Take This to the Bank

Jim's_Bank

I stole this picture just like the banks, credit card companies, and identity thieves will steal your money if you’re not careful. [photo credit: http://familyguy.wikia.com/wiki/Jim’s_Bank%5D

Do you love your bank? 

“What kind of weirdo asks that type of question?” you think. “Love my bank? I don’t even have a bank. I stuff my money under my pillow before I take my girlfriend out to the dollar menu and spend it all.”

Yes, indeed, big spenders.

In order to have money you have to know where it is. This means you need a financial institution and all the cards and statements that go with it.

“Miss, can you look at this, my bank keeps charging me fees.” The student was really upset, as I would be if a bank took all the money I’d planned to use for dates at the dollar menu. I told him to bring in his statements and ATM slips. Turns out, he went for gas on Friday, spent some money. The money didn’t come out immediately, so he checked his ATM balance the next day, and saw there was money in there. He didn’t put any more money in there, which would have been my first red flag, but he said, “It was there, Miss!”

“Sometimes it takes a couple days to show up.” We’re so used to everything being instant we don’t realize there are sometimes time delays. So, he was spending the same money more than once. The bank frowns on this. They’ll cover for you like a loanshark, he discovered, but slap you around with some $25 fees to remind you to be responsible with your cash.

You should know where your money is and what’s going on with it at all times.

Critical questions to ask yourself:

Do I have a financial institution I love?

What’s the difference between a bank and a credit union?

What’s the difference between a credit and a debit card? A checking and savings account? A CD and a CD-ROM?  Which of these things do I need to survive in the real world?

How do I tie together the stuff I’ve learned about financial literacy–debt, savings, planning–together with the best financial institution in the world–to get the ball rolling?

Am I “old school” or “tech” when it comes to banking? (Ye Old Paper Check and Ledger vs. Online Banking and the Digital Financial World)

What’s my liability when someone in some country I can’t spell steals my identity? How do I fix that?

Let’s take a look at all the financial institution stuff you never ever cared about, but if you have two bucks in your pocket and want three or four instead of zero, you’d better start to care about, now…

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Fiat Isn’t A Foreign Car: Introduction to Bitcoin

imagesIn order to understand bitcoin and cryptocurrency (currency that’s somewhere in the cyberworld) you need to understand the concept of money. Have you ever wondered why money has value or how much money there is on earth? If you watched the link to the V-Sauce video, you’d say, “Wow, we can create money,” or “What do you mean money has value just because we say it does?”

In the past, money was concrete. For example, if you had a chunk of gold, it was worth whatever the value of gold was times the weight of your gold. That’s why people bit gold in old Western movies. It wasn’t that they couldn’t eat at the chuck wagon–it was that unscrupulous people would devalue gold by mixing in other metals. Gold is soft. If you bite hard enough, it should leave a tooth mark. I’m not really sure I want your dental records on my wallet, but still.

Paper currency and credit were invented because it’s heavy carrying all those coins. If we agree on the value of the paper I gave you, the that’s a good thing. We can do business without bringing our camel caravan filled with heavy metals.

Today, the value of our money doesn’t rely on every paper dollar having a piece of gold somewhere that it represents. The “gold standard” is dead. There’s a central bank for most countries that prints money. Printing too much money can cause an increase in the amount of money–more spending, but more inflation. Decreasing the money supply increases the value of the money (there is less money, so each unit’s got more value)

There are countries out there with really bad economies, and nations that play with the value of money. Cryptocurrency was invented to get around this. There is no centralized bank, and the money is not fiat money. Fiat money is all the money you have in your wallet–money that some government makes and you believe has value because the government says it does.

What happens to currency if the government collapses? Well, then, many people turn to commodity money. Commodities are goods that are traded on the market–generally foods or resources. These have value based on supply and demand. For example, if a pest wipes out the coffee supply and I own coffee shares, then coffee’s going up in price. If I sell then, I make cash.

“Hey, dummy, I asked you about bitcoin.” 

Oh, sorry. Here’s a little primer. Bitcoin is a decentralized form of money that only exists in electronic form. It’s transferred via the internet using a “P2P” (person to person) protocol. In other words, there’s no centralized bank, government agencies, taxes, or anything like that. It has a floating value. People mine bitcoins by finding them hidden on the internet–to unlock them takes some computer genius and for the average person’s probably not going to be a possibility.

“Can I buy bitcoin?”

Yes. The value is floating–meaning it changes based on market demand. You can therefore invest in bitcoin, hoping to buy low, sell high. The price has been over $1K/btc, but today rests much lower. You can buy bitcoin in exchanges. Only 21M btc will ever exist.

Who thought of this stuff?

Satoshi Nakamoto began working on the concept for bitcoin in 2007. It’s a pseudonym, and he may be one person or a collective group. This timeline gives a great history of the rise of bitcoin into mainstream.

Is bitcoin a good thing?

Depends. If you’re a person in a country with a destabilized currency–a currency with crazy inflation or no consistency–then it may be good. I lived in Russia when the government decided to reissue the ruble. This meant that after a certain date the old currency wouldn’t be accepted. People rushed to spend the money they hid under their mattresses, or trade it at banks (where they had limits to what they could trade in) or mafia kiosks which gave them fractions of the value for the purpose of trading them in. It was devastating.

These people would have liked bitcoin or other cryptocurrencies. People living in China trying to get around government regulations, war-torn countries with crazy inflation, or places with chronically untrustworthy currencies and policies, like Argentina like bitcoin.

“Who doesn’t like bitcoin?” Governments trying to impose regulations, taxes, or trace money do not like bitcoin. Investigators do not like bitcoin because going off the radar means that shady people run to cryptocurrency.

“But I’m not a cartel or mafia boss. Can I use bitcoin, too?”

Yes. You can invest in bitcoin and speculate that the market will go up, especially now that it’s getting harder to mine bitcoin and the supply will be steady. But there is risk–if all of a sudden people decide this is just a fad and there’s no increase in usage, and some key investors say that’s currently the trend (that bitcoin needs more people to use it and more merchants to accept it).

What are the other uses of bitcoin?

Bitcoin is a ledger–a place where online transaction records are kept. The uses could be endless. Even for those who don’t wish to spend it, tech geniuses are seeing the value in developing platforms and ideas that support cryptