 10% IRR project, the 10% one may have a higher NPV due to greater scale, thus being the better investment choice.

You can use our Internal Rate of Return calculator to calculate the IRR for a company.

Payback

Payback is the simplest metric and is expressed as the number of years required to recoup the initial investment in nominal terms, not accounting for time value of money or financing costs.

Example: Capital Expenditure

In this example, a firm is deciding what to do with an unused plot of land. They do not want to sell it, but they are unsure whether it’s more profitable to rent the land or expand production. For simplicity we are examining this decision over a 5-year projection period.

Option 1 – Invest in New Facility

The firm’s cost of capital is 10%.
The facility will cost $1,000,000 to build
Yearly expenses of $40,000 increasing by 3% each year.
The revenue generated by this facility is $150,000 the first year, increasing by 3% each year

Breakdown:

The current year is 0 and that is when the million-dollar capital expenditure is incurred. After year 1, cash flows are calculated by subtracting operating expenses from revenue. These cash flows are multiplied by discount factors: 1 / (1+ discount factor).

Here the NPV is $209,024, indicating that it is a worthwhile investment, given no other options. The IRR easily surpasses the discount rate of 10%, indicating a potentially lucrative project.

Invest in New Facility
Discount Rate – 10%

Year	0	1	2	3	4	5
Revenue		150,000	154,500	159,135	163,909	168,826
Plant Cost	(1,000,000)
Operating Expenses		40,000	41,200	42,436	43,709	45,020
Cash Flow	(1,000,000)	110,000	113,300	116,699	120,200	123,806
Terminal Value						1,238,060

Discount Factor		0.91	0.83	0.75	0.68	0.62

PV of Cash Flow	(1,000,000)	100,000	93,636	87,678	82,098	76,874
PV of Terminal Value						768,738
NPV						209,024
IRR						19.25%
Payback (years)						6.18

Option 2 – Rent the Land

Discount rate 10%
15,000 cash inflow each year, rising by 3%

In this scenario, the firm opts to rent the property for 15,000, keeping up with the historical inflation rate of 3%. Similar, but more simple analysis results in an NPV of $332,709.

Rent the Land
Discount Rate – 10%

Year	0	1	2	3	4	5
Revenue	15,000	15,450	15,914	16,391	16,883	17,389
Discount Factor	1	0.91	0.83	0.75	0.68	0.62
PV of Cash Flows	15,000	14,045	13,152	12,315	11,531	10,797
PV Terminal Value	255868

NPV	332,709

Final considerations

Sometimes it’s difficult to know exactly which cash flows are relevant. Relevant cash flows are characterized by occurring in the future and being incremental.

Incremental cash flows are ones that are incurred by making a decision. Cash flows that occur in the future, but would have been made regardless of the decision are excluded. In this example, items such as depreciation, a non-cash expense, and taxes (cancel out) are not included because they are irrelevant. Furthermore it’s important not to include the value of the land because it does not represent a cash flow. At one point it was paid for, representing a sunk cost, which is defined by occurring in the past and no longer relevant for future decision making.

Faced with these two options, the decision makers in the firm should choose to rent the land instead of expanding production. As a general rule, choosing the option with the highest NPV will increase the firms value the greatest.

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Personal Finance

Consolidating Debt

Written by Kevin Smith

If you start falling seriously behind on your bills, simple prioritization and negotiation may not be enough to help you catch up on your debt. Even in this situation, you still have some options available to keep your finances under control. One of the most straight-forward options is debt consolidation.

When to Consider Debt Consolidation

Most adults have at least half a dozen creditors, such as credit card companies, banks for a mortgage, car loan providers, student loan providers, and basic utility companies. If a unexpected event occurs, such as losing your job, you may start falling behind on payments for several creditors all at once.

Prioritizing your bills and negotiating with your creditors can get most people through tight money situations for a month or two, but it can only work for short periods of time. After a couple of months, even the savviest negotiators will find themselves getting stuck with mounting late fees, finance charges, and angry calls from creditors. Each late payment also affects your credit score, which will hurt your chances for getting other lines of credit in the future.

What It Means to Consolidate Debt

This is where debt consolidation comes in. Consolidating your debt means taking out one big loan and using that money to pay off all outstanding balances from your previous loans.

While taking out a new loan may not seem like such a good solution, there are several reasons to consider a debt consolidation loan when you find yourself in hot water.

Preserves Your Credit Rating

Every time you make a late payment on your credit card or on another loan, your credit rating will take a hit. Miss enough payments and you will have a very hard time securing any loans, even years later.

On the other hand, if you consolidate your debt and pay off your consolidation loan quickly, your credit rating can actually improve. Paying off all the outstanding balances means no more negative reports on your credit history. Debt consolidation acts like any other loan. Making payments on-time will boost your credit rating.

Keeps all your creditors happy

Remember: the most important concern for any of your creditors is that they get paid, and the sooner the better. Consolidating your debts quickly and getting all outstanding balances paid off builds goodwill with your creditors. This means they will usually be more flexible in the future if you hit another rough patch because they know you will come through.

Lowers Your Payments

Once all your outstanding balances are paid off, finance charges and late fees are gone too. This means the amount due each month is just a single payment towards the principal and interest, the same as for any other loan. The interest rate on consolidated loans is almost always lower than the late fees and finance charges you will get from each of the individual outstanding balances.

What this means for you is that a consolidated loan will keep your credit healthy and growing, and it will lower the number of monthly payments required to pay off the same principal in debt.

How to Consolidate Debt

Consolidating debt means taking out a loan to pay off other outstanding balances. Like all loans, there are two main types to consider:

Unsecured Loans

Getting an unsecured debt consolidation loan is very rare. Most creditors are very wary of people who need debt consolidation loans because it means they have already let their debts get out of control.

One unsecured loan type to consider is simply using your credit card to pay off all other balances. This will require you having a sufficient credit limit on your card. If you already pay most of your bills using your credit card, you are consolidating your debts without even realizing it. Many people prefer this simply to keep all their payments in one place, making them easier to track.

The biggest downside of using credit cards or other unsecured loans to consolidate your debt is the finance charges. Unsecured loans almost always charge higher interest rates. This means you might not be saving much money by consolidating everything on your credit card rather than just making minimum payments.

You also cannot use your credit card to pay off other credit card debt. If credit card debt is one of your problems to begin with, you probably will not be looking at unsecured loans for consolidation.

Secured Loans

Most types of debt consolidation loans involve a secured loan, usually a home equity loan, also called second mortgage. This means you will use the equity built up from your home to take out a new loan. The amount of debt you can consolidate is dictated by how much equity you have to use as collateral. If your debts are greater than the equity you have built up in your home, you are considered insolvent.

If you are a renter, you won’t have a home equity loan as an option. However, there are some types of secured loans that use your car or other property as collateral. Unfortunately, these usually fall under “Payday Loan” or “Pawn Shop” type lenders, which can charge excessively high finance charges. Taking these types of loans is more likely to drive you farther into debt than to help pull you out. If you are not able to find any other type of consolidation loans, you should investigate credit counseling services.

Risks of Consolidating Debt

Debt consolidation is not a “get out of debt free” card. You are simply using existing credit lines and equity to pay off a temporary hardship and preserve your credit rating.

Risks with Unsecured Loans

If you simply transfer other outstanding debts onto your credit card, you now must grapple with your new credit card debt. Credit cards typically charge fairly high interest rates compared to secured loans, which means the interest you pay will still be very high. The interest charge itself could be nearly as much as you would be paying in late fees, but you would not be hurting your credit rating.

If you can only afford the minimum payments on your credit card, you are stretched dangerously thin. Any other financial emergency could force you into default.

Risks with Secured Loans

Consolidating your debt with a secured loan is cheaper than using your credit card or an unsecured loan. This makes this type of loan a more attractive option, but it comes with its own serious drawbacks.

First, you are wiping out your equity. This means all the value you have been building up in your mortgage (or any other property used as collateral) is gone. You will need to completely pay off the consolidation loan to get it back.

Second, your finances are still stretched very thin. Missing your payment on a consolidated secured loan is the same as missing a payment on your primary mortgage. It could put your whole house into default and trigger foreclosure proceedings.

Taking Action

If you are in a position where you cannot juggle your bills or negotiate a 1-2 month extension with some creditors, you need to take action quickly in order to get out of debt and keep your finances healthy.

Consolidating your debt is often one important part of that process, but it is not a decision to make without consulting experts. If you are considering consolidating your debt, speak first with a not-for-profit credit counseling agency to fully explore your options. Debt consolidation is usually one action taken as part of a larger personal finance plan, not an action to be taken on its own.

Any time you are working with debt, the clock is ticking. It is always better to ask for help sooner rather than just panicking later.

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Challenge Questions

Using examples, what does it mean to consolidate debt?
What are the advantages of consolidating debt?
Are there any disadvantages to consolidating debt?
What is the difference between a secured and unsecured loan?
What are the current loan rate percentages being offered in the market place today for a loan of $10,000 over 3 years?

Bonds, Finance, Stocks

Why Stock and Bond Prices Move

Written by Personal Finance Lab Team

Stock and bond prices move up and down every day, sometimes by very large amounts. If you want to start investing, the first thing to understand is why these price movements happen, and how to plan for them.

Stock Price Movements

If you look at the stock for any public company you will often see a line graph that depicts how prices change every day. You may see sharp movements in certain stocks while others have smaller shifts. Stock prices are the reflection of the present value of future earnings expectations. The present value of future earnings is divided by the total number of shares that were issued by the company. In other words, the stock price reflects the expected performance of a company at some point in the future.

To see how the process works, start from the beginning: the investment bank that oversees a stock’s IPO.

Investment Banks

Investment banks are multi-tiered corporations that enable companies to have their stock traded on a public market. Examples of famous investment banks include Goldman Sachs GS, JP Morgan JPM, UBS, among others. Any public company you can think of today was once held privately. They used the services of an investment bank to become a publicly traded stock. The process to become publicly traded is known as an initial public offering, or IPO for short. Once a company is listed on a public market anyone can buy, sell, or trade the stocks.

The IPO Process

The process begins with a company discussing the pitch for an IPO with bankers. The company selects book runners and co-managers who will be responsible in selling the newly issued stocks for the primary bank. The company must file the registration forms and discuss the timing of the IPO. The bankers then conduct due diligence, a process by which they speak to customers, do research and analysis on the industry and trends, figure out the legal situation, and sift through the financial statements and make sure there are no irregularities. The S-1 form is filed after the due diligence, which releases the historical financial statements, key data, and other information investors would like to see before making a purchase decision.

The pre-marketing stage involves bankers speaking to investors regarding the company and industry in order to determine a price range to sell the initial stock offering. The final price will be set after more conversations with investors. Banks will then allocate shares to different investors prior to the first day of trading. Once shares are allocated, investors can now buy, sell, and trade to each other while the general public can begin to purchase shares.

The period following the IPO is often considered the most volatile period in a stock’s history because of investor sentiment. Investor sentiment is how large-scale buyers of stocks feel about companies, industries, and the market as a whole. Investors are typically large financial institutions that employ economists, analysts, and industry experts who drive the appetite of a specific stock or industry.

Investors that are bearish are under the assumption there will be a decline in the stock or market. Bullish investors anticipate growth in a specific stock or the market. Investor sentiment is driven in part due to earnings.

Earnings

After the IPO, a stock’s price movements are dominated by earnings, both realized and expected.

Earnings reports are made available to the public to announce a company’s most recent historical performance. Quarterly reports feature the previous three months, while annual reports provide a snapshot of the most recent year. These reports feature commentary from the company about initiatives and projections moving forward.

The one metric that affects stock prices almost immediately following these announcements is EPS (earnings per share). This represents the portion of the company’s profit that is allocated equally to each outstanding share. Analysts converge to create a consensus estimate regarding the EPS of each company during each quarterly announcement. If the actual EPS is greater than the estimate there is usually a spike in the stock price. If the company misses the estimate there is likely a decrease in stock price. Additionally, within the reports there may be other metrics that investors look at which may also cause a swing in either direction.

Systematic vs Unsystematic Risk

Finally, stock price fluctuations deal with the concept of risk. There are two types of risk, systematic and unsystematic. Systematic risk is an event that can affect the stock market as a whole. Unsystematic risk is specific to the company or industry. Beta is the measure of the volatility a stock has in comparison to the market as a whole. A beta greater than 1 represents a stock that will move higher than the market in periods of growth but decrease more in periods of decline.

Systematic Risk

Systematic risk includes events such as wars, interest rate fluctuations, recession, and geopolitical occurrences. These events tend to affect all stocks regardless of company specific performance and growth prospects. Systematic events can be looked at as disruptions to the market and cause a downward shift in stock prices.

Unsystematic Risk

Unsystematic risk includes company or industry specific events. For example, companies that produced radios were at risk when TVs became popular, companies that grow and sell vegetables are affected when there are weather events such as droughts or hurricanes that destroy their crops. These risks can greatly affect a stock and often cause sharp declines in prices.

Bond Price Movements

While stocks, or equity, are one way for a company to raise money, debt is another. Debt for a company is often raised in the form of bonds. Bonds are issued by large corporations such as Apple or Amazon, by cities such as New York or Los Angeles, by states such as Illinois or Florida and by countries like America, or Brazil. Bonds are issued by the entity and bought by the investor. Over time the entity will pay back an interest rate known as the coupon in addition to the principal. All bonds are issued at a par rate. This is the price of the bond when it is issued.

How Bonds Work

For example, let’s say Apple needs $100M to build a factory and decide to issue bonds with a maturity date in 10 years. Apple would identify an interest rate at which investors are confident with lending money. If the interest rate is 5%, Apple would need to give the investors 5% of the borrowed amount every year until the maturity date of the bond, the year the money will be returned. Bonds are usually issued in denominations of $1000.

Therefore, if you bought a $1000 bond from Apple, you would pay them the money today and receive 5% of 1000 ($50) every year for the next 10 years. At maturity, they pay back the $1000.

Interest Rates and Bonds

Bond prices, much like stock prices, experience fluctuations. The first and major implication is interest rate risk. Suppose you invest in a corporate bond that pays a fixed interest of 5% until maturity while the central bank interest rate is 2%. If the central bank rates rise while you own the bond to 4%, the price of your bond will fall.

This is because investors are always comparing the risk and return of your bond with anything else they could be investing in. If your bond pays 5% compared to the central rate of 2%, you are earning a 3% premium. If your premium drops to 1%, fewer other investors would be interested. Interest rates have an inverse relationship with bonds, as rates rise bond prices fall and vice versa.

Inflation and Bonds

A second factor in bond price fluctuation is inflation. Inflation is when the value of currency decreases over time. If a bond is paying a coupon rate of 5% on a $1000 bond, over 10 years the value of the coupon is worth less in the 10th year then the current one. As a result, the effective yield is lower as the market price of the bond decreases. As a result, we have a second inverse relationship, as inflation increases bond prices decrease, and vice versa.

Credit Ratings

Lastly credit ratings affect the price of bonds and cause fluctuation in prices. Credit Rating Agencies such as S&P Global Ratings, Moody’s, and Fitch conduct investment analysis on companies and assign independent debt ratings. Ratings go from AAA, which indicate a very low probability of failing to make bond payments to investors, to D a complete default of the debt. When the debt rating for a company goes up, the price of the bonds increase accordingly, and any new bonds they release will have a lower interest rate. A downgrade is followed by bond prices falling, and any new bonds issued coming with a much higher interest rate.

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Marketing

Planning and Evaluating Business Advertising

Written by Carl Millegan

Planning advertising for any business is nothing to be taken lightly. Advertising, after all, is the method by which a business gets its message out to the world. How, and how well, a business advertises its products or services can, and does, make the difference between business success and business failure. Thus, planning and evaluating advertising are critical business activities.

Most successful business advertising results from four basic considerations: connecting with the customer, adhering to legal and ethical norms, the methods of communication with customers and measuring advertising effectiveness.

Connecting with the Customer

How the business wants to present itself, what the business products or services the business provides, and who the customers of a business are all effect how advertising connects to the customer. The first way a business connects with the customer is by way of branding.

Branding

In the old west, a brand served as a symbol which quickly communicated a message of who owned that brand. Today, a brand performs the same function and much more. A company’s brand communicates the company’s image or how the business wants to present itself to and be perceived by the public.

Ford Motor Company (F), for example attempts to communicate a different image with its Ford branded cars than it does with its Lincoln brand even though both companies belong to Ford Industries Incorporated. Ford’s brand strives for an image of reliability, safety and value which attempts to connect with the common working people trying to make the most out of every dollar. Meanwhile, Lincoln’s brand image attempts to communicate an image of luxury, comfort and elegance to a wealthier or more demanding customer base.

The Advertising Concept

How advertising communicates these images is by the advertising concept, or the underlying theme of the advertisement. The advertising concept determines how well the business connects both emotionally and rationally with its customers and can determine the effectiveness of any advertising campaign.

The television commercial starring Matthew McConaughey illustrates the idea of concept exceptionally well. The smooth jazz music, to the suit McConaughey wore, to the decision to film the Lincoln speeding across a tidal flat, and the calculated decision to leave McConaughey unshaven all worked to establish a concept which, “conveys exhilaration and the visceral feeling of driving,” according to Lincoln’s own website.

The products and services a business sells guide decision-making for the brand, their image and concept because what a business sells often determines how to sell it. Ads from the candy company Mars focus on the fun and pleasure of a little sweet indulgence, whereas ads for Tyson Foods (TSN) emphasize the quality and purity of their chicken. These differences reflects the different concerns of the customers, and those concerns become the base of the advertising plans for those businesses.

Target Markets

Likewise, who a business sells to changes both the image and the concept of how a company advertises. Advertising may be different if a business sells to a wide customer base than to a specific market. The customer chooses whether or not to buy what a business is selling, so knowing who the customers are, what they want and what they will pay for is key to advertising success. Hershey (HSY) and Ghirardelli sell chocolate to customers of different economic strata; thus, their brand images and the concepts used in their ads reflect those differences.

Who your customer is changes how and what you communicate; what images will influence the customer’s emotions, what messages reach their intellect, what values do the customers respect and what value will the customers pay for?

Adhering to legal and ethical norms

The most critical legal and ethical issue regarding advertising is honesty. Ethically, businesses should avoid any statement or omission of information which may mislead their customers when planning their advertising. First, this is just good business. Companies caught lying to their customers normally lose customers. Second, federal, state and local governments have established various “Truth-in-Advertising” laws which come with hefty fines. Thirdly, because aggrieved customers are likely to sue dishonest businesses in court.

Another ethical and legal issue in planning business advertising is copyright infringement. This occurs when a business purposefully or inadvertently uses legally protected images, trademarks, or other material in advertising without the permission or remuneration of the protected material. Using a photograph taken from the internet for an ad may represent the image you want, but the photographer who took the shot and owns its copyright will probably sue you.

Also, businesses need to avoid any charges of discrimination based on the material or placement of their ads. Very few businesses could withstand the uproar caused from alienating one or more minority group because of an insensitive image or implication in their advertising.

The methods of communication

The methods, or media, that a business uses for its advertising changes how the company’s brand, image and advertising concepts are delivered.

Today, businesses utilize four general methods of advertising: print, broadcast, electronic and event advertising. Each method possesses its own strengths and weaknesses; therefore, most businesses utilize most or all methods when planning advertising campaigns.

Print

Print advertising focuses mainly on placing ads in newspapers, magazines and fliers, posting ads on billboards, park benches or city bus stops and reaching out to customers directly through direct-mail campaigns. The sign outside of a business is yet another form of print advertising as is the company’s logo or trademark. More importantly, each type of print media reaches different regional, economic, cultural, ethnic, demographic or interest groups, and businesses must plan for this reality when hammering out a solid advertising plan.

Broadcast

Broadcast advertising includes, AM and FM radio as well as broadcast and cable television. Each of these media methods appeal to varying audiences and therefore their use must be part of a comprehensive business advertising plan. For example, AM radio stations hold a different demographic of listeners than FM radio stations. Cable news networks possess different audiences than cable movie channels, and broadcast stations seek a variety of viewers.

Electronic

The advent of the internet created yet another media method for business advertising. No serious business can long survive in today’s interconnected world without having its own, professionally-designed and managed website complete with links on how to buy what the business is selling and secure methods to pay for it upon demand. This does not happen by accident; business professionals must plan their business website with the same rigor that they use when advertising on the internet.

The power of including internet advertising as part of an advertising plan comes from the fact that computers and computer programs give the business professional the ability to target specific advertising to demographic groups based on region, religion, race, national-origin, to any number of interests or even to specific individuals.

Advertising can be placed on applications for smartphones, on social media sites, on blogs and a number of other electronic media forms. Business planners therefore must weigh almost unlimited options against costs and the company’s brand and image and the ad concepts they wish to adhere to.

Event

Finally, event advertising presents its own planning concerns. Every sport, race, concert or show draws a different crowd. Some are regional events and some are national. Some are televised, and some are broadcasted over the radio. Planning advertising to take advantage of this can effectively double the reach of your advertisements and increase its effectiveness.

Which leads to the final consideration in planning business advertising: measuring the effectiveness your advertising.

Measuring advertising effectiveness

The bottom line for planning advertising must include a means for measuring the return on the advertising investment. Whether the company possesses millions of dollars to spend on a comprehensive multi-media advertising plan or a budget barely enough for a small plastic sign on the door, no business willingly writes a check for anything that does not make a profit.

This means a good advertising plan needs a yard stick, or a way to measure if it’s working.

Account Tracking

One of the simplest methods for measuring advertising effectiveness is product or account tracking. Supermarkets often track items offered for sale in weekly newspaper fliers to determine if customers are buying more of the items advertised. Retailers count returned coupons printed in various print media to measure response rates.

Quick Response

One more modern method of measuring print advertising response is the Quick Response or QR code. Businesses use these computer-generated digital images for various purposes, but they prove highly effective for measuring advertising response for print media. Most product packaging (a form of print media) possess a QR code which customers can scan on their smartphones. Most QR codes contain the company’s URL web address giving customers access to special offers or content, but they also provide nearly instant feedback to companies who planned ahead and insisted on placing a QR code on labeling or advertising.

Promo Codes

Adaptations of the QR code came into vogue for other media not long after the print version. Both radio and television advertising refer to the company’s website and offer discounts or additional services for entering a specific “Promo Code” upon entering the site or at checkout.

Click Tracking

Various software companies offer “Click Tracking” programs with the capability of tracing all the way back to the individual computer used to click on an ad, and most companies offering modes of digital advertising possess the ability to route additional advertising for similar products and services directly back to previous customers.

Planning for advertising at events should include accounting, coding and tracking methods as well if the professionals responsible are to evaluate its effectiveness.

All of this may seem daunting even for a large business, but advertising firms, television and radio stations, cable providers, ad sales representatives, and individual professional consultants stand ready to provide much of the talent, knowledge, capability and skill necessary to help any business that has a message and is planning on getting it out into the world.

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Personal Finance, Personal Finance

Debt Negotiation

Written by Kevin Smith

Most adults have faced a financial emergency, when an unexpected event has broken their budget or spending plan into pieces. Sometimes more than one emergency has occurred in a short period of time, causing debt balances to spiral out of control.

Even in extreme circumstances, it is still possible to keep your personal finances under control. With some ingenuity and a little bit of work, you can start slashing loan balances while keeping your credit score protected.

What It Means to Negotiate Debt

If you are getting behind on your bills, you need to find a way to pay at least a portion of them on a regular basis. Negotiating with the creditor or service provider allows you to show that you are interested in paying your bills and are not just walking away from your obligations. In order to negotiate, you need to understand how the creditors look at what you owe. First, understand that your balance due is split into two parts:

The Principal. This is be the amount you borrowed (for credit cards) or the amount of service used (for things like utilities).
The Finance Charge. This is “everything else” that you get charged for – the interest fees, late charges, service charges, etc.

When you get behind on your bills, the finance charge is what will start growing out of control, especially on credit cards.

If you want to protect your credit rating, there is nothing that can be done about the principal for now. Debt negotiation focuses on lowering the finance charge and protecting your credit score. By working with your creditors, you may be able to get some of the late fees and interest charges reduced or removed from your total balance due.

To Err Is Human

Everyone falls behind on their bills at one point or another. Debt negotiation leverages this fact. If you call your creditor to explain the situation, the person speaking with you has likely been in your situation before, and he usually can offer you some breathing room.

Believe it or not, creditors like negotiating these finance charges. They prefer to be paid in full by the due date, but they would much rather hear from you and adjust some finance charges than to not get paid at all. Imagine if you loaned $20 to a friend, and that friend was not able to pay you back on the day you agreed. You would rather get a call or text from the friend explaining the situation than to have your friend start avoiding you.

Companies are the same way. If you are not able to pay your bill one month, they do not know if a payment is coming the next month or if you are on the verge of declaring bankruptcy. If they don’t hear from you and are forced to use a collection agency to collect their money from you, they will add on additional charges to cover their extra expenses. However, if you keep them in the loop on your financial situation, reassuring them that they will get paid, they will usually drop some or most of those extra charges. They would rather help you become current on your account than keep adding extra charges.

How to Negotiate

Debt negotiation is not the same as “debt settlement,” “debt consolidation,” or any other debt management service that you may have seen advertised. The process of negotiating your debt involves two basic steps.

Step One: Make Your Payment Plan

If you know you will be behind on your bills, develop a priority list. Decide who will get paid and it what order, how much you will pay, and when you will send your payment. Negotiating your debt means that you need to talk to each creditor directly. Every creditor you owe will want to be paid first, and you cannot promise that to everyone.

By having a strong plan, you will be able to tell your creditor what your situation is and when you expect they will be paid.

Step Two: Call Your Creditor

To rephrase, call each creditor as soon as possible. You need to be in contact with your creditors as soon as you know that you will not be able to pay the full amount by the due date. During this phone call is when you negotiate the finance payments.

Ideally you will call each creditor before the due date on your bill and especially before late charges are applied. The longer you wait to call, the less likely your negotiation will be successful. Also notice that the word is CALL. Do not consider email or live chat as the same thing. Remember, when a debt collector wants to put pressure on you to make a payment, your phone will be ringing. You want to put that same pressure on your creditor. It is much easier to tell you “no” by email than over the phone.

Step Three: Know What You Are Asking

When calling your creditor, you will need to be very clear on what you are asking for. You are not asking for a reduction in principal. You are asking for the late fees and extra interest payments to be deferred while you get money together. These are things that whoever you speak to, or his/her manager, can usually help you with.

When calling, use the term hardship, and ask if they have a hardship assistance program. Many larger creditors have a procedure in place specifically for hardship assistance, which includes waiving late fees and lowering interest payments.

Regardless of whether or not such a program exists, your main ammunition is your personal payment plan and the fact that the person on the other end of the line is human. Explain what caused your hardship and that you do have a plan to pay the debt. You absolutely should NOT get angry at them or try to fight their decision. If things are going poorly with one representative, you can try to call back and talk to someone else.

Benefits of Debt Negotiation

In the lesson on managing bills, we showed that getting one or two months behind on your bills can be addressed by putting off some bills until next month and paying the rest in full today. We also estimated that there would be some damage to our credit by doing this, and we would accrue late fees and interest charges.

In that scenario, no communication was made with the creditors. We just tried to see which bills had the highest fees and highest risks. We could potentially get our total loss much lower or even have zero loss if we simply reached out to those last remaining creditors and asked for a payment extension.

Lower Cost

The most obvious benefit of debt negotiation is pure cost. Removing your late fees and increased interest charged will reduce the total amount you need to pay off.

Cheap and Easy

Negotiating your debt takes some time and planning, but it can be accomplished with little more than a phone call. This makes debt negotiation by far the cheapest debt management solution out there.

Preserved Credit

Preserving your credit score is another huge bonus. Talking to your creditors means they are far less likely to mark you as delinquent on any payments, keeping negative marks off your credit score.

In the managing bills lesson where we paid off most of our bills and left others for next month, simply calling up our creditors and negotiating the late fees could have eliminated the problem entirely by cutting out the late fees and interest being charged.

The bottom line is that if you get behind on your bills, call your creditors as soon as possible. Even if you cannot pay a dime this month, simply opening the lines of communication will save you money in the long run.

Starting The Discussion

Watch this great video from Bank of America showing how to start the negotiation process with your creditors.

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[qsm quiz=139]

Challenge Questions

Why might a company be interested in negotiating your debt with you?
Using an example, explain what is the difference between principal and interest?
How might the interest on the same loan vary from person to person?
How does debt negotiation benefit you?
How can debt negotiation go against you in the future?

Personal Finance

Effectively Juggling Bills

Written by Kevin Smith

It happens to everyone: a monetary emergency happens, such as a car breakdown, draining your bank account. Bills are still coming in, and you know that you will not have enough money to pay for your debt obligations this month.

One of the first goals when developing a strong personal financial plan involves avoiding these scenarios by having a savings cushion, but this is not always possible. How can you get out of this situation with the least pain?

Example Scenario

For the examples in this article, we will assume that you have enough groceries for the month, you have $1000 in your checking account, and your next paycheck is a month away. You just received all of your bills today:

	Bill Amount	Late Fee	Late Interest (Monthly)
Rent	$600.00	$50.00	10%
Electricity/Gas	$80.00	$10.00	5%
Internet	$80.00	$10.00	5%
Cell Phone	$50.00	$10.00	5%
Credit Card	$80.00	$20.00	25%
Student Loan	$260.00	$40.00	0%
Car Loan	$200.00	$20.00	0%
Car Insurance	$30.00	$5.00	0%
Health Insurance	$250.00	$20.00	0%

The total of all these bills is $1630 – way above what you can afford. Instead of getting worried or depressed, develop a plan of action.

Evaluate the Damage

The first step is to take a look at what will happen for each of these bills if they are not paid. This is a good way to prioritize which bills to tackle first.

If your rent is unpaid for one month, you will get charged a late fee, but you probably won’t be evicted.
Utilities usually cannot be turned off unless there are several months in a row of failed payments.
Your internet connection probably will take a month or two of failed payments before your service provider shuts it off.
If your cell phone bill is unpaid, your provider most likely will shut off your phone within a few days.
Missing a credit card payment will not automatically put you in default, but you have a high interest rate and a late fee to deal with. Plus missing a credit card payment can really hurt your credit. This also applies to your car loan.
Missing your student loan payment can put you in default fairly quickly. This is the stickiest kind of debt. Not even bankruptcy will remove it.
Missing a payment on your car insurance might void your policy. And if you lose your insurance, you can no longer legally drive to work.
Missing your health insurance payments might also void your policy, although there are some protections against this, and getting back on the plan might be expensive.

By knowing those facts about your different bills, now we can make a “ranking” of how important it is to keep each one of your creditors happy in the short term:

High priority — must pay	Would like to pay	Can wait if needed
Cell phone Health insurance Car insurance	Credit card Car loan Student load	Rent Electricity/Gas Internet

This priority will shift a lot if you are facing multiple months of being behind on your bills. For example, if you are under direct threat of eviction, rent might jump near the top of the list.

Explore Your Options

Next, spend a few minutes to think about any other ways you can scrounge up enough cash to make all your payments this month. We discuss this in detail in our article on Short-Term Financing.

Borrow from Friends or Family

Borrowing money from friends or family members might be able to help bridge the gap. This is usually the cheapest and easiest way to get money to pay your bills, but many people are uncomfortable or unable to borrow money from the people they know.

Credit Card Financing

One option is to pay off your credit card first and then use the line of credit available to pay off all your other debts. You could then pay off the credit card balance with your next paycheck. This is the second fastest and easiest method. This will keep all of your creditors happy, and you will not accumulate much interest before your next paycheck, making this the least expensive option available.

Short-Term Unsecured Loans

A short-term unsecured loan is the type of loan you can ask for at a bank. Whether it is granted or not depends on your credit history, the amount you need to borrow, and the policies of the bank itself. If your bank offers you a loan, this is another workable solution. (This is NOT a payday loan. See our article on Short-Term Financing to tell the difference.)

Divide Your Paycheck

In the real world, dividing your paycheck is the most common course of action if the first 3 options fail. Some of your bills are completely non-negotiable and will cause major problems if you cannot make the monthly payment. Pay those first. Then for the remaining bills, divide up your paycheck proportionally and hope your creditors do not complain too much until next month.

Pay Off What You Can

Paying off only what you can also happens in the real world, but is more rare. When using this method, instead of dividing up your paycheck proportionally, you pay off several of the bills in full, leaving others to be completely unpaid until next month. The creditors you do not pay off hate this. You may get angry phone calls or letters, and it could seriously hurt your credit.

Take Action

If you can borrow some cash, use your credit card, or get a line of credit from your bank, that will be the way to go. If not, you will need to determine which hurts less: dividing your paycheck or paying off what you can. Let’s take a look at how this works.

Step 1: Subtract the Non-Negotiables

The top 3 things on our list are non-negotiable. Any lapse in the bills will cause termination of your service entirely.

Non-Negotiable Bills = Health Insurance + Car Insurance + Cell Phone

= 250 + 30 + 50

= $330

We know that no matter what, we need to spend this $330, leaving us with $670 in cash for the remaining bills.

Step 2: Calculate Extra Costs Charged for Unpaid Bills

We want to decide if we are diving our $670 proportionally, or paying off a couple of bills entirely. To see which is best, we first need to know how much extra cost will be applied to the remaining bills if we wait until the next paycheck to make a payment

	Bill Amount	Late Fee	Late Interest (Monthly)	Bill Plus Late Fee	Interest Charge	Total Due In 30 Days
Rent	$600.00	$50.00	10%	$650.00	$65.00	$715.00
Electricity/Gas	$80.00	$10.00	5%	$90.00	$4.50	$94.50
Internet	$80.00	$10.00	5%	$90.00	$4.50	$94.50
Credit Card	$80.00	$20.00	25%	$100.00	$25.00	$125.00
Student Loan	$260.00	$40.00	0%	$300.00	$-	$300.00
Car Loan	$200.00	$20.00	0%	$220.00	$-	$220.00

$1,300 in bills today will grow to $1,549 next month if unpaid, or $249 more than it would be if we could pay everything today. We can see the biggest hits are coming from rent and credit cards.

We are not getting charged extra for missing payments for the student loan and the car loan, but missing a payment will damage our credit history, and we will accumulate more interest on the principal balance. We will estimate the damage to our credit history being $60 each for the credit card, student loan, and car loan payments.

There is also a chance that our landlord and utility companies will report the missed payments. We will assume there is about 1/6 chance, so we will estimate a “credit damage” amount of $10 for each of those bills.

This means the total damage done by missing every payment this month is $459.

	Late Fee	Interest Charge	Credit Damage	Total Cost
Rent	$50.00	$65.00	$10.00	$75.00
Electricity/Gas	$10.00	$4.50	$10.00	$14.50
Internet	$10.00	$4.50	$10.00	$14.50
Credit Card	$20.00	$25.00	$60.00	$85.00
Student Loan	$40.00	$-	$60.00	$60.00
Car Loan	$20.00	$-	$60.00	$60.00
Total	$150.00	$99.00	$210.00	$459.00

Step 3: Calculate Cost if Paycheck Is Divided

Next, we want to see what our cost will be if we divide our paycheck proportionally. This means we are not paying any bill in full. We are looking at the proportion each bill represents of the total amount we owe, and dividing our paycheck accordingly. We will still get charged late payments and some interest. However, we will assume that there will be 1/4 the amount of damage to our credit for a partial payment compared to making no payment at all.

	Bill Amount	Percent of Total	Amount We Pay ($670 x the %)	Amount Unpaid	Late Fee	Total Unpaid
Rent	$600.00	46.1%	$308.87	$291.13	$50.00	$341.13
Electricity/Gas	$80.00	6.2%	$41.54	$38.46	$10.00	$48.46
Internet	$80.00	6.2%	$41.54	$38.46	$10.00	$48.46
Credit Card	$80.00	6.2%	$41.54	$38.46	$20.00	$58.46
Student Loan	$260.00	20.0%	$134.00	$126.00	$40.00	$166.00
Car Loan	$200.00	15.3%	$102.51	$97.49	$20.00	$117.49

We are paying $150 in late fees alone. Now we factor in the interest charges and damage to our credit that goes with this payment:

	Total Unpaid	Late Interest (Monthly)	Interest Charge	Credit Damage	Total Due Next Month
Rent	$341.13	10%	$34.11	$2.50	$377.74
Electricity/Gas	$48.46	5%	$2.42	$2.50	$53.38
Internet	$48.46	5%	$2.42	$2.50	$53.38
Credit Card	$58.46	25%	$14.62	$15.00	$88.08
Student Loan	$166.00	0%	$-	$15.00	$181.00
Car Loan	$117.49	0%	$-	$15.00	$132.49
Totals	$780.00		$53.57	$52.50	$886.07

To calculate how much this is costing us, we can add together our total late fees, total interest charge, and total damage to our credit:

Total Cost = Late Fees + Interest Charges + Credit Damage

= $150 + $53.57 + $52.50

=$256.07

The total damage is $256.07, which is just $202.93 better than paying nothing at all, but still a big amount.

Step 4: Compare with Paying Off Big Credit Debts First

What if instead of dividing up our paycheck equally, we just pay off what we can afford, and leave the rest? To prioritize, we can take our $670 remaining, go down the list of priorities, and simply pay them off.

	Amount	Remaining Cash
1. Credit card	$80.00	$590.00
2. Car loan	$200.00	$390.00
3. Student loan	$260.00	$130.00
4. Rent	$600.00	Can’t pay – skip
5. Electricity/Gas	$80.00	$50.00
6. Internet	$80.00	Can’t pay – skip

Now we have an unhappy landlord and an unhappy internet service provider, but our other bills are paid. We can now compare this option to how much damage skipping these bills entirely would do:

	Bill Amount	Late Fee	Late Interest (Monthly)	Interest Charge	Credit Damage	Total Damage (Late fee + Interest + Credit damage)
Rent	$600.00	$50.00	10%	$65.00	$10.00	$125.00
Internet	$80.00	$10.00	5%	$4.50	$10.00	$24.50

This gives us a total damage of $149.50, saving over $100 compared to dividing up our paycheck equally. We even still have $50 remaining. Applying the $50 to the internet or rent bill would remove some of the credit damage and the interest charged, saving even more money.

Our calculations show that paying off most bills completely and leaving a few unpaid will be better dollar wise. You will save money on late fees, interest charged, and damage to your credit. However, the reason most people still divide up their paycheck and pay a little to each creditor when faced with a cash shortage is due to the human factor. Every creditor who is not paid will send you emails and make phone calls as soon as your payment is late, demanding payment as soon as possible. So people try to minimize the damage from each creditor instead of focusing on minimizing the damage from every creditor. By keeping the big picture in mind, you will do your spending plan a huge favor!

You can download a spreadsheet showing all of these calculations, and even change the values to match your own bills, by clicking here.

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[qsm quiz=138]

Challenge Questions

What reasons might there be that could cause someone to miss paying a bill?
In your opinion, how important is it to have an emergency fund?
After reading the text, would you pay a small amount to each creditor or prioritize and look to eliminate one bill at a time?
What are some of the effects of paying your bills late?

Business, Finance

Asset Valuation – How to value an asset through their financials

Written by Michael Wateska

Every asset has a value that is always changing. So, what factors affect this change? Things such as earnings announcements, financial ratios, and recent news all go into the movement of an asset’s valuation. The key with all asset valuation is that ratios and prices are always relative. This means most methods for asset valuation can only compare one company to another company (usually in the same industry) to give an idea of which one has a competitive edge, and is poised for growth.

The most common methods of asset valuation are based on ratios from companies’ financial statements, and some more advanced theories that try to make a more “objective” valuation, regardless of industry.

Valuation Through Financial Ratios

The two most common ways to give relative value to companies is by comparing their Price over Earnings, and Price over Sales ratios.

Price over Earnings (PE Ratio)

Price over Earnings = (Current Stock Price/Earnings over last 12 months)

Price to earnings and price to sales are a good place to start. For the purpose of this article, we will be looking at two different companies and their financial ratios, Nordstrom (JWN) and Macy’s (M). Calculate this ratio by taking the current stock price and dividing it by the company’s earnings per share (obtained from the Income Statement, which you can find under “Financials” in our quotes tool).

	JWN	M
Stock Price	47.71	23.5
Earnings	2.02	1.99
P/E Ratio	23.61	11.81

From this point, we can interpret the value of a stock use this ratio to determine if it is a high growth or flawed stock. First we take a look at Nordstrom and how to interpret its P/E ratio. Their current P/E ratio is 23.61. Next we look at Macy’s, with a P/E ratio of 11.81. High P/E ratios correlated with higher growth stock due to investors finding more value in a companies share price. If this holds true, Nordstrom is seen as a better buy than Macy’s because investors expect more growth in the future.

Price over Sales

Price over Sales = (Current Market Cap/Revenue over the past 12 months)

A second metric to look at is the price to sales, which while similar to price to earnings, looks to the company’s retail performance. Calculate this by taking the company’s market cap and dividing it by the revenue for the year. You can find a company’s current Market Cap on the standard Quotes page, and their revenue from their Income Statement (in the Financials section of the quotes tool, or under “Company”, and “Key Ratios”).

2016	JWN	M
Market Cap (In Billions)	7.92	7.19
Revenue (In Billions)	14.86	25.35
P/S Ratio	0.530	0.280

This specific financial ratio has been very useful over the past year with regards to the slump in retail stores due to online shopping. Nordstrom has a P/S ratio of 0.530 and Macy’s has a P/S ratio of 0.280. This is a great tool for valuing an asset in comparison to another in terms of sales. This ratio shows that Nordstrom’s current market cap is much lower than it could be in terms of their revenue compared to Macy’s – per dollar value of the company, Macy’s is making more sales.

Growth of Revenue

It is also important to look at growth of revenue over the past year to determine if this ratio is useful to value. You can also find this information in the Quotes tool, under the “Company” section, and “Key Ratios”.

	JWN	M
Revenue Growth (3 year)	4.62%	-2.78%
Revenue Growth (5 year)	5.47%	-0.99%

When we put all three of these together, we can get a picture of which stock is looking for more growth. The P/S and P/E ratios are both much higher than Macy’s, which means investors are expecting to see much more growth. This is backed up by the revenue over the last few years, where Nordstrom has been growing much faster, giving more value to their shareholders.

Theories and Models:

Financial ratios themselves are a great indicator of future performance of an asset, however, there are theories and models to use to determine things such as expected return. The most pertinent ones are the arbitrage pricing theory and the capital asset pricing model, or CAPM for short. Both of these formulas use similar variables, so it is important to identify them first:

Risk-free rate (rf)

The expected return on a riskless asset such as a U.S. Treasury Bill. This is because the U.S. Treasure will never default

Risk on the Market (rm)

This is a broad risk, which includes risks faced by financial markets, but some of them include, recessions, political turmoil, changes in interest rates, etc. There are many different ways to calculate this from different sources.

Market Risk Premium (rm – rf) = rp

This is simply the risk on the market subtracted by the risk-free rate. How much an investor stands to gain by investing in a riskier asset.

Beta (β)

The measurement of the riskiness of an asset. You can get this from the Quotes page for almost any stock.

Sensitivity of an asset to a factor (b)

This is how an assets price is affected by the movement of another asset. This sensitivity can be anything – basically any variable you want to include in your model that you think will impact the price of the stock.

Arbitrage Pricing Theory (APT)

We’ll start with the arbitrage pricing theory the formula is as follows:

To use this model, start by taking the risk-free rate of return, then adding in how you think many different variables will impact the price. Each “b” in the formula is another factor you think will have an impact, and you can have as many factors as you want. You could base the formula off of the inflation rate, exchange rates, production rates, etc. The possibilities are endless.

The valuation that you attain from this formula is considered to be the expected return on an asset. Say you are trying to find the expected return on Tesla (TSLA). A few different variables to use would be oil prices, electric prices, and auto loan rates. These three have a direct correlation with the performance of Tesla’s sales over the next year and therefore their stock price. If auto loan rates go up, you can expect Tesla’s expected return to go down. If oil prices go up you can expect their expected return to rise due to more people switching to electric vehicles. It’s a great tool to bring in variables that are otherwise disregarded.

Using Arbitrage Pricing Theory

To put this formula in action, first identify several factors that should impact the stock’s price, which would be the “b” factors. For example with Tesla, we might say:

b(1) = Growth in the price of oil
b(2) = Growth in the price of electricity
b(3) = Growth in auto loan interest rates

Next, think about how each of these factors influence the stock price (rp, or “Risk Premium”). You can use Linear Regression to calculate these variables in Excel or any other spreadsheet program, the values below are just an example.

rp(1) = 0.7, meaning we expect a 1% increase in the price of oil to make Telsa’s stock price to go up by 4%
rp(2) = -0.5, meaning we expect a 1% increase in the price of electricity to make Telsa’s stock price to go down by 0.5%
rp(3) = -2, meaning we expect a 1% increase in auto loan interest rates to make Tesla’s stock price to go down by 2%

Next, we just need to get the actual values for how we expect all of these rates to move in the next year, then plug these numbers into the formula.

Oil prices are expected to go down in 2017 by about 4%
Electricity prices are expected to go down in 2017 by about 2%
Car loan interest rates are expected to go down by 3%
The current risk-free rate (as valued by a 10 year treasury bill) is 2.35%

Finally, plug these values into the formula:

Expected Rate of Return = (rf) + b(1) * rp(1) + b(2) * rp(2) + b(3) * rp(3)

= 2.35% + (-4% * 0.7) + (-2% * 0.5) + (-3% * -2)

= 2.35% – 2.8% + 1% + 6%

= 6.55%

So, a stock has this expected return given sensitivity towards these factors of 6.55%

Capital Asset Pricing Model (CAPM)

The capital asset pricing model is the following formula:

In plain English, this formula means that the average expected rate of return is based on the risk free rate, plus the Beta of our stock, modified by the average risk in the overall market.

For this we simply plug in the above variables, remembering the order of operations and you will receive an expected return on an asset. The great thing about this formula is that it’s rather simple and all of the information needed is listed publicly and is easy to access. It’s important to keep in mind that even though this gives you an expected return it isn’t the most accurate number and should always have more research done about an asset before investing. We will now look at an example of CAPM using Nordstrom’s stock as the example. JWN currently has a beta of 0.71111, and we will use 4.04% as our Risk on the Market rate (derived here).

Expected Return = 2.35% + 0.71111(4.04%-2.35%)

= 2.35% + 0.7111 * 1.69%

= 2.35% + 1.201%

Expected Return = 3.5517%

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Accounting

Operating Ratios

Written by Dominick D'Andrea

Operating ratios are a class of ratios that are meant to analyze how well a company is using their assets. Specifically, these ratios show how well a company utilizes its assets to create revenue. Like many of the ratios that are used in financial analysis, operating ratios are complex ratios. Some use simple measures in their numerators and denominators, such as COGS (Cost of Goods Sold) and revenue, but many incorporate other ratios into the calculation. Therefore, it is crucial to have a firm grasp on the most basic ratios, such as working capital. Like all ratios, these are only meaningful when compared across time, and to the industry norm.

Sample Financial Statements

We will use the following sample financial statements as the example for all of our ratios.

Exhibit 1 – Income Statement

Income Statement Year Ended 20X5

Revenue	$100,000
COGS	40,000
Gross Profit	60,000

Exhibit 2 – Balance Sheet

Balance Sheet 20X5

Accounts Receivable	$50,000
Inventory	10,000
Current Assets	60,000
Land	25,000
Total Assets	85,000
Accounts Payable	25,000
Total Liabilities	25,000

Common Operating Ratios

Inventory Turnover

The inventory turnover looks at how long a firm has inventory. The formula is:

For this firm, the inventory turnover would be 4x. This means that the firm completely sells its inventory about 4 times during the period. Some industries, like grocery stores, have a very high turnover, while others, like a Bentley dealership, will have very low turnover ratios. Therefore, it is crucial to understand what industry is being looked at, and what the average for that industry is. Comparing the ratios over time to see how it changes will also reveal any trends.

Days of Inventory on Hand (DOH)

Inventory turnover can be taken one step further to see how many times a firm depletes its inventory over the year. The equation is:

In most cases, the number of days will be 365. In this case, 365/4 is ~91. This means that every 91 days, inventory is completely depleted. A high turnover ratio, and thus a low DOH ratio, may mean that the firm isn’t keeping enough inventory on hand. A low turnover ratio, and a high DOH ratio, may mean the firm is having issues selling the inventory. These ratios often point toward other problems in the firm, and are used as a starting place. If turnover is low, one may want to look into the company further to find out why.

Receivables Turnover

The receivables turnover ratio shows how many times in a given period cash is collected from buyers. The formula is:

This firm has a receivables turnover of 2x, which means that is collects from its customers twice in a period. A number that is this low may indicate that the company’s credit policies are too relaxed, or that the firm lacks credit efficiency. On the other end of the spectrum, a high turnover can mean that the company has either a very efficient credit policy, or is very strict with its policy and may be losing customers to competitors with more relaxed policies.

Days of Sales Outstanding (DOS)

As with DOH, days of sales outstanding allows an analyst to determine how many days a year sales are outstanding for a given firm. The ratio is calculated as:

The DOS for this firm is 182.5 days, which means the company goes 182.5 days without collecting from its customers. Again, it is important to compare to the industry average, because certain ratios that may seem abnormal are actually quite normal for a given industry.

Payables Turnover

The payables turnover ratio describes how quickly a firm pays its vendors. It can be calculated as:

If purchases is not readily available, it can be determined as COGS + ending inventory – beginning inventory. For the purposes of this example, purchases will be $75,000. Therefore, the payables turnover for the firm will be 3x. If the turnover ratio is higher than the industry average, it could signal that the firm is paying too quickly, or taking advantage of a credit discount. In contrast, a low ratio could indicate that the firm is having trouble making payments on time, or that the firm is taking advantage of lenient credit terms.

Number of Days Payable

The number of days payable is used to determine how many days in a given period a firm waits until paying its outstanding balance. It is calculated as:

In this example, the firm has a number of days payable of ~122. Therefore, every 122 days the firm pays off its balance. Coupled with the days of sales outstanding, this measure can be used to calculate the cash conversion cycle. The cash conversion cycle shows how quickly a firm converts its investment in inventory into cash. While that measure is typically used for liquidity purposes, it is useful to see how various ratios can be used in different ways.

Total Asset Turnover

The final operating ratio is the total asset turnover, which shows how efficiently a company is able to convert its assets into revenue. Total asset turnover is calculated as:

The total asset turnover for the firm is 1.17. In other words, this means that for every $1 in assets, the firm is able to generate $1.17 in revenue. A higher ratio indicates that a firm is efficient at converting assets to revenue. However, since both current and long-term assets are included in the measure, it can be difficult to interpret.

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Business, Finance

Margin Trading and Market Timing – High Risk Investing

Written by Kenneth Kelliher

Most people trading on their own will use a basic cash account – you deposit your cash into your brokerage account, which you then use to buy securities like stocks and bonds. For professional investors, like day traders and financial professionals, there are ways to multiply the investment amounts and returns by using more complex types of brokerage accounts and trading strategies. This includes margin accounts, which lets investors borrow money to invest, international investing, or buying stocks and bonds from other countries, and using market timing strategies to try to “beat the market”.

Margin Accounts

When investing, an investor deposits money within an account with their broker. There is a choice of two types of accounts in which to deposit the money: a cash account or a margin account.

If the investor has a cash account, they can only invest with the amount they deposited in the account. The investor must pay the full sum of each investment, including any transaction fees associated with the investments. With this type of account, borrowing from their broker is not an option.

In comparison, a margin account has the option of leveraging. Leveraging is where the investor can borrow money from their broker to use for investing. The purpose of this is to that it provides the investor with greater buying power. An increase in the money invested results in an increase in returns(profits). After closing positions on stocks or financial instruments, the money borrowed must be repaid to the broker along with interest.

Example

If an investor had $50 and wanted to invest in a stock or financial instrument, they could borrow another $50 from their broker and then invest $100 into the stock. If the stock value increases, the investors profits are higher (double in this example). The risk in this scenario is that when borrowing from your broker, the investor can lose more money than they have. If the stock lost all its value, the investor loses $100 instead of $50. Then the investor would owe the broker $50 plus interest, which is money that the investor did not initially have.

Anatomy of a Margin Account

The margin accounts will have a balance made up of the investors own money and money the investor borrowed from the broker. The amount that the investor can borrow from the broker is determined by the maintenance margin.

The maintenance margin is an amount that the investor’s own money cannot go below. It is given as a percentage of the whole account balance. If the maintenance percentage is set at 30% for example, this means that the investors own cash must always account for at least 30% of the balance in the account. If the account is losing money and is down from $100,000 to $70,000, 30% of the funds left must be the investor’s cash.

When the account goes below the maintenance margin, the broker makes a margin call. A margin call is when the broker calls the investor and informs the investor that they must increase the cash amount in the account to meet the maintenance margin. The investor should deposit more money – if they do not, the broker has the right to sell any of the investor’s other investments to meet the maintenance margin of the account.

Short Selling

When an investor buys a stock or other financial instrument, they expect that the price will increase. Short selling is the opposite. The investor sells the stock or financial instrument aiming to profit when the price goes down.

The investor does not own the stocks to short. Instead, the investor borrows shares from a lender and sells them, then the investor buys the stock back and returns the shares to the lender. To make profit, the investor sells the stock at a high price and buys the stock at a lower price. The profit is the difference between the price the investor sold and bought the stock multiplied by the number of shares shorted. The potential profit when short selling is 100% if the stock price, (i.e. if the stock itself) loses all value. Therefore, potential profit is limited.

There is a huge risk with short selling. If the price of the stock or financial instrument increases, the investor is at a loss. The stock price can reach any height and therefore the potential loss is unlimited. Investors short stocks or financial instruments due to speculation or if they want to hedge positions on investments.

Example

If the investor short sells 50 shares of a stock that is trading at $10 and the price depreciates to $8, the profit is $100 (50 shares x $2 price change). In the opposite scenario if the price increases by $4 going from $10 to $14 the loss is $200 (50 shares x $4 price change).

To be able to short sell, the investor needs a margin account. With unlimited potential losses in short selling, the balance could fall below the maintenance margin if the stock experiences a huge spike in price.

Market Timing

Market timing is an investment strategy where the investor buys or shorts stocks and financial instruments based on their expectations of what might happen in the market. This is the “Buy low, sell high” idea – trying to buy stocks just before the prices go up, and selling them at the peak.

The success of the strategy depends on how well an investor can predict the market. The investors predictions can be based on economic indicators or technical factors such as trends. The investor would need to be very familiar and educated with using economic data and technical analysis to have a market timing strategy. The investor uses these factors to decide which companies or industries to invest in or to short sell. Trading styles can be either active or passive. Active investing is frequent investing. In comparison, passive investing is a buy and hold type strategy. Market timing would fall under an active trading style.

Example

When President Trump was elected, using a market timing strategy to invest in banking stocks before the results of the election would have been very profitable. An analysis of President Trump’s policies would have suggested benefits for the investment banking industry. When President Trump won the election, there was a spike in their stock prices of investment banks. However, by investing in investment banks, investors were betting that Trump would win. Most investors had bet on Hilary Clinton winning. Therefore, their market timing strategy was unsuccessful.

Many academic studies have found that market timing is not a successful trading strategy, in favour of long term investments. However, this is debated by active traders who argue in favour of market timing. In general, it is considered an unreliable method of investing as the market is unpredictable. Majority of investors who have a market timing strategy are unsuccessful. Comparing strategies, long term investing strategies have many more success stories.

International Strategies

A portfolio has an international investment strategy if it has investments in foreign markets. An international investment strategy offers the investor the opportunity to lower the risk of their portfolio and to take advantage of possible investment opportunities in foreign markets. It reduces risk through diversifying. Diversifying is where the investor invests in more than one market to reduce the risk to any specific market. Instead of being fully invested in domestic markets, the domestic market holds a smaller percentage of investments with investments in foreign markets making up the rest of the portfolio. If the investor was to only focus on American markets and if the markets took a dive, it would be very difficult to protect the portfolio from taking a hit. Therefore, if they had investments in many markets internationally, the investments in other markets would be safe. The investor’s portfolio of investments would not be as exposed.

For active traders who have a market timing strategy, major international events would provide them with much more opportunities to trade. They would have many more events to speculate about. Similar passive traders would have a much wider range of stocks and financial instruments to choose from, providing greater opportunity to make profit.

The trade-off to this extra diversification is more risk. Each country has unique political situations that could affect investments, which need to be carefully tracked and understood. International investing also exposes investors to currency exchange rates. Exchange rates may also effect the return on investments, and so also are a very serious consideration. The investor must be aware of all factors that could affect an investment as they may not have the same knowledge and exposure to information about foreign markets.

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Management

Social Responsibility in Management

Written by Jinni Raisa Alingasa

Social responsibility is having a sense of duty to society and everything that is a part of it. In other words, “social responsibility” means managers are accountable to society at large, not just their shareholders.

Social responsibility is an important aspect of capitalism at large. Individuals and consumers place trust in businesses to “do the right thing”, and take a leadership role in making the world a better place. A world with more socially-responsible managers also leads to fewer government regulations, since regulations are almost always introduced as a reaction to businesses profiting at the loss of society around them.

What does it involve and who does it involve?

The business itself (through its mission and vision statements), those put in charge of running it (the managers), and the people that produce value for it (the rank-and-file employees) are expected to act socially responsible. This means they have to be virtuous in who they are and what they do; that is, think in the best interests of the public, act on those best interests, being able to face the consequences of those actions (if they ever arise), controlling negative behaviors that could lead to negative outcomes, and most importantly, being fair to yourself and those around you.

Upper managements such as the chief executive officers (CEO), the chief financial officer (CFO), the chief operating officer (COO), the chief technology officer (CTO), the chief marketing officer (CMO), the directors, the presidents, the senior vice presidents, the vice presidents, the sales managers, and many others are charged with being the role models, supporters, the enforcers, the implementers, and the delegators of social responsibility. In other words, social responsibility usually comes from the top, with the highest-level managers encouraging their subordinates to act with social responsibility. This is usually done through the company’s mission and vision statements, implementations of internal controls, and specific goals laid out in the business plan.

Besides the management, there are those who keep such people in line and make sure they’re accountable and responsible for everything that happens: you, me, the media, the government, regulatory agencies, critics, customers, investors, activists, and so forth. “Bad press” and “good press” are the biggest motivators for managers to act with social responsibility. If the public sentiment starts viewing a company negatively, its competitors will be very eager to start stealing business.

Everyone is a stakeholder; including the owners (shareholders), employees, customers, suppliers, and society at large. The internal stakeholders are those inside the company, and the external stakeholders are everyone outside of the company.

How should managers approach social responsibility?

Management should make every effort to appear and become socially responsible in everything they do, and what they represent. This helps keep the company in high esteem with their customers, but also proactively avoids problems caused by new regulations (either by preventing their passage to begin with, or already being prepared for them once they are enacted). Managers can be socially responsible by focusing on four key areas.

Constructive

Being and becoming socially responsible is about working with people who are able to identify when something is socially responsible or irresponsible. Social responsibility is about listening and learning about the people and the environment from which it will apply. Being constructive means listening to complaints, coming from both inside and outside of the organization, and being willing to act on those complaints.

Open-minded

The past is in the past, pay attention to the here and now, the moment in time where it actually counts. Do not be afraid to try new things or consider different options because things will continue to change. Change is something we all have to deal with as we approach the future.

This means companies need to be willing to listen to new research and new concerns coming from outside the organization, even if those concerns might mean a fundamental change to their products or way of doing business.

Accommodating

Do whatever you can to be socially responsible in all areas of your life and your career. By being more accommodating you will make it harder for critics to question your management ability or implicate you in crimes against social responsibility.

In other words, when valid concerns are raised, socially responsible managers need to actually do something about it. This does not mean changing the entire way an organization does business with every valid complaint, but it does mean managers address complaints coming from outside the organization while mapping the company’s path forward.

Proactive

Take the necessary steps to make social responsibility happen and not wait around for others to follow through with it. Make sure that the structure of social responsibility is in place, but always follow up just to be sure that everyone is complying with it because even if one person diverges, detraction will soon follow.

Companies get the best press if they are proactive and address social issues before they are forced to do so by government regulation. For example, the Heinz brand became nationally beloved after it became the first major food manufacturer to lobby in favor of the Pure Food and Drug Act, a major social issue that other manufacturers were fighting. Nobody will celebrate a brand if they simply follow the bare minimum responsibility that the law requires, but brands can build a loyal following by being ahead of the curve.

Ultimately, a manager must decide whether to become stiff and stagnant or adapt and change towards social responsibility. If the former is chosen, the manager might be publicly scrutinized, penalized, fined, jailed (if they remain stubborn after government regulation is implemented), or worse, totally unemployable (by becoming a villain in the eyes of the public). By choosing the latter, the manager will live to fight another day, becoming recognized for their valiant efforts for social change, and will be remembered as this great person we all strive to be. Social responsibility should not be a second thought, it should be the first and most important thing to consider when devising successful business strategy.

What ways can those charged with social responsibility carry it out for internal and external stakeholders?

The first step and the best thing management can do is include all stakeholders in their decision-making by making them a part of what the organization stands for (vision, mission, goals) and how they operate. The internal stakeholders are the shareholders (owners) and the employees. Shareholders demand that a business does well, which can be seen when their earnings increase and they are able to receive dividend rewards because of it.

In comparison, employees desire monetary compensation for the work that they do and additional benefits of working on the job (medical, 401k, etc.). Then there are the external stakeholders; the suppliers, the banks, the customers, the government, and society. Suppliers want payment for what you purchased from them, banks want interest from the loans they provide you with, customers want to be happy with the products and services they get from you, the government wants you to follow their laws and pay taxes, and society wants you to pay it all forward for a good cause.

Considering all of that, there are many ways a business and those who are running it can show that they are socially responsible, here are a few of them:

Crowdsourcing

Inviting the public (current, future, and potential customers) to share their thoughts and ideas of how the company can improve their products and services and reaching out to the public to help solve problems. Whenever you take a survey or write a review, all that data is used by the company to make a change.

Environmental Sustainability Initiatives

Creating products and services that are less harmful to the environment by recycling materials, cutting waste in the production process, and using renewable energy. Many people are becoming more aware of global warming and how humans are damaging the earth, by being on the right side of science you can change the world. SC Johnson Company has historically been famous for willing to undermine its own product lines for the sake of environmental sustainability, which has been a huge boost to its public image.

Give Back

Starting charity foundations, offering academic scholarships, donating resources, being generous, and caring about what is important to others to win over customers, employees, and society. Helping others realize their true potential is what business should be about and when people see that, you will be attracting more customers and keeping the ones you already have.

Confront the Critics

Warren Buffet understands that it takes a long time to build a good reputation, but it takes mere moments to destroy it. Companies must take care to keep a good reputation and what better way than to face the negative publicity, the horrible comments, and disgruntled individuals with undeniably positive solutions that will help bring them to your side. Trying to silence critics or slander bad press usually only makes a bad PR problem worse.

Government Laws and Regulations That Have Resulted From Social Irresponsibility

Laws and regulations are there to protect people and the environment because society and the government will not tolerate any harm or abuses that its citizens experience. However, laws and regulations did not spring up from nowhere: they were a result of multiple offenses and repetitive indiscretions that brought attention to the irresponsible actions that needed to be prevented from happening again. And, if they did happen again, people who thought they could get away with it would face hefty fines or serious jail time. Let’s take a look at some of them here:

Telemarketing and Consumer Fraud and Abuse Prevention Act (1994)

The federal government had to respond to this one because people were getting tricked into buying things over the phone by people pretending to sell them something they needed. In return, people gave these fraudsters their personal and financial information. Investigators reported that each year there were $40 billion of losses because of these indirect phishing schemes and Congress responded. This act makes it illegal for telemarketers to deceive and coerce customers and requires them to disclose their information and only make calls at certain times of the day.

Fair Packaging and Labeling Act (1966)

In the past, people used to make all sorts of crazy claims about what their products could do and how much use it could provide. The government eventually tried to put a halt to deceptive labeling, which makes it impossible for companies to lie about their products. This law requires that the product is identified for what it is, be provided in the stated amount intended, and be traced back to the company who developed it or offered it for public consumption.

Fair Labor Standards Act (1938)

This law has been amended almost 20 times with new additions and changes that reflect every time period where the law and labor standards intersected. This law protects everyone that is working or going to work by limiting work hours to 40 hours a week, establishes a minimum wage, allows for overtime pay that exceeds the rate of minimum wage, and also makes sure that children stay in school and not working in a factory.

Occupational Safety and Health Act (1970)

This law makes it illegal to place any worker in unsafe working conditions, and has so many amendments covering ever-broader workplace hazards. This law even covers workplace discrimination. Anything that is a detriment to the health and well-being of any worker is confronted by this law and it holds employers accountable for it.

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Finance, Management

Internal Risk Management

Written by Nimrod Komen

Risk Management is when a manager tries to organize his company (or business unit) to prepare in case of, and try to prevent, something going wrong. Risk management is one of the most complicated branches of management, as it requires managers to be able to assess unknown situations and try to be prepared for anything. It is the technique of distinguishing, investigating, and acknowledging uncertainty and speculation management choices. Essentially, risk management occurs whenever a financial specialist or fund manager analyzes and tries to determine the potential for loss in any given situation, and later makes the appropriate action to try to minimize that risk.

Internal versus External Controls

Tools for Risk Management are usually divided between Internal Controls, meaning tools to prevent problems coming from inside the organization, and External Controls, which means preparing to face threats and problems coming from somewhere else.

Internal Controls

Internal Controls are the procedures and processes in place at an organization to make sure everything operates smoothly and mistakes stay rare. This includes things like building Standard Operating Procedures (SOPs), Quality Assurance (QA), and Auditing. It also includes checks and investigations to make sure those SOPs and QA processes are being followed properly, not just unused documents. Most of the examples in this article will focus on internal risk management.

External Controls

External Controls are in place to protect an organization from damage done from some outside force. This includes things like assessing how likely a new product might fail to sell, how much damage would be sustained in case of an accident, and making sure the organization is properly insured in case of disasters. External Controls include relatively minor things like building security (to make sure industry secrets are kept safe) through currency hedging to make sure the organization is not overly damaged if exchange rates start fluctuating.

Nature of Internal Risk Control

Internal Risk Control is what a manager and organization put in place to minimize risks coming from inside the organization. These controls fall into 4 broad categories:

Monitoring: These are controls put in place to keep an eye on operations and identify problems before they escalate
Control Environment: This means organizing the workplace to minimize risk. This can be anything from a factory installing safety equipment to the IT department putting up firewalls to protect against viruses.
Information and Communication: This is the establishment of regular reports and communication channels between departments, workers, and managers. Sometimes workers and managers believe they have a problem “under control”, but it could be on the verge of spiraling into disaster – good communication and reporting helps prevent this from happening.
Risk Valuation: This is the method that an organization uses to put a dollar amount on how much risk each aspect of operations is adding to the whole.

Risk valuation is the most tricky, but also the most important. Each organization has finite resources that it needs to spread to minimize risk as a whole, and this valuation process helps guide those efforts. At the same time, every time a company adds more monitoring, controls, and reporting duties to its staff, the staff spend more time focusing on risk management, and less on what generates revenue. Every time a new internal control is imposed, it must be balanced with the cost it imposes on the team it is trying to protect.

Internal risk control is done at every level of management. The lowest-level managers are trying to minimize the risks inherent to their team in meeting their objectives, while higher levels of management examine risks running throughout the organization as a whole. Effective controls are also bottom-up as well as top-down, by adding direct avenues of communication from rank-and-file workers to report any time they believe internal controls are being disregarded, or if new controls may be necessary to address new risks.

Contrast with External Risk Control

External risk control is more free-form, since the risks from outside an organization cannot be quantified quite as easily. This usually starts with a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats), and focuses on addressing the Threats identified. External Risk Control is usually addressed by the higher level managers, who then issue directives to the lower levels of management to address these risks.

While internal controls are put in place to ensure the organization continues to operate smoothly, external risk controls try to address threats to the business itself. For example, airlines are always at risk for the price of oil going up, which causes a huge spike in their operating expenses. One major form of external risk control they exercise is purchasing oil futures, which locks in a set price for several months in the future, removing some uncertainty. External risk controls try to look at everything from input prices changing to new laws and regulations being passed, and everything in between.

Ways to assess risk

Risk evaluation has no settled guidelines on how it ought to be done. However, there are a couple of general rules that are followed. There are five stages to risk evaluation that can be taken to guarantee that risk appraisal is completed accurately. These five stages are:

Stage 1: Detecting the hazards

Before a risk can be assessed, the first step is identifying what exactly that risk is. The goal of Step 1 is to have a clear and concise definition of what exactly the potential problems are and what kinds of damage might be caused. For example, dangerous machines in a workplace have a defined risk of harming workers, which both loses productivity and results in lawsuits.

Many hazards are initially very vague, but effective controls cannot be put in place until the managers identify what exactly they are trying to control. Hazards can be recognized by utilizing various diverse procedures, for example, strolling around the work environment or asking the workers. A few hazards might be anything but difficult to distinguish and others may require some help from different experts outside of one’s business.

Stage 2: Identifying the stakeholders

This stage builds on the hazards and risks found in stage one. A problem in the workplace has a few different levels of stakeholders. For example, with dangerous machinery, the workers at risk of being injured are obvious stakeholders. Additional stakeholders would be the other units of that business who will be put behind schedule if there is an incident earlier in the production chain. It will also impact the families of those who might be injured, as well as the stockholders of the company who may pull their investment in light of the bad press following an injury.

Stage 3: Evaluating the dangers and choosing control measures

Evaluating the dangers means trying to assign some probability of how likely the hazard is to occur. No hazard can be completely eliminated – only minimized. This means businesses first identify how likely a problem will arise from that hazard, and how much potential control measures will lower that possibility.

Potential controls are evaluated by balancing their cost to implement (both in dollar value and how much time/effort of the staff it will take to enforce the control) with how much risk is actually reduced. Once several alternatives are compared, new controls can be introduced.

Stage 4: Record the findings

Effective controls are implemented on a trial basis. This means the team has a training session to outline what the hazards are and the new controls being implemented to address them. While the trial progresses, the entire team (from rank-and-file workers through the management involved) record how the implementation impacts their work, both in terms of actually addressing the risks the controls are addressing and the realized cost of implementing them.

Step 5: Review the assessment and refresh

Risk controls need to be continually reviewed for effectiveness and refreshed, with corresponding communication to all the stakeholders involved. This is usually done by the management team, with a specific “Assessor” tasked with conducting a review or audit of the control and how it evolves over time. Changes need to be implemented to every type of control over time to address new risks and changing business environments.

Importance of auditing risk control

Audits are larger reviews of the internal risk controls that a company has implemented. Audits are separate from the normal risk assessment procedures, but do follow a similar road map for how they are conducted.

Regular audits of internal risk controls are essential to keep an organization running smoothly. Their two major benefits are making sure that the internal controls are being implemented as designed, while also getting a “bird’s eye view” of the overall controls in an organization. This bird’s eye view can help identify redundancies with the internal controls, and streamline the processes, making them cheaper, easier, and more effective.

Risk Identification and Assessment

This is the same as Step 1 through Step 3 in the normal Risk Assessment, but looks at the business operations as a whole, rather than individual business units. The purpose is to identify what risks are present, and what controls already exist to address those risks. If adequate controls are not present, the auditing team will make recommendations to the relevant stakeholders to fix it.

Enhanced Process Efficiency and Effectiveness

This is the process of trying to harmonize the internal risk controls already implemented across an organization. The main goal of these exercises is to try to make it easier for business units to maintain effective controls. This usually means merging SOPs from different business units, enhancing communication channels, and getting more input from managers about what types of controls are eating the most of their time. Effective internal control audits mean workers need to spend less effort on compliance, and more effort building value for the business, without sacrificing protection against risk.

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Personal Finance

Researching Purchases

Written by Kevin Smith

Every person makes hundreds of purchases every month. Think about how many individual items you choose when buying groceries, how often you eat out or use a vending machine, or how often you buy new clothes. Each purchase has a reason, but each purchase costs money.

One of the cornerstones of strong personal finances is knowing why you buy what you do and knowing how to research your purchases in advance.

Why We Buy What We Do

Coke or Pepsi? Large coffee or medium? Prepare your own bag lunch or go out to eat? You will make thousands of tiny decisions every month about how your paycheck gets divided.

It is not possible to carefully consider every single purchase you make. This would lead to decision fatigue. Decision fatigue happens because every choice you make takes some brainpower. As you spend more time and effort considering each choice, you will get worn out very quickly. This is why most people spend a lot more time researching “big ticket” purchases than every item in their grocery cart.

Once you break down your spending with a spending plan, you will see that all your minor purchases add up very fast. That’s why it is important to understand why you make each of those small purchases.

Advertising and Spending

You are susceptible to the effects of advertising. Everyone is. Most people think advertising does not really affect them much, but no matter how savvy you are, you will be affected by ads.

When you are deciding whether or not to buy a product, you already have some pre-formed opinions about what benefits you will receive compared to the price you are paying. Where did those pre-formed opinions come from? They came from several prior experiences you’ve had that allowed you to interact with the product in rational and emotional ways. Advertising was at work.

A successful ad is able to do three things. First, it attracts your attention. Bright colors, interesting people, music, humor, bold words, and familiar experiences are all at work to capture our attention. Next, the ad gets the name of the product stuck in our heads somehow. Third, advertisers put a positive spin on their products to convince us that this is something we truly want or need. A good ad is able to hook your emotions and bypass your brain. Then when you see those products while you’re shopping, you are more likely to make impulse purchases rather than comparing products and choosing the one with the best value.

Advertising has the biggest impact on our smaller purchases, where we only spend only a few seconds weighing pros and cons. A simple product endorsement from a social media website may be the reason you buy Product A instead of Product B.

Previous Experience

Our own previous experience is the opposite of advertising. We have used a product previously, and so we know exactly how well it works and the value it brings relative to cost. Smart shoppers should not rely solely on previous experience to make purchasing decisions. Buying certain products out of habit means you are not taking time to compare one product to other available alternatives.

Most of us have an older relative who has used the same products or visited the same restaurants for the past 30 years, even though newer, better alternatives are now available. This happens because shoppers fall into spending ruts, where a positive previous experience has switched off the part of the decision making process where you consider alternatives.

Peer Pressure

When it comes to spending, peer pressure is not always a bad thing. Peers will share their personal experiences with a product or service, allowing you to gain knowledge of what you are buying before wasting your money. Getting a product endorsement from someone you trust is one of the best ways to feel the benefit of the product is worth the price.

On the other hand, peer pressure can also encourage over-spending. If you have more than a couple of friends, once they know you are shopping for a particular product, chances are you will get recommendations from each of them. Each may claim that different products are well worth the cost and the investment. Each friend might be right, but even if they are, buying more items just because they were recommended can really hurt your budget.

Think about watching TV shows. You might have 4 different friends, each recommending a different TV show, which takes ½ hour to watch one episode. If you take the advice of all 4, you’ve already dedicated 2 full hours to watching TV, before you even get to the shows you privately wanted to catch up on!

How to Spend Your Time Researching

Researching purchases is mostly a time problem. There are thousands of purchases to consider, but only one of you and only 24 hours in a day. Thankfully, there are some tools that can help with your research, making the process easier for you.

Use Your Spending Plan or Budget

Before you make any purchase, your need to first decide what money you actually have to spend. If you have created a budget or spending plan, this usually means looking at what you spent last week or last month and using those dollar figures as a starting point.

Next, decide if you can spend less on future purchases without missing out. For example, you may prefer name-brand products or getting your coffee to go instead of brewing it yourself, but could you save money simply by making small changes? You might prefer that extra cash at the end of the month more than the drive-thru coffee you purchase in the mornings.

Conduct some personal research to determine how much each item is really worth to you. Try decreasing your grocery or clothing budget by a few dollars each month. With less money allocated for these purchases, you may be forced to spend an extra few seconds thinking about each item that normally goes into your shopping cart. Sometimes this is all it takes to save a lot of money in the long run.

Compare Online as You Shop

Most people today have a smartphone with full internet connectivity. If you are shopping at a brick-and-mortar store purchasing items that cost more than $20, it may be well worth your time to do a quick online price-check for those items.

This online price-check provides two major advantages. First, you will see instantly if you can find the items at a cheaper price somewhere else. If the purchase can wait a few days, you can order online and save money. Second, online shopping sites usually provide user reviews from other people who have purchased certain products. These reviews will educate you on the product’s actual quality, how long it will last, and problems other customers have experienced.

Delay Purchases

If you decide you want to buy something, there is a simple trick to help you save a huge amount of money. Delay the purchase. Simply do not purchase the item as soon as you’ve made up your mind that you want it, even if it is on sale.

Have you noticed when you’re shopping online for certain products that advertisements for those products seem to “follow” you around the internet? Ads for those new shoes you were looking at seem to appear in your email, your news feeds, and in your social media websites. Let those ads do some of the research for you! When you find an item that you want but do not buy it right away, the ads that are following you will now be showing you some alternatives. These alternative retailers or products might have better prices or better reviews that you did not see during your first round of research. The biggest advantage in delaying purchases comes by simply cutting out impulse purchases entirely. According to the BBC, most shoppers waste about $800 per year on impulse buys for products that they never really use and never needed in the first place. Delaying your purchase by a couple of days kills that impulse. By delaying the purchase and killing the impulse, you just saved yourself the entire purchase price, plus you don’t have items around your house that you really don’t need.

Be Wary of Sales and Bundles

A shopper recently purchased a laptop from a major electronics store. It was purchased at a competitive price, was well-researched, and had all the desired specs. At the check-out, the salesperson offered a bundle. The store would offer a full set-up of the laptop, complementary antivirus software with a 1-year subscription (which the store sold separately for $70), and a 1-year warranty for accidental damage, all for only $60.

This bundle exists at most electronics stores, with similar terms, but it really does not offer much more than simply an increase in cost. The bundle is offered at check-out specifically to give the buyer little or no time to research the purchase before having to make a decision. This should raise a red flag for shoppers. In reality, no part of the bundle was a good deal.

There is no real “set-up” process for new computers anymore. Just entering your name and logging into your home’s Wi-Fi is usually enough to get up and running.
Almost every new computer comes with a “trial” version of professional antivirus software, which lasts as long as the membership period offered in the bundle. The Windows operating system now includes its own built-in antivirus protection, known as Windows Defender. And free versions of almost every other reputable antivirus exist for extra protection. Apple computer products also have their own free suite of antivirus software to choose from.
The accidental damage warranty offered by the store was almost identical to the one already included by the manufacturer of the laptop, providing no additional benefit to the customer.

You can find a similar story behind almost any bundle ever offered at check-out. If you are being offered a bundle deal without being given time to do proper research on what you are buying, you will be better off by opting out and sticking with the purchase you have already researched.

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Challenge Questions

Why is it important to consider comparison shopping?
Other than price, what other factors should you consider before purchasing something?
With the use of examples, what do you understand by peer pressure?
With your understanding of opportunity cost, how does this apply to purchases?
How might delayed gratification and delayed purchases help you with your budgeting?

Career Development, Personal Finance

Work Versus Study

Written by Kevin Smith

Every high school student makes a choice when they are about to graduate – enter the job market right away, enter a trade school, or enroll in a university?

Everyone will make the same kind of choice many times throughout their lives. If you first choose to work, the option is usually still available later to go back to school. University graduates sometimes feel like they are reset back to square one: once they have a degree in-hand, they must choose again whether to enter the job market right away, continue studying for a Master’s Degree or Doctorate, or work towards professional designations and certifications!

Striking a balance between working and studying will dominate your career path, lifelong income, and job satisfaction, so everyone always needs a plan.

Step 1: Understand the Question

If you are graduating high school or college, the question of going right to work or going back to school (or training) seems pretty straight-forward: Earn money now, or try to find a way to increase the amount of money you will earn later. This does not give you the full picture – a big part of the reason why you might go right to work, or go back to school, has as much to do with the doors that will open (regardless of the choice) as it does the paycheck you earn or the degree you earn upon completion.

Your career will change and evolve, be prepared!

Baby boomers, on average, held about 11 jobs by the time they turned 50. If we think each person was 17 when entering the job market (some entered earlier, some later), that means each person changed jobs, on average, once every 3 years (less than 10% held four or fewer jobs during their career).

You might have heard that older generations often stayed with the same employer for their entire career – even though people changed jobs more often, this is often due to promotions or role-changes, more than a full career change. With younger generations, we do not have enough data yet to show how many jobs each person has, but research is suggesting that young people are changing jobs about as often, but changing their employer, and the types of jobs, more often than in the past.

This means that the types of jobs you are applying for today, and the type of training you would get from going back to school, is probably not going to be exactly lined up with the work you do 8 or 9 years from now.

Open Doors

This is important for your choices today. Everyone needs to prepare themselves for a rich and rewarding career doing something they enjoy, and an important part of that is growth. This means that regardless of your choice to work or study, you need to focus on building valuable skills and experience that you can use to build up your career later.

Step 2: Build Skills

Once you realize that the job you are preparing yourself for today might be a far cry from what you want to be doing in 10 years, the next step is building skills to distinguish yourself from all the other job-seekers.

Building skills is vital for any successful career, regardless of how much education or training you have. There are over 150 million workers in the United States today: to give yourself a fighting chance at a rewarding career, you need to be able to do things that set you apart from the crowd.

Building Skills in the Workforce

If you are jumping right into the workforce, this means actively seeking out jobs with some level of on-the-job training, and opportunities to grow over time. You do not need to constantly switch jobs and employers, so long as you feel that the work you are doing today will make you a more valuable asset to any company tomorrow.

Building Skills at School

If you are studying, needing to set yourself apart becomes more obvious. As soon as you graduate, you will be in direct competition for everyone else from your major for the same pool of jobs.

This means your goal while in school is not just to excel in your major, but find new and exciting ways to show how you are different from everyone else – what makes you a more valuable prospective employee than everyone else from your classes.

Most universities have built-in ways to do this: you can declare a second major or a minor, ideally focusing on skills and knowledge that will be valuable for jobs mostly recruiting in your primary major. You can also join skill-building fraternities, sororities, or student organizations, which include seminar series, special projects, and opportunities to take on leadership roles.

Step 3: Build Your Network

Building a network is one of the ways that going to a full university can really help your career, even beyond the skills learned.

Your “Network” is the group of peers you build with similar careers (or career objectives). They might be close friends, or even just professional acquaintances that you occasionally work with on a personal basis. Most universities work on building student networks by encouraging group projects, collaborations, and mixing students together. Professional organizations (again, like fraternities and sororities) might be the fastest way to build up a network, as they often organize mixers including both current students and graduates already in the workforce.

The Hidden Job Market

The reason these networks help is that it will connect you to job openings, promotions, and career advancement opportunities that simply do not exist unless you already know someone. If you have looked for a job recently, you have probably been very frustrated by the fact that up to 80% of job openings simply are not advertised at all – they get filled by someone who knows someone who can provide a recommendation.

Building a professional network of friends and contacts working in the industry where you want to be will help you tap in to this huge pool of rewarding jobs that you might otherwise completely miss out on. In fact, the opportunities to build your professional network through peer groups and internships is one of the least-advertised (and most important) advantages of going to college.

Networking Outside of School

If you jump straight to the workforce, or have already graduated, building up your professional network might be a bit slower, but is still very important. Try joining a professional social network, like LinkedIn, to help manage your networking presence. As you build relationships with other professionals, you can add them to your network in order to keep in touch outside the narrow scope of the job at hand.

You can start to balloon your professional network by participating in volunteer groups, social events, and basically any activity that lets you meet and mix with new people. Blurring the line, taking evening or weekend classes at a local college on topics that interest you is a great way to both build your unique skill set and build your network at the same time.

Step 4: Compare Cost

This is the big one – how much will school cost you, and how much will you lose in lost wages if you attend? Think about the jobs that will be available to you when you graduate – is the benefit worth the cost?

This is the hardest part of the problem to really define and solve for yourself. To try to see the scope of the problem, try out our job search tool and look for some job openings in your area. You can narrow down your search by using keywords describing the kind of work you want to do – it does not need to be your dream job, but something you could see yourself doing, and will help you build skills and a network.

Find Your Job First, Decide on Education Later

Once you pick out jobs you like, compare what qualifications they require against the pay they are offering. If you see that the job has very low pay but absolutely requires a 4 year degree, it suggests that there are a lot more people with that degree than there are jobs willing to hire them – so you will need to really focus on building skills and keeping the cost of education down to break even.

On the other hand, many jobs emphasize experience and practical skills more than education requirements. For these, you can start working backwards – to get the experience requirement, what other jobs will you need as a stepping-stone, and how much do those pay? If your dream job requires 5 years of toil in a job you hate for low pay, you can usually replace some of that experience requirement with some relevant education or other training.

Minimizing Education Cost

If you do decide to go to college or university, your choice now is focused on balancing cost, quality, and networking opportunities.

The cheapest way to get a 4-year degree (outside of scholarships) is completing your first two years of general education requirements at a smaller local community college while continuing to live at home, or working part-time to offset the cost.
The most expensive way is usually living on-campus for all 4 years at the same institution, which can add tens of thousands in extra tuition and room & board expenses.

The flip side is that just attending class, then going back home seriously reduces the amount of interaction you will get with your peers, hurting your networking opportunities. Staying at the same school for all 4 years also opens more doors to get involved in professional organizations early, rising to leadership positions (which looks great on your resume).

Whatever balance of work, training, and education you take, make sure it is an informed choice. Look at job postings early and often, not necessarily to constantly switch jobs, but to make sure you know what skills are in demand, and to help plot a course for your career forward!

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Challenge Questions

What do you understand about work versus study?
Why is it important to network with others and how could this help you?
Why is it important to offer help where you can to others when networking?
Currently students across the US have a combined debt of $1.4 trillion dollars. What could you do to minimize your education costs?

Career Development, Finance

Certifications in the Finance Industry

Written by Marcin Pasternak

Have you ever thought about a career in the finance industry? Have you wondered what is required to be considered a professional in the stock trading world? Well I have good news: you’ve come to the right place! We’ll cover educational requirements and the basics of Series 6, Series 7, and several professional designations in the industry. So buckle in and let’s get started!

Buying and Selling Securities – The FINRA Series Exams

The Series 6 and Series 7 exams are administered by Financial Industry Regulatory Authority (FINRA).

Series 6 Exam

The Series 6 exam (Investment Company and Variable Contracts Products Representative Exam) consists of 100 multiple choice questions, takes 2 hours and 15 minutes to complete, and costs $100. The passing score is 70%. A candidate who passes this exam is able to solicit, buy, and/or sell mutual funds and variable annuities.

Series 7 Exam

The Series 7 exam (General Securities Representative Exam) consists of 250 multiple choice questions, takes six hours to complete, and costs $305. Passing score is 72%. A candidate who passes this exam is able to solicit, buy, and/or sell all securities products, which include products such as common/preferred stock, options, and bonds. There are no prerequisites for either the Series 6 or Series 7 exams, but you do need to be sponsored by your employer to take them.

The main difference between the exams is increased difficulty and study time for the Series 7, but it allows you to sell a larger choice of investment products. Recommended study time for the Series 7 is about 2 months, and a little less for Series 6. If you want to show your potential employer that you are serious about getting the Series 7 as soon as you start, you can take a Series 7 Training Course to get pre-certified.

Other Series Exams

Series 7 is a prerequisite for most other examinations that FINRA offers, such as Series 4 (Registered Options Principal Exam) and Series 24 (General Securities Principal Exam). The Series 4 is a great registration for anyone that enjoys trading options, and the Series 24 is beneficial for anyone wanting to get into a supervisory or management role in a financial organization.

The CFA Institute Charters

As in all professions such as doctor or lawyer, certain professional designations help grow your career. The most prestigious designations you can hold in the world of finance today are issued by the CFA Institute.

Certified Financial Analyst

The CFA designation is currently the gold-standard of professional designations in the finance world – having this on your resume will open a lot of doors. This program is offered through CFA Institute. It consists of three levels, and once a candidate completes the program and meets all professional requirements they are awarded the “CFA charter” and become a “CFA charter-holder”. Currently, there are about 132,000 charter-holders around the world. The requirements of a charter-holder include four years of qualified work experience and holding a university degree. Candidates take one exam per year for three years (if passing each level). Costs vary depending on registration time, but range from $710-$955 for each level. Passing rates vary as well, averaging 40% for Level 1, 44% for Level 2, and 58% for Level 3. The recommended study time can be pretty intensive, with most candidates reporting 4-6 months of study time per level. The low passing rates add to the prestige of acquiring this designation. This is the designation to have for anyone interested in equity research or portfolio management. The topics covered in the three levels of the program include Ethics, Quantitative Methods, Economics, Corporate Finance, Financial Reporting and Analysis, Security Analysis, and Portfolio Management.

You can find more about the CFA Program by Clicking Here.

Certificate in Investment Performance Measurement

The CFA Institute also offers enrollment in the Certificate in Investment Performance Measurement (CIPM) Program. This focuses on advanced, globally relevant, and practice based investment performance and risk evaluation skills. The exam is offered twice a year, consists of 100 multiple choice questions, and takes 3 hours to complete. First time early registration will set you back $575. This exam has no prerequisites, usually takes one year to complete, and is perfect for portfolio managers, financial advisors, and investment professionals in general.

You can find out more about the CIPM Program by Clicking Here.

The Institute of Business & Finance Certifications

Besides the CFA Institute, the next most important set of professional designations is offered by the Institute of Business & Finance, or IBF. These certifications focus more on mutual funds, annuities, and bonds.

Certified Fund Specialist

If mutual funds peak your interest, the Certified Fund Specialist might be the certification for you. It is the oldest designation in the mutual fund industry, and is provided by the Institute of Business & Finance. It consists of a 60 hour self-study program. To learn more about this certification, Click Here.

Other IBF Certifications

The IBF offers several other designations that include Certified Annuity Specialist (CAS), Certified Income Specialist (CIS), Certified Tax Specialist (CTS), Board Certified in Estate Planning (CES), and a Master’s of Science in Financial Services (MSFS). There are over 13,000 IBF designation holders across the globe.

Certifications for Retirement Planning

If you enjoy working with senior citizens, a Certified Senior Advisor certification will allow you to build effective relationships with seniors and help them plan their retirement. This designation is offered through the Society of Certified Senior Advisors. The Institute of Business & Finance also offers a Certified Senior Consultant (CSC) program consisting of a 30 hour self-study program. This program concentrates on issues facing the aging population including Social Security, Medicare, housing and retirement.

Certified Financial Planner

A Certified Financial Planner is administered by the Certified Financial Planner Board of Standards Inc. and covers over 100 topics. The CFP designation is kind of like an umbrella – a Certified Financial Planner is someone who can help an individual plan all aspects of their financial life, from how to allocate their income between saving, spending, investing, and retirement, all the way through managing fixed-income portfolios for retirees, and even helping with income tax planning.

The exam takes place over two days (10 hours total) and consists of 180 questions, although recently it has been reduced to 170 questions and 6 hour testing period thanks to converting from paper based to computer based test taking. The cost is $595 and passing rate averages in the low 60%. A bachelor’s degree is required to hold the certification along with 3 years of full time work experience or a 2 year apprenticeship. The major topics covered include general principles of finance and financial planning, insurance planning, employee benefits planning, investment and securities planning, state and federal income tax planning, asset protection planning, retirement planning, estate planning, and financial consulting. This certification is perfect for anyone looking to become an expert in the financial planning field. You do need a bachelor’s degree to obtain the CFP Certification.

Other Professional Designations

This is not an all-inclusive list, as the list of available designation for financial services professionals is numbered over 208 (and growing). Some of the other designations include Chartered Alternative Investment Analyst, Chartered Market Technician, and Certified Public Accountant (which we discuss more in detail in our Accounting articles), the latter being the most prestigious in the accounting world, but going a long way in the financial world as well. It can be overwhelming choosing one or two designations to pursue, and it can be expensive and time consuming as well.

If you are trying to plan your career in Finance, the two most popular currently are Series 7 and Chartered Financial Analyst, which will open a lot of doors if you can feature on your resume. If you have a specific interest such as mutual funds, options, or supervisor, there are designations that are perfect for those career paths as well. I hope this basic introduction to available certifications in the finance industry was useful and best of luck in your career!

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Management

Importance of Planning and Vision

Written by Jinni Raisa Alingasa

Planning is an important management function because it helps managers prepare for the short term and long term challenges and opportunities that a business faces every day. Planning plays a crucial part in creating a business plan and strategic plan in that it reinforces a company’s mission, visions, and goals that are used to develop and implement strategy, competitive advantage, and achieve effectiveness and efficiency in how a business operates.

What Planning Means

Planning is a combination of analysis and outlining a plan of action. Planning is what you want to do to achieve some goal or objective to help better manage a business. The purpose of planning is to plan what direction the business is headed, what decisions need to be made, how to be better than competitors in the same industry and business, and how to eliminate wastefulness and optimize current operations. Since plans address a huge variety of business objectives, they tend to be very diverse themselves, but all good plans have a few core components:

Goals and objectives

What the organization wants to achieve; they can range from very broad (the big picture, the overall strategy, the long-run) to very specific (in the moment, tactics, the short term). Remember, it is the small steps (objectives) that help a business reach their big steps (goals).

Analysis of the External Environment

What is outside of the organization’s control in the form of evolving trends, new technologies, additional laws, emerging competition, unusual events, etc. No one can truly predict what will happen tomorrow, only what could happen. So, in the event something changes (good or bad), a business can be better prepared for it.

Analysis of the The Internal Environment

Good plans are not created in a vacuum: they take into careful consideration the mood and corporate culture in which they are hatched. This means managers need some level of awareness of what is going on in human resources, the accounting department, the legal department, marketing and sales, logistics, maintenance, and so forth. Such activities can create value for the organization, or they can be a source of great loss if not properly controlled.

Company Equity

What the company owns and what it has that creates value and wealth that indicates its financial position and the power it holds over the market and its competitors. Excellent planning tries to leverage all the tools a manager has at his or her disposal to best reach their goals.

Planning Scope

Different levels of an organization will make plans with a different scope. A plan’s scope means how big the plan is in relation to the company’s total operations. The higher up in an organization a manager is, the wider the scope their plans usually have. The major types of planning scopes are:

Strategic Planning

Strategic Planning is the very highest-level plans in an organization. These plans define what a company is and what it does, and should serve as the guiding philosophy for all of the managers at a company when setting goals and objectives. Strategic plans usually do not outline specifics, just a broad company direction. Strategic plans usually have a time horizon of several years.

Business Planning

A “Business Plan” defines some core goals, either of a business as a whole or a division of a business. The Business Plan takes the company’s vision and translates it into specific, obtainable goals, usually with defined time horizons on when they expect these goals can be accomplished. Business Plans are usually created as a collaboration of the top-level managers and much of the middle management. With smaller and younger companies, Strategic Planning and Business Planning is often merged – eliminating the Strategic Planning phase and skipping straight to a Business Plan (see below). Business Plans usually have a time horizon of just a year or two.

Operational Planning

Operational Planning means converting the goals outlined in the Business Plan into specific objectives with fairly short time horizons, and outlining to a team how to obtain those objectives. Operational planning focuses on defining the direction that the rank-and-file staff of a company should be working on day-to-day, and are usually created by the lowest level managers (with input from the middle management). Operational plans usually are project-based, so their time horizon depends on how big the project is that they want to tackle.

Entrepreneurial Planning

These are plans that deal with what can be created to grow the company and what can be introduced to consumers to add value. Entrepreneurial planning stages do not follow the same hierarchical structure as the other types of plans – entrepreneurial ideas are often generated throughout the company, and tend to move up and down through the management levels as the ideas are refined.

The Business Plan

A “Business Plan” in this context is the core document of a small business – it merges many elements of both Strategic Planning and Business Planning together to present one clear vision of what a company is, what its goals are, and how it seeks to achieve them. A good business plan serves three functions: it provides direction to all levels of management as to where the company is heading (like a Strategic Plan), it provides guidance for what a company’s goals and missions are to the rank-and-file workers at a business, and it serves as a document to present to banks and other investors to show why a company will be profitable.

A business plan is made up of the following elements:

Executive Summary

The first thing that appears on your report and the last thing that is written once you have included all of the other necessary components of the business plan. The Executive Summary tries to condense all other parts of the business plan into one short glance.

Business Description

Defines what type of business you are going into and briefly goes over what you are offering consumers. The products or services that will be provided should also be specified here.

Mission Statement

A statement that has a set of goals that explains why the business exists, how it operates, and how it is unique compared to other businesses.

Vision Statement

A statement that inspires employees to perform at their best, and why customers remain loyal to an organization.

SWOT Analysis

Reveals the possible strengths, weaknesses, opportunities, and threats that your company will encounter in internal and external business environment.

Objectives

The things that you want to achieve with your business.

Implementation

How the business plan will be executed such as the marketing, sale, distribution, promotion, etc.

Additional components can be added that explain in more detail the marketing strategy, marketing mix, competitive environment, competitive advantage, barriers to entry, and the external environment to cover any questions and concerns that may come up in those areas. Managers need to be aware that plans can change because of rapidly changing trends, new technology, political turmoil or economic downturn, poor customer demand and lack of customer support, surrounding events, and the additional costs than being associated with the business. These changes need to be mentioned or reflected in the business plan as they happen, making the business plan an evolving document.

Operational Planning

Strategic Planning is planning, but with strategy in front of it. The strategy part is studying and making decisions that will define the business and helps it maintain a competitive advantage. These are the plans that assess the identity of an organization, both to itself and its image to the rest of the world, and how to make better decisions when it comes to logistics, operations, marketing, selling, servicing, administering, investing, and producing a value that can be turned into cost-savings or profits. The goal of Operational Planning is to make a lasting and transformative impression inside and outside the organization that is practiced in a manager’s day-to-day activities.

Logistics Planning

Planning and locating the procurement, distribution, and exchange of supplies and materials to reduce shipping time and decrease shipping costs.

Operations Planning

Efficiently designing and delegating building layouts, the flow of operations, jobs, and job descriptions to lower production costs and incorporate new technology.

Marketing Plans

Effectively advertising and promoting the company by organizing and controlling various multimedia platforms such as direct mail, Facebook, Twitter, newspapers, etc.

Sales Plans

Planning and organizing sales methods given information from conducting surveys, studying current customers, researching current trends online, reading the news to know what changes will affect sales, etc.

Service Plans

Planning and controlling how workers respond to customers complaints and suggestions and evaluating the quality of services carried out and making continuous improvements.

Planning Methods and Techniques

The planning process demands awareness, perspective, and understanding. Realistically, the organization, those charged with running it, and those contributing resources need to implement methods and techniques to make the plan happen. Here are a few that can be used for the business plan and strategic planning:

Crowdsourcing

Crowdsourced plans farm out most of the “heavy lifting” to a large number of people. Companies with strong cohesion of their low-level managers and workers can find great success when crowdsourcing business plans, because it gives all of the people involved a greater “stake” in helping define what company goals are attainable.

Environmental Forecasting

Environmental forecasting means trying to predict what will happen next by looking at patterns and history of events, activities, trends, and the competition. This is a heavily data-driven type of planning, with emphasis on strong research and trend analysis.

SWOT Analysis

Looking at the strengths, weaknesses, opportunities, and threats of the internal and external environment. A SWOT analysis is a core component of most types of plans to help identify what can go right, and what can go wrong.

Competition Analysis

Knowing the barriers to entry, the power buyers have when it comes to quality and competitive forces, the power suppliers have on prices and quality, the threat of replacement substitutable products or services, and how strong competitive forces are among competitors. A competition analysis is essential for a company to know what they are up against in their field, and stay on top.

Value-Chain Analysis

A strategic analysis of primary activities (those that create value for the company) and support activities (those that add value to primary activities) to determine what can be improved, removed, or adjusted. A Value-Chain Analysis tries to look at a company as a whole to identify where the most value is being added to their products or services, and try to expand across the whole breadth.

Planning Relative to Other Management Functions

Management is maximizing benefits in everything that needs to be managed (logistics, human resources, operations, etc.). This involves a lot of planning on what to do, how to do it, where to do it, who does it, where will it go, who will it go to, how much, etc. However, planning is only one of the four major functions of management, the other three being organizing, leading, and controlling. These other three functions all require planning to be implemented expediently, efficiently, and effectively in that, all need planning to lay the groundwork before a management action or response is engaged.

For instance, when it comes to organizing in the logistics department, the manager plans the structure of when shipments will be made, at what times, how long the shipments should be, at what facilities they should be distributed to reduce shipping costs. The manager also needs to plan how much supplies will be allocated to each factory, how much each factory will produce, how much of that product will be shipped to facilities, and where should they be distributed. The manager leads in the structure and allocation of what happens in the logistics department by planning how to get workers to do what is asked and expected of them so that the work process and item production are operating at the highest level. However, when problems arise the manager must control the situation by planning how to solve the problem and how to prevent it from happening again. Planning is in everywhere and everything the manager does.

The importance of planning can be expanded to other areas and departments of a business because time really is money. Every second, minute, hour, day, month, and year spent on planning can make a lot of difference to how simplifying the production flow can minimize and decrease expenses, how quality can be improved and be used to demand higher prices, and how the freeing-up of resources can be used to develop new products and services to increase profits.

Strong plans are the core of a business – everything else is built from there!

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Personal Finance

Planning Long-Term Purchases

Written by Kevin Smith

When you are evaluating how to spend your money, most people make a fairly simple comparison. If the benefit they believe they will receive from the purchase is greater than the cost, then most people go ahead with the purchase.

When you are working to master your personal finances, you might notice a problem with this idea. There are many potential purchases you can make that you believe are “worth the money,” so you spend money now instead of saving for the future. In order to change your mindset, you need to start thinking long-term. By building a toolkit that lets you think about a purchase and how it will impact you over time, you can begin making smarter financial decisions.

Opportunity Cost and Depreciation

When you start to plan for purchases instead of shopping with no plan in mind, you no longer just focus on whether or not a purchase is “worth the money.” You start to think about how this purchase will impact you moving forward. To make this process easier, start by applying some economic and financial concepts to your purchases.

Opportunity Cost

The opportunity cost of a purchase focuses on what you are giving up when you buy something. For example, if you purchase a new smartphone for $1,000, the cost to consider isn’t just the $1,000 you spent on the phone but other things you could have done with the $1,000 including purchasing other products, saving the money, or investing the money and gaining interest on it down the road.

When you make an expensive purchase, instead of just thinking about the cash in your pocket, keep in mind that you are making that money unavailable for other wants and needs. If you had that $1,000 currently invested in the stock market, would you be willing to pull it out of your investments to buy the smartphone? What if instead of the latest model smartphone, you only needed to pull out $500 for a 2-year old model, leaving the other $500 to continue to grow? Would that be a wiser decision?

Amortization and Depreciation

Amortization means you spread the value of a purchase over the useful life of the item instead of counting it as one sunk cost now and then “free usage” until it breaks or you get rid of it. Thinking this way allows you to spread the cost over a span of time. For example, if you buy a $1,000 phone and plan to use it for 3 years, you could view the cost as $266.67 per year.

Depreciation describes the fact that most items lose value over time. The new smartphone you purchased will start to get slower and less reliable in the coming years. The novelty you got when you first purchased it will wear off the instant a newer model is released. However, that item still has value. Your $1,000 new smartphone may only be worth $600 two years later, but it still has value.

More expensive, higher-quality items tend to depreciate in value slower. This means you are getting more value over a longer lifespan. Consider this when you are comparing higher-quality and lower-quality items. It may be worth the extra money to purchase a more expensive item if it will retain its value for a longer period of time.

Combining Concepts

When you plan for a purchase, you should consider a balance of the value of the item, the monetary cost, your opportunity cost, and the depreciation rate of the purchase. The more expensive the item is and the longer you think it will last, the more important this balance becomes. You’ve learned to look beyond the simple idea of whether or not you can afford it.

Keeping with our smartphone example, let’s assume you we still trying to decide between the $1,000 newest model and a two-year-old model priced at $600. To make a decision, we need the following information:

On average, people keep their smartphones between 2 and 3 years. We will keep the phone for 3 years.
We also need something to compare the purchase against. The S&P 500 stock index has an average long-term return of about 11%. We won’t be too optimistic, so let’s assume we can invest in the S&P 500 Index Fund (SPY ETF) and receive a return of 8% per year.

Step 1: Calculate Realized Purchase Cost

Our “realized” purchase cost will be the sticker value, plus the opportunity cost. In this case, if we buy the new phone, it costs $1,000 flat. If we buy the older phone, it costs $600, but we are investing that extra $400 savings at a rate of 8% for 3 years.

Using our compound interest calculator, we can see that our $400 will grow to $504 – an extra $104. Since this is cash we would not otherwise gained, we can subtract it from the purchase cost.

Now we are comparing a $1,000 new phone with a $496 older phone.

Step 2: Amortize the Cost

Next, we can amortize the cost over the phone’s useful life.

Our $1,000 phone costs $333.33 per year for 3 years.
Our $496 phone costs $165.33 per year for 3 years.

We can see that the older phone is still much cheaper per year, but we knew that before. We also knew that we value the $1,000 phone more than the $600 phone, or else we wouldn’t have needed to think about the trade-offs so much. The purpose of amortizing the cost is to give ourselves a yearly number that we can depreciate – what this phone is costing us per year.

Step 3: Depreciate the Value

Next, we need to figure out how quickly the value of our phone will disappear. If we use market data to assess the decay rate of our smartphone, we can see that our $1,000 phone will decay to $600, (a $400 decrease) within 3 years, 60% within 2 years, or 30% per year.

At this point, we have not yet specified how much we personally value each of the phones in front of us. It could be that the new phone has some amazing new feature that we would be willing to pay $3,000 for, and the $1,000 asking price is a steal. Or it could be that our value of the phone is just a little bit more than the asking price. When you depreciate the value of a phone, you are not depreciating the money it costs you to buy it. You are depreciating the value you place on owning it.

Unfortunately, right now we do not know how much we value these phones (either by themselves or relative to each other). Instead, what we will assume is that we value the phones at least as much as they cost us. This means we will take our amortized value and depreciate that to give ourselves a minimum amount we must value these phones to even consider buying them.

	Year 1	Year 2	Year 3	Total
New Phone	$333.33	$333.33 – 30% = $233.33	$333.33 – 60% = $133.32	$699.98
Old Phone	$165.33	$165.33 – 30% = $115.73	$165.33 – 60% = $65.33	$346.39

These totals are less than the price, so now we can find our break-even value for each phone.

If the cost of the purchase is less than how much you value it, don’t buy!

The break–even point is when the cost of the phone is equal to how much you value the phone, including how much value it loses over time. Regardless of the alternatives, you would not buy a phone for a higher cost than you value it.

New phone: $1,000.00 – $699.98 = $300.02

This means we need to factor in $300.02 in lost value over the life of the phone by adding it back in to our purchase price.

$1,000 + $300.02 = $1,300.02 break-even point

For us to consider purchasing the new smartphone, we need to value it at $1,300.02 or more. (Notice we are not even comparing the new and old phones.) This is the minimum value we need to put on this phone for it to be an option. If we cannot say that we would get $1,300.02 of value out of the new phone, our decision is over. Do not buy it.

Old phone: $496.00 – $346.39 = $149.61

This means we need to factor $79.12 in lost value over the life of the phone by adding this back into our purchase price.

$496 + $149.61 = $645.61 break-even point.

For us to consider purchasing the old smartphone, we need to value it at $645.61 or more. (Again, we are not even comparing with the new phone.) This is the minimum value we would put on this phone for it to be an option. If we cannot say that we would get at least $645.61 in value out of the old phone, our decision is over. Do not buy it.

Step 4: Make a Decision

What we calculated in Step 3 was our minimum values for how much we value each phone. Now we can calculate the difference in these values:

$1300.02 – $645.61 = $654.41

Now we can finally make our decision of which phone we want to buy. Do you think you will get $654.41 more in value from the new phone than from the old phone?

This is only up to you. Nobody can tell you how much you personally value either phone. The purpose of the 4-step process is not to tell you which choice is “best.” It is for you to see the full impact of your decision across time.

Once we factor in opportunity cost, amortization, and depreciation, the choice of phone looks a lot different. A $400 sticker price difference transforms into a $654.41 value difference once we look at how the purchase impacts us across time. This means a smart shopper will go for the older phone, unless they can justify to themselves why the new phone is worth $654.41 more.

If you want to try out this exercise for yourself, you can download a sample spreadsheet here showing the steps above.

Hold On, This Is Way Too Complicated!

Now that you have seen all 4 steps in action, you can understand the value of looking at a purchase over a longer period of time, but actually making all these complicated calculations when you are standing in a store considering two alternatives seems a bit unlikely.

And you are completely right!

It will be very rare when you compare two or more options using this full process. At most, you might sit down for the full calculation once or twice per year. The important thing is not that you calculate the exact realized purchase cost, amortized cost, and depreciated value, but that you remember all three of these factors should weigh into your purchase decision, not just the sticker value.

Calculate at the Check-Out

The next time you make a purchase for something you expect to keep for a long time, try thinking specifically about how long you expect it to last. Next, remember that the money you are spending is money you are not using for something else, like investing, so add in a bit of extra cost to account for what you are missing out on.

Now divide that full cost over its useful life, whether it is 6 months or 5 years. Every purchase you make has a useful lifespan. Do not fall into the trap of thinking a purchase is good forever. Whatever the item is, it will break, a better alternative will enter the market and you will buy it, or the reason you originally bought the item will eventually disappear from your life. Always consider the maximum useful life of every purchase. This will at least give you some idea of how much this purchase will cost per week, month, or year of its life.

Finally, consider how fast the purchase will lose its value. A lot of technology loses its value fast. Our cell phone example was decaying at about 30% per year. Better alternatives are always coming out and new apps are released that require newer hardware. Your clothes will also have a fast decay rate since they go out of fashion or are damaged through normal use. Other purchases, like kitchenware or furniture, will lose value more slowly.

You do not need to take out your calculator and get exact numbers for each step, but you do need to remember that all of these factors exist! Just keeping that in the back of your mind will make you a much smarter shopper and will help you see the true value and cost of your long-term purchases.

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Challenge Questions

Using examples from your own life, explain what opportunity cost is.
Why should depreciation be a consideration when purchasing a product?
In the text above, what is meant by the real cost?
Explain what you understand by the term amortization and how would you explain it to someone else using an example?

Personal Finance

Health Insurance

Written by Kevin Smith

Health insurance is usually the most complicated and expensive insurance you need. Unfortunately, it is also usually the most important, making it very difficult to avoid the cost.

With very few exceptions, health insurance is mandatory for all citizens in the United States, but the way you become insured will change drastically based on your age, income, and the company you work for.

Types of Health Insurance

Health insurance falls into three broad categories:

Public Insurance

Our government provides public insurance directly for some individuals. This includes Medicare, healthcare for the elderly, Medicaid, healthcare for low-income families and children, and some health insurance coverage for veterans. These public health programs are funded through payroll taxes, and the coverage provided is not free. The covered persons usually must pay some amount out-of-pocket before the public insurance takes effect.

About 50% of all healthcare spending in the United States is through public insurance programs, the largest portion being through Medicare.

Group Insurance

Employers often offer group health insurance to their employees. With group health insurance, a business will split the cost of health insurance coverage with its employees. Eligible employees are usually required to participate in the program, unless they have better coverage from somewhere else. (Since a husband and wife may both have group health insurance options through their employers, the couple will decide which option is better and cheaper for the family.) Group insurance is usually the cheapest option for individuals. This is because it groups many people from different age groups and different risk levels together and splits the cost with the employer. Big group policies also have bargaining power to negotiate better deals with insurance providers. About 60% of Americans have health insurance coverage through their employer.

Individual Coverage

You may need to purchase health insurance directly from a health insurance provider yourself if you cannot get it through your employer. The cost of insurance you purchase as an individual is usually higher because you are not splitting the cost with your employer. There are some subsidies and state-run insurance exchanges that can make this cheaper. About 9% of Americans are covered through individual health care plans.

Health Insurance Terminologies

Health insurance is built upon the same core concepts of premiums and deductibles, like other forms of insurance. The premium is the monthly charge you pay to have health insurance coverage. The deductible is the amount you pay first for medical expenses before your insurance pays. As with all insurance policies, there is a balance between the premiums you pay, the deductibles you pay when there is a claim, and the level of coverage you receive.

Health insurance also has other concepts that you need to understand.

Co-payments and Coinsurance

Co-payments and coinsurance refer to the amount of money you are responsible for paying, beyond your premium and deductibles.

A co-payment is what you pay per visit to be seen by a health care provider. There is no maximum to the amount of co-pays you would pay in a year. For example, if your policy states that you have a $50 co-payment for a doctor’s visit, you will need to pay the first $50 out-of-pocket for each visit, with your insurance covering the rest of the cost.

Coinsurance requires you to pay a certain percentage of the cost for treatment. For example, if your policy states a 10% coinsurance level, you would be required to pay 10% of any medical cost incurred. Your insurance provider would cover the remaining 90%.

Coverage Limits and Maxima

Heath insurance policies may put a ceiling on how much in total they will pay for medical expenses in a year. Once that maximum amount is reached, you now pay out-of-pocket.

The coverage limit is the term referring to the total amount an insurance company will pay out for a single policy over the course of the year. Sometimes, this applies to the maximum over your lifetime. Any additional expenses above this amount will be entirely passed on to the insured.

If your policy includes an out-of-pocket maximum, that means there is a cap on the maximum amount of money that you would be required to pay yourself before the insurance covers everything else at 100%. For certain policies, in order to keep premiums and deductibles low, the tradeoff may be a high coinsurance percentage. These policies would most likely include an out-of-pocket maximum to ensure that individuals would not be bankrupted by very expensive medical emergencies.

Networks, Authorization, and Emergencies

You may have noticed that health insurance can be quite complex. Unfortunately, it gets a bit messier from here!

When health insurance companies keep their costs down, this means your coinsurance payments are lower. To keep costs lower, the insurance companies often make specific agreements with hospitals, doctors, and other healthcare providers to set standard costs for routine procedures. They also negotiate prices for more complex procedures. As the insured, you do not necessarily need to worry about these negotiations and specific contracts, but you do need to be aware of which doctors and hospitals your insurance provider has agreements with.

In-Network and Out-of-Network

In-Network healthcare providers are the providers that your insurance company has contracts and agreements with. If you visit an in-network doctor or hospital, your costs will be much lower. If you visit an out-of-network provider, your costs will usually be much higher, and your health insurance company may refuse to pay at all unless you can prove there was no viable in-network alternative. These agreements often apply to prescription medications as well. Your health insurance may not cover all medications your doctor prescribes. You should always call your health insurance provider before visiting a specific health center to find out if they are an in-network provider.

Prior Authorization

For certain expensive tests and procedures, your insurance company may require that you get their authorization prior to setting an appointment. This is usually done by getting an in-network doctor to confirm that the procedure or test is necessary. If your insurance provider refuses to authorize your care, you can appeal it to an independent third party to review your case. It’s not that the insurance company doesn’t want you to have treatment. They just want to make sure that an in-network doctor truly believes it is necessary.

Emergency Care

Emergency Care is the exception to both your network and insurance pre-authorization requirements. If you are injured or very sick, you are entitled to use emergency services of almost any healthcare provider and your insurance will cover it.

Supplemental Health Insurance

Normal health insurance coverage does not cover many non-life-threatening health issues. Supplemental insurance policies exist to fill this gap.

Co-Insurance Supplement

If your insurance plan includes a high co-insurance percentage, you could end up spending thousands of dollars for an unexpected surgery and hospitalization. In order to reduce that financial risk for you, some companies offer supplementary insurance plans. Supplemental insurance provides an added layer of financial protection by covering the out-of-pocket expenses that your primary health insurance plan does not cover. This can include the cost of copayments, coinsurance, and deductibles. The policy coverage limit is normally set at the same level as your primary policy’s out-of-pocket maximum. This means that with both primary and supplemental insurance policies, your out-of-pocket costs could simply be the cost of your annual premiums.

Vision and Dental Insurance

Most health insurance policies do not cover glasses, contacts, routine eye exams, or dental care. You will need supplemental Vision and/or Dental Insurance Plans to cover these treatments and exams. Some vision and dental plans are designed to cover all costs at 100% after you pay the deductibles. Others do not provide explicit coverage such as paying for the cost of an eye exam or a filling. Instead they provide a list of “Network Providers” and the costs you will pay for specific treatments. These costs reflect a discounted price for Insured individuals. This works the same fashion as the provider network you get through your health insurance. Your dental or vision insurance provider negotiates with eye doctors and dentists to lower prices for the individuals covered through their insurance plans.

Specified Disease Coverage

Sometimes you are able to purchase insurance that explicitly covers one disease. For example, if your family has a history of breast cancer, it may be possible to get a specific breast cancer health insurance policy supplement.

These specific disease supplements generally emphasis preventative care and early testing. This helps catch the disease early which both improves survival rates and reduces total cost. Having specific disease coverage can reduce premiums on your primary insurance coverage. This is because it lowers the risk that your primary insurer will need to cover issues from that particular costly disease.

Why Health Insurance Is So Expensive?

For insurance companies, their ability to operate successfully comes from collecting more money in premiums and fees than they need to pay out in expenses. For individuals, they want to feel that the money they pay in premiums and fees will provide the coverage they need. When balancing these two parties’ needs, determining the “right cost” is key. How much to charge and how much to pay are questions that get re-evaluated on a regular basis.

Healthcare emergencies are often extremely expensive, and sometimes the needed care drags on for a very long time, accumulating hundreds of thousands of dollars in medical bills. This means even if your personal risk of having a medical emergency is fairly low, the potential cost for the insurance provider is extremely high. This is the main reason why health insurance policies are so expensive. The company needs to plan for potential costs. But there are a few other factors that contribute to rising costs as well.

The Self-Selection Problem

In the past, health insurance was not mandated for all citizens. Most people were insured through the companies they worked for or were covered by public insurance. Those who were not covered by these options could decide if they would purchase individual medical insurance or remain uninsured. They could self-select to be insured or not.

Because medical insurance is so expensive, it meant that most of the people who enrolled on their own were people at high risk of having medical problems. This increased the likelihood that the insurance company would have to pay claims for a higher-risk individual, and this probability caused the rate of premiums to increase. Preventing this “self-selection” problem is the main reason why health insurance is now mandatory in the U.S. Having more low-risk individuals in the insurance pool should lower the average premium.

The Emergency Room Problem

In the United States, emergency rooms are required to treat every patient who arrives. Insured and uninsured individuals can get seen and treated there. However, people may not know that getting treatment at the emergency room is by far the most expensive way to receive medical care. Because ER doctors cannot turn anyone away, this means that an uninsured person with little savings and a chronic medical problem can use the emergency room to receive the treatment he needs. The emergency room provides the treatment, but who will pay the bill?

The cost of providing medical care does not evaporate if the person is unable to pay the bill. Instead, the cost gets redistributed among all the other patients at a hospital who are able to pay. This means the cost of every other type of care at the hospital goes up. This is why you may have heard infamous stories such as the $15 hospital Tylenol or experienced extremely high costs for your own emergency room visit. This financial dilemma causes a loop. As the cost of other treatments goes up, more individuals who are uninsured find it difficult to pay their emergency room bills, pushing treatment costs even higher.

Most people with insurance do not need to worry much about these costs. Insurance companies usually negotiate directly with the hospitals to force these costs back down. The government pays for people with public insurance coverage, but they do not usually negotiate prices as much as private insurance companies do.

The Regulation Stability Problem

You may have heard about some of the major changes that have been discussed by Congress over the last couple of years regarding health care in the United States. Usually those discussions center around how much insurance will be subsidized, what levels of care are mandatory, and how many people might be covered by public insurance programs. For health insurance companies, all of these changes create problems to be addressed. For example, it makes it difficult to engage in long-term planning regarding premium costs for current customers when the government is enforcing changes in the industry.

When insurance regulations are being rewritten and reformed, the fee structure becomes unstable. Health insurance companies often raise their premiums to protect against big changes in their insurance pool, the group of people covered. For example, the government currently provides a subsidy to encourage insurance companies to cover more low-income families. If health insurance providers hear that Congress is considering removing the subsidy at some point in the next few years, it is probable that these low-income families could drop out of the insurance pool, raising the insurance company’s average cost. The insurance company would also lose revenue, since they would no longer be receiving the subsidy. To protect against this potential change in the future, they raise premiums slightly in the short term to act as a buffer.

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[qsm quiz=127]

Challenge Questions

In your opinion, is it worth having Health insurance?
Using examples, explain what a deductible is.
What is the opportunity cost when considering whether you should have Health insurance or not?
How do insurance companies calculate the premium they will charge people for their insurance policies?

Marketing

Personal Selling

Written by Carla Spoto

Collectively, as a society, we are invited everyday to buy something for various reasons. For instance, we see an ad on TV for a car; so later we go to the dealership and pick-up some information about the car, with the objective being to purchase one. The advertisement on TV is the business marketing the product to us. Once we enter the dealership, we are now engaged in a process of personal selling.

Personal selling is when businesses use people to “sell” the product to a customer face-to-face. These sales people promote the product with every aspect of themselves, including their appearance, attitude and special knowledge of the product. Sales people are not only selling the product, but they are selling themselves as well. The purpose of personal selling is to encourage the customer to buy the product (or at least try it out), and to keep the customer coming back. There are specific rules and strategies to follow to execute the deal, along with certain boundaries that can make selling the product more complex.

Personal Selling is usually the most expensive stage of the sales process – this is the step where a dedicated salesperson is focusing on one specific deal (as opposed to general marketing campaigns, which target many potential customers at once).

Steps in the Personal Selling Process

In order to gain the most beneficial outcome from this expensive advertising tool, one must follow a precise process. Personal selling can be adjusted in the way knowledge is communicated based on questions that are being asked to the customer. The 8 steps to be followed for an effective sale and relationship are as follows:

Prospecting

This is the first step in the Personal Selling Process which is the process of looking for and checking leads. When we look for a lead, we’re trying to find individuals that could potentially become customers. A qualifying prospect is a lead whose name is on a list. Let’s go back to the car dealership example, if we were to request a quote on a website for a car, we are considered a qualifying prospect because we have already shown interest in the product. A qualified prospect has a need and they can benefit from the product so it’s important to focus attention on these clients.

Fun Fact: About 20% of a business’ customer base is lost due to death, dissatisfaction, transfers, and competition. So, a growing list of prospects is important!

The Pre-approach

Here, sellers gather as much relevant information as possible prior to the appointment with the customer. This focuses on new customers where information is collected in such a way that it has enough applicability and usefulness for effective use. This can be looking up a customer on their social media accounts and finding their likes, dislikes, and needs to present this information in relation to the product.

The Approach

This is known as the FAB technique where the seller focuses on the products Features and Advantages that can Benefit the customer.

Features refer to the physical characteristics of the product such as size, gadgets and engine.
Advantages refer to the performance that is provided by the physical characteristics, the engine is a 4-cylinder.
Benefits refer to the benefits for the customer, the 4-cylinder engine can save you 10% on gas.

The Sales Presentation

Once the customer’s interest is grabbed, the sales presentation is executed. This involves a visual and persuasive vocal explanation of the product and it should be done in such a way that encourages the customer to share personal information (small talk) to reduce tension and to establish their requirements in the product.

The Trial Close

In this very important step, (part of step 4) the seller sets a temperature question so they can understand what the customer’s position is on the product so far.

Handling Objections

This is an important step because when a customer comes into the dealership (still on the car example), they want to purchase a car, but may not be fully convinced yet and may have some issues that are preventing them from buying. The customer is in fact requesting additional information to help them justify their decision to buy. This also helps the seller establish what is on the customer’s mind, and what they’re looking for in their car.

Closing the Sale

The last part of the presentation and the most fearful for the seller. But have no fear! Closing the sale is only confirming and understanding, the fear will disappear if the seller TRULY believes that the customer will enjoy the benefits after they made the purchase.

The Follow-up

Just because the product is sold, doesn’t mean the selling process is complete! Following-up with the customer is imperative to establish and keep long-term relationships. Following-up to get feedback on the product and the customer’s satisfaction shows the customer that you are concerned with their needs and will do anything to meet them. This builds lasting relationships and can in turn bring in more prospects.

The seller just followed all 8 steps, and made their sale. This is great, but it’s very important for that seller to retain a relationship with the customer that just drove off in their new car! For most businesses, most profit does not come from the initial sale, but from repeat customers and referrals, so building a rapport with customers makes this happen. Remember – the personal selling process is the most expensive aspect of marketing, and repeat clients cuts the time (and therefore cost) each salesperson needs to spend on each sale.

The role of the seller when building relationships starts with the quality of the product/service being sold, and the quality provided by the company builds trust: this is essential for every relationship. Staying true to their word, showing high interest in the customers needs, fixing complaints, incentives and having respect for the customer not only keeps customers coming back, but brings in new repeating business.

Impact of Technology on Personal Selling

Improvements in technology are drastically changing the communication between buyers and sellers. This phenomenon is referred to as a revolution in sales. Technology is an amazing factor in the personal selling process, and allows for products and services to be sold in a variety of different ways. Social Media and the Internet contributed a great deal to this revolution. Customers still want relationships, but look for it in different ways. With more and more people buying online, relationships and repeating customers have to be brought in – in a completely different way. Sellers are no longer meeting face to face with each customer, and need another way to build trust. You might have already seen one way companies address this – many websites have an online chat feature that allows a potential customer to communicate with a seller and then partake in the 8-step process above.

Social Media is a major key in executing the personal selling process. If used correctly, Social Media can yield positive results for any business. In today’s society, no one seems to have time to walk into a store and buy, or pick up the phone and ask a question. When a business has a user friendly Social Media accounts and a website, it gives them a massive boost in the pre-call prospect phase. When businesses track their websites and Social Media, they can see who visited, and in turn can lead to a sale (if the prospect did not already buy).

Ethical Selling

Every sale made by a seller needs to address a real need from the buyer at a price the buyer can afford – if the seller tries to get a potential customer to buy something they do not want, or pressure them into buying something they cannot afford, an ethics barrier is broken. Ethics is important for businesses and employees of the business. Unethical selling is never good for a business in the long term. Customers feel cheated, referrals and repeat business massively suffer, and unethical practices tend to doom business growth. As icing on the cake, most unethical sales tactics are outright illegal, and can land the seller in a lot of trouble if discovered. These are some of the biggest ethical pitfalls to avoid.

Misrepresentation

A false statement of a material fact made by the seller to the customer who was included to enter into a contract. Three types include:

Fraudulent misrepresentation which happens if the seller makes a claim they know is false.
Negligent misrepresentation is when a false statement is made without reasonable grounds for belief (the seller might not know for a fact it is untrue, but greatly suspects it is).
Innocent misrepresentation is when a false statement is made with reasonable grounds for its belief. Ethical sellers will fact-check any claims they make to their prospective clients before making any promises.

Unlicensed Selling

When a seller has no license to sell the product or the service of the company but is doing so anyway (e.g. buying insurance from the receptionist at the brokerage firm). It is important that the seller has the capability and qualifications to be selling the product/service and provides relevant information. Unlicensed selling is almost always illegal (which is why those licenses exist).

Misselling

This is an attempt of the seller to convince the customer to purchase a product/service that is not appropriate for that client. The car salesman persuaded a 75-year-old man to purchase the jalopy, knowing they wanted a reliable vehicle. Customer dissatisfaction will arise because it is not what the customer wanted.

High-pressure selling

When the seller is being extremely aggressive to convince the customer to make the purchase with no regard for the customer’s ability to afford the product or their needs.

Cheating

This is an immoral way to achieve a goal and is used to break the rules for advantages in a competitive situation. By forging invoices and receipts, the seller can receive bonuses that they have not earned.

Culture and Personal Selling

Negotiating in the U.S. and around the world may seem different, but they are actually pretty similar. Although cultural differences exist, the skills and principles remain the same. The major difference lies in the seller showing respect to the customer’s culture. In personal selling, it is crucial to have some knowledge about other cultural norms other than their own American culture. This can make or break a sale, because if a customer is offended by something as little as too much eye contact, a sale can be lost. A few things to keep in mind include:

Be careful of the small talk, some cultures believe that it makes someone appear untrustworthy. In America, although tedious to some, small talk is normal. However, in some other cultures, talking about personal life before talking about a business deal can cause the customer to feel uneasy about the seller and may view them as mischievous.
Be aware of collective decision making! With many Eastern cultures, collectivism focuses on giving everyone a turn in fear of offending others. This is not unique to the East – Belgians are also famous for seeking “consensus” with most important decisions. Many sellers in America work by finding a “champion” in an organization and working specifically through that outlet, but some buyers may be more sensitive towards a sales approach that focuses on the organization as a whole.
How Confrontational Are You? “Confrontation” in sales refers to the act of trying to make the potential buyer make a decision sooner rather than later. In North and Latin America, sellers are more confrontational when it comes to making a sale or a deal. For some people, adding a sense of urgency to the sales process can help bring the matter at hand to attention, and move along the sales process. For others, adding any confrontational aspect will be a massive turn-off, and kill the sale very quickly.
Be Aware of Language Barriers. When speaking to a customer where English is their second language, it’s important to stay away from fancy words and just keep the dialogue short, simple, and to the point. The sale may be lost if the seller uses technical jargon that the customer does not understand.
Eye contact is respectful in the Western Culture, but in Asian or Arab cultures, too much eye contact is seen as impolite. Some cultures speak in a louder tone, use their hands more, and are more emotional. It’s important to keep in mind that different cultures communicate differently.
Negotiating on price in America is what they do. It’s very common to go back and forth on pricing in order to close a deal, whereas in Germany, the price is the price and that’s that!

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How To Pick Stocks

Written by Kevin Smith

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.

Diversification

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 (NVDA). Before the presentation, NVDA was trading around 102 and soared continuously every since to 149.44 on the 7^th 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 (GAMR), 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.

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 17^th, 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!

Upgrades/Downgrades

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

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.

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.

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.

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.

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:

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
Equity
Net Sales
Average Total Assets
Average Shareholders’ Equity

Profit Margin
Asset Turnover
Equity Multiplier
ROE

Analysis of Company XYZ with Industry Competitors

DuPont Model Components	Company XYZ	Company A	Company B
Net Income
Equity
Net Sales
Average Total Assets
Average Shareholders’ Equity

Profit Margin
Asset Turnover
Equity Multiplier
ROE

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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Career Development

Job and Internship Search

Written by Kevin Smith

Use this tool to search for jobs and internships, either near you or around the world. A great way to get introduced to the job market, and identify what qualifications you need to build to land your dream job!

Management

Human Resource Planning

Written by Carla Spoto

The Human Resources department at a business is in charge of everything from hiring and firing employees, organizing and implementing training programs, resolving internal conflicts, determining the pay scales, and everything in between.

Human Resources Role

The Human Resources department is concerned with the specific employees of the company, rather than sales, marketing, or product development. In a nutshell, the Human Resources department of any company works to make sure the employees are the best they can be.

Managerial Roles

From a managerial perspective, the Human Resources department fills five major roles:

Executive role – The HR department are specialists in areas that encompass the management of employees.
Audit role – HR inspects other departments to make sure health & safety policies, and training are being enforced aligned with the company’s HR policy.
Facilitator role – HR helps other departments reach their goals that the company has laid out. This typically means developing training programs, and making sure different departments can work together efficiently.
Consultancy role – HR advises managers how to approach and solve specific issues professionally. This usually means resolving personal disputes with managers and employees.
Service role – The HR department is also responsible for raising awareness of the main mission of the company and any new corporate policies. This means they are usually responsible for most mass internal communications.

Day-To-Day Roles

There are also major HR activities that managers face in the day-to-day activity at work. These activities may vary in different organizations and may be responsibilities of not only HR managers, but other managers as well. Most of the day-to-day actions revolve around hiring, training, compensation, and employee reviews. The most common activities are:

Choosing and hiring employees – The HR department oversees setting job qualifications and sifting through résumés and choosing the most qualified candidate for the interview.
Paperwork & orientation – HR makes sure that the newly hired employees fill out several forms to get them ready to start the job such as the W-4 and I-9, and introduces the new employees to the other workers in the organization.
Training & development – HR trains the new employees, which may involve hands-on training or just handing out a manual. The actual training exercises are usually conducted by the manager to whom each new employee reports, but the HR department is responsible for maintaining “best practices” and general training regarding corporate norms. HR also sets up training for existing employees to improve their skills in their job.
Compensation – HR determines the best compensation package for the organization that best fits their employee’s needs. Compensation includes; salary, 401k plans, vacation, personal time, and benefits.
Performance appraisals – HR managers develop these forms to determine the percentage amounts of raises each employee should receive. This paperwork serves as a review for the employee and allows them to know their strengths and weaknesses.
Safety & health – All HR departments must ensure that the work environment is safe. HR responsibilities in this field depend on the type of company that they work for. An HR manager in an accounting firm will do less of this, but an HR manager in a welding business might do this more. Also, the HR manager in a small business is usually responsible for posting safety procedures in the office.
Managing legal issues – HR must ensure that the organization does not partake in any discriminatory acts. The Equal Employee Opportunity Act (EEO) is a law that all HR departments should be aware of because it states that companies should not discriminate based on ethnicity, race, disability, or gender.

These Human Resource activities help organizations achieve their goals of having an effective and profitable business as well as recruiting and maintaining a core staff to work for the company. It is important that HR keeps employees motivated in the workplace, both with the help of motivational techniques such as promotions, pay increases and bonuses, but also conducting reviews of training and continuing education.

Building Human Resource Requirements

Human Resource Planning is a process that identifies current and future HR needs for an organization to reach its goals. HR Planning serves as a link between HR management and the overall business plan of the company while developing a strategy that assists in the organization’s goals. The major responsibility for Human Resource Planning (HPR) is to ensure the best fit between employees and jobs while being able to meet short-term challenges.

Needs Analysis

To determine Human Resource requirements, there is something called a Needs Analysis.

A Needs analysis is a valuable technique that focuses on how a product addresses the needs of a human consumer. In Human Resources, this needs analysis is used to determine training needs for an employee to not only help them grow as a worker, but to also help the company grow. By determining these training needs, an organization can decide what specific knowledge and skills are needed to improve the employee’s performance in the company. The 4 main methods are:

Surveys – Surveys focus on specific areas of performance deficiency and can be given by management or an outside party. A written questionnaire allows an employee to answer anonymously, freely and truthfully, while the questions are targeted to specific tasks.
Observations – This is when employees are watched at work, which can give HR enough information on how the employee works and how well they work.
Interviews – Interviews involve talking to each employee an evaluating their work and how well they do the work that it assigned to them. This is a decentralized and democratic approach in training because it allows the employee to give their opinions.
Customer comment cards – This is when customers serve as a major source of information as to how well the employee does their job. Secret shoppers may partake in this method and can indicate to management what each employee needs to work on.

The needs analysis is a crucial activity in the training and evaluation process, as it allows HR to separate the strong employees from the weak ones. This, in turn, is used to compensate the best employees, and identify how to improve training and best practices to improve overall efficiency.

Internal Vs External

Human Resources are usually internal, which means they operate inside the company for the employees that work within the organization. For example, Apple headquarters has its set of Human Resources, and each individual apple store within the country (and world) usually has its own smaller HR department.

However, some companies, usually smaller businesses, will outsource some or all of their Human Resources to an outside company. This is known as “Outsourcing”.

Outsourcing

Outsourcing occurs in a business when they want to reduce costs by having a third party complete specific job functions such as manufacturing, customer service, or Human Resources.

Outsourcing Human Resource Planning occurs when a business instructs an external supplier to take risk and responsibility for HR functions and performs these tasks for the business. There are two main reasons why a company looks to outsource their human resources:

Smaller businesses may not necessarily be big enough for a full-time human resources department, so contracting an outside firm may be cheaper than doing all HR in-house.
Specialized HR firms are generally very up-to-date on any changes with laws/regulations, such as new labor laws, subsidies, and other changes.

This allows the internal resources to focus on the strategic operations of the business. HR outsourcing is great for small companies to transform and get expertise without hiring extra personnel with high salaries. When HR is outsourced, it minimizes the businesses risk because labor laws change regularly and it can be difficult for the employer to be up-to-date with the new laws.

On the other hand, the impact on the actual employee relationships can be murkier. As an advantage, it can help businesses manage employee performance because the outsourcing firm is a truly unbiased source of information, which can help cut through entrenched management attitudes and practices.

As a disadvantage, it becomes more difficult for the HR department to have a direct personal relationship with any employees. This is problematic because outsourced HR firms will be less effective with employee recruitment and training than in-house HR departments, since the outsourced HR is less familiar with the overall business strategy and corporate vision. Because of this, very small companies tend to outsource their Human Resources, while more companies bring the HR department in house as they grow.

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Management

Business Ethics

Written by Jinni Raisa Alingasa

“Business Ethics” defines what is right and wrong in a business – not necessarily what is or is not illegal. It is the responsibility of everyone in any organization to maintain high levels of business ethics, as businesses who fail to do so lose the public trust, and the ability to continue to do business, very quickly.

Maintaining strong business ethics generally requires all actions taken by a company and its representatives to meet the following criteria:

Truthful. The company and its agents do not issue false statements, and do not unreasonably withhold information from the outside world.
Fair. The company does not engage in underhanded business tactics to unfairly damage its competition.
Benign. The actions of the company do not harm its employees, investors, or the surrounding community.

Schools Of Ethical Thought In The Business Environment

What is and is not “Ethical” is often very subjective. Over time, several different ways of defining ethical behavior have arisen.

Egoism – doing what is best for yourself

Utilitarianism – doing what is best for the majority at the expense of the minority

Libertarianism – everyone should be free to do whatever they want as long as they do not interfere with another person’s freedom

Categorical Imperative – act only on an ethical rule that can be applied (without change) to every situation

Existentialism – you are free to do whatever you want as long as you are responsible for your own actions and deal with the consequences of those actions

At the end of the day, true “Ethical” behavior is a combination of all of these – what is considered unethical is mostly defined as what does everyone else think is unethical.

Examining A Business Code Of Ethics

A business code of ethics is a manual for what is right and wrong in the workplace, what is acceptable and not acceptable. Most large organizations publish their own in-house Code of Ethics. It includes information on customer relations, employee relations, proprietary information, disclosure, the company’s core values, policies, procedures, laws, competition, conflicts of interest, documentation, accountability, and compliance. The most common clauses you would find in a Code of Ethics are:

Customer and Employee Relations. Details how customers, employees, and co-workers should be treated and what behaviors are expected when dealing with them.
Proprietary Information and Disclosure. Defines methods of confidentiality and exercising discretion when dealing with sensitive information.
Core Values. Reinforces the company’s mission, vision, principles, and values and how it relates to the ethical environment in how they do business.
Policies, Procedures, and the Law. Highlights what to do and what steps to take in a situation listed within the ethics manual. Federal laws, regulations, and rules that affect how work is done and what should be done are also mentioned.
Competition and Conflicts of Interest. Describes what a company is allowed in the face of competition, how to remain competitive in the marketplace, and the types of relationships allowed that do not jeopardize the company’s best interests.
Documentation, Accountability, and Compliance. Reveals the type of work and events that should be recorded and reported, what everyone is ethically responsible for, and how to ethically comply with everything mentioned above. This section also points out where to go and what to do for any questions or ethical problems not defined in the manual.

The Importance Of An Ethical Work Environment

All businesses are based on a foundation of trust. Customers expect to get their money’s worth from a product they buy (that it will do what is advertised, is free from defect, and is safe to use). Investors expect to know how their money is being used to run the business (though accurate financial statements, truthful statements from the management, and adherence to core principles). Nothing destroys a business faster than losing the public trust, which is why maintaining strong business ethics is essential in the business world today.

From a business perspective, maintaining strong ethics will:

Better serve the public which includes governments, institutions, companies, societies, communities, groups, and individuals
Communicate the values of the company that is in the best interest of the public
Develop a good relationship with the public that will lead to public trust
Prevent more federal restrictions and limitations of businesses in the form of new laws, penalties, and fines that will make it more difficult for businesses to operate

Impact Of Unethical Behavior And The Role Of Government

Usually if someone at a company is engaging in unethical behavior, their main concern is not being caught. However, the fallout of unethical activities is usually very far-reaching in any organization.

When Unethical Behavior Goes Undiscovered

The business, or individuals at a business, profit unfairly at the direct loss of others. Unethical behavior is inherently risky and not sustainable – if a business shows a profit when it should have taken a loss, it is likely that the underlying problems causing a loss will continue. This means that over time, the scale of unethical behavior needs to either increase, or the company will flounder on its own.

If the company begins to flounder, the source of the unethical behavior that temporarily generated a profit will often be exposed through a review of business practices as the company attempts to regain profitability. This usually results in the perpetrators getting caught and dismissed (or legally prosecuted, if applicable), but can hasten the decline of an already ailing company.

If the scale of the unethical behavior continues to encourage continued growth, whoever was the victim of the unethical behavior (either a competitor or the public at large) will often seek legal action to expose the unethical behavior, and sue for damages. This greatly damages the reputation for the business.

If The Unethical Behavior Is Discovered Internally

If a company discovers the unethical behavior through its own internal auditing or whistle-blowing programs, the damage is greatly reduced. Corrective action can be taken to punish the offenders, and while initial exposure can damage the company’s image, they can also work early on rehabilitation efforts.

Internally discovering and stopping unethical behavior is in the best interest of every company.

If The Unethical Behavior Is Found By The Government

The government actively monitors companies throughout the country, through quality control tests on products, audits of tax forms and financial statements, and other avenues. If unethical behavior is discovered by the government, a company will usually face extremely stiff penalties, and the management may be criminally liable. The company will also likely be forced to engage in lengthy and expensive legal battles, and may have its reputation irreparably damaged.

Guidelines For Ethical Decision-Making

Step 1. Define the ethical issue you are facing in clear terms. You cannot address an issue without first establishing exactly what the issue is.
Step 2. Figure out who is involved in the ethical issue and how these people would be affected. Who is benefiting from the unethical behavior? Who is hurt?
Step 3. Find any specific laws or regulations that apply to this situation. If something about this situation is illegal, it makes your decision much easier.
Step 4. Define the options you have available, and how each alternative works legally, and how it impacts the people involved.
Step 5. Take Action.
Step 6. Identify what caused this issue to arise in the first place, and take steps to prevent it from happening again.

It is not always easy to do the right thing. The main concern when making ethical decisions is to always act like everyone is watching – if you feel like your actions would disgust others if they knew about it, then you may be crossing ethical boundaries.

Evaluating A Business Code Of Ethics

You probably will not see a business’s Code of Ethics until after you start. For most employees, they usually do not even take a good look until a major ethical issue has already come up, but your life will be made much easier by evaluating the Code of Ethics early, and bringing up any concerns with your managers before issues arise.

When you are trying to evaluate a Business Code of Ethics, these are the main things to look for:

Understand the business you are working for. Ethical considerations can be very different for companies in different fields. As you evaluate your Code of Ethics, consider the types of ethical issues you think might come up, and see how well the Code addresses them.
Critically think about how it applies. Analyze and form meaningful associations in what the business code of ethics involves. Figure out how you fit into all of it.
Know your limitations. Know what can and cannot be done on-the-job for different types of work for that role or position taken at that company.
If it is not illegal, it could be unethical. Just because it is not written in the code of ethics does not mean it is something acceptable and appropriate to carry out. If it violates what is considered ethics by any normal person, it is unethical.
Seek help. If unsure about what is ethical or unethical follow the guidelines on who to go to, what to do, and where to go for help. Most companies have a specific Ethics officer, otherwise you can reach out to the Human Resources department and request a confidential meeting.
Follow the law. Know your rights and responsibilities that apply. When working, if there is a difference in what you are told to do and what you should do, you should always follow what the law requires you to do because it is never an excuse to do something unethical because your boss said you could.
Ignorance is not the same thing as innocence. If you witness something unethical and do nothing about it, in the eyes of the law you will be held responsible.

Government Regulations From Unethical Behavior

Most government regulations on unethical behavior follows in the wake of huge scandals stemming from unethical behavior that impact millions of people – basically the “Worst Case” scenarios of acting unethically. There are several monumental pieces of legislation aimed specifically at curbing and punishing unethical behavior in the workplace.

Sarbanes-Oxley Act (2002)

This act was created in the wake of the Enron Collapse. Enron was a company that primarily dealt with energy. Throughout the late 2000’s, the corporate culture of Enron was obsessed with driving Growth At Any Cost – the company’s daily stock price was posted in the elevators, and associate bonuses were based almost entirely on short-term gains. At lower levels of management, managers were found to have been artificially manipulating energy levels in several states, causing artificial shortages to drive up energy prices. At higher levels, senior managers were found to be manipulating the “book value” of many assets to make failing assets seem profitable. Eventually the entire company collapsed when journalists began investigating their seemingly impossible winning streak, bringing down both one of the biggest energy companies in the world, and one of the most (formally) trusted accounting firms.

Dodd-Frank Act (2010)

Also known as the Wall Street Reform and Consumer Protection Act, it is a law that regulates the listing, reporting, marketing, packaging, and selling of financial products and services. It contains 16 titles with their own subtitles and more than 200 rules, here are a few of them:

Regulates the sale and ownership control of financial institutions
Standardizes regulation and reduces competition among regulators
Orders financial advisers and different types of financial managers to register with the government
Investor protections and improvements to the regulation of securities
Improving Access to Mainstream Financial Institutions Act – makes financial services available to those with low-income or middle-income
Mortgage Reform and Anti-Predatory Lending Act – requires accurate consumer financial information and lending is only permitted for those who have the ability to pay

The Dodd-Frank Act arose from the financial collapse preceding the Great Recession. This recession had many diverse causes, and so the Dodd-Frank Act has many specific provisions, but the two biggest issues that the Act attempted to address involved weaknesses in the mortgage loan and derivatives market industries.

Ahead of the Great Recession, many banks were issuing record numbers of sub-prime loans, or loans issued to lenders with poor credit history or low earnings. Sub-prime loans in and of themselves are not bad – they can be an important way to help uplift people from poverty. What was new was the introduction of wide-spread derivatives trading involving investment banks using something called derivatives and interest-rate swaps, which created a potential for abuse.

The way these markets work is that a local bank will issue many mortgages over the course of a month. Some will be “Prime” loans, some “Sub-Prime”, which have a higher chance of default. Banks do not simply hold a mortgage and collect the payments on it though – your local bank will take all of the mortgages it issues, bundle them up into a single “Security”, then sell that bundle of securities to investment banks. Mortgages are often sold at an “Adjustable Rate”, meaning the interest rate on the mortgage will go up or down depending on the prevailing market rates, so the value of that “Security” the investors purchased will go up and down over time as well. Investors generally do not like a lot of uncertainty, though, so the investors who buy these “mortgage-backed securities” will often then purchase a derivative known as an “Interest Rate Swap”.

With an Interest Rate Swap, the holder of those mortgage-backed securities will trade their variable interest rate for a fixed interest rate – the other investor purchasing that variable interest rate is betting that the variable interest will average out to higher than the fixed rate they offered in exchange, while the person buying the fixed rate is mostly interested in making sure they get a steady stream of income. This all works fairly well if everyone knows all the risks involved – the purchaser of the mortgage-backed securities knows the risk rate of their investment, and the seller of the interest rate swap knows the expected amount of variable interest they will see.

Prime mortgages are generally considered very safe investments, since they reliably provide a steady stream of income at a rate above inflation. Sub-Prime mortgages are considered riskier loans, since they have a higher chance of “defaulting”, or the person taking out the loan is likely unable to fully repay it. With the financial crisis, banks who were bundling the mortgages into securities were not properly disclosing how many of the mortgages were “Prime”, and how many were “Sub-prime”. This means the investors did not have a clear picture of how much risk they were actually buying. Those trading the interest rate swaps thought they were buying a much more stable package of mortgages than they were.

Once those sub-prime loans started to default, the investors at every part of the chain realized they could not trust the original banks at their word about the risk level, resulting in a massive sell-off of these securities, crashing the prices. This meant banks were no longer able to offer mortgages as easily; because they could not re-sell them later, a chain reaction in the housing market occurred that is still being felt today.

Foreign Corrupt Practices Act (1977)

Composed of the Securities Exchange Act (1934), which regulates the sale of public securities and makes it illegal to bribe foreign officials to get them to do something they would not do in the normal course of business.

This act came into practice after the Securities and Exchanges commission conducted a series of investigations that found over 400 companies throughout the United States that were also doing business overseas had made bribes to officials in other countries. The most infamous of these were Chiquita Bananas, who had made sizable bribes to the President of Hondouras in exchange for tax breaks, and Lockheed-Martin, which had made bribes in several countries in exchange for preferable judging for airplane contracts.

Before this act was passed, it was clearly illegal to make bribes in the United States, but bribery was not necessarily illegal in other countries, so there was no legal repercussion for these bribes, even though it was clearly unethical. This act made bribing any foreign official or government a crime.

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Career Development

The 5 Biggest Mistakes Of Job Seekers

Written by Kevin Smith

Experienced workers have a job search lasting about 43 days, and fresh graduates can expect a longer wait. Your search will be much harder if you make one of the following very common mistakes. Avoiding all 5 will not promise an interview, but hitting any might mean you are missing out.

Errors In Your Application

When you are applying for a job, you should be triple-checking everything you want to send to your potential employer. Every job posting gets over 250 applications, and every hiring manager is looking for the fastest, easiest way to chop down that pile into something manageable. If you have typos in your resume, or misspell the manager’s name in your introduction or cover letter, chances are you will never get a call back.

Even earnest job applicants fall into this trap. If you are applying to many jobs, and making tweaks to your resume for each one (as we recommend), it is easy for a typo or two to slip in the cracks.

How To Avoid It

Your secret weapon is checklists. Surgeons use checklists to make sure they never skip steps, and you should too. You may want to customize the checklist for your own job search, but you can find a good template below.

Does my resume and cover letter include everything I want it to?
I have at least 2 keywords in my resume.
I have at least 3 keywords in my cover letter.
My resume has no spelling errors.
I have the correct company name, job title, and hiring manager name (if applicable) in my cover letter.
My cover letter is free of grammar errors
My cover letter has no spelling errors
I have included the correct attachments on the email I’m sending to the hiring manager

Applying for jobs you are not qualified for

tossed application — Another way to get rejected, and blocked from applying again

This mistake will come up more often the longer your job search drags out. As your savings start to run low, you may try to stretch your qualifications and apply for more jobs outside of your element – this can cripple your chances of getting an interview (and an offer).

The problem arises from what are called “Blacklists”. These are lists of applicants that a hiring manager was hit with such a bad impression that they basically strike the applicant from consideration at any other posts in their company.

If you are on a blacklist, that means that the hiring manager felt that you wasted their time, and so your name is removed from consideration from all jobs at that company. The most common reason to be blacklisted is applying for jobs that you are not qualified for. If the hiring manager thinks you are stretching your qualifications to the limit, or not meeting their baseline application requirements, you are risking the blacklist for that company, so not only will you not get a call back for this post, but probably any others too.

How To Avoid It

This is a tricky one to avoid. Hiring managers usually put far more “essential requirements” for a job than are really needed. You can usually safely apply to a job where you meet 50% of the required qualifications because of that. The real trick is finding out which of the qualifications you can ignore, and the ones that can get you blacklisted if you ignore.

Required education (bachelor’s degree, associates degree, MBA) are usually strict requirements. If you do not meet the education requirement, you better have quite a lot of experience to make up for it.

Certifications can be trickier. If a position requires a certification that you do not have, read about that certification before applying. If it is something that requires sponsorship from your employer, then you can usually apply so long as you express your intention on obtaining it as soon as you start. Having a pre-certification, like our Series 7 Course, is also a great way to get your foot in the door.

Being able to use specific software or have a specific skill is more lenient. These are usually more of a “wish list”, so having a couple of these will help, but you can confidently apply even if you just have one or two (if you have none, that is a red flag). Always use your head – if you are applying for a Graphic Designer position but you do not have the required proficiency in Photoshop, that can be just as bad as missing the Education requirement.

Cutting your job search short

confident business student — Just got his first call back

If you have been searching for a position for more than a couple weeks, there is no bigger relief than a call back or an invitation to an interview. Searching for positions to apply for, writing new cover letters, and constantly tweaking your resume can be an exhausting process, and getting that call back seems like a light at the end of the tunnel.

The only problem is when you decide to put new applications on hold while you wait to see how your interview goes. Before you know it, 2 weeks have passed, you finally send an email to ask how the interview went only to find out they went with another applicant. Now you are 3 weeks behind on your job search, with nothing to show for it.

How To Avoid It

To avoid this one, first you should understand the “Hiring Funnel“, as John Sullivan puts it. You were one of the 200 or so people who applied for this job, and the hiring manager picked out probably around 20-25 for a first-round interview. If you are one of these, you have passed the 90% mark, but you still only have about a 10% chance of getting the job.

If you are called back for a second round interview, then you know it is serious, but the hiring manager probably called another 4 or 5 people, so you are still only looking at a 20-30% chance of getting this job. Even if you hit the final interview stage, you are still competing with 2 or 3 other people. Until you actually have a job offer in-hand, probability says that you likely will not get this be their first pick, but there will probably be between 2 and 4 weeks between when you first get a call for an interview and when the final decision is made.

If you are called back for a second or third round interview, you can safely put your search for new jobs to apply for on hold for a couple days to make sure you are fully prepared. The most important thing to remember is that your job search “isn’t over until its over”.

Applying for too many jobs

This pitfall is the opposite of the previous – you are so concerned with getting an interview that you tried to cast a very wide net and make sure you always have applications sent out. This is a common problem because it is also a productive habit. Maybe you set a goal for yourself to find and apply for one new job every day, or spend 8 hours searching for a job every week.

The problem does not usually come up until a couple weeks of trying to meet your “quota”. As you move farther into your job search, the grind of constantly finding and applying to jobs will begin to wear on you, and quickly. This means you are much more likely to start cutting corners (not properly optimizing your resume for keywords and the job you’re applying for), make mistakes (more typos, less likely to follow your checklists), and apply for jobs for which you are not fully qualified.

How to avoid it

This might be the hardest one to avoid, if you are a dedicated job seeker. Setting goals for yourself is one of the most important ways to stay motivated and keep your job search running. It is equally important, though, to recognize when the grind is getting to you, and take a break.
If you have been at your job search for more than two weeks, ask yourself the following questions before you start to apply for a new job:

Am I applying to this just to say I’ve applied today?
If I saw this posting last week, would I have skipped it?
If I got this job, would I probably quit within the first year?

If you answer “yes” to any of these, it may be a good idea to skip this posting and take a break from applications for a day or two, and come back with fresh eyes later.

Starting Too Late

As we said in the intro, the job search process will last around 43 days for experienced workers, longer for fresh graduates. This application time is going to be stressful – probably a lot more stressful than any job you secure, so you should count your job search time as work.

A very common problem with graduating students or people who are looking to leave their current position is that they do not start their job search before graduating/quitting. This is done for a variety of reasons, but some of the most common are wanting a “clean break” (some space between school and work, or between jobs) and underestimating the competition in the job market.

If you start your job search too late, the total time you will spend unemployed will go up, but you also increase the chances of making any of the mistakes above. If you get call backs for interviews right away, you will probably underestimate the competition and think that your break was justified. If you don’t get calls for interviews right away, you may begin to panic and apply for too many too quickly, without giving yourself adequate time to customize your application for each job you apply to. Either way, you will always wish you started the job search sooner.

How To Avoid It

A question we get all the time is “when should I start looking for a job”? The answer is always right now. Even if you will not graduate for another 3 years, start looking for jobs right away. You may not start applying, but you will get to know the job market, and the skills that employers are looking for in the jobs that you want. This will give you an opportunity to cater your educational path towards the skills employers want.

If you are graduating within the next year, searching for jobs now can help you find what certifications you can start working towards right away to get you a leg up over the competition.
If you are graduating at the end of this semester, you should be searching and applying for jobs or internships as soon as possible. Companies generally hire entry level positions in cycles, so try to get any interviews you can lined up before you graduate.

Applying while you are still in school, getting ready to graduate, is also a great way to show initiative to potential employers.

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Career Development

The Truth About Internships

Written by Kevin Smith

The internship season is upon us. It might be better to say that it never ended.

Some estimates put the total number of internships in the United States a bit over 1.5 million positions per year, and with new spots opening with every school term, students with an eye for work experience are usually keeping tabs for interesting posts opening in their area.

In fact, internships have become such a standard part of the education experience that your school might require it for your major, or assume that most students will partake on their own initiative.

What should you, the intrepid business student, be looking for when you start applying for internships?

The Value of the Internship

The most valuable benefit of an internship is, of course, getting some work experience under your belt, which is why so many students are keen to have one or two added to their resume before they graduate.

Internships are also seen as a great way to get recruited and have a job waiting after you graduate – making a great impression on a company you want to work for during your internship can help skip the line when they start hiring fresh graduates. Getting an internship after you graduate is also a tried and true method of getting your foot in the door.

We digress – these are the benefits you have heard about from every angle by now. What you might not know is how much the circumstances surrounding your internship will play out for your job prospects after you graduate.

Paid Versus Unpaid

Everyone would prefer an unpaid internship, of course, but you might be surprised at how big a difference it comes to whether you are paid for your work. The conventional wisdom over the last few years has been that the experience of the internship is the most valuable part of the experience, but paid internships offer a lot more than a bit of extra cash.

You get what you’re paid for

Paid internships are always better than unpaid

Every year, the National Association of Colleges and Employers surveys internship participants about their experiences. For students who undertook paid internships, all the common knowledge of internships applied: students graduated with job offers nearly twice the rate of students with no internships (63% vs 35%), earned far more in their first jobs ($51,200 vs $37,000), and generally benefited in every way that was expected.

Students who went with unpaid internships had a very different story. On the whole, they were barely better off in terms of job offers than their peers with no internship at all (37% vs 35%), and worse, they started at even lower salary points ($35,700 vs $37,000).

Why The Discrepancy?

fetching coffee — Should not be a major part of your internship experience

There are a few factors at play when it comes to unpaid internships. The first is that companies who tend towards hiring lots of unpaid interns are generally more strapped for cash than those who pay for student labor. This means when it comes to hiring, they are less likely to have many openings to offer even the best interns.

Another factor at play is that when a company hires an unpaid intern, they are making a much smaller investment in that student, so there is less incentive to make that intern be fully productive. This translates to less training, less important tasks assigned, and (most importantly) less incentive to keep them around after the internship expires.

This means that the job experience you get with an unpaid internship is likely much less valuable than a paid internship.

Are unpaid internships worth it?

Lower starting wages, barely better chances of getting a job, less interesting work while on the internship, why would students offer to work for free at all?

At the end of the day, the solution is not quite as simple. Taking an unpaid internship in finance is not the same as taking an unpaid internship in social services, for example. If you intend to enter a field where you simply do not see many (if any) paid internships advertised, the field itself may require unpaid internships as a proving ground. This is especially the case in industries like fashion and writing.

The truth of the matter is, though, that even in these industries where unpaid internships are the norm, you will probably struggle to find work after graduating because the industries themselves are so competitive.

Internships are only valuable if you gain work experience that will help you later in your career. If you cannot find a spot at a company that you want to work with, you may be better off sticking with the classroom and try to build up your resume through certifications or other training programs.

How To Land A Great Internship

When you apply for an internship, all of the standard rules for job seekers apply. Have a great resume. Write a killer cover letter. Be ready to crush your competition with a great interview.

There are some extra tips and tricks to keep in mind though. Companies generally hire interns in cycles, but the recruitment process to fill each internship starts an average to 6 to 8 months ahead. If you want to get an internship before you graduate, you need to start right now (click here to go to our internship search page).

Internships are also extremely competitive, moreso now than ever. Companies expect to hire fewer interns in 2016 than they did in 2015, so your pool of competition is getting fiercer. Be ready to apply early and often, and be ready for rejection (as with any job hunt).

What if I miss out?

If you try and fail to land an internship, it is not the end of the world. Per the most recent survey data, you have some things to take solace in:

You’re probably going to earn more after you graduate than someone who took an average unpaid internship out of desperation to have “something”.
Just because you get an internship doesn’t mean you have a secured job. After 1 year, workers who had no internship had more secure jobs than people who took an internship, but were hired by a different company after graduation
After 5 years, workers who had no internship at all had the most secure jobs (64.2% were still with the first employer they worked with after graduation)

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Career Development

Ace Your Interviews – Tips and Tricks

Written by Kevin Smith

What separates a “good” job interview from a “great” one?

There are many factors that will work for or against you when you head in for an interview for a great job. Some factors you don’t have much control over, but most job interview “bombs” are very easy to avoid, if you know what you are looking for.

The Basics

Try to look at the interview process from the perspective of the hiring manager. Like we have said before, the average new corporate job posting gets over 250 applications – in order to whittle down that massive stack down to a final hiring decision, it is much easier to eliminate candidates for fairly trivial reasons than it is to try to find the redeeming qualities.

Show up to the interview on time. If you arrive too early, the interviewer will not be prepared to meet you, and may not have had a chance to fully look over your resume and come up with questions meant to better get to know you. Arrive late and you can mess up the scheduling for the rest of the day.
Be showered – a strong odor will leave an impression, but not a good one.
Dress appropriately. This can be harder to judge in advance, so err on the side of formality. Showing up for a job interview at a bar in a full suit can be just as bad as interviewing for a corporate banking position in a t-shirt and flip-flops. Doing some research on the company’s corporate culture can go far for this, since it helps if you already “look” the part of the person they want to hire.
Have a hair cut/shave. This does not mean no beards or big hair – just that you should rock the best look you have for the interview. Try to look the part they want to hire, not shock your interviewer. They should be impressed by our resume and responses, not at the first impression.
Know what you are there for. You will probably send out dozens of resumes, but before you get to the interview you should do some intensive research on the company, its background and corporate culture, and anything you can learn about the specific role or team you aim to join. The more at home you seem talking about the role, the better.
Take Notes. Bring a notepad and pen to the interview, write down key parts of the job position, and write down questions you have to ask. Taking notes makes you look more engaged in the interview, and having your questions handy means you are less likely to forget anything.

No – The Interview Stop Word

You’ve done it – your cover letter rose to the top of the pile, and you were called in for an interview. Everything seemed to be going great – you have all the skills and knowledge they were looking for, and the interviewer laid out all the responsibilities of the position. There are some parts of the role that you have not done before, so you make it clear you wouldn’t be comfortable doing that just yet, or you feel that it is not your strong suit so you would prefer to orient yourself towards other aspects of the role.

Everything else went great, but you were shocked to get an email back the next day that they are going with another candidate.

What Went Wrong?

Always try to think about an interview from the perspective of the manager who wants to fill a position. The manager has specific needs and wants for the candidate, but the most important condition is that whoever they hire needs to be able to fill the gap in the team. If you give the impression that you cannot (or do not want to) do the job they need, they will probably move on. This is even true if you are the most qualified candidate for the position. Most corporations would rather spend extra time training a candidate who is excited for a role than hire someone who does not want to do part of it.

How To Do Better

When you are interviewing for a job, the interviewer’s primary concern is whether or not you can do that job. If they get the impression that there is something you cannot, or will not, do, chances are they will move on to another candidate. This does not mean you should overstate your qualifications or say you can do something you can’t. Instead, if there is a part of the position you feel under-qualified to fill, mention that you would need some extra training for that aspect.

When given the choice between an under-qualified candidate who is willing to learn and a fully-qualified candidate who does not seem like they want to do the job, managers prefer the first.

If you feel that there are aspects of the job that you truly would prefer not to do, you might not be a great fit for the position.

Ask Questions

Your interview is just wrapping up – the interviewer seems impressed by your resume, the position seems like a great fit for your skills, and everything seems clear for both you and your interviewer. Since you do not have any further questions, you shake hands and head for the door, confident that everything went well.

Unfortunately, they decide to go with another candidate.

What Went Wrong?

Candidates who ask just one, or none at all, can appear disinterested or incurious about the post. With great candidates, between 1/4 and 1/3 of the interview length should be dedicated to questions you ask the interviewer. If you are really “hitting it off”, this number can go up, but if you stop short, it is probably a red flag.

How To Do Better

Asking questions at your interview serves two main purposes:

Sets yourself apart from other candidates

Ace your interview by asking more questions

The questions you ask are something unique to you, meaning this is where the interviewer leaves their prepared script. Asking questions makes the interviewer stop and think of a response, meaning it is one more hook that will help you stick in their mind later – interviewers are more likely to remember specific details about candidates who ask questions. The types of questions you ask will also set you apart from everyone else they spoke with that day. This extra edge is often what separates you from the rest of the pack.

This can also be a two-way street – you should have questions prepared for the interview, but beware of using “best questions to ask at an interview” lists. If the questions you ask seem a little too pre-baked or rehersed, the interviewer can get the impression you’re asking it just to have something to ask. This can suggest a lack of curiosity or disinterest. Using one or two “boilerplate” interviewee questions can work well to cover bases your interviewer has not, but make sure you come up with your own unique to the position.

Show Off

By asking certain questions, you can also highlight your strengths. If you have a set of skills or interests that have not yet been explored in the interview, having some questions prepared can set you up to talk about them. Do you enjoy writing? Ask about how much writing the position requires, and segue into how much you enjoy it. Asking the right questions is a great way to highlight any other skill or competency you think you have relevant to the job, but has not yet come up as part of the interview. Try to have a couple questions reserved just to talk about parts of the job you are most excited about to make a good impression.

Be Prepared For Common Interview Questions

You sat for your interview, but were blindsided by most of the questions the interviewer asked. “Can you tell me about yourself” left you rambling about your latest hobbies (of which he or she takes no interest). When asked “How does this position compare with others you have applied for”, you were left stammering about how you already blew your first two interviews.

You left the interview sure there was no call-back coming, and an email you received the next day confirmed your suspicions.

What Went Wrong?

Your interviewer will probably ask some of the same basic questions asked millions of times before at nearly every job interview. Candidates who have a thoughtful, concise answer will always look more polished than those grasping at straws.

There are two ways these questions can go badly – giving the wrong answer, and giving a rehearsed answer.

A “wrong” answer is one that sets off a red flag for the interviewer. If when describing yourself, you do not list any qualities they are looking for to fill the position, this can be a red flag. A “rehearsed” answer can be just as bad – the interviewer does not want to feel like you are trivializing the question and not putting any serious thought into your response.

How To Do Better

This one is very easy to prepare for, but most candidates overlook it.

Just as you are reading this for tips on how to make a great impression during your interview, your interviewer is probably reading up on ways to filter candidates by asking the right questions on their end. This gives you an advantage, since you can easily look up common interview questions, and even some of the best ways to answer them. On the other hand, if you have prepared answers you can list off without a second thought, it can also come off as dishonest.

For example, one of the most common interview questions is to list your strengths and weaknesses. What interviewers want to hear is that your strengths are something that will specifically help with the role you are interviewing for, and your weaknesses are something you are aware of, are working to improve, and will not impact your performance at this role. This means that for every interview you sit for, the way you answer this question should be a bit different, but keeping with the same theme.

It also helps to practice interview questions with a friend, taking turns as both the interviewer and interviewee.

Pop Quiz

[qsm quiz=119]

Career Development

Using Keywords In Your Job Search – Make Or Break Your Application

Written by Kevin Smith

Keywords – the Achilles Heel of every student’s resume. Knowing how to craft a killer resume and cover letter that grabs employers attention (and keeps it) will only help once you get your resume in the hands of a recruiter. Unfortunately, today anyone can apply to just about any job anywhere, so that great new opening you have your eye on may already have dozens, or even hundreds, of other applicants.

How can you get your resume read, let alone rise to the top of the pile?

Enter keywords – your new job search best friend. This will help you float through the resume database (the “black hole” of the application process) and make sure your resume gets read by the right people, right away.

The Resume Database

When you apply for a job, you already know you are not the only one. In fact, on average, companies receive around 250 resumes for each job posting, and only 2% of applicants ever get a call back. For the average hiring manager, they realistically are not able to read 250 resumes in detail and make a detailed “pros” and “cons” for each candidate.

In fact, the sad truth is that your resume probably will never be read by human eyes at all.

Machine Sorting Candidates

Big companies looking to fill a position need to be able to sift through hundreds of applications for every job. Since they are typically listing dozens of jobs at any given time, that means they need to be able to sort through thousands of resumes every day. Even extremely dedicated HR managers who have every intention to give every applicant a fair shot would not be able to handle the sheer volume of resumes and cover letters coming across his or her desk.

To cope with this, systems called “Applicant Tracking Software” (ATS) have been developed. This system does two things:

Takes all resumes and enters them into a database
Allows the hiring managers to search, sort, and filter all applicants to narrow down the search

This means that the hiring manager is machine sorting through all the resumes to try to find candidates that push the right buttons. If your resume does not have what they are looking for, chances are that nobody will ever read it.

The Six Second Resume

Even if you get past the ATS, a study from TheLadders.com recently found that recruiters only spend about 6 seconds scanning a resume before deciding to move them forward to reject. This means that chances are, your resume will not be given its full time in the limelight even if it reaches human eyes.

By focusing in on the keywords that the hiring manager is looking for, you can make those six seconds count. Draw their eyes to what they are looking for to maximize your chances at a call back.

Keywords – Search Engine Optimization

If you want to make sure that your resume pops to the top of the research results, you will need to make sure that it is easy for the searching machine to read. The easiest way to do this is to simply make sure your resume will have the words and phrases that recruiters are searching for! You are advertising yourself with your resume, so make every word count.

Think Like Google

Google is built on search engine optimization. Try searching for “Brown Shoes” and “Black Shoes“. Which websites are the highest in the search results? What is special about these pages that makes the search engine in Google think it is the best result for that search?

You want to be that #1 result when the recruiter is searching their database – think of the terms that the recruiter is most likely to be looking for, and make sure your resume features those words or phrases well.

Think Like LinkedIn

LinkedIn is the premier professional social network, and it includes a great resource to help pick keywords for your resume. Check the “Skills and Endorsements” section – these are all keywords that you can build in your resume. The more endorsements you can get, the stronger that keyword probably applies to you. Play your strengths and pick keywords you can back up.

Choosing Keywords

Once you know how to think like Google and hone in on specific words, and think like LinkedIn to figure out which best apply to you, the next step is identifying which keywords each potential employer is probably searching for.

Take a look at this sample job posting found using the StockTrak Browse Jobs Tool:

Entry Level Sales, Marketing, Entrepreneurship
Mutual of Omaha – Braintree, MA

Requirements: ‎‎-‎ Health and Life Insurance License or the ability to obtain one prior to your ‎start date- Obtain Series 6 and 63 or 7 and 66 within one year‎-‎ Reliable transportation-‎ Bachelors or Associates degree preferred, or experience in the industry- Appropriate legal documentation to work in the US. ‎Attributes: ‎‎-‎ Confident-‎ Self-motivated-‎ Goal-oriented-‎ Outgoing-‎ Adaptable A national financial services and insurance company, Mutual of Omaha has been in the business ‎for more than 100 years. With affiliates, the company manages assets in excess of $32 billion. ‎Our advisors are responsible for providing insurance, investment ‎products and advice to our ‎clients. ‎Whether you are just starting in the industry or want to further develop an existing practice, the ‎New England Division Office is dedicated to helping you toward many years of success.

There is a lot going on in this very short job posting, but you can very easily pick out some keywords to make sure you have featured in your resume and cover letter:

Entry Level Sales, Marketing, Entrepreneurship
Mutual of Omaha – Braintree, MA

Requirements: ‎‎-‎ Health and Life Insurance License or the ability to obtain one prior to your ‎start date- Obtain Series 6 and 63 or 7 and 66 within one year‎-‎ Reliable transportation-‎ Bachelors or Associates degree preferred, or experience in the industry- Appropriate legal documentation to work in the US‎. Attributes: ‎‎-‎ Confident‎-‎ Self-motivated-‎ Goal-oriented-‎ Outgoing-‎ Adaptable. A national financial services and insurance company, Mutual of Omaha has been in the business ‎for more than 100 years. With affiliates, the company manages assets in excess of $32 billion. ‎Our advisors are responsible for providing insurance, investment ‎products and advice to our ‎clients. ‎Whether you are just starting in the industry or want to further develop an existing practice, the ‎New England Division Office is dedicated to helping you toward many years of success.

We have two tiers of keywords highlighted:
Orange words are ones that are easy to spot, but not very likely that the hiring manager will be searching for. These are the “Low hanging fruit”.
Green words are the important ones – key job requirements that the hiring manager is going to look for specifically. These are the “High value keywords”.

High Value Keywords

The Series 7 course is a great addition to your resume

The “High Value” keywords are the core job requirements that the hiring manager is almost certainly going to filter for. In this case, the recruiter outlined several:

Health Insurance License
Life Insurance License
Series 6
Series 63
Series 7
Series 66

You will want to make sure your resume contains 2 or 3 of these at the minimum, in prominent positions that are easy to spot at a glance.

Low Hanging Fruit

The “Low Hanging Fruit” keywords are the ones that the recruiter specifically outlines in the job posting, but they are less likely to be specifically searching for. These keywords come in to play during your Six Seconds the first hiring manager is filtering your resume. If you have some of the buzz words they have in mind for their ideal candidate, you are more likely to get a call back.

The trick with low hanging fruit is not to over-do it. Pepper in one or two of these keywords, but if you hit on all of them (or too many too quickly), your resume can come off as disingenuous .

Customizing Your Resume

You probably already have a killer resume you’ve written. Your biggest mistake now is using the same one to apply for every job.

Once you have your keywords in mind, it is time to start customizing your resume for the job you are applying for. If you are a student just graduating from school, this can be tricky. Always keep in mind that you should only apply for jobs you are qualified for. If you are qualified, fitting in the keywords should not be a stretch.

Your Objective Statement

Your objective statement, the short sentence or paragraph at the top of your resume, is a great place to pepper in one or two of the “low hanging fruit” keywords. This helps set the tone for the rest of the page.

Qualifications Area

Your qualifications area is the best place to drop in any high-value keywords that apply to you. For example, if you are still in school, some of these phrases could apply:

Passed STC Series 7 Prep Course
On track for Life Insurance License
Completed Health Insurance License coursework

Avoid Fluff

Fuzz is something to avoid in a professional resume

A common pitfall of recent graduates starting their job search is a habit of adding in “puff pieces” or resume padding – these are words or phrases that make your resume look “fuller”, but do not add any relevant information for the recruiter. This tends to be an unfortunate side effect of padding to reach word limits on term papers and other academic writing projects, but it has no place in your job application.

Remember: the recruiter will only look at your resume for about six seconds. If your resume cannot be easily digested, the recruiter will most likely miss anything that was not at the forefront. Make sure they see what they are looking for as soon as they look at the page.

Pop Quiz

[qsm quiz=121]

Personal Finance

Life Insurance

Written by Kevin Smith

Life insurance is an insurance policy designed to pay out if the insured person dies. These policies were created so that if the main income holder of a household died, the payout from the policy could be used to support his/her family. Over the last 50 years, life insurance policies have greatly expanded in both form and function. Sometimes they look more like investment vehicles than simple insurance policies.

Getting a Life Insurance Policy

As happens with most other types of insurance, the policy is very straightforward . There is an assessment of the risk, the policy is created, monthly premiums are paid, and the insurance company pays out when something goes wrong. However, with life insurance, it can be hard for the insurance company to know the exact level of risk you present, and when “something goes wrong,” you have died, so the money is paid to your survivors instead of you. This makes the structure of the life insurance contract is a little bit different than for other types of insurance..

Cost and Insurability

Anyone who purchases life insurance on their own will need to have their “risk of death” evaluated by the insurance company. The company typically looks at factors like personal and family medical history, how healthy and in-shape the person is, and whether or not the person is a smoker. Smoking is the quickest way to increase the cost of premiums. If the insurance company thinks you might die soon, it won’t agree to insure you. Examples of issues you have that would cause concern include having previously suffered a serious illness, having a family history of serious illness, or having an unhealthy lifestyle.

Individuals can skip this risk evaluation if they are able to get group insurance, usually through their employer. With group insurance, everyone in the group pays the same premium. The insurance company makes an estimated average for the whole group.

Parties to the Contract

There are at least two parties involved with any life insurance policy, but there can be up to four.

Policy Owner. This is the person who is responsible for paying the premiums on the policy and is the legal owner of the policy.
Insurer. This is the insurance company, the entity the policy owner pays in exchange for life insurance coverage.
Insured. This is the individuals whose life is actually being insured. If this person dies, the Insurer will pay out the death benefits.
Beneficiary. This is the person who receives the death benefits from the Insurer when the Insured dies. The policy owner can usually change the beneficiary at any time.

In some cases, the Policy Owner, Insured, and Beneficiary are all the same person. An example is a father who purchases a life insurance policy for himself which is paid out to his estate upon death. It is more common for the Policy Owner and Insured to be the same person while the Beneficiary is someone else. An example is a father who purchases a life insurance policy for himself while listing his spouse as the beneficiary.

The Policy Owner and Beneficiary can also be the same person with insurance covering someone else. This is common in large companies who take out life insurance policies on high-value employees. If the employee dies, the company receives a death benefit to help offset the loss of value from the employee. This is extremely common with movie stars.

All four parties can also be different. For example, a husband may take out a life insurance policy on his spouse with the children listed as beneficiaries.

In these examples, you may have spotted an opportunity for fraud. There have been cases in the past where people have taken out insurance policies listing someone they barely know as the insured and themselves as the beneficiary; then they murder that person to collect the death benefit. To combat this, all life insurance policies require that the Policy Owner prove that they will suffer a serious loss if the Insured dies.

Types of Life Insurance

There are several broad types of life insurance, each with different benefits and cost structures.

Term Life Insurance

Term life insurance is typically the least-expensive type of life insurance. A term life insurance policy is good only for a specific period of time, usually 5, 10, or 20 years. Then the policy expires. Term insurance policies are most commonly used by heads-of-household to insure themselves until they retire. The family members are listed as the beneficiaries. This provides financial security for a family when the main income provider dies. If you see “low-cost life insurance” advertised, it is usually for term life insurance. The premiums for a term life policy will be fairly low for young people, but they increase with the age of the Insured.

There is a sub-type of term life insurance called Senior Life Insurance. This policy is specifically for older people and provides a very low death benefit, usually less than $50,000. It is designed just to cover funeral costs for the Insured, alleviating that financial burden for a spouse or children.

Endowment Life Insurance

Endowment life insurance is almost the inverse of term life insurance. It has a set maturity date, but instead of the policy maturing and the policy holder getting nothing, the beneficiary is paid out in cash, either as a lump sum or in several payments over time. These policies are often used by parents as a sort of “college savings” account for their children. The insurance policy matures the same year as the child graduates from high school, and the payout is used to cover college tuition costs.

Whole Life Insurance

A Whole Life insurance policy has no expiration or maturity date. It is guaranteed to remain in force for the life of the Insured, as long as premiums continue to be paid. Premiums for a term life insurance policy usually start out cheaper and increase as the Insured ages, but a wholelife insurance policy will usually be cheaper over the lifetime of the Insured. This is because with a term life policy, your premiums are based on the chance that you will die while the policy is in force, so the older you get, the more likely it is that you will die. With a whole life policy, you keep paying into the same “risk pool” for many years. If you have a whole life policy long enough, the insurance company has no risk at all from your death since the total amount you’ve paid for premiums will be close to your total death benefit.

Whole Life Insurance policies often have extra “riders” or benefit packages which pay out double or triple in the case of certain types of death. For example, a typical death benefit is paid out after someone dies of an illness or a disease. The beneficiary has some time to prepare for the death ahead of time. Many whole life policies will include an “Accidental Death” rider, so if the insured is killed unexpectedly, the policy pays a much higher death benefit to compensate the family for the sudden loss.

Life Insurance as an Investment

Many people treat their life insurance policies as a type of investment, and there are some very good reasons for doing this.

Investing in Whole Life Insurance

There are a wide range of whole life insurance policies, but one common feature is that they offer dividends to shareholders if the total payout from everyone insured is less than the company has collected in premiums. Since inflation causes these dividends to increase in value over time but your premium stay the same, the dividends you receive can end up being nearly as much as the total premium you pay. This means you pay almost nothing and still keep your insurance.

Whole Life policies also have a cash value, which can be used for two things:

You can take a loan out from your whole life policy tax-free, up to the cash value of the policy. If this loan is not paid back before you die, the amount you owe is subtracted from the death benefit paid to the beneficiary.
If you cancel your policy, you can get a percentage of this cash value back as a “Surrender Value.”

The cash value will continue to increase the longer you have your policy, so it is common for whole life policy holders to use the tax-free loan from their cash value to help with buying a house or making other large purchases.

Investing in Endowment Life Insurance

An Endowment policy is a life insurance policy which pays a lump sum at maturity or when the Insured dies. Typical maturities are ten, fifteen or twenty years. It is common for endowment life insurance to be used as an investment vehicle to save for college or other large expenses. However, endowment life generally offers similar growth rates as a normal savings account.

Endowment policies are often sold as a way to force extravagant spenders into saving. The policy combines a savings account and a term-life policy into one package.

Investing in Term Life Insurance

Term life insurance in and of itself is not much of an investing vehicle, but a common approach with financial planners is to “Buy term and invest the difference.” The concept is based on the fact that premiums for term life policies are significantly cheaper than for other policies, with the only difference being that the insured receives no “cash value” at the end of the term.

Financial planners look at the math involved. If you compare the cost of an endowment policy with a term policy, the cost for an endowment policy is higher. Rather than paying the higher premiums, they suggest that you get a term policy with lower premiums and invest the difference.

Endowment policy premium – Term policy premium = Amount you can invest

If you invest the difference in premiums into a high-yield savings account, mutual fund, ETF, or other investment vehicle, you will probably have more cash at the maturity date. The same is even more true if you compare term premiums to whole life premiums. The only disadvantage in this approach is that you need to make a point to save that difference, which can be an issue for many individuals.

Whatever type of life insurance policy you choose, the safety provided through life insurance is an extremely important part of any person’s financial future.

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[qsm quiz=123]

Challenge Questions

List all the different types of Insurance mentioned in the text above.
Why might someone consider a Life insurance policy?
How can Life insurance be an investment?
Would you consider a Life insurance policy later on in your life? If so why? If not, why not?

Personal Finance

Homeowner’s Insurance

Written by Kevin Smith

Homeowner’s Insurance is a broad type of insurance coverage designed to cover a home, its contents, and the property it sits on. This insurance is very broad, wrapping many different types of coverage into one package.

If you want to take out a mortgage on a home, the institution you borrow from will probably require you to have some level of homeowner’s insurance. They want to make sure that if there is a disaster, they do not lose their collateral on the loan. Homeowner’s insurance is like a broader form of renter’s insurance – it is a combination of property insurance and liability insurance.

History of Homeowner’s Insurance

What we now call “homeowner’s insurance” started in the 1600s as insurance against homes burning down in a fire. It was created in direct response to the Great Fire of London. In the era before we had public fire fighters, private insurance companies would sell fire insurance to homeowners. That insurance company would then have its own staff of fire fighters who would put out fires at any insured home. There were many examples of the fire fighters arriving to a scene of a fire at an uninsured home, or at a home insured by another company, and just letting the home burn until the owners paid the company a hefty fee.

By the 1700’s, insurance companies began pooling resources into public firefighting stations. In America, Benjamin Franklin worked to popularize the notion of adding coverage for the actual damage caused by the fire, instead of just paying for firefighters. Throughout the late 1700s and 1800s, more types of property insurance were created and sold by insurance companies, including insurance against theft and burglary, insurance against water damage and weather, and insurance against someone getting injured on your property, known as liability insurance.

By the middle of the 20^th century, most insurance companies bundled these separate policies together into a single “homeowner’s insurance” package. The type of coverage that was offered was standardized in 1950, but it has continued to evolve since then.

Types of Homeowner’s Insurance

There are two broad categories of homeowner’s insurance, named after the type of coverage provided.

Named Perils

or loss to the insured home or property is caused by anything other than one of the listed risks, the insurance will not cover it. Named perils policies represent the minority of homeowner’s insurance policies sold. Because the coverage is so limited, most homeowners prefer more comprehensive coverage. There are two types of named perils coverage:

H01 – Basic

This is the most basic form of homeowner’s insurance. It is used for vacant buildings or if you lapse on your insurance coverage, but the bank holding your mortgage still wants to protect their investment. It covers the following named perils:

Fire and smoke damage
Lightning
Windstorm and hail damage
Explosions
Vandalism
Vehicle damage

H02 – Broad

This is a slightly more common type of insurance, which covers several additional named perils.

Everything from H01
Burglary/break-ins
Falling objects like trees
Collapse from ice and snow
Damage from frozen pipes
Accidental water damage
Damage caused by power surges

All Risk

All risk coverage is the opposite of named perils. It covers all damage unless it is specifically listed as an exception. This type of coverage is used much more by homeowners, but policies can vary quite a bit in terms of the specific exclusions. There are some types of damage that are almost universally excluded from these policies, so homeowners will need to purchase separate insurance policies for these exceptions to be covered:

Earthquakes
Floods
Power outages
Neglect
War
Nuclear disasters
Damage the homeowner causes on purpose

What Does a Homeowner’s Policy Cover?

A homeowner’s insurance policy has four specific types of coverage.

Structural Coverage – This covers the floor, walls, foundation, and other parts of the building itself.
Material Coverage – This covers the personal property items contained within your home. As with renter’s insurance, it is recommended that you walk through your home with a video camera at least once a year, pointing out any possessions that have significant value. Some homeowner’s insurance policies require an explicit list of the material possessions covered.
Loss of Use Coverage – If your home is damaged and you need temporary lodging, this type of coverage will pay for the hotel nights while the damage is repaired.
Liability Coverage – This protects the homeowner in case a guest is injured and sues for damages. Liability coverage is the biggest source of claims on homeowner’s insurance policies.

Types of Reimbursement

There are two types of reimbursement the homeowner can choose from when filing a claim.

Replacement Cost Value– If you choose this option, the insurance company will replace whatever was destroyed with a brand new item, and they will pay the full repair cost of anything that was damaged. This option is more expensive, so your insurance premium will be higher to reflect your choices. .
Cash Value – If you choose this option, the insurance company will pay you for the current value of your item. For example, if three years ago you purchased a television for $1200, the TV has depreciated in value, so right now it may only be worth $700. The insurance company will pay you the $700 that the TV is currently worth. Think of the cash value as the purchase price you would set for these items if you were selling them at a garage sale.

Coverage Limits

All homeowner’s insurance policies have limits. The limit is the maximum the insurance company will pay for a certain occurrence or claim. For example, most policies include $100,000 of liability coverage, so if someone gets hurt on your property and sues you, the insurance company will only pay out up to that limit.

Different parts of your property include different coverage limits.

The structure of your primary dwelling (your house): This number is the estimate of how much it would cost to rebuild your home based on current construction costs and the square footage of your home.
Other buildings on your property, like a shed or garage: This number is calculated as percentage of your primary dwelling, so if you have a 60% limit on secondary buildings and your house is covered up to $100,000, your garage would be covered up to $60,000.
Personal possessions: Coverage for your belongings is also calculated as a percentage of the insurance on your dwelling.

How Much Will It Cost Me?

Homeowner’s insurance can be expensive compared to renter’s insurance, depending on your level of coverage. According to the National Association of Insurance Commissioners, the average annual homeowner’s insurance premium was $1,192 in 2019.

Like all insurance policies, your choices increase or decrease your insurance premiums.

Increasing Premiums

The biggest factors increasing your premiums relate to your liability coverage – most payments insurance companies have to make is because someone is suing the homeowner. These items will probably see your rates go up the fastest:

Dog Bites. If you have a dog that bites someone, your premiums will immediately increase. This is the single most common reason why homeowners file insurance claims – their dog bites someone, who then sues for damages.
Slip and Fall claims. If someone is injured on your property from a “Slip and Fall” (the second most common type of claim), your premiums also might jump, especially if it is more than once in a 3 year period.
Mold and water damage. Mold is extremely expensive to repair, so much so that some insurance companies have dropped it from their policies entirely (this is something you should confirm with your insurance company before signing). If you have one mold or water damage claim, insurance companies might raise a red flag that more might be coming in the future due to aging plumbing or improper repairs.

Decreasing Premiums

Premiums swing both ways. Here are some ways to get your premiums to decrease over time.

Increase your deductible. Increasing your deductible means that you are agreeing to pay more before asking the insurance company to pay their portion. The amount of your deductible and the cost of your premium have an inverse relationship. The higher your deductible, the lower your premium. Another option to consider is to pay out-of-pocket for smaller damages and not filing a claim at all. If you file too many claims, your premiums\ will definitely increase.
Reduce your coverages. Many policies will over-insure your belongings, such as jewelry, so you can request that certain items be removed to reduce your premium before you sign.
Shop around. Like all insurance policies, you will benefit from shopping around once a year to find better terms. Companies change the way they categorize risk and the way they group customers into similar pools, so you could end up saving hundreds of dollars just by checking around occasionally to see if other insurance companies classify your property differently.

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Challenge Questions

What is the purpose of homeowners insurance?
Give examples of the type of things that a homeowner policy will cover?
What is meant by coverage limits?
In your own words and with examples, explain what a deductible is.
What should you do when looking for insurance?

Personal Finance

Renter’s Insurance

Written by Kevin Smith

Renter’s Insurance is taken out on property you rent to insure against damage or loss. Renter’s insurance works in a similar fashion to homeowner’s insurance. Homeowner’s insurance is designed to cover damage to a home’s interior and exterior, the theft of possessions, and personal liability for harm to others, for example if someone fell down your porch steps and sued you.

As a renter, it may seem like the landlord would have you covered, but this is only partly true. For example, if there is a fire at your apartment building caused by one of your neighbors, your landlord’s insurance would cover the repairs to the building, and his possessions (like any appliances of furniture provided in the rental units), but it would not cover any of your personal items that were destroyed.

Most renters think their items are not worth very much, so purchasing renter’s insurance isn’t a priority to them. But when renters actually take the time to calculate the replacement cost of all of their items, the totally is usually over $20,000. Would you have $20,000 in the bank to replace everything you own? Probably not. This is why renter’s insurance is important.

What Does Renter’s Insurance Cover?

Renter’s insurance applies to most events in which your personal property is damaged or stolen. This includes fires, plumbing leaks, lightning damage, items stolen during a burglary, items damaged by vandals or rioters, and items broken due to cold or hot weather. Renter’s insurance can also protect you if a guest gets injured on your property and wants to sue you.

There are three main areas of protection you receive through a basic renter’s insurance policy:

Your Personal Property

The most commonly needed type of renter’s insurance coverage is coverage of possessions in case of theft or damage. As a “best practice,” at least once a year, you should walk through your apartment or rental property with a video camera. Video tape everything of value that you would want replaced if it gets stolen or damaged. You will not need this video in order to get an insurance policy, but if something is stolen or damaged down the road, your video will show proof that you owned the item that now needs to be replaced.

You can also take pictures of your valuable items. Store the pictures or the videotape in a safe place away from your home so if there is a fire or water damage, your documentation is not lost. Before the days of digital storage, experts would recommend storing your videos or pictures in a bank safety deposit box along with a copy of your insurance policy. But you can now store the documentation in a cloud storage service like Google Drive or Dropbox so it can be accessed from anywhere.

Your Shelter

If your apartment burns down or gets damaged due to a water leak, you probably will not be able to sleep there until the damage is fixed. If you have renter’s insurance, the policy will include a clause about “Loss of Use.” This means that if you cannot use your rental apartment, your insurance company will pay for lodging expenses while the damage is being repaired. That way you will always have a place to stay. There is usually a daily dollar amount that they will pay for your temporary housing, so don’t book a room at a fancy hotel because you’ll have to pay the difference.

You

Renter’s insurance also acts as liability insurance for you against your guests. If you have a visitor to your home who gets injured and wants to sue you, your renter’s insurance will cover the lawsuit claim (up to a point), including legal fees.

What Rental Insurance Does Not Cover

There are a few cases where damages will not be covered by a standard renter’s insurance policy, so make sure you understand these exceptions before filing a claim.

Floods

Most natural floods (from heavy rain and river overflows) are not covered by standard renter’s insurance policies. If you are worried about flooding, you can usually purchase an additional “Flood Insurance” policy.

Earthquakes

Just like floods, earthquake damage is not covered by default in most renter’s insurance policies but can be purchased as a secondary policy. If you are moving to a state you are not familiar with, make sure you ask if earthquake insurance is recommended for renters. It will be worth the extra cost if you need it.

Hurricanes

While most normal storm damage, like lightning strikes and hail damage, is covered through renter’s insurance, hurricane damage is not. You will need to acquire a separate policy to cover hurricane damage.

Intentional Damage

Any damage you cause on purpose is not covered. For example, if you get angry and punch a hole in the wall or kick down a door, your renter’s insurance will not cover the necessary repairs. If you make any fraudulent claims, such as saying that items were stolen (when you really threw them away) or that the kitchen fire destroyed your brand new laptop (when it was really 3 years old), you are committing insurance fraud which can land you in prison.

Getting Reimbursed

If you need to file a claim with your insurance company, there are two types of reimbursement to choose from. You make this choice at the time you take out your insurance policy. The differences are important for you to understand. Both types are subject to your policy limit. The policy limit is the maximum amount the insurance company will pay for each claim.

Option 1: Replacement Cost Value

This is the more expensive option and will make your premium higher. Replacement cost value pays you the amount of money needed to cover the replacement of your possessions at current market prices. This means if your apartment burns down and everything inside is destroyed, the insurance will replace your items with brand new items.

Option 2: Actual Cash Value

This option is cheaper and it is available in more policies. Actual Cash Value means your insurance company will estimate the current value of your items, not the price you paid when you purchased them. For example, if you have a computer that you purchased five years ago for $1,000, it is now only worth about $500. So the insurance company will pay you $500, not $1,000. This is not a rip-off. You are being paid “fair market price” for your items, just like you’d receive if you were selling them at a garage sale.

How Much Will Rental Insurance Cost Me?

The good news is that renter’s insurance is a very inexpensive type of insurance, cheaper than auto, health, or homeowner’s insurance. A typical policy costs only about $15 per month, and it could be cheaper for young people with fewer items that need to be covered.

Depending on who you rent from, your landlord may actually require you to get renter’s insurance within a certain period of time once you’ve signed your lease. The reason for this is simple: If you have renter’s insurance and a disaster hits, you are more likely to simply file a claim with your own insurance company instead of trying to sue your landlord for damages.

Whatever your reason for getting it, renter’s insurance is inexpensive and incredibly valuable for every renter.

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Why do renters have insurance?
List 4 examples of what renters insurance does not cover.
In your opinion are you for or against insurance and why?

Personal Finance

Car Insurance

Written by Kevin Smith

If you drive a car, you need to be covered by some sort of automobile insurance. You have probably seen dozens of advertisements from insurance companies claiming to help lower your rates, improve your coverage, or just encouraging you to compare rates, but before you buy your first insurance policy or change insurance providers, the first step is understanding exactly how car insurance works.

Types of Car Insurance

There are several types of insurance coverage, each designed to cover different potential cost.

Liability Coverage

Liability coverage is required in most states if you want to drive. This coverage exists to pay for repairs and medical costs of any property or person damaged as part of an accident that was your fault. If you cause property damage by running into a building or fence, liability coverage will pay for that too.

Your liability coverage does not cover you or your car. It only covers other drivers and their vehicles. This means that if you cause an accident and damage your car or get hit by another driver who doesn’t have insurance, you will be on the hook to pay 100% of the repairs and medical bills yourself.

Collision Coverage

Collision insurance helps pay to repair or replace your car if it’s damaged in an accident with another vehicle, regardless of who caused the accident. It also covers your car if it’s damaged by another object, such as a fence or a tree.

Personal Injury Protection

Collision coverage will pay for damage to your vehicle, but it won’t cover the cost of any medical expenses you incur. To cover medical expenses resulting from an accident, you need Personal Injury Protection (PIP). PIP covers medical expenses, regardless of who was at fault in causing the accident, for both you and your passengers. Plus, it often covers lost wages if you are unable to work until you recover. Remember that if another driver caused the accident, his liability insurance will cover your car repairs and your medical expenses. However, you can have your own Personal Injury Protection as well. In some states, PIP is a required policy add-on. This is worth the additional cost if you are seriously injured and have high medical expenses.

Uninsured Motorist Coverage

Even though most states require auto insurance, there are still individuals who drive a car without having the needed insurance. These drivers are called “uninsured motorists,” and because there are uninsured drivers on the road, your insurance company may require that you have uninsured motorist coverage. Remember that the driver at fault is responsible for the bills related to your personal injury and auto repairs, but if this driver is uninsured, who pays?

Insurance companies developed policy coverage to address situations involving uninsured or underinsured drivers—one that covers physical harm and one that causes damage to your vehicle. Bodily Injury covers you, your passengers, and pedestrians who were injured or killed by a driver who does not have insurance. It pays for medical expenses, funeral expenses, loss of income while you recover, and sometimes pain and suffering. Property Damage covers the costs of repairing your car, and it may also cover other property such as your home or items in your car that were damaged in the accident. It can also cover your repairs from a hit-and-run accident where the other driver is unknown.

Comprehensive Coverage

Comprehensive coverage is designed to insure your car for damages and repairs that are not caused by accidents, often events that are out of your control. This includes events such as theft, damage from fire, vandalism, weather damage, hitting an animal that runs in front of your car, and getting a cracked windshield.

It’s very important for you to understand that even if you have every type of automobile insurance coverage, you are still responsible for general mechanical repairs. These will always be paid for out-of-pocket.

Tort vs No Fault

Each state regulates car insurance independently, which means that the types of insurance coverage required will be different depending on where you are located. State rules generally fall into two categories: “Tort” and “No Fault.”

Tort States

A tort state requires that someone be found at fault for causing the accident, and that driver is responsible for coving all damages. For example, if you cause an accident at were deemed at-fault because you ran a red light, your insurance would cover the other driver’s damages including medical bills, lost wages, and property damage. Tort states require drivers to have liability insurance in order to cover harm done to others. If the at-fault driver does not have liability insurance, he/she would be responsible for paying for the damages caused out-of-pocket.

It is possible that both drivers could be assigned blame in the accident so both share in the financial costs. For example, in the accident on January 1, Driver A was 40% at fault and Driver B was 60% at fault. This percentage of fault will determine how much each party is required to pay for repairs and damages.

Most states are tort states. The main advantage of the tort system is that it is perceived as more fair. The driver responsible for causing the accident (and his insurance company) is responsible for the damage he caused, no more and no less. However, if the amount of the insurance payout does not cover the costs incurred, the injured driver can sue the driver who caused the accident. A disadvantage of the tort system is that a huge number of accidents end up in court, and the courts then need to determine who was at fault and how much to award. This is extremely expensive both in legal fees to the drivers involved in the accident and in the burden placed on the legal system.

No Fault States

The opposite of the tort system is the no-fault system. No-fault states generally do not make any effort to determine who was responsible for a collision. The costs for repairs and medical expenses are paid solely by each driver involved in conjunction with their own insurer. Because the costs incurred in some accidents are extremely high, the state may allow an injured driver to sue the other party if costs exceed a certain level. The court would then determine who was at fault based on police reports and eye witnesses.

In no-fault states where drivers are responsible for their own costs, having liability coverage and uninsured motorist coverage becomes less important but collision coverage and personal injury protection are usually mandatory.

There are currently 12 states with “no-fault” regulations: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah, plus Puerto Rico and Washington D.C. Several other states offer the option of no-fault insurance policies in addition to tort policies.

Proponents of no-fault insurance argue that it makes filing a claim and getting compensation for repairs simpler and faster, and it removes a huge burden from the legal system. Opponents say that it does not properly discourage drivers from behaving recklessly which often results in higher premiums.

Driving Between States

If a driver from a no-fault state is visiting a tort state and causes an accident, he/she may be on the hook to pay a significant amount to the other driver if he/she does not have sufficient liability coverage. Conversely, many tort state policies treat drivers from no-fault states as if they are uninsured motorists, so Uninsured Motorist coverage would pay for damages from an accident.

How Much Insurance do I Really Need to Have?

Liability coverage is the minimum auto insurance coverage required to drive in most states. Remember that this insurance covers the other driver in an accident that you caused. Insurance companies may advertise that they offer the “lowest cost insurance,” catching the attention of new, young drivers and cash-strapped drivers. However, this low-cost insurance is for liability coverage only which means you and your vehicle won’t be covered when you cause an accident. At the other end of the scale, many so-called personal finance “experts” will advise all drivers to get the maximum amount of coverage they can afford. Following this advice means that you may be paying for coverage you don’t necessarily need. Take time to talk to your insurance agent for guidance on how to balance the trade-offs by determining your potential risks and the right amount of coverage for you.

Deductibles and Premiums

There are many factors that will influence the cost of your monthly premium, but the biggest factor that you can negotiate is the balance between your deductible and your premium. The deductible is the amount of money you pay first when you file a claim. The insurance company will then pay the rest. The premium is the amount you pay each month for your insurance coverage.

The amount of your deductible and the cost of your premium have an inverse relationship. The higher your deductible, the lower your premium. This relationship allows you some control over your total insurance costs. For example, you may want coverage for liability, collision, uninsured driver, and personal injury protection in case of a major accident. Even with all of this coverage, by having a high deductible, you can keep your monthly premium payments lower. You may have to pay a big sum out-of-pocket if you get into an accident, but your monthly premiums could be lower than someone who only has liability coverage and a very low deductible.

What Will Raise Your Rates

Besides choosing the type of coverages you need to have and determining how to balance your premium and deductible, there are several other factors that can influence how much your insurance rates will be.

Type and Year of Vehicle

The type of vehicle you drive has a definite impact on your insurance rates. Fast sports cars have much higher insurance rates, simply because they are more expensive to repair if they get into an accident. New cars are more expensive for the same reason. You may think that having an older car seems like the best option, but insurance companies will also charge more for cars over 15 years old. This is because older cars have higher failure rates than newer cars. Older cars are more likely to break down while on the road, causing an accident.

Crime also plays a role in how expensive your insurance might be. If you happen to drive a model of car that thieves prefer, the cost of comprehensive coverage will be significantly more expensive for you. The most frequently stolen cars usually are not the most expensive cars. They are the cars that can be cut up for individual parts and sold at higher rates.

Your Age and Gender

Historically, men typically get in more accidents than women do, so women usually get a bit of a break on their car insurance premiums. Younger drivers also pay more than middle-aged drivers since their lack of experience results in more accidents. Although they’ve had decades of experience driving, retirees may see their rates increase if they are physically impacted by changes in vision or are taking certain medications.

Your Location

Urban areas have more drivers than rural areas, thus increasing the chance of collisions on your daily commute. If you live in a city, expect to pay more for insurance.

Other Drivers Using Your Car

If you have a spouse who also uses your car, you will pay more to insure your spouse. The insurance company wants to make sure that regular drivers of a vehicle have coverage too. Before you regularly drive someone else’s vehicle, such as your spouse’s or friend’s car, see if you need to purchase insurance. You may be considered an uninsured driver if their insurance does not cover other drivers. When you started driving your parent’s car as a teenager, most likely your parents saw a huge spike in their monthly premium.

Using Your Car for Work

If you use your car as part of your work responsibilities, such as making food deliveries or driving around for sales calls, your normal personal insurance will probably not cover you if you get in an accident on the job. You will need a special class of professional insurance in order to be covered. The good news is that your employer will usually compensate you, and if not, you can write off the expense on your income taxes.

Making Claims

If you frequently file claims with your insurance company, even for accidents that are not your fault, your premiums will go up. The insurance company sees that you are a higher risk because of where you are driving or the time of day you are driving.

Citations and Tickets

If you get speeding tickets or reckless driving tickets, your rates will start to go up quickly. These tickets show that you are a riskier driver.

What Will Lower Your Rates

Insurance companies consider many factors that can help lower your insurance rates, but be warned – if you tell your insurance company you qualify for these discounts but they find out you were misleading them, your policy will be cancelled and you may even be prosecuted for fraud.

Garage Parked Car

If you park your car in a garage each night, you can get a huge reduction in your monthly premiums. This is because cars parked in a garage see less “wear and tear” from the elements like rain and snow, get less damage from vandalism and debris, and are far less likely to get hit by other drivers while parked.

Policy Bundle

If you have renter’s insurance, homeowner’s insurance, or any other type of liability insurance, your insurance provider might offer a bundle price in order to get all of your business. Bundling different types of insurance with one company could knock off 15% from your premium costs for each of your insurance policies.

Fewer Claims

If you do not file claims frequently or if you have never filed a claim, your premiums will start to fall after a few years. You have shown the insurance company that you are low risk.

Safe Driver Courses

You may be able to take Driver’s Ed or a Safe Driver class and get a few dollars knocked off your insurance premium each month. Being an educated driver means you are less risky because you’ve learned how to be a safer driver. Many insurance companies will require you to take a safe driver course after receiving a certain number of speeding tickets or citations. If you do, you can avoid a huge spike in your premium.

Shopping Around

Your monthly premium is determined partially by your history of claims, but you can also save money on this cost by getting a strong understanding of how insurance works. When you sign up for a policy, your insurance company will put you into a pool with dozens or even hundreds of other drivers who have similar characteristics (age, number of claims, type of vehicle, etc.). The insurance company then determines how much to charge you based on the average amount of money it had to pay out in claims for this group in previous years.

The criteria used to determine which group you should be part of changes from year to year, and it will be different for different insurance companies. Once you are part of a particular group within one insurance company, you most likely will not be moved to a less expensive group, even if you qualify. Insurance companies tend to review their “group characteristics” only every few years. If two insurance companies had completely identical groups, the premium cost could be different for individuals in both groups simply because one insurance company might pay out a more for claims than the other company. So new customers being added to the “pool” would be charged different premium rates. Why should you understand this? You could end up saving hundreds of dollars simply by shopping around at different insurance companies regularly. Even if your rates do not change from year to year with one company, they might be drastically different if you apply 12 months later with a different company. Most experts recommend shopping for new auto insurance at least once every two years.

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[qsm quiz=115]

Car Insurance

In your opinion, should every driver or car on the road be insured?
Using examples , state and explain the different types of car insurance that are available.
Using examples, explain what a deductible is.
Explain what is meant by the term premium when discussing insurance.
What is the difference between Tort and No fault?
In what ways could your actions cause your insurance premium to increase?
In what way are you able to reduce your insurance premium?

Personal Finance

IRS Audits

Written by Kevin Smith

Once you file your income taxes, the IRS will review all the forms you submit (your tax return) and either accept your submission or reject and return it to you for a correction, usually with very little turnaround time. This can happen whether you are paying what you owe or receiving a refund. However, occasionally the IRS will decide to “audit” your tax return, asking you to provide some supporting documentation before your tax return is accepted.

The Basics of an Audit

An audit is what happens when the IRS chooses to examine your tax return more closely, verifying that your income and deductions are accurate. The auditing process is designed to catch errors in tax returns, verify that the correct amount of tax is being paid, and preventing fraudulent tax claims.

Getting Audited

Audits can be triggered by a random selection process or if your tax return information contains anything suspicious. Audits are normally triggered within 3 years of the filing date, but in some cases an audit can occur up to 6 years after filing your initial return. If you file taxes with a professional accountant, that accountant will usually accompany you through the entire auditing process and do almost all of the leg work. If you file on your own, you will need to go through the auditing process on your own as well.

The reason the audit timeline differs is mostly political. Congress has repeatedly cut the IRS budget over the last few years, resulting in tens of thousands of fewer auditors, with far less training each, so the auditing process takes longer each year, creating a growing backlog. Because of this backlog, you need to keep all financial records used to prepare your tax return for about 7 years beyond the filing date to ensure you are prepared in case of an audit. The shortage in personnel also means fewer audits are conducted due to random selection and more are due to tax returns triggering an audit due to suspicious activity.

What is suspicious about my return?

IRS auditing agents do not review every tax return. Most tax returns are processed automatically, with the data read, processed, and stored by a computer. Since all this data is in one place, the IRS has a research division that carefully combs through all the data to find statistical patterns. They use these statistics to build models of what most returns should look like, based on what the person is claiming. For example, returns filed by married couples with children look more similar than single people filing alone.

When returns are submitted and the information does not fall in line with what would be “expected,” that return gets flagged for an audit, and an IRS expert gives it a closer look.

What do auditors need?

If you get selected for an audit, the auditor will ask to see your financial records in order to verify that the claims you made on your tax return were accurate and justified. You should not need to generate any new records for an audit. Generally you will only need the same documents you used when completing your tax return. For example, if your tax return included a $1000 donation to a charitable organization, you will be asked to provide a copy of your donation receipt.

If you do need to submit any documents to the IRS, each document should include a note of what it is and how it applies to their request and your return. Click here for a list of the records that auditors might request.

Steps of an Audit

There are two basic steps of an audit. When your return is first flagged for an audit, it is reviewed by an experienced auditor and analyzed in detail. This auditor can either accept your return as is or forward your paperwork to an examining group.

If the experienced auditor accepts your return with no changes, your paperwork will be processed normally, and you may not even be aware it was ever flagged at all. If it is forwarded to an examination group, you will be notified by mail of what exactly the auditors are looking into. You can be audited either in person or by mail. This is usually determined by the complexity of your return and how many flags were raised by the first auditor.

You will only be notified of an audit by mail. The IRS will never call you by phone to inform you of an audit or to demand payment. (Note: This is a very common scam.)

Audits by Mail

Audits by mail are very easy affairs. The paperwork you receive from the IRS will explain why you are being audited and what they are looking for, and you will be asked to mail specific supporting documentation, usually receipts, logs, or records detailing your expenses. You simply need to mail the IRS copies of those documents and they will review what you provide. (Never mail your original documents since they could be lost in the mail.)

Audits in Person

In-person audits are a more formal affair. You can be asked to come in person to a local IRS office, or an IRS agent may ask to meet with you at your home, place of work, or with your accountant. You will be asked to choose the date and location, which must be arranged with your auditor.

In-person audits are usually requested for more complex audits where several flags were raised with your return, allowing the auditor time to ask specific questions about specific items.

If you are contacted for an in-person audit, the IRS will still specify the reason why you are being audited and ask for specific documents, but it is always a good idea to bring as much documentation as possible to the meeting. Bring copies of your documents since the auditors may need to keep some of your records as they make their decision. They should not be given originals.

Auditing Results

After mailing your documentation or meeting with the auditors, the auditors reviewing your tax return will confer and discuss your paperwork and the information you have provided. You will always be notified when an audit has concluded and a decision has been reached.

The auditing team will either accept your return with no changes (meaning they were satisfied with the documentation you provided) or will request changes. You can either accept or reject their proposed changes.

If you accept the changes, you will sign a document confirming you understand and agree to the changes. This has the same effect as filing a revised tax return. If the revision means you owe additional taxes, you will need to pay them in full at this time or through installment payments.

If you reject the changes, you can request a conference with a higher-ranked IRS agent who will review the auditing process and your objections. If you disagree with this agent as well, you can take your case to mediation where a third party discusses the issues with both you and the auditing committee, or you can take your case to Tax Court where you will need a lawyer to argue your cause in front of a judge.

Very few disputes end in Tax Court since most taxpayers and the IRS prefer to resolve the issue through mediation rather than pursuing an expensive legal process. Click Here for more information from the IRS website.

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What is a tax audit?
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Personal Finance

When to Hire a Tax Professional

Written by Kevin Smith

Most young people are perfectly capable filing their own taxes using the IRS Form 1040. However, as your personal finances grow more complex and you become eligible for tax credits, have multiple sources of income, or need to report common tax additions, filing your own taxes becomes more complicated. At the point where completing your own tax return becomes a burden, you may want to consider hiring a tax professional for help.

What Choices Are Available When Completing Your Tax Return?

People generally have very mixed attitudes towards hiring a tax professional to assist with fileing their taxes. Some people believe it is a waste of money, choosing instead to work through the tax worksheets by themselves. Others purchase tax preparation software or use online tax preparation services, like TurboTax or TaxSlayer, which simplifies most of the worksheets and forms. Still others prefer meeting with an accountant face-to-face, explaining their tax situation and letting the professional do all the leg work.

You will need to decide which method is best for you by considering your cost and benefits. Use the following guidelines when making your decision on how to file your taxes for this year.

Filing Yourself

Filing taxes yourself means obtaining and printing the required forms, gathering the necessary income, expense, and taxes paid documents, and following the form instructions to fill in the specific numbers. You will then calculate your tax, deductions, and credits to determine if you owe additional taxes for the year or will be receiving a refund. Once the calculations have been made and the form has been signed, you are responsible for mailing the tax form and the required supporting documents to the IRS. In the past, this was the way nearly all Americans filed their taxes each year.

Cost

Filing taxes yourself costs nothing but time and a postage stamp.

When To Use This Method

If you have no dependents, tax credits, or additional income to report, filing your taxes using Form 1040 can take as little as 5 minutes, and if you are receiving a tax refund, you can expect a direct deposit to your bank account soon after. The simpler your tax situation, the more sense it makes to file yourself.

When to use a different method

As your personal finances become more complex (usually after having children, purchasing a house, or having a significant amount of investments), the time needed to file your taxes grows exponentially, as does the margin for error. So your “cost” has increased. Simple calculation errors can trigger an audit, create delays in the processing of your tax return, or cause you to miss out entirely on tax breaks you might qualify for but didn’t realize.

The IRS holds about $1 billion each year in unclaimed refundable tax credits, simply because people failed to file a tax return or they failed to claim credits they were eligible for (most commonly the Earned Income Tax Credit for low income individuals).

Even if you are confident you can file your taxes yourself every year, it is a good idea to file with a qualified tax professional at least once every few years to ensure you have not missed any new tax credits or deductions you were eligible for. You can even use a tax professional to review previously filed returns to make sure nothing was missed, and then file a 1040X correction form to receive any refunds you may have missed.

Tax Preparation Software

Tax preparation software has gained enormous popularity in recent years. There are dozens of software programs and apps to help you file your taxes on-time, and with good reason. When using the software, all of the calculations are handled automatically, so there is no margin for error with arithmetic mistakes you might make, and the step-by-step instructions make you aware of everything you can claim.

When to use this method

The strongest benefit of using tax preparation software is the ability to quickly and efficiently identify and apply some of the biggest tax deductions, credits, and additions you may be eligible for. This makes tax preparation software very popular with everyone from part-time workers looking to claim their EITC (earned income tax credit) to families with children looking to claim various common tax credits.

When to use a different method

Tax preparation software is not free for most individuals. This monetary cost is the most common reason why people with simple returns still prefer to file on their own. Tax preparation software is not necessarily easier. You can still miss out on deductions or credits that may not be very well explained by the software, and it may be difficult to report certain types of extra income (e.g. if you have tips or cash earnings not reported by your employer on your W-2). Reporting investment income and capital gains from the sale of stock may also be fairly complicated when using some versions of tax preparation software. So if your financial situation seems to be too complicated for you to understand, you probably want to choose to work with a professional.

Professional Accountant

Filing your taxes through a professional accountant is traditionally the most reliable way to get the highest tax refund. Professional accountants are trained to know the ins and outs of the tax code. Plus they are generally aware of new tax changes that may take affect from year to year. One reason so many people choose to meet with an accountant in person each year is for the human touch. It is educational to actually sit down with someone and review your finances from the past year who can help identify tax breaks, credits, and any other claims you may need to make.

When to use this method

Generally speaking, the more complex your tax filing, the more you will benefit by using a professional accountant. This is certainly true if you have any income not reported on a W-2 or a 1099 form, such as contract work or side jobs. An accountant can help you get your entire tax situation organized and filed correctly. There is also a benefit in working with an experienced tax professional who has helped thousands of individuals in the past.

Professional tax firms usually offer assistance in case you are audited. This can remove a huge amount of stress and hassle knowing you have a professional in your corner.

When to use a different method

This expertise does come at a cost. Filing your taxes through a professional is typically the most expensive way to file since it requires dedicated one-on-one time with a highly-trained expert. If you believe you have very few tax credits or deductions and your financial situation is fairly simple, it will be cheaper to simply file yourself.

During tax season, you may see large accountancy firms advertising a low cost to help you file your income taxes. However, this low costs generally applies only to a basic return, and you will be charged more if you have any complexities such as interest income or stock dividends to report. So before booking your appointment, take the time to ask how you will be charged. Knowing that cost up front will help you make an informed decision about how to file your income tax paperwork this year.

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Why do taxes exist?
In your opinion, what are the advantages and disadvantages of hiring a tax professional?
List 3 tax forms mentioned in this article.
The IRS holds about $1 billion each year in unclaimed refundable tax credits. What does this mean?

Personal Finance

Tax Additions: Situations Requiring You to Pay Extra Income Tax

Written by Kevin Smith

Everyone loves getting tax breaks, but what can really impact your finances is forgetting about tax additions – extra taxes and fees you owe for income that should be reported when you file your income taxes. Forgetting to include this income and not paying the taxes owed on this amount will hurt you in the long run. Taxpayers are charged interest on the outstanding tax balance from the date taxes are due (April 15) until the taxes are paid in full.

This means if you fail to include all of your tax additions in your annual return and get selected for an audit later, you will be charged interest for the entire period between when your taxes were due and when the error was found. Understanding the additional taxes you might owe and the tax credits and deductions you may qualify for are both important in keeping your finances healthy.

Why do tax additions exist?

Generally speaking, the government wants to make it as easy as possible for you to pay your taxes, so most people do not have any significant tax additions to report. Their main source of income is their earned wages. However, many individuals earn extra income beyond their wages, and the taxes owed on this income has not yet been reported to the IRS. It is your responsibility to include these tax additions when you file your income taxes.

If all of your income for the year is reported by your employer on your W-2 form, you will not have any tax additions. However, if you work as a waiter or waitress and earn more than $20 a month in cash tips, you need to report those tips as income on your tax return. This will increase your Adjusted Gross Income, and therefore increase your tax burden.

Following is a list of the most common situations that create tax additions.

Tips

Legally you need to report your tips to your employer by the 10^th of each month. If you work for a regular restaurant, this is probably part of the normal flow of business. At the end of each shift, your employer may ask you to calculate how much in tips you earned and report it before you leave. If this is the case, when you receive your W-2 form, it will already include the tips that your employer knows about.

However, the problem arises if you received tips that your employer does not know about. If you received other tips, then you will need to report them separately using a Form 4137.

Keep in mind that your life will be much easier if all tips are reported to your employer. If you use a Form 4137, the tip amounts can be harder to track over the course of a full year compared to just a month. If your employer does not already keep track of tips, you can ask that they do. Give them a Form 4070 (Employees Report of Tips to Employer) before the 10^th of each month, and request that they include that information on your W-2 to make filing taxes simpler.

Rents

If you own property and charge a rental fee, you will need to report all of that fee as income. Rental income is taxed. Excluding rental income on your income tax paperwork is one of the biggest triggers for an audit, and the result can include huge back taxes if ignored.

Reporting rental income is very easy. The IRS has tax forms specifically for reporting rental income and expenses. All you need to do is track those numbers over the course of the year so that you can properly report them. Click Here for the IRS article on reporting rental income and expenses.

Capital Gains

If you have any investments, you will need to report any capital gains (or losses) you experienced during the year. A capital gain occurs when you sell an asset at a price higher than you purchased it for. Capital gains alsoinclude dividend payments you received from stocks you own, so even if you don’t actually make stock trades during the year, you might still owe tax.

Larger capital gains occur when you buy or sell property that was held as an investment. If you sell your house that you’ve owned and lived in for 5 years, you will probably not owe taxes on any capital gains. But if you “flip” a house by buying it, renovating it, and selling it 2 years later, you will owe capital gains on the profit you earned.

Capital gains are taxed at a lower rate than for other income, but they still need to be reported and paid. Click Here for the IRS FAQ for capital gains taxes.

Consumer Use Taxes

When you make purchases at your local store, part of the price you pay includes a sales tax. However, if you purchase an item online from another state, it is possible that you did not have to pay any tax at that time. For this item, you would now be responsible for paying that tax yourself. Instead of paying a sales tax, you would be paying a use tax. (Since sales taxes are only collected at the local level, use taxes apply only to your state income tax return, not to your federal return.)

Use taxes come up in cases where you normally would owe a sales tax, but for one reason or another none was paid. The most common example is goods purchased from sellers online and shipped to your location. While the biggest online retailers, such as Amazon, have integrated sales tax charges into their purchases, many smaller sellers have not. If you purchase goods online and did not pay a sales tax, you will need to report the purchase and the taxes owed on your state tax returns.

The exact process for reporting use taxes varies greatly from state to state. Some states will have a specifically line on the income tax form for listing use taxes owed while others will require a separate form to be filed just for use tax. Your state’s Department of Revenue can provide information about how use tax is handled in your state and what type of purchases may be exempt. Check that website for details. Then remember to check your receipts for purchases made from out-of-state companies to determine whether or not you paid sales tax with the purchase or will need to pay use tax now.

Many people ignore the use tax because it can be complicated to file for very small amounts. However, if you do get caught dodging use taxes, fines and penalties are steep. In addition to high interest rate penalties, there are failed filing fees, and potentially even jail time if the amounts are high enough.

Other Income

Other Income is a blanket term for any other income you received during the year that was not reported to the IRS with a W-2 or a 1099 form. This typically includes things like cash prizes and award winnings, gambling earnings, and any money you earn on the side as cash, either through your own business or for something like pet sitting.

All of these “other” forms of income are reported using the standard 1040 form and Schedule 1. The exception is if you are earning extra money from a side job or being paid cash for odd jobs – this requires the Form 1040 Schedule 1. On line 8 of Schedule 1, the form asks you to report “type and amount” of your “other income.” So if you received $26 for attending jury duty, you would list that there.

Late Filing Fees

Late filing fees represent “extra money” you may need to pay when you are filing your income taxes. If you do not file your taxes by the deadline, usually the middle of April, you can be charged both a failure-to-file penalty and a failure-to-pay penalty (if you owe money to the IRS). Currently the fee for filing late is 5% of the unpaid taxes for each month or part of the month that your taxes are late. And the fee for paying late is .5% of your unpaid taxes. The IRS website says that “You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return.”

This should help you see how important it is to file your income tax paperwork on time, even if you owe tax and cannot fully pay it. If you need extra time to file your taxes, for example if you are waiting for some paperwork relating to extra income you need to report, you can also file for a short-term extension. This will give you an additional 120 days to file with no late fee penalty. Click Here for the IRS article on late fees.

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Challenge Questions

What other items, other than you initial income from your paycheck can be taxed?
What is a W-2 or 1099?
In your opinion, should people pay taxes? If so, why. If not, why not?
Using examples, explain what Capital gains is.

Admin Guides

Communicating With Students

Written by admin

Personal Finance Lab has a built-in way to communicate with your students, post messages, or even add sponsorships to your classes. All of this can be found from the “Post A Message” page under your Admin menu.

This will take you to the Announcements tool. Posting a message is easy – just write what you want to say!

Once your students log in, they will see your message on the right side of every page, just above their Assignment for the week.

The Announcements tool also supports more than just text – you can include formatting, images, and even embed videos for your students! The box is 295 pixels wide, so keep this limit in mind if using any HTML formatting.

Marketing

Classification of Products and Services

Written by Shane Legatzke

Clearly no two products are exactly alike and therefore each merits a unique marketing strategy. However, certain products carry similar characteristics in terms of price level, similarity between competing brands, and the way consumers approach them in the buying process. It is often useful to group these similar products into categories in order to help set up marketing strategies for each segment. This process is known as product classification.

Within the category of consumer products, there are four main classifications: convenience goods, shopping goods, specialty goods, and unsought goods. This article will describe characteristics of goods in each category, provide examples, and discuss relevant marketing strategies. Additionally, it will touch on the validity of this model of product classification as a useful input for developing marketing strategy.

Convenience Goods

These are products that consumers purchase often and habitually, without much thought given. Convenience goods usually are low-cost items with little differentiation between brands, and therefore customers often pick a brand one time and then remain with that brand without reconsidering. Examples include toothpaste, ketchup, soap, and candy.

Marketing Strategy

Because convenience goods carry a relatively low price, consumers usually don’t bother price-checking—they simply stick with the brand they have always bought. For that reason, pricing isn’t overly important as long as the company doesn’t raise prices to the point of being significantly different from competitors. If someone always purchased Crest toothpaste for their entire life, they will not bother checking Colgate’s price to see if they can save a few cents; it’s a habitual purchase. Wide-scale promotion is very important in order to build brand recognition. Typically for a quick, impulsive purchase consumers will choose a brand that they have heard of and are familiar with (Heinz ketchup, for example, holds over 60% market share in the US largely because of its iconic brand). Strategic placement is also frequently used in an attempt to sell convenience goods. A common example is when stores will place candy and other small items right next to the checkout line in hopes of stirring up impulse purchases.

Shopping Goods

In contrast, consumers looking to purchase shopping goods are more willing to do research and compare different product options. The reason for this is because shopping goods are higher-priced or more important items within a person’s life and therefore it is a more economic use of consumers’ time to compare products. Examples can include extremely large purchases like houses and cars or more modest items like clothing. Take cars– people are willing to exert significant time and resources looking online, visiting multiple dealerships, and test-driving different vehicles to find the best car for the price.

Marketing Strategy

Strategically, product quality and pricing are much more important for shopping goods than for convenience goods. With customers actively weighing their options, it is vital for a company to provide an offering with attractive value. This can mean selling a product that is better quality than competitors for the same price or selling a product that is similar in quality but at a lower price. The larger the purchase, the more important marketing the good becomes because customers will more actively consider the product’s price-value relationship. Promotion is also important for shopping goods in order to differentiate a product from its competitors and to communicate the value proposition to customers. Whereas promoting convenience goods simply focused on awareness, promoting shopping goods must focus on separating a product from its competition in the minds of customers.

Specialty Goods

Specialty goods are products are so unique or have such a loyal following that consumers will go to extensive lengths to seek them out. Rather than comparing brands looking for an attractive value, buyers of specialty goods focus on seeking out the one specific product they are looking for. Examples include Ferraris, GoPro cameras, and iPhones.

Marketing Strategy

Typically, consumers of specialty goods do not have much price sensitivity—they are willing to pay whatever price is necessary for the product or brand that they prefer. Someone purchasing a Ferrari likely doesn’t care if a similar car is a few thousand dollars cheaper; they are paying for the brand name and the social status that comes with owning a Ferrari. Therefore, more of the company’s strategic focus needs to be centered on developing outstanding and innovational products that will retain the loyalty of their following. Promotion focuses on demonstrating the company’s latest great product and when/where people can buy it. It is also important to promote status that comes with the brand.

Unsought Goods

The final category of product is unsought goods—products that consumers either do not know about or would never think of buying. They are often items that people buy out of a sense of fear or danger, such as life insurance or fire extinguishers. Another example is batteries; no one ever thinks to buy a battery until their old ones die and need replacement.

Marketing Strategy

The key to marketing unsought goods is to remind consumers that the product exists and to convince them that they need to purchase the product to avoid future hardships. For example, a company might run an emotional campaign focusing on how the potential customer’s loved ones will suffer financially if the customer dies unexpectedly. If successful, this would convince the buyer that purchasing a policy is a payment toward protecting their family and they would be compelled to go through with it in order to not have to worry about the potential danger. A lot of promotion is necessary, because consumers rarely think about buying such products unless they are prompted to.

Validity of Model

There are certain issues or uncertainties within the product classification model that need to be taken into consideration. One problem is that certain goods can potentially fall under multiple categories. For example, certain customers may see diamonds as a shopping good and compare prices extensively between brands before making a purchase. Other consumers may have chosen one brand as the best (ie Tiffany & Co.) and they buy that brand for the quality and status it brings. Sometimes product classification can vary depending on the individual customer that is buying the good.

Additionally, convenience goods and shopping goods can have some overlap. There are customers that may have bought Dove soap for their entire life, but will switch to Ivory if they look on the shelf and notice that it’s cheaper. Sometimes the social responsibility of the company producing the good can play a factor in the consumer’s choice as well. If it gets out that one toothpaste-maker mistreats their workers, there are a lot of people that would make a conscious decision to switch to a different brand.

While there are certainly some concerns with the product classification model and some external factors to keep in mind, it remains a useful general tool to help in planning marketing strategy.

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Personal Finance

Tax Credits and Deductions

Written by Kevin Smith

When you file your income taxes, you can “write off” certain expenses, and get extra tax credits based on your living situation. This means that if you had a qualifying expense over the course of the year, you basically get to subtract that expense from the income you report to the IRS, which will increase your tax return (or at least lower how much you owe).

Claiming these credits and deductions can be tricky – many people miss out on them simply by not knowing they exist or how to claim them. Only one type of tax credit can be claimed when using the 1040 EZ, so if you think you can claim any others, you will need to use the form 1040 or 1040A (which is the longest, but has the most potential deductions). Actually calculating how much credit or deduction you can get is detailed in the instructions for the 1040.

Deductions VS Credits

There are two ways to reduce your tax bill – a “Deduction” and a “Tax Credit”.

A “Deduction” means you can subtract this amount from your total taxable income, so it will then lower your taxes owed or increase your refund.

A “Tax Credit” is an amount simply subtracted from the amount of tax you are owed. There are also two types of Tax Credits:

Refundable – if you already owe zero tax, claiming a refundable tax credit means you will get a tax return for that amount
Non-Refundable – These can reduce your total tax burden to zero, but if it goes lower you won’t get the excess as an extra tax return.

Basically, when you pay an income tax directly from your paycheck, your W-2 form will show how much tax has already been paid. By claiming only “Deductions” and “Non-refundable tax credits”, the most you could get back on your tax return is that full amount.

If you also can claim “Refundable” tax credits, you could end up getting back a return for more than the total taxes you pay.

The Standard Deduction

To make it easier to file taxes, everyone has the option to choose between “Itemized Deductions” or “Standard Deduction”. If you file an “Itemized Deduction”, you need to provide evidence of each item you’re deducting (like receipts and proof it is eligible), which can be very time consuming for small deductions.

Alternatively, if you don’t think you have very much to deduct, you can just claim the “Standard Deduction”, which is a flat $6,300 per person. If you take the Standard Deduction, you get it without having to provide any evidence of anything. Young people with lower incomes and no dependents generally find that their Standard Deduction is bigger than their itemized deduction, and is much easier to work with.

If you do take the standardized deduction, you can still claim other tax credits, but no other deductions. See the IRS page on the Standard Deduction.

Dependents and Children

The most common tax deductions and credits involve families with dependents or children. In order to qualify as your dependent, a person must:

Be under 18 (17 or 19, for some tax breaks) years old
Be related to you
Have lived with you for more than half of the last year
Not be claimed by someone else as their dependent

If you are able to claim dependents, you cannot use the form 1040 EZ. Click here to see the IRS page on Dependents.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a national program to help raise low and middle income workers out of poverty, specifically targeting families. It is a refundable tax credit.

While you do not necessarily need to have dependents to claim the EITC, you will get a lot more out of it if you do. If you are claiming it without dependents, you can use the 1040 EZ to claim your EITC.

The EITC works by helping people with low income – this means you need to have worked and earned some income for the previous year. The EITC you might be eligible for is shaped like an n – you get very little if you earned very little, then rises with your income to a certain point before tapering off as your income continues to rise.

This is because the EITC is designed to encourage people to be working and earning a wage. For people with very little income from working, the EITC gives very little because it works under the assumption that they are earning other benefits, such as food stamps and housing assistance. It rises in the middle to help the working poor escape poverty, while tapering off as income continues to rise in order to reduce the benefits received by people who no longer require the assistance.

Your EITC goes up significantly if you claim dependents – in 2016 the most you could get with no children was just over $500, while having two children increased the amount to over $5,500.

Graph created by Timothy Taylor of Conversable Economist

Click Here to see the IRS page for the Earned Income Tax Credit.

Child Tax Credits

There are also tax credits available specifically for children, creatively named the “Federal Child Tax Credit” and the “Additional Child Tax Credit”.

Federal Child Tax Credit

The Federal Child Tax Credit gives a simple tax credit for $1000 per child, up to a certain income threshold (between $55,000 and $110,000, depending on your marital status). If you earn more than this threshold, you will have $50 less tax credit for every $1000 over the threshold (so a married couple earning $120,000 would have a $950 tax credit). This tax credit is non-refundable. Click Here to see the IRS FAQ for the Federal Child Tax Credit.

Additional Child Tax Credit

This tax credit basically works off of the Federal Child Tax credit – it takes whatever part you could not refund, and makes up to $3000 of it refundable (again, with an income threshold). The rules for this tax credit get more complicated if you have 3 or more children, but the effect is basically making the non-refundable part of the Federal Child Tax Credit refundable. Click Here for the IRS FAQ for the Additional Child Tax Credit.

The Child Dependent Care Tax Credit

This tax credit was created to offset the cost of daycare and child care – you can deduct between 20% and 30% of any child care expenses under $6000 per child (no tax breaks on costs over $6000). Unlike the other tax credits, this one only applies to children 13 or younger. Click Here for the IRS FAQ for the Child Dependent Care Tax Credit.

Work-Related

There are also many deductions and credits available to offset any work expenses you might pay for yourself.

Job Moving Expense

While you cannot write off any costs incurred in a job search, if you need to move between cities when you get a job, you can usually write off part of the moving expense. This is a deduction, subtracted from your taxable income. Click Here for more information about deducting moving expenses.

Work Equipment

If you need to purchase a uniform or other work-related equipment for your job, you can also write off these expenses. This is a big deal if you are a contractor or self-employed: you may even be able to write off some of your rent, utilities, and other expenses if you work from home. Click here to learn more about work expense write-offs.

Home Ownership

There are also many tax credits and write-offs if you own your home.

Mortgage Interest

If you have a mortgage, some or all of your interest will be tax-deductible. Not all mortgage interest is tax-deductible – you need to provide evidence that your mortgage was taken out to buy your primary residence, or used for extensive renovations, and only applies to interest paid on loans up to $1 million. If your mortgage does not qualify, you can still write off the interest on the first $100,000 of your loan. Click Here for more information about mortgage interest tax credits.

Energy Credits

There are also many tax credits available to help offset the cost of renovations you do to your house, if those renovations help it become more energy efficient. These credits were put in place to help homeowners upgrade old insulation and windows, reducing the total energy cost of keeping the house warmed in the winter and cooled in the summer. The tax credit is typically for around 10% of the purchase cost, but this can vary year to year. Click Here for more information about energy efficiency tax credits.

Bigger energy credits are available if you add green energy equipment to your house, like solar panels or residential wind turbines. These credits are typically for about 30% of the purchase cost.

Education

There are several major tax credits if you attend college, or get extra work training. These are in place to encourage people to keep building more valuable work skills.

Student Loan Interest

You can write off up to $2500 of interest on your student loans per year. This works as a deduction, so this amount is simply subtracted from your taxable income. Note that if your parents help with your student loan payments, you can still claim what they pay on your taxes. Click Here for more information about the Student Loan Interest deduction.

American Opportunity Tax Credit

The American Opportunity Tax Credit gives credit for the first $2500 in education expenses per year, but you need to be enrolled in an accredited university in the United States, and be pursuing a degree. You can only claim this credit for 4 total years, and you must be enrolled for at least one full session in the year you claim it.

This is a semi-refundable tax credit – if your tax burden is already zero, 40% (or up to $1000) is refundable. Click Here for the IRS page on the American Opportunity Tax Credit.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit is very similar to the American Opportunity credit, but with a lower threshold – only up to $2000, and is not refundable.

The upside is that you can claim it as many times as you like, and do not need to be enrolled in a degree program (so it also applies to extra courses and skill-building programs). Both the Lifetime Learning and American Opportunity tax credits have income thresholds – as your income goes up, your tax credit will be reduced. Click Here to learn more about the Lifetime Learning Tax Credit.

Insurance and Investments

There are also many breaks you can get for some insurance and investment costs, designed to help offset these costs for lower income workers.

Advanced Premium Tax Credit

If you purchased health insurance through the healthcare.gov exchange, you can claim some of your premiums as a tax credit. The actual amount you can claim will vary greatly based on your income and premiums, but the credit is also refundable. Click Here for the IRS FAQ for the Advanced Premium Tax Credit.

Saver’s Credit

The “Saver’s Credit” is another word for the Retirement Savings Contribution Credit – the purpose of this credit is to encourage saving in retirement accounts and IRAs. This credit is for up to $2000, and is calculated as a percentage of your contributions (either 50%, 20%, or 10%, depending on your income). Click Here for the IRS information on the Saver’s Credit.

Capital Losses

“Capital Losses” is when you have an investment, whether it is stocks, property, or any other asset, and sell it for less than you paid for it. If your stock portfolio has been taking a beating over the last year, you can write off up to $3000 of losses as a deduction. Click Here for more information about capital loss tax credits.

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Marketing

Pricing Strategies

Written by Shane Legatzke

One of the most crucial aspects of developing a marketing strategy is determining an approach to pricing. A company could have a great product and a fantastic promotion campaign, but could still fail if the price isn’t right for customers. On one hand, high prices could repel value-seeking consumers and could result in poor sales and low profits. However, prices that are too low could mean narrower margins that could outweigh any boost in additional sales. The key is to select a strategy that fits the company’s product, their competitive environment, and their customer base.

This article will discuss how the forces of supply and demand impact pricing and the concept of price elasticity, cover some of the most common pricing strategies along with scenarios in which they are typically applied, and finally touch on how technological developments have impacted price determination.

General Price Concepts

Supply and Demand

Supply and demand are among the most basic factors on market price for goods, and often an individual firm has little control over them. When there is an oversupply of a product in the market, assuming constant demand, the price of the good will decrease as firms attempt to unload their excess of inventory. Companies that refuse to lower price during a period of oversupply can be punished with huge drops in sales and a buildup of inventory they can’t get rid of. Oil is a prime example of an industry that is currently in oversupply—increased production has led to prices falling from well over $100/barrel down to around $50/barrel today.

Likewise, any decrease in demand with no change in supply will also result in lower prices. With less aggregate customers, companies are forced to fight harder to win the demand of each customer, and this fierce level of competition leads to price decreases. During a recession, like the one that happened in 2008, demand often falls for a wide variety of goods as consumers are tighter with their spending, and this forces companies to cut prices.

To learn more about Supply and Demand, along with examples of how it works, read our article about Supply and Demand Examples in the Stock Market.

Price Elasticity

The basic impact that a company has in controlling their pricing is upon the quantity demanded by consumers. If prices are raised, less customers will buy the product and if prices are lowered, more customers will buy. Price elasticity concerns the relationship between the degree of the price increase (decrease) and the degree of the following drop (boost) in sales.

Elastic demand means that for any downward change in price, the boost in demand will be proportionally higher or vice versa. Therefore, for a product with elastic demand, the best move for managers is to lower prices to increase quantity demanded. Products with many similar substitutes, like McDonald’s hamburgers or Hershey’s chocolate, often have elastic demand because consumers can be more sensitive on price and easily switch to a different product choice.

Inelastic demand is the exact opposite; for any change in price, the percent change in demand is lower. So when goods are price inelastic, management should increase prices because the additional profit will outweigh any drop in quantity demanded. Luxury goods like diamonds are price inelastic because customers tend to be less price sensitive when they are spending on something that is essentially a status symbol of wealth. Also, goods with very few substitutes like gasoline and tap water are typically price inelastic because consumers do not have the ability to switch to another product; they are forced to pay the higher price.

Common Pricing Strategies

Below is a description of some of the most widely used pricing strategies:

Line

Line pricing is when a company offers products at several different levels of quality (typically low, medium, and high). Pricing is set to reflect the relative quality of each offering, so the low-quality product would be at a discount price, the medium product would be at an average price, and the high-quality product would be at a premium price. The iPad is an example of this strategy—customers have the choice of buying a very basic model or they can pay several hundred dollars more to get one with higher quality and better features. As its name indicates, the line strategy is effective when a firm has a product line with several items that have a distinct difference in quality level. Segmented pricing can help clarify to consumers the added value that buying a better model entails and it provides customers some flexibility on deciding how much they want to spend.

Loss Leader

The loss leader strategy involves a company selling certain items at a loss in order to bring customers into the store. The assumption is that once customers are tempted into the store, they will have a tendency to buy other things as well that will generate the profit for the company. One very basic example of this are restaurants that sell kids’ meals for very cheap (even for free sometimes). The restaurant loses money on the kids’ meal, but makes their profit when the adults accompanying the children have to order full-price meals. This can be an effective strategy to generate store traffic, but firms must be careful to make sure that customers actually are buying products besides just the loss leaders.

Psychological

Psychological pricing is an approach where prices are set based upon a psychological reaction that they will cause consumers. The ultimate goal of this tactic is to increase sales without significantly reducing prices. The most common example of this is when retailers price items one penny below an even dollar amount, $9.99 instead of $10 for example. Customers associate the $9.99 with the lower dollar amount of $9 rather than actively realizing that it is just one cent below $10. The massive usage of that tactic alone illustrates the success psychological pricing can have. It can be effective both for relatively low cost goods like gasoline or for big purchases like cars– $19,999.99 for some reason just seems a lot cheaper than $20,000.

Penetration

Penetration pricing is when a firm introduces a product at a low price in order to generate a lot of early sales and “penetrate” a market. Then, once the market has adopted the product, the company attempts to raise the price. Netflix could be considered an example of the penetration strategy—they started out pricing their service at a low monthly rate, and now that they have a vast number of addicted customers they are able to slowly raise prices to try and generate profit. The biggest issue with the penetration strategy is that once consumers are used to paying a low price for a product, it can be very difficult to convince them to pay a steeper price for the same item.

Skimming

Skimming is sort of the opposite of the penetration strategy. In the skimming strategy, companies introduce products at a high initial price—often the highest price they think that customers would be willing to pay. Then, once the initial demand is satisfied, the firm lowers prices to capture a new group of consumers. This process can continue through several price decreases. The skimming strategy is often used by startups that have a brand-new, unique product. Through the early high pricing, these companies try to get as much profit as they can before competitors step in and force price cuts. One problem with skimming is that it entices competition to the market as rival firms perceive an opportunity to undercut the original company’s product.

Impact of Technology

Technology has led to a very different environment for pricing than has been the norm in the past. With an increased ability to quickly “price-check” online, customers have become more sensitive to prices and it is more important to either be priced below competitors or to clearly communicate the brand’s superiority to consumers. It is also easier for customers to switch brands in that they can shop online and avoid having to travel to multiple stores to find the best deal. In these ways, additional power has shifted to the consumer in determining the way prices are set.

With a shift towards e-commerce, new factors are added into a company’s pricing decisions. One key issue is shipping—will the business charge customers for shipping or cover the cost themselves? With Amazon offering free shipping on many items through its Prime service, there is additional pressure on companies to lower price through the shipping aspect. Overall, the emergence of online shopping has resulted in much lower prices through this type of direct, easily-comparable competition.

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Accounting

GAAP – Gains and Losses

Written by Dominick D'Andrea

Revenue vs Gains

Revenue and Gains are related fields related to the income a company receives. The main difference between them is the source of the income.

Revenue

Revenue represents income earned by the firm through the primary goods and/or services provided. It is the income earned from the firm’s operating activities. For example, Mike’s Computers specializes in selling computers to small businesses. During the year, he sells 10,000 computers at $800, and nothing else. The total sales from the computers sold during the year, $8,000,000, would be Mike’s revenue.

Gains

Gains, on the other hand, denote income not earned through the company’s operating activities, but on the sale of assets. Expanding upon the previous example, Mike’s Computers has decided to sell a warehouse it owns. The warehouse is listed under the long-term assets account Property, Plant, and Equipment (PP&E) at the historical cost of $100,000. Mike can sell the warehouse for $150,000 in 20X3. On the balance sheet, $100,000 will be subtracted from PP&E to write off the asset, while a gain of $50,000 will be reported on the income statement after taxes.

Gains directly impact our Balance Sheet and Income Statements, see the samples below to see how this property transaction impacts both.

Balance Sheet

Year: 20X2

Assets

Property, Plant, and Equipment…………………………………………………$800,000

Year: 20X3

Assets

Property, Plant, and Equipment…………………………………………………$700,000

Income Statement

Year: 20X3

Revenues and Gains

Gain on sale of asset………………………………………………………………$50,000

One thing to note is that both revenues and gains are reported on the income statement net of taxes. Furthermore, gains are reported when an asset can be sold for more than what it is listed for on the balance sheet, which is typically historical cost (although some assets, such as derivatives, are always listed at fair value). Income from the sale of property, equipment, securities, etc. all are considered items that would fall under the category of gains on the income statement.

Realized and Unrealized Gains

Gains can be broken into two categories: realized and unrealized. The example above regarding the warehouse is considered to be a realized gain because the asset was sold and income was received.

Unrealized Gains

Unrealized gains are gains in value on an asset that has not been sold, and thus do not result in income. If Mike’s Computers purchases 10,000 shares of Sally’s Software, Inc. for $15 a share at the beginning of the year, and those shares are $20 at the end of the year, the investment would have increased from $150,000 to $200,000, a $50,000 gain. However, since Mike did not sell the security, he cannot report this gain as income on the income statement. Thus, it is an unrealized gain.

Realized Gains

Realized gains are listed on the income statement, while unrealized gains are listed under an equity account known as accumulated other comprehensive income, which records unrealized gains and losses. This account may be added to the end of the income statement (which results in comprehensive income), but is clearly marked as such and is not incorporated into the income statement.

A sample entry to the income statement would look like this:

Year: 20X3

Accumulated Other Comprehensive Income

Unrealized gain on available for sale securities………………………………………$50,000

Expenses vs Losses

Expenses and losses have the same underlying concept as revenue and gains, but for negative values.

Expenses

Expenses are the costs that are incurred over a time period to produce revenue. Expenses encompass many different forms, from the cost of goods sold to payroll for the period. Depending on whether the income statement is classified or not, the revenues and expenses may be separated into two groups or grouped together to create subcategories. During the year, expenses for Mike’s Computers may include $3,000,000 in cost of goods sold, $1,000,000 in payroll, $100,000 in advertising, etc.

A sample entry to the income statement would look like this:

Year: 20X3

Expenses

COGS………………………………………………………………………….$3,000,000

Payroll Expense…………………………………………………………………$1,000,000

Advertising Expense………………………………………………………………$100,000

Capitalization and Depreciation

Expenses can either be capitalized or expensed. Capitalization effectively means the cost of an assets can spread out over the life of an asset. A machine, for example, may be capitalized rather than expensed because the asset has a long useful life.

Example: Mike’s Computers has just purchased a piece of equipment for $200,000 that will more efficiently attach screens to monitors. Rather than expense all $200,000 from revenue in one year, Mike adds the equipment to the balance sheet. This is called Depreciation.

Each year, the piece of equipment will depreciate; depreciation represents the cost of the machine incurred in a year, and is subtracted from revenue before interest and taxes. The first year (20X2), the machine may depreciate by $40,000. On the income statement, this would be recorded as a depreciation expense. On the balance sheet, the $40,000 would be added to a contra asset account known as accumulated depreciation. In year two (20X3), depreciation expense may again be $40,000. The balance under other accumulated depreciation would now be $80,000: $40,000 from the first year plus $40,000 from the second year. Over the years, depreciation will accumulate in the account until the asset is sold or written off. On the balance sheet, it looks like:

Year: 20X2

Assets

Property, Plant, and Equipment…………………………………$200,000

Accumulated Depreciation………………………………………………$40,000

Year: 20X3

Assets

Property, Plant, and Equipment……………………………………$200,000

Accumulated Depreciation………………………………………………$80,000

Losses

Losses are similar to gains in that both are recognized on the income statement only when an asset is sold and a loss is taken. Like gains, there can also be unrealized losses.

For example, lets say Mike purchased 100 shares of Sally’s Software, Inc. for $15. If the value of the stock at the end of the period is $10, Mike will have $500 in unrealized losses, which is a part of the equity account accumulated other comprehensive income. Losses can be realized on property, plant, equipment, securities, etc. Unlike gains, there is no outflow of money for taking a loss; it simply means that the sale of an asset wasn’t greater than the original cost.

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Personal Finance

Income Tax Filing and the Form 1040

Written by Kevin Smith

What is income tax?

Income tax is the tax you pay on your income, usually directly taken out of your paycheck. Everyone who works in the United States should be paying income tax on their earnings.

Income 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

The 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

The 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 1040 is a simple one-page tax return. If you have a fairly simple financial situation (few deductions, little external income), you can just fill out the one-page form and send it in. If you have more complicated income and expenses to file, you might need to include additional “Schedules” – supplementary forms outlining your other income and expenses.

Parts of the 1040

There are four basic parts of the 1040

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.

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

The 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.

Audits

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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Accounting

Accounting Regulation and Ethics

Written by Kyle Maclay

Professional accountants are vital to our economy and society. Accountants ensure the effective use of resources by recommending ways to reduce cost, increase revenue, and mitigate risk. The accountancy profession is only as good as the quality of service provided by its members. The regulatory environment of the accounting industry seeks to ensure the quality and consistency of these services. This means accountants must comply with ethical, technical, and professional standards. Accountants must represent the interests of their client (or company) and the indirect users of accounting services, such as investors and creditors.

Accounting and Regulation

In addition to helping managers keep control of their business, good accountancy allows investors, managers, and regulators to compare companies directly. To ensure all accounting practices of all companies could be compared directly, the Generally Accepted Accounting Principles (GAAP) were developed as the guideline for accounting in the United States.

GAAP is a set of accounting rules and standards used for financial reporting. In the United States, public companies operate under the rules of US GAAP.

Most of the world uses the International Financial Reporting Standards (IFRS). However, through convergence, the US is moving from US GAAP to IFRS standards. The purpose of convergence is to have US GAAP closely mirror IFRS standards. These are the basic rules that companies and their accountants must follow when creating financial statements.

Regulation Background

The purpose of the Financial Accounting Standards Board (FASB) is to establish and improve US GAAP. There are also auditing standards, enforced by the Public Company Accounting Oversight Board (PCAOB), and required by the SEC. The purpose of the PCAOB is to protect the public interest in the preparation of audit reports. The FASB and PCAOB are responsible for the oversight of all United States accounting. Internationally, the IFRS Foundation and the International Accounting Standards Board (IASB) oversee international accounting.

Evolving Regulation

Regulation of accounting practices is constantly evolving to reflect the needs of the growing economy. In the early 2000s, there were numerous accounting scandals that rocked the accounting profession.

These scandals resulted from manipulated financial statements that were intended to mislead investors, creditors, and/or shareholders. Failures in the regulatory system that allowed these scandals to occur created mistrust of corporations and the accounting profession in our society.

SOX Act

To remedy this, the Sarbanes-Oxley Act of 2002 (SOX) was passed by U.S. Congress in 2002. The SOX Act is a United States federal law that introduced major change to the regulation of financial disclosures and corporate governance. The SOX Act has closed loopholes in accounting practices and increased the consequences for fraudulent activity. The accounting profession is constantly changing and must adapt effectively and efficiently to meet the demands of the economy and society. Developments in the accounting profession, economy, and society affect the profession and how it performs its role. The SOX Act is one example of how a new regulation forced the profession to adapt to change.

The primary purpose of the SOX Act was to make management responsible for their own financial statements. Before the SOX Act, management of companies caught up in fraudulent activity would pass the blame on to other employees and claim to be ignorant of wrongdoing. However, now management must certify that financial statements are accurate. Management must also personally review internal control systems of their company. Management is responsible for the preparation and accuracy of financial statements. The role of auditors is to ensure that financial statements are as fair and accurate as possible (per US GAAP). While auditors do uncover fraud, that is not their primary purpose.

For regulation to be effective, it must be accompanied by ethical behavior. Ethical behavior is the final step in guaranteeing good service and quality. Therefore, regulations must be designed in a way that promotes ethical behavior. Ethics can be defined as a broad set of moral principles.

The Accounting Profession

Accounting is considered a profession because it is a field that requires specialized knowledge. People outside of the profession must be able to trust that their accountant is competent and ethical. This is because they rely on the accountants who prepare the financial statements, as well as the auditors who verify them, to make decisions. Therefore, cultivating trust within the industry is extremely important to business, the economy, and society.

Ethics in Accounting

Accountants regularly face ethical dilemmas. Accountants seek to add value by reducing costs and increasing revenue. An accountant wants to produce favorable results for their company or client. Accountants must also have the public best interest in mind. Therefore, information must be represented fairly and accurately to be ethical.

However, there can be pressure for accountants to produce favorable results for a company, even when favorable results are lacking. Do you bend the rules to make the client happy or serve the public interest by reporting information fairly and accurately? Are you bending the rules? Do other accountants bend the rules? By how much?

Good accounting practices can be used to make better personal and business decisions because they offer guidance on how situations should be handled. Accountants must follow the rules; however, the rules are not black and white for every situation. This means accountants must exercise their best judgement on a regular basis. To be ethical, we must: do what is right, do what we think is right, and not do what we think is wrong.

AICPA Code of Professional Conduct

The AICPA Code of Professional Conduct establishes a code of ethics for accountants to follow:

Responsibilities Principle. Member should exercise careful professional and moral judgement when carrying out their responsibilities.
Public Interest Principle. Every action taken by an accountant should serve the public interest. The public interest refers to clients, employers, investors, creditors, and so on.
Integrity Principle. Accountants should perform responsibilities with a high sense of integrity. Integrity is the quality that creates public trust.
Objectivity and Independence Principle. This is an obligation to be impartial, honest, and free of conflicts of interest.
Due Care Principle. Accountants should be aware of the profession’s technical and ethical standards. Accountants should continually improve the competence and quality of their services.

Being aware of professional codes of conduct such as this helps guide our decision-making process.

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Personal Finance

All About Sales Tax

Written by Kevin Smith

What Is Sales Tax?

“Sales Tax” is a tax that is charged on goods sold to end customers, the final user of that product. The sales tax is a set percentage of the sale price of the goods sold, and individual states set their own sales tax percentages. Most states use sales taxes to generate revenue to pay for the state’s operations, but some charge no sales tax at all. These are Alaska, Delaware, Montana, New Hampshire, and Oregon. Many cities also impose a sales tax, so the actual amount of sales tax you pay for a purchase will vary quite a bit if you travel.

Who Collects Sales Taxes?

Sales taxes are collected by businesses at the time they sell goods or services. Most states require the businesses to remit the amount collected either monthly, quarterly, or yearly. Different levels of government (city, state, and national) have different rules for when sales taxes need to be remitted back to the government. If you are a new business owner, your state’s revenue office sets the time frame based on how long the company has been in business and how much tax they expect to collect throughout the year. Sales taxes are required on all cash transactions, credit sales, installment sales, lay-away sales, and sales involving trade-ins or exchange of property. (For those of you thinking you might want to own your own company one day, accounting for and paying sales taxes can be one of the most confusing parts of starting a retail business.)

As a consumer, you may notice that sales tax is almost always added to your receipt as a separate line item, but businesses are not required to charge sales tax separately. In theory, businesses could simply pay the government out-of-pocket for the tax they owe on the products they’ve sold, but it is much easier for them to determine the amount they owe if they charge and account for product sales and taxes separately.

Sales Tax Vs Use Tax

Sometimes when a product is sold, the buyer is responsible for paying the taxes. This tax is called a Use Tax. Use taxes are generally applied to transactions where no sales tax was charged at the point of sale. Think about this example. Let’s say you live in Oregon where there is no sales tax and you purchase a $1000 desk from a manufacturer in Kalama, Washington. You would pay the price for the desk and would be responsible for paying the use tax of 6.5% tax for the state of Washington and 1.4% tax for the city of Kalama. It is your responsibility to self-assess and report your use tax liability to your state Department of Revenue.

What Purchases Are Exempt From Sales Tax?

Even in states and cities with sales taxes, not every purchase is subject to a sales tax.

Groceries

Most states have certain tax exemptions for groceries, usually taxing groceries at a lower rate or assessing no tax at all. While most groceries do get a tax break, “junk food” (with high fat and/or sugar content) and “prepared foods” (such as roasted chicken that is ready to eat) are still taxed at the full rate.

Out-Of-State

Sales taxes only need to be paid for residents of that state, so if you are purchasing a good or service from a different state, you may be exempt from that state’s sales tax. You also see this if you travel internationally. Airports that have international flights often have “duty free” shops. These are stores whose goods are exempt from paying national taxes based on the requirement that the goods are sold to travelers who are taking them out of the country. (Remember that if your purchase is exempt from paying sales tax, you may still be required to pay a Use Tax in your home state.)

In every day practice, you likely would be required to fill out a “sales tax return” with that state’s government.

Non-Profit

Goods and services sold to not-for-profit organizations are generally sales tax-exempt. The organization has to be registered as a Not-for-Profit organization, and it has to request an Exemption Certificate from whichever government would normally be collecting that tax.

Goods for Resale

If you purchase goods and intend to re-sell them, you are also tax-exempt on that purchase. This comes into play most often with small businesses who buy merchandise from wholesalers. Like non-profit organizations, resellers are also required to obtain an Exemption Certificate for their purchases.

Sales Tax Holidays

Some states have “sales tax holidays” where sales taxes are suspended either entirely, or for certain classes of goods. For example, Texas has a sales tax holiday in August each year for clothing, footwear, school supplies, and backpacks (that cost less than $100). The intention is to help families purchase needed supplies as they prepare to send their children back to school.

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Challenge Questions

What is the sales tax percentage in your state?
Explain how you would calculate sales tax using your own example.
List 10 states and their sale tax rates.
Why might sales tax vary from state to state?
When your sales tax is collected by the local governing bodies, how is it used?
Who is the Governor of your state and how has taxes been used in your area?

Marketing

The Product Life Cycle

Written by Shane Legatzke

Humans and animals have standard life cycles—a series of stages of living that each passes through before death. For people, these phases could include infancy, childhood, adolescence, adulthood, and retirement.

Products also move through a series of phases throughout the duration of their lives called the “product life cycle”. The four stages included in the product life cycle are introduction, growth, maturity, and decline. This cycle is extremely important for managers to monitor in order to plan an effective strategy for their business. This article will provide descriptions of each of the four stages, examples of products in each stage, and strategic implications to managers stemming from the product life cycle.

Introduction Stage

The introduction stage marks the very first time a company brings a product to market. The main objective for companies at the beginning is not profit (often new products will generate losses because of high advertising costs and low sales) but rather developing a market for the product and building awareness among consumers. If successful, the company can then enjoy a better ROI in future stages as sales grow and relative costs lessen. An example of a product in the introduction stage could be when Amazon first rolled out their Echo device.

One of the key attributes of this phase is a necessity to establish quality. When a company releases a new product, step one for management is to make sure that those first units are perfectly made and a strong representation of what they want to showcase to their customers. If the introduction of a product has issues with quality, it becomes very difficult to convince the customers to give the product a second try. The Echo device brought in numerous unique, consumer-friendly features like the ability to remotely control the lights in their home, use Amazon’s Alexa to ask questions or issue commands (ie to order pizza), and additionally operate as a speaker for music. Successfully appealing to customers led to a successful introductory stage for the Echo.

In the introduction stage, there are two main pricing strategies. Either managers can keep prices low in an attempt to appeal to customers and build market share or they can set higher prices to try and recover more of their development costs in the short run. Promotion in the introduction stage can often be aimed towards innovators—the bold types that would be the first to try a new product and would show it off to their peers. Sometimes promotion can also include education about a product, particularly if it is something consumers have never seen before.

Growth Stage

If products make it through the introduction stage, they next advance to the growth period. This is when demand starts to take off for a product as companies promote to a wider audience in an attempt to build consumer preference over other brands and win market share. Because of increasing demand, companies are often able to start to make sizable profits in this stage. An example of a growth-stage product in today’s market could be drones; though they are a fairly new product, the market has been established and demand is rapidly growing.

In the growth stage, promotion picks up aggressively. Whereas beforehand the company advertised more selectively, now they will target a broad audience to maximize exposure. In the drone example, look at just a couple years ago; it would have been extremely rare to see drones flying around or to even know someone who owned one. Now that the market has been established a bit more, most people at least know someone who owns a drone and they are far more commonplace because of the increased promotion drones have had.

To keep up with the increased demand, distribution channels are added. With production at higher levels, economies of scale begin to play a factor in lowering costs per unit and improving margins—this factor combined with better pricing ability and higher sales volume means that companies have higher profits or at least lower losses in this phase.

The growth stage is usually a favorable one for the company producing a product, and one that managers try to extend as long as possible. A high-quality product, strong advertising strategy, and connection with consumers help make the growth phase continue for a longer period of time. It also helps to have a product that is difficult for competitors to imitate, as competition can shorten the growth period. Patent or copyright protection can help fend off rival firms.

Maturity Stage

At some point, growth inevitably slows down and products reach the maturity stage. The top focus for managers at this point is protecting the market share they have earned, because the maturity stage is often the phase of the product life cycle with the most competition. Another key objective is to maximize profits—products in this phase of their life often turn into “cash cows” for companies that generate the funds necessary for developing new products. Apple’s (AAPL) iPhones are an example of a maturity stage product, as just about everyone who wants an iPhone likely has one by now and growth has slowed down.

A major issue for companies in this stage is the intensification of competition. Now that a proven market exists for the product, competitors see that there is profit involved and enter seeking a piece of the pie for themselves. Some of these competitors may try to closely imitate the product and sell for a cheaper price, while others try to improve certain aspects of the product. Either way, it is vital for companies in this stage to repeatedly convince consumers that their product is better than the output of competitors and to retain customer loyalty. For the iPhone, Apple faces stiff competition from top rival Samsung as well as other firms. Apple’s focus is to keep innovating and adding features to the iPhone that will keep their customers coming back.

Because of the intense competition, often prices have to be decreased in the maturity stage or else customers will leave and turn to a cheaper variety of the product. Promotion is focused on informing consumers why the company’s product is better than that of competitors. The maturity stage can continue for a long time if a product is appealing enough to have durable, long-lasting demand from consumers.

Decline Stage

In the final stage of a product’s life, demand starts to decline as consumers move on to newer and more appealing products. Traditional telephones are an example of a product in this stage—with the emergence of cell phones, fewer and fewer people are using landlines and the market seems to be on its last legs.

Companies have several options with products in this stage. The first option is simply to close up shop and move on to new products. This makes sense when the product is no longer generating a profit or when the resources required to continue production no longer justify the level of profit being obtained. This “liquidation” option either means selling the product segment off to another firm or simply getting rid of all remaining inventory and ceasing production.

Alternatively, firms have two main choices that involve continued production of a product in decline. The first is increasing investment to add new features or new applications to a product and rejuvenate growth. This can be risky, as it wastes capital if the turnaround effort fails. The second choice is to continue to offer a product but decrease investment in it. This usually leads to the product falling behind remaining competition, but can be a great idea if the reduced costs lead to profits that can be reinvested in other areas of the company.

Validity of Product Life Cycle Model

While the product life cycle model is useful in many ways, it does have some issues. For one, there are products that do not seem to fit into the model. Brands like Coke (KO), Heinz (KHC), and McDonald’s (MCD) have been around for decades without running into decline, a phenomenon not predicted by the product life cycle. This would suggest that outstanding, well-managed brands have the potential to last indefinitely.

Niche brands that occupy non-traditional portions of the market are also less applicable to the prodct life cycle. Swedish furniture company IKEA is an example of this—by combining low-cost, simple products with modern, high-quality in-store atmospheres and offerings, IKEA feels a lesser impact from competition despite their lack of adaptation over time. The unorthodox approach and presentation to the consumer protects IKEA and has led to outsize growth over the past few years.

An additional issue is that sometimes the expectation of a “product life cycle” can lead managers into poor business decisions. For example, the product life cycle suggests that for products in the maturity stage, differentiation and adding features is a necessity to help protect market share. However, in reality, sometimes it is more effective to keep a product simple and avoid costly extra expenditures on refining the product. In summary, the product life cycle has some issues, but it can still be a useful tool for managers to help them develop their marketing strategy.

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Management

Management Theory

Written by Carla Spoto

When holding a job, there are usually certain people that have specific “titles” that describe the work that they do. With those titles, comes the chain of command, which can be looked at as a flow chart:

The CEO –> who oversees Management –> who oversees Associates.

These managers organize and coordinate the activities of the business to achieve specific goals. While the chain of command is fairly straightforward, the middle part, or Management, has many different ways of functioning.

Defining Management

What exactly is management? Is there only one way to manage? Management is the organization and coordination of the activities within a business to meet specific goals. Management creates policy and organizes, plans, controls, and directs a company’s resources to complete the objectives of that policy. Do all managers manage the same way? Do they all follow the same guidelines to meet their goals? As a matter of fact, management can be done in a number of different ways to achieve different goals within a business. The different ways managers define guidelines, set goals, and organize the company is collectively known as “Management Theories“, while the ideas behind ways managers interact with associates and lower-level managers are known as “Motivational Theories“. Some of the most prevalent management theories were first formulated by by Frederick Taylor, Max Weber and Henri Fayol, while some of the most potent motivational theories were formulated by Abraham Maslow, and Frederick Herzberg.

Management Theories

Management theories are implemented to help increase productivity and service in the business environment. Frederick Taylor, Max Weber, and Henri Fayol all had different views on management and how employees should work and how a business should run.

Frederick Taylor – Scientific Management

Frederick Taylor’s theory of scientific management developed techniques for improving the efficiency of the work process. He set up a systematic study of people, tasks and work behavior to break down the work process into small units or sub-tasks. He did this so he can determine the most efficient method possible for the completion of a specific job. Taylor was focused on finding a method that can get the most amount of work done in a certain time frame. This management theory is using employees based on their optimal performance. What this means is that he found what employees are good at and made them stick to that one task. This is like an assembly line for the production of furniture or cars. Employee 1 will assemble the back of the chair while employee 2 does the legs, and so on and so forth. This improved productivity because each person focused on one task at hand and this was able to speed production. Taylor also had a reward system for improved productivity. Through this management theory, there had been development for current management theories: Setting up bonus programs, commission based jobs, better personal practices, departmentalization, and widespread improvements in quality control.

Max Weber – Bureaucratic Management

Max Weber had a bureaucratic management theory built on principles of Frederick Taylor Weber focused on making a system based on standardized procedures and a clear chain of command. The chain of command is top-down management where employees answer to their department managers, who answer to their managers who then answer to the CEO in a pyramid structure. Weber stressed efficiency and while he focused on a bureaucratic way of doing things, he stressed the dangers that a true bureaucracy could face. Max Weber feared that a company would hire someone who will not be qualified for the job, so he stressed that employees only be hired if they possess the skill set of the job. While this may seem obvious, the reason this is important is because Weber’s management theory puts in place to make sure the employees being hired are competent, or can be weeded out of the company. Through this management theory, there had been development for current management theories: Job roles, authority hierarchy, strict record keeping, standardized procedures and hiring employees if their skills match those that are needed in the job.

Henri Fayol’s 14 Principles

Henri Fayol Management Theory- Henri Fayol’s Management theory is a simple model that displays how management interacts with personnel. His management theory is based on 14 principles of management which are as follows:

Division of work – Departmentalizing the business to promote efficiency of the workforce to increase productivity. The specialization of the workforce increases accuracy and speed.
Authority and responsibility – Managers have the authority to give orders to employees and are responsible for that employee to get the job done. It is necessary to make agreements about this because the responsibility can be traced back from performance.
Discipline – This principle is about the obedience of management and is a core value of the company’s mission statement. This is an essential principle to run the organization smoothly
Unity of command – This means that an employee should receive orders from one manager and answers to that manager. If more than one manager gives tasks to one employee, it can lead to confusion and conflicts.
Unity of direction – Employee’s work in teams directed by a plan of action and monitored by management to get the job done. The manager is responsible for the performance of the group.
Subordination of individual interest – Fayol stressed that personal interests are subordinate to the interest of the organization and the primary focus is of the organization not the individual.
Remuneration – Ultimately, this is about rewarding the efforts of the employees. Rewards can come in a non-monetary form (compliments, credits) or monetary form (bonus, compensation).
The degree of centralization – This implies the concentration of decision-making authority at the top of the management pyramid, But also depends on the size of the organization.
Scalar chain – Top-down hierarchal management, which varies from senior management to low levels of management. This can also be seen as a type of management structure.
Order – Employee’s must have the right resources at their disposal so that they can function properly. Managers must also function in an orderly way.
Equity – Employees must be in the right place in the organization to do things right. This increases production efficiency (if John is good at making spreadsheets and is nervous talking to people, management wouldn’t have John answering phones).
Stability of tenure personnel – Minimize employee turnover by investing in the right staff and putting them in the right department.
Initiative – Principle employees should be allowed to express new ideas to add value to the company, encouraging employees to be involved.
Esprit de Corps – Striving for the involvement and unity of the employees. Managers are responsible for the development of morale in the workplace.

Democratic Styles

A democratic style of management allows management and its staff to have significant responsibility. This is also sometimes called “Lateral Management”, or “Flat” organizations, since it is defined by fewer levels of middle management between associates and the top management. It gives employees a chance to have a voice and it is often combined with participatory leadership by collaborating between leaders and the people they guide. The democratic style splits responsibility between staff.

Democratic styles of management have become much more common in recent years, since lower-level associates tend to be more motivated by having a larger “voice” in the company. This has an important trade-off: since there are fewer levels of management, the higher-level managers need to choose between spending more time developing broad strategies, while risking individual associates may not be working as efficiently as they could be, or micro-managing the associates to improve efficiency on smaller projects, but at the risk of losing coherent vision.

Fayol, Weber, and Taylor all had interrelated management theories. They all focused on one main goal – maximizing the productivity of the business. It is said that Frederick Taylor had an autocratic style, Weber had a bureaucratic style and Fayol had more of human resource style. Over the years, these management theories have been merged by different organizations and businesses. Mostly all companies combine these theories to best fit the needs of the organization and its goals, and managers use combined management skills such as bureaucratic, democratic, autocratic and human relations to manage their employees.

Motivational Theories

Motivational theory is discovering what drives individuals to work towards a specific goal or outcome. Most motivational theories differentiate between intrinsic and extrinsic factors. The two biggest core motivational theories are the hierarchy of needs theory, which was coined by a psychologist named Abraham Maslow in 1943, and the 2-factor theory that was identified by Frederick Herzberg.

Hierarchy of Needs – Abraham Maslow

Maslow focused on the notion that “People have needs”. Those who work must have these needs met in order to increase productivity and self-satisfaction. His hierarchy of needs shows that there are five main needs that follow in order of importance to the human. One important thing to note is that Maslow’s contention that ones well being increases, as the higher level needs are met. The hierarchy is shown as a pyramid and we start at the bottom, which is the most needed.

Physiological needs – These are the basic needs of a person including sleep, hunger, thirst, shelter
Safety needs – Security, protection from danger
Social needs – Sometimes referred to as the “love” need. Friendship, giving & receiving love, and social activities.
Esteem needs – Includes self-respect and the esteem of others
Self actualization – This is the desire to reach ones full potential, to become everything you can be.

Dual Factor Theory – Frederick Herzberg

Herzberg focused on a dual factor theory which states that certain factors in a workplace cause job satisfaction with a separate set of factors cause dissatisfaction.

Factors for satisfaction

Achievement – The employee’s efforts need to result in a tangible achievement, rather than a constant struggle
Recognition – Employees must receive recognition for the work they do
The Work – The employee must actually enjoy (or at least not despise) the actual work itself
Responsibility – The employee needs to feel responsible, that their job is important and the fruit of their labors is necessarily to the organization
Advancement – Employees prefer not to have “dead-end jobs”, where there is eventual possibility of advancement
Growth – The employee is building new skills and competencies over time

Herzberg argued that employees work better and produce more when these 6 factors are present in the organization. This means that the job should have challenges that utilize the full ability of the employee. When the employee demonstrates that they can handle the challenging work, they will be given more responsibility.

Factors for dissatisfaction

Company policies – Company policies that seem arbitrary or “in the way” are a major cause of dissatisfaction
Supervision – Over-supervised employees to not feel trusted, and productivity tends to suffer
Relationship with supervisor and peers – Negative interpersonal relationships in a work environment will cause a major drain on productivity
Work conditions – If employees are not happy with the conditions under which they are expected to work, their productivity will suffer
Salary – Under-paid employees are less likely to take pride in their work, since it can be a reflection that their work is under-valued
Status – Status within the company means how much their voice is heard. Employees who feel they are at the “bottom of the ladder” are less likely to take their jobs seriously
Security – Jobs with no job security are far more stressful, which is a major drain on efficiency and productivity

If an employee doesn’t feel secure with their job, is receiving a low salary and cant support themselves, and there is too much micro managing, the employee will be dissatisfied and will not work as well and produce quality work.

It is important for companies to meet the motivational needs of their employees in order to make the company grow. It is also important to adapt to a way of managing so that the employees are happy in their environment so they can produce high quality work. Traditional and current management theories are applied in the business environment by combining the different types to better serve the organization and the work environment. Depending on the type of business that the employee is in, will determine the type of management in the work place, but the employer must always make sure they meet the motivational needs of the employees in order to succeed.

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Accounting

Accounting for Liabilities

Written by Shane Legatzke

Every firm needs capital to purchase assets like inventory, land, and equipment. They also need cash to help manage expenses such as paying employees. How do companies raise the money they need to run their businesses? The answer is through a mix of liabilities (borrowing money) and equity (selling shares of ownership of the company). Liabilities and equity make up the right-hand side of the fundamental accounting equation:

Assets = Liabilities + Shareholders’ Equity

This article will focus on liabilities and their accounting treatment under GAAP, covering current liabilities and long-term bond issuances.

Current Liabilities

Current liabilities are defined as any liability due within one year. This typically includes accounts payable, accruals, and short-term debt. This is not limited to debt that was originally issued at a term of under a year—long-term debt becomes a current liability as soon as it reaches one year to maturity. It is then referred to as the “current portion” of long-term debt.

Unlike asset accounts, a debit to a liability account decreases the account instead of increasing it. Likewise, a credit to a liability increases the account. This makes sense from the perspective that the right-hand side of the balance sheet (liabilities and equity) are obligations to the company, and therefore they should receive the opposite treatment as the left-hand side with assets.

Accounts Payable

Journal entries for accounts payable are fairly straightforward. There are two main entries that involve the account; the initial credit to accounts payable and later the cash payment that pays off the liability. Say I own a shoe company and have purchased $10,000 worth of inventory using $5,000 in cash and $5,000 of credit. The initial entry would be as follows:

Account	Debit	Credit
Inventory	$10,000
Cash		$5,000
Accounts Payable		$5,000

When we eventually pay the supplier for the $5,000 purchased on credit, the following entry would be applied:

Account	Debit	Credit
Accounts Payable	$5,000
Cash		$5,000

The debit of $5,000 decreases accounts payable back down to zero and we are left with a $0 ending balance in accounts payable (assuming no further purchases on credit).

Interest and Rents Payable

Certain other “payable” liabilities, including interest payable and rent payable, have nearly identical journal entries to accounts payable and therefore it serves as a good basic framework. These accounts where an expense has been incurred but not yet paid are known as accruals. Here’s an example: if my shoe business borrowed $100,000 for one year at an 8% interest rate on December 1, 2016, what amount do we need to “accrue” or recognize as interest expense on December 31, 2016?

The first step is to calculate what amount of interest is owed for an entire year. This is done by multiplying $100,000 * 8% to reach an expense of $8,000. However, the matching concept dictates that we recognize expenses as they are incurred, and we have not incurred an entire year’s worth of interest. Instead, the next step is to calculate the fraction of a year that we have been paying interest. In this instance, we take one month (because we have only held the debt during December) divided by the twelve months in an entire year to reach a value of 1/12. Finally, we take 1/12 * $8,000 to conclude that our accrued amount needs to be $667.

Issuance of Note 12/01/2016

Account	Debit	Credit
Cash	$100,000
Note Payable		$100,000

Accrual of Interest 12/31/2016

Account	Debit	Credit
Interest Expense	$667
Interest Payable		$667

The accrual entry will be identical every month from January-October, as the company incurs a month’s worth of interest during each period. If the cash interest is due when the note matures in December of 2017, the following entries would be necessary on November 30, 2017:

Accrual of Interest 12/31/2016

Account	Debit	Credit
Interest Expense	$667
Interest Payable		$667

Repayment of Notes and Interest 11/30/2017

Account	Debit	Credit
Note Payable	$100,000
Interest Payable	$8,000
Cash		$108,000

This accrues our last period of interest before accounting for the cash payment of the note and interest.

Long-term Debt

Often it is more practical for companies to issue debt that does not have to be paid back within a year. Issuances with maturity between one and ten years are commonly referred to as “notes” whereas those above ten years are called “bonds”.

When a company issues long-term debt, the party purchasing the debt (the creditor) may not always pay the face value of the bond. If debt is issued at below face value, it is said to be at a “discount”, whereas bonds issued above face value are at a “premium”. Both discount and premium bonds require special accounting treatment—we will look at examples of each.

Discount Bonds

Let’s say that on January 1, 2017 the shoe company issues $50,000 in 8% 20-year bonds for $48,000—discount bonds. The opening journal entry would be as follows:

Account	Debit	Credit
Cash	$48,000
Discount on Bonds Payable	$2,000
Bonds Payable		$50,000

Assuming the shoe company doesn’t default, at the end of 20 years the bonds will trade at par (or equal to face value). Therefore, we need to amortize the discount on bonds payable over the 20-year life of the issuance. Typically, firms do this with semiannual entries to match up with semiannual interest payments on bonds. Using straight-line amortization, our first entry would go like this:

Account	Debit	Credit
Interest Expense	$2,050
Discount on Bonds Payable		$50
Cash		$2,000

Interest payable is calculated by taking the bonds’ face value of $50,000 times 8% divided by two (to account for semiannual interest payments). Then, to calculate the amount of discount to amortize, we take $50,000 face value minus the $48,000 issuance price to get the total discount amount of $2,000. Then, since we need to amortize the discount over 40 payment periods (20 years times two payments per year), we take $2,000/40 and reach $50 that needs to be amortized per period. The interest expense account is a plug figure—we add $2,000 +$50 to get $2,050. This entry will be repeated until the entire discount is amortized and the bonds reach maturity.

Premium Bonds

Now, what if the same bonds ($50,000 face value, 20 years to maturity, 8% coupon rate) were issued for $54,000? These would be premium bonds, which have slightly different journal entries. The issuance entry would look like this:

Account	Debit	Credit
Cash	$54,000
Premium on Bonds Payable		$4,000
Bonds Payable		$50,000

Notice that the premium is a credit account instead of a debit, and that this time we will have to amortize the premium through debit entries. The amortization entries would be as follows:

Account	Debit	Credit
Interest Expense	$1,900
Premium on Bonds Payable	$100
Cash		$2,000

Interest payable is still 8% * $50,000 *1/2, and the premium amortized is found by taking the $4,000 total premium divided by 40 payment periods. We subtract $100 from $2,000 to get the interest expense of $1,900.

Implications for Financial Statements

The interest expense that gets applied on the income statements is the “interest expense” account from our above entries, NOT the cash interest paid. Therefore, premium bonds result in the company paying a greater amount of cash interest relative to the amount that is expensed, whereas discount bonds cause a higher expense than cash paid. This corresponds with the greater amount of cash raised by a premium issuance and the lower amount raised from discount issuances.

On the balance sheet, long-term liabilities are listed at their carrying value, not face value. This means that for premium bonds, the balance sheet would show the bonds at face value plus any unamortized premium. Discount bonds would be shown at face value minus any unamortized discount.

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Marketing

Marketing Plan – Purpose, Elements, and Design

Written by Farhan Patel

Marketing is a cornerstone in the success of any organization. However, successful marketing is not as wide spread in large part due to the lack of a marketing strategy and marketing plan. To ensure marketing is successful for an organization, companies need to compose long-term marketing strategies promoting their goals with specific actions. A short term marketing plan is also necessary to ensure actions taken are consistent and effective in achieving the long-term marketing strategy. Here we will be discussing the purpose of a marketing plan as well as key components of the design and elements of a good marketing plan.

Purpose

The purpose of a marketing plan is to create an outline for a company’s marketing efforts, usually over the span of a year. The marketing plan should outline a series of short-term marketing targets, aligned with a long-term marketing strategy. Ultimately, the purpose of marketing plans is making progress towards reaching and capturing the desired customer base and improving both the top and bottom line of financial statements. These plans should not be static – it is meant to be revised on an annual basis so as to remain flexible and avoid becoming irrelevant.

Most entrepreneurs could argue that a marketing plan is time-consuming and unnecessary, simply because they need to spend more time and effort running their business, which is an unfortunate mistake. A well-written marketing plan helps organizations remain focused in building the organization in a focused direction, and guides the stakeholders involved in helping to achieve its short term goals. Overall, the marketing plan is essential in supporting short-term business success and long-term business growth. Without this plan, short-term actions may not be compounding in the desired long-term direction, resulting in a sub-par performance.

Elements & Design

While the design and elements of a marketing plan will be focused on the unique desires and needs of each organizations’ goals, there are some aspects that are similar across all marketing plans. They should be driven by the long-term vision and strategic marketing goals. These elements are the marketing mix, also known as the 4 P’s of marketing: Product, Price, Place and Promotion. This marketing mix acts as a guide to help marketing managers create products, pricing, distribution and promotional campaigns for their products and services in a strategic manner. In order to create the right combination of the 4 P’s, the marketing plan focuses on the following elements:

1. Market Research: Research helps to identify the current situation in the marketplace that ultimately points towards opportunities and threats organizations should be aware of as they strive to move forward.

2. Target market: Find the target market through research and an understanding of the organization’s products and overall goals. This helps to focus and optimize efforts towards a particular customer.

3. Brand/Product Positioning: Here a perception of the brand or product is formulated for the target market. This is important as the perception of the brand/product will have an effect on sales and methods of marketing.

4. Competitive analysis: Similar to market research, this element helps to understand the competition within the market place. By doing so you identify the threats and opportunities your organization has relative to your competition.

5. Budget/Sales Forecast: Here a detailed month-by-month plan and tracking of actual results is done. This allows for decisions in financing, marketing and logistics to be made to better the return on investments.

6. Metrics for Evaluation: Finally, a method to evaluate the plan and efforts made to execute the plan are necessary. Specific metrics such as House hold penetration or more broad metrics like Return on Investment may be used to keep track of the organizations operations. Ultimately aiding in day-to-day decision making.

The Great Marketing Plan

Using these basic elements for a marketing plan, organizations can shape and execute a marketing mix based on their long-term marketing strategy. The format in which the marketing plan can be written and presented is all that remains. While this may seem a rather unimportant matter, the format is critical in the effective communication of a marketing plan. Communication is key, as having team members on the same page allows for a superior execution of the plan. Once again, each marketing plan will have a unique format based on business needs, however there are some common format features of a good marketing plan:

1. Situational Analysis: In this section of a marketing plan, the market research is discussed at length to get an in depth understanding of the marketplace. Reviews of the external environment, internal operations, product category and competition are all discussed in this section.

2. Short-term Marketing Strategy: Here, a discussion on the target market and efforts made to communicate with them are discussed. In addition, positioning remarks are also covered in this part of the written plan. It is vital to understand that this plan compounds on itself, therefore these discussions should be done with the previous situational analysis in mind. It is through this that an effective plan is created and executed.

3. Budget and Forecast: Here a detailed discussion on the financials related to the plan and forecasts based on the plan are made. Often it is recommended that a best case, worst case and most likely scenario be presented to give an understanding of all scenarios and the areas most sensitive to the success of the plan.

4. Controls and Evaluation: In this final section a discussion on the metrics for evaluation are made and the method of evaluation. It is also recommended that a risk and mitigation plan is detailed in this section to reduce the risk of failure.

All in all, a marketing plan plays a crucial role in the short-term success of any organization and ultimately the successful execution of the long-term marketing strategy. By understanding the elements of a marketing plan and communicating the plan through a well thought out design, the chances of success are elevated. When all members of the organization understand the marketing plan this leads to a higher likelihood of a successful execution.

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Personal Finance

Short Term Financing

Written by Kevin Smith

Short-term financing means taking out a loan to make a purchase, usually with a loan term of less than one year. There are many different types of short-term financing, the most common of which are “Buy Now, Pay Later,” “Unsecured Personal Loans,” and “Payday Loans.”

Short-Term Financing vs Credit Cards

Short-term financing has terms similar to credit cards. It usually includes a grace period, a set interest rate, and monthly minimum payments.

The biggest difference is that credit cards operate on revolving credit. This means as you pay down your outstanding balance, you can continue using your credit card. In fact, your credit card company loves when you keep an outstanding balance because you will continually pay them interest. This is how credit card companies make their money.

In contrast, short-term financing is usually used for one specific purchase or for one single sum of money which is then expected to be paid off over a fairly short period of time. As a borrower, you probably would not be using the same source of short-term financing more than once or twice. If you do, this should be a red flag for how you are managing your finances.

Types of Short Term Financing

There are three major types of short-term financing – Buy Now, Pay Later, Unsecured Personal Loans, and Payday Loans.

Buy Now, Pay Later

Many stores offer Buy Now, Pay Later loans, both in person and online. With this type of financing, you can typically walk out of the store with your purchase immediately, then pay for it later either through installments or through monthly payments that begin after a set period of time. These loans can be attractive if you are low on cash since they allow for instant gratification.

How do they work?

Like credit cards, many of these loans include a “grace period” that allows you to pay the balance in full before any interest is charged. This is typically a main selling point for companies since “No payments for 3 months!” sounds great to consumers.

At the end of the grace period, you will be charged interest for the full grace period, and you will be required to make minimum monthly payments until the loan is paid in full. The main difference between this type of financing and using a credit card is that the grace period is typically longer, sometimes three to six months, and you will be expected to pay off the full amount of the loan after a set period of time. You are not able to maintain a “revolving balance” like you can with a credit card. Note: Some companies waive the interest charge in the grace period as well advertising something like “No payments and no interest for 30 days.”

Should I use these loans?

If a seller is offering you this type of financing, they generally are making money on selling the item you are buying, not from the interest on the loan itself. For them, it is okay if you pay off the full amount within the grace period because then they don’t have to worry about collecting monthly payments from you. However, they also know that the longer it takes you to pay, the more interest they are receiving from the payment of your loan.

If you don’t pay off the loan during the grace period, your interest charges will add up faster than if you made the same purchase with a credit card. This is because with a credit card, you have a shorter grace period, so you begin paying down the loan faster. With a longer grace period, interest is able to build up on the full loan amount for a longer period of time, so you end up paying more in the long run.

Buy Now, Pay Later loans are usually advertised to buyers who have low or bad credit and who may not have any other means of financing available. The bottom line is that if you are choosing between buying something with your credit card or using “Buy Now, Pay Later,” you will probably be better off using your credit card.

Unsecured Personal Loans

Unsecured Personal Loans refer to any loan you take out without providing collateral. In fact, credit cards are one type of unsecured personal loans. You can also go to your bank or another financial institution for a one-time unsecured personal loan. This works similarly to taking a cash advance from your credit card.

How do they work?

Receiving an unsecured personal loan is fairly straightforward. You go to your bank or any other lender and ask for a short-term line of credit. You will typically be approved for a set credit line, say $5,000, based on your credit history and income.

This type of short-term financing is most common for emergencies and unplanned expenses, such as car repairs or medical bills. These types of loans typically have a shorter grace period, about the same or less than a credit card. The interest rate varies, but is typically about the same or higher than for a credit card.

Should I use these loans?

Taking a short-term unsecured loan is usually not an easy choice to make because you will most likely be faced with them during times of emergency for expenses higher than your credit card limit allows. If you can, you will usually be better off putting these purchases on your credit card, which may have a longer grace period at a lower interest rate.

If the amount you need to borrow is higher than your credit card’s credit limit, try first to borrow money from friends and family or to get an unsecured loan from a commercial bank, credit union, or savings & loan. If you are tempted to work with an alternative creditor, beware. The more the creditor advertises that they work with people with low or bad credit, the worse deal you will probably get.

Payday Loans

Payday loans are the riskiest type of loan you can take. These loans are typically offered as a “bridge” between an expense (such as rent) and your next paycheck, usually with term lengths of less than 1 month. These loans can be either unsecured or secured. Secured payday loans typically require a car title as collateral. This means that if you fail to pay back the payday loan, your car could be seized and auctioned off to pay for your debt.

These loans include extremely high interest rates (often over 1000% APR) and little to no grace period. In theory, you could pay a very small finance charge if you take out the loan and immediately repay it within the next week or two, but over 80% of payday loans get “rolled over” into the next period. Rolling over a payday loan is what happens if you cannot repay the full amount on or before the due date, usually within 2 weeks (when you’d receive your next paycheck). Payday loan offices make most of their money on these rollover finance charges which are typically $15 to $20 for every $100 borrowed.

Here’s how you could be trapped in a payday loan cycle. If you take out a $500 payday loan with a 2-week repayment date and a $50 finance charge, you would need to pay $550 in 2 weeks. If you cannot pay the $550 and have to roll over the loan for another 2 weeks, you would be charged the interest again, another $50. So now you owe $600. This loan went from a 10% interest rate to a 20% interest rate in one month, and the interest owed piles up fast.

Should I use these loans?

NO! From a personal finance perspective, it is never a good idea to use payday loans. If you think you need a loan in order to make your rent or utilities payment, just talk with your landlord or utility company. They will almost certainly charge you less in late fees than you would pay in interest on a payday loan.

Payday loan offices appear most often in communities with a shortage of commercial banks, credit unions, and savings & loan institutions. This means that those communities are often cut off from unsecured loan options, leaving payday loan offices as the only source of short-term credit for emergencies.

If you ever find yourself in a situation where a payday loan seems to be your only option, remember this: From a personal finance perspective, you are almost certainly better off missing the payment entirely than taking a payday loan.

Try It

Try matching the characteristics to each loan type:

Short Term Financing – The Bottom Line

At the end of the day, if you need short-term financing, your best bet will probably be your credit card instead of any of these methods. If you do have an urgent expense that your credit card cannot cover, see if your bank can help or talk to friends and family. If you want to keep your personal finances healthy, avoid Buy Now, Pay Later schemes and Payday Loans entirely.

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Challenge Questions

In your own words, explain with examples what short term financing is.
How are credit cards and payday loan similar?
How can missing a payment on your credit card or loan be a problem for you?
How might buying something when you can outright afford it without the need for credit help you with your finances?

Accounting

GAAP – Accounting for Assets

Written by Shane Legatzke

Facets of Assets

How much is someone worth? One way to think about it could be to add up assets, or everything a person owns that holds financial value. First, think of everyday items like cash, a car, a computer, and perhaps money stored in a savings or investment account. However, there are some less obvious items to include as well. What if someone loaned a friend $20 and he/she promised to pay it back next Friday? Assuming they can trust this person to pay them back, that $20 should also be included on the list of assets.

Businesses typically have some similar assets to individuals (cash, equipment, investments, etc.) and some different ones (inventory, manufacturing plants and the like). The difference is that companies are required under GAAP to keep a record of their assets against debt and equity claims on the balance sheet. Assets are the first ingredient in the instrumental accounting equation:

Assets = Liabilities + Shareholders’ Equity

In this article, we will cover several important rules and things to consider on the asset side of the equation.

Accounts Receivable

In today’s business world, it’s becoming increasingly rare that customers pay with cash. This makes sense for convenience’s sake—it’s a whole lot easier to swipe a credit card to pay for food rather than carrying cash around for everything. Then, at the end of the month, one can quickly pay off credit card bills using money earned during that time period. For a business that has numerous and much larger payments, using credit is a necessity.

When a customer pays for goods or services using cash, the business can immediately record that cash as an asset. If the customer pays on credit, the business cannot record cash that they haven’t received. Instead, they chalk up the transaction to accounts receivable.

Let’s say I run an ice cream shop and do $50,000 in cash sales plus $50,000 in credit sales. The journal entry would go as follows:

Account

Debit

Credit

Accounts Receivable

Cash

$50,000

Sales Revenue

$100,000

Uncollectible Accounts

The tricky part is that there’s a chance some of these customers don’t come through on their payments. Typically, companies make an assumption that a portion of their accounts receivable will go unpaid and account for this using something called an allowance for doubtful accounts.

It’s up to the business to estimate the portion of accounts receivable that will go unpaid. If I believe that 2% of my ice cream customers will fail to deliver their payments, I’ll take 2% * $50,000 to get $1,000 going into my allowance for doubtful accounts. The journal entry would be as follows:

Account	Debit	Credit
Bad Debt Expense	$1,000
Allowance for Doubtful Accounts		$1,000

Because allowance for doubtful accounts counts against accounts receivable, we credit it and debit “bad debt expense”, assuming ahead of time that $1,000 of my payments aren’t going to be ultimately coming into my business.

This first entry is just an estimation. During the year, if I get word that a customer really isn’t going to be able to pay for their $200 purchase (ie if they went bankrupt and aren’t able to pay off any of their credit card bills), I need to do a different journal entry to actually write off the accounts receivable:

Account	Debit	Credit
Allowance for Doubtful Accounts	$200
Accounts Receivable		$200

This would bring our running balance in accounts receivable to $49,800. Throughout the year, the company would write off all of the uncollectible accounts like this that come up, and next year we would need to make a new estimate and entry to replenish the allowance for doubtful accounts.

Inventory

Inventory is the portion of assets that a company is holding to sell to customers—the ice cream itself in my example. Inventory is one of the most important assets to manage in terms of running a company because of the issues it can cause. If a company doesn’t carry enough inventory, it will run out of product to sell to customers and sacrifice valuable revenue. However, holding too much inventory can cost a lot of money in storage expenses. Striking a balance is vital in order to keep a company running smoothly and profitably.

To achieve this balance, inventory flow must be closely monitored and analyzed. In accounting, there are three basic methods to keep track of inventory flow: FIFO, LIFO, and weighted average—we will discuss how to utilize each method. Say my ice cream business holds the following inventory in the first quarter of 2017:

Date Purchased	Units	Cost per unit	Inventory Value
1/1/2017	100	$5.00	$500
2/1/2017	200	$6.00	$1200
3/1/2017	150	$6.50	$975

Total Inventory Value– $2,675

On April 1^st, the business sells 200 units of ice cream. How much gets recognized in cost of goods sold? It depends on the method used:

FIFO—First in, first out

Under FIFO, the first inventory units bought are also the first units recognized as being sold. Whenever a sale is recorded, the cost of goods sold is calculated based upon the cost of the oldest units in our inventory. In this example, we would first use the 100 units purchased in January and then, when that stock runs out, we add another 100 units from February (the second-oldest inventory).

	# Units	Cost/Unit	Total
January	100	$5	$500
February	100	$6	$600
Cost of Goods Sold = $1100

Subtract $1100 from the previous inventory balance of $2675 to get the new value of $1575.

LIFO—Last in, first out

LIFO is just the opposite; the newest units of inventory are taken out first. We would use all 150 units that we purchased in March, with the remaining 50 coming from the February batch.

	# Units	Cost/Unit	Total
March	150	$6.50	$975
February	50	$6	$300
Cost of Goods Sold = $1275

When we remove the $1275 from our $2675 in inventory, the new balance is $1400. Notice that because ice cream prices were rising, our LIFO cost of goods sold was higher than the FIFO amount.

Weighted Average

This method involves a different process. Before doing anything, we have to figure out the weighted average cost of our inventory. This is done by taking the total amount of inventory purchased divided by the total number of units.

Date Purchased	Units	Cost per unit
1/1/2017	100	$5.00
2/1/2017	200	$6.00
3/1/2017	150	$6.50
Total	450	$ 2,675
Weighted Average Cost = $2675 / 450 = $5.94

Afterwards, we simply price the units sold at that weighted average cost. 150 units at $5.94 each comes to a $1188 cost of goods sold, which translates to a $1487 balance left in inventory. The weighted average method will always lead to a cost of goods sold between the levels produced by the FIFO and LIFO methods.

Inventory Method Selection

How do firms decide which inventory method to use? It depends on both the company and the price trend of the inventory involved. For the purpose of this article, we will assume that prices are increasing. This is normally the case, because of the impacts of inflation.

The argument for using FIFO in an environment of rising prices is that it better represents the value of goods held in inventory. Removing the oldest inventory (which has the lowest cost) leaves product purchased more recently that better matches up with current market value. This translates to being left with a final inventory value that is a more accurate representation. Additionally, applying FIFO will increase net income because it will result in a lower cost of goods sold. This could be favorable for a manager that is under pressure to turn out strong earnings in the short run, or for one that needs a strong number to impress new investors.

However, many companies in reality use LIFO. Despite not representing an accurate inventory value, the LIFO system has the advantage of lowering current net income and lowering a firm’s tax liability. By essentially overstating cost of goods sold, companies are able to decrease their taxable earnings and save significantly on income tax without any real financial disadvantages. There has been some talk of repealing LIFO as an acceptable accounting method, but for now it is a favorite– especially in inflation-sensitive businesses like oil, copper, and chemicals.

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Accounting

Basics of Payroll Accounting

Written by Carla Spoto

Most the taxes paid are through paychecks, so a large part of payroll accounting is properly accounting for all taxes.

Most people are familiar with their annual personal tax return, but payroll tax filing works a bit differently. Payroll is run weekly, bi-weekly, monthly, or even semi-monthly, so for each pay cycle, taxes need to be calculated and reported. All tax payments need to be calculated for each pay cycle, then filed once per quarter.

Paying Taxes vs Withholding Taxes

When paying payroll taxes, there is a distinction between the taxes paid by the employer, and taxes withheld by the employer. In a nutshell, companies need to pay certain payroll taxes to the government, but they also withhold all the taxes that employees need to pay the government too.

Think of it this way – the government charges some taxes directly to employers, so companies need to pay these directly and it does not have any impact on the employee’s take-home pay. These are taxes employers pay the government. These are employer taxes.

The government also charges taxes on the employee’s income, so these are the taxes employees actually see on their paycheck (like the state income tax), and so impact take-home pay. These taxes are withheld from each paycheck and also sent directly to the government. At the end of the year, each employee gets a statement showing how many taxes were withheld throughout the year, which is used to file personal income tax returns (to get some of that withheld cash back, if possible).

When doing payroll, both employer taxes and employee taxes need to be calculated.

Employer Taxes

When running payroll, the first concern is calculating the taxes owed for each employee in each pay period. The main payroll tax categories that are paid by employers are FICA and Unemployment taxes.

FICA – Federal Insurance Contributions Act

FICA refers mainly to two large programs managed by the Federal Government – Social Security and Medicare, which support supplemental income and healthcare for the elderly and disabled. FICA taxes are shared between employers and employees – both sides pay the same amount into the program.

Social Security

This tax supports retirement supplemental income and disability benefits for workers. The Social Security part of the FICA tax is 6.2% of the base salary.

Employer’s Social Security Tax = Employer Social Security Tax Rate x Base Salary

For example, if an employee earns $40,000 per year, the calculation would be:

Employer’s Social Security Tax = 6.2% x $40,000 = $2,460

There is a cap on the maximum amount companies need to pay for each employee – Social Security Tax is only charged on the first $127,200 of income (which is $7,886.40 in total tax paid). Even if the employee earns $150,000 per year, the employer still only needs to pay $7,886.40 (as of 2017).

Medicare

The Medicare program supports healthcare for the elderly, and is the other half of FICA. The Medicare part of the FICA tax is currently 1.45% of base salary.

Employer’s Medicare Tax = Employer’s Medicare Tax Rate x Base Salary

For the sample employee earning $40,000 per year, the total Medicare tax paid by the employer is:

Employer’s Medicare Tax = 1.45% x $40,000 = $580

Unlike the Social Security tax, there is no income cap for Medicare taxes. For the high-earner example, the calculation would be:

Employer’s Medicare Tax = 1.45% x $150,000 = $2,175

Unemployment

The second major type of payroll tax employers pay is Unemployment. Unemployment taxes are used to fund unemployment insurance programs and job placement programs run by states. Like FICA, there are two different pieces of unemployment taxes paid by employers – FUTA and SUI.

FUTA – Federal Unemployment Taxes

The FUTA taxes are federal taxes, so it will be the same regardless of where you live (like FICA). This tax funds unemployment insurance, and is distributed to state governments to fund other unemployment programs. The FUTA tax rate is 6% of base salary.

Federal Unemployment Tax = FUTA Tax Rate x Base Salary

Like Social Security, FUTA has a cap on the maximum amount that needs to be paid – FUTA is only charged on the first $7,000 of base pay. Consider three employees – our $40,000 and $150,000 earners from before, but also a temp worker who only earned $5,000.

FUTA ($150,000 Earner) = 6% x $7,000 = $420
FUTA ($40,000 Earner) = 6% x $7,000 = $420
FUTA ($5,000 Earner) = 6% x $5,000 = $300

SUI – State Unemployment Insurance

The other half of unemployment taxes come at the state level. State unemployment taxes vary quite a lot from state to state, and can be complex to calculate even within a single state. For example, in Texas the state unemployment tax rate can vary between 0.59% and 8.21% (as of 2017), but averages 1.64% for most employers.

The state unemployment taxes also have a cap, which again varies by state. In Texas, the cap is $9,000.

Using our three example employees from before, we can calculate the expected SUI taxes due in Texas:

SUI ($150,000 Earner) = 1.64% x $9,000 = $147.60
SUI ($40,000 Earner) = 1.64% x $9,000 = $147.60
SUI ($5,000 Earner) = 1.64% x $5,000 = $82.00

Calculating Employer Tax Owed

Once we have all four of the employer taxes calculated, simply add them together to get the total tax the employer owes for each employee.

Employer Tax = FICA + Unemployment
Employer Tax = (Social Security + Medicare) + (FUTA + SUI)

For each of the example employees, the totals would be:

Employer Tax ($150,000 Earner) = $7,886.40 + $2,175 + $420 + $147.60 = $10,629
Employer Tax ($40,000 Earner) = $2,460 + $580 + $420 + $146.60 = $3,606.60
Employer Tax ($5,000 Earner) = $310 + $72.50 + $300 + $82 = $754.50

Note that for the lowest earner, the employer needs to pay almost the same in unemployment taxes as FICA.

Withheld Taxes

All of the calculated taxes above are paid strictly by the employer, so they would not appear on an employee’s paycheck or impact their take-home pay. However, employers are also required to withhold the employee’s income taxes as well and file it with the IRS. These income tax withholdings do appear on an employee’s paycheck – employees can subtract these withholdings from their Base Salary to find their Net (after-tax) pay.

FICA Taxes

FICA taxes are charged to employees too – employees need to pay the same amount as employers, both for Social Security.

Employee’s Social Security Tax = Employee Social Security Tax Rate x Base Salary
Employee’s Medicare Tax = Employee Medicare Tax Rate x Base Salary

The FICA taxes paid by the employee follow the same rules as the FICA taxes paid by the employer – same cap rules, and almost always the same rate. Currently, employees also pay 6.2% Social Security tax and 1.45% Medicare tax. For the three example employees, the FICA taxes are:

FICA ($150,000 Earner) = Social Security + Medicare = $7,886.40 + $2,175 = $10,061.40
FICA ($40,000 Earner) = Social Security + Medicare = $2,460 + 580 = $3,040
FICA ($5,000 Earner) = Social Security + Medicare = $310 + $72.50 = $382.50

Income Taxes

Income taxes are also withheld by employers and remitted to the IRS. There are two types of income tax – Federal and State. The actual calculation for both income taxes can be more complex, as the tax rates change for different levels of income at the federal level.

States also use different income tax rules – some states (like Texas and Alaska) do not have any state-level income tax at all.

Filing Payroll Tax Returns

Once employers calculate the total taxes owed and the total taxes withheld for each employee, they must file Form 941 with the IRS. Unlike personal income tax returns, the Form 941 is filed quarterly, not annually. This form reports all the income earned, pays the employer’s FICA taxes, and remits all the employee side income taxes withheld. Most employers use payroll software, and most payroll software will automatically generate the Form 941, which can be electronically filed with the IRS automatically.

Just like with personal income taxes, it is possible for employers to get a tax return when filing the Form 941. This happens most often if there was an error in the previous report – employers need to manually file a Form 941-X for any amendments or corrections.

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Management

Short Term and Long Term Financing

Written by Dominick D'Andrea

A company, just like any person, needs to be able to raise extra funds for itself to build new plants, buy inventory, etc. But a firm, unlike a person, has many more options to choose from when it comes to borrowing money. People either get a loan from a bank, or use a credit card, but a firm can raise capital by issuing stock, selling debt, borrowing from the bank, and even from other corporations.

A corporation has two different broad types of financing available; short and long-term. Equity and debt financing are the most commonly referred to, but both are forms of long-term financing.

Short-Term Financing

There are numerous ways a firm can borrow funds to satisfy its short-term needs, but the most common ways are through unsecured and secured loans, commercial paper, and banker’s acceptance.

Bank Loans

There are two types of bank loans – Secured and Unsecured. While the main difference is collateral, there are some other important distinctions as well.

Unsecured Bank Loans

An unsecured bank loan is a loan in which the borrowing firm does not provide any assets as collateral. Therefore, the bank is taking on default risk if the borrowing firm doesn’t repay the interest or principal. These are loans provided by a bank that can be either committed or non-committed.

With a committed bank loan, usually used if the firm is borrowing from a bank for the first time, the firm must file legal paperwork with the bank that determines the amount the firm can borrow. A non-committed loan allows the firm the ability to borrow up to a certain amount of funds, usually up to the amount previously borrowed, without having to file the legal paperwork.

Secured Bank Loans

A secured loan is a loan in which the borrowing firm provides assets as collateral. This way the bank is assured that it will be repaid if the firm defaults on the loan. Common forms of security, or collateral, may be inventory, accounts receivable, or other liquid assets.

A firm would choose a secured loan over an unsecured loan because the bank will provide a lower interest rate if the loan has collateral attached to it. That being said, the firm runs the risk of having its assets provided as collateral seized in the case of a loan default.

Commercial Paper and Banker’s Acceptance

Other forms of short-term financing include commercial paper and banker’s acceptance.

Commercial Paper

Commercial paper is a debt instrument in which a firm issues an IOU to a bank, company, or wealthy individual, which provides funds to the firm. It typically makes up notes payable in current liabilities. Commercial paper has a maturity of 270 days or less, which exempts it from being registered with the SEC, providing an easy transference of funds.

Banker’s Acceptance

A less common way for firms to receive short-term funds is through banker’s acceptance. This occurs when a seller sends a bill to the customer’s bank, which agrees to pay that bill. Of course, the firm will eventually need to pay the bank back with interest.

Both types of loans provide the firm with quick, easy cash that doesn’t require the type of legal contracts that come with bank loans. Commercial loans are relatively safe investments since firms with high credit ratings issue the loans, and due to the short period of time the loan is outstanding, the financial health of the firm is easily predictable. Banker’s acceptance is an easy way to “borrow” funds since the firm doesn’t have to repay the bank immediately. Both options are used due to their ease.

Long-Term Financing

Long-term financing is comprised of debt and equity financing. Equity can be broken down into two different forms; common and preferred.

Stock

The most common type of long-term financing used by corporation is by issuing stock. Stock has two types – Common and Preferred, both types have advantages and disadvantages.

Common Stock

The most common of these two is common stock. Common stock represents a partial stake in the corporation. A buyer of common stock provides funds to the firm in exchange for ownership and voting rights in the firm. It is important to note that a firm only receives the funds from the initial sale of stock, not from any transactions that occur when a person sells stock to another person. With equity, once issued, the firm has an immediate inflow of cash that requires no future payment. The downside here is that the equity holders have ownership in the firm, and can vote on issues pertaining to management and the future of the company.

Common stock is what is normally trading on stock exchanges.

Preferred Stock

Preferred stock has components of debt and equity in that is pays a fixed dividend regularly, has priority over stockholders, and trades like stock. The payments are predictable and can be written off the tax statement. Why is preferred stock less popular among investors? It is less popular than equity because the rate of return is lower than that of stock, and less popular than bonds because bonds typically have a higher coupon rate.

Debt (Bonds)

Debt is a fixed income security that pays periodic interest, but doesn’t represent ownership in the company. As a brief overview, a firm issues a bond to individuals with varying maturity dates, quoted above, below, or at a fixed value called par. The firm receives money from the investors in the amount of principal paid at the time for the bond. Debt is attractive to corporations because the interest payments made can be deducted from the company’s taxes, lowering the amount it pays. Plus, the payments made are easily predictable and fixed. However, issuing debt increases the number of people who must be paid regularly, regardless of the company’s financial performance. One of the most important reasons a firm chooses debt over equity, though, is that debt provides a firm with financial leverage.

Financial Leverage

The biggest reason companies use debt is for financial leverage. Financial leverage is simply the use of debt to purchase assets. A firm that borrows funds by issuing debt will, in effect, have extra cash that it can use as it wishes. This is akin to a credit card. For example, a firm can use $200,000 to buy equipment by using its cash, or it can multiply that $200,000 by borrowing additional $400,000 to buy $600,000 worth of equipment. While this allows firms the ability to use more cash than it has on hand, it comes with significant risk. The more the firm borrows, the more interest it will owe on outstanding debt. While this will lower the amount of taxes the firm must pay, the firm cannot neglect interest payments, which needs to be paid out regularly. The firm must strike a good balance between using cash on hand and leverage so that it benefits without too much added risk.

The Short and Long-term Financial Needs of a Business

A firm has two different ways it can finance itself; short and long-term financing. How does the firm decide which to use? Is one better than the other? The answer is found on the balance sheet.

Current assets are financed with short-term borrowing (current liabilities), and noncurrent assets with long-term borrowing (noncurrent liabilities). For example, accounts receivable needs to be financed because when a firm sells from inventory on credit, it will not actually receive the funds immediately. There is a stretch of time between the date of the sale, and the date the funds are received. Therefore, the firm needs to cover this temporary deficit with money.

Short-term financing is used in this case because it is relatively simple to borrow on the short term, and it is received by the firm quickly. Also, it is relatively easy to pay off debt in the short term. On the other hand, if a firm is building a new factory, this requires long-term financing. Long term financing is more attractive for very big investments that take a long time to pay off.

For example, Ford recently announced plans to build two new factories, costing a total of 2.6 billion dollars. There are not very many banks that have enough cash on hand to make a loan that large, even if they really liked Ford’s business plan, but there are millions of investors who each might be willing to buy some Ford bonds and earn interest.

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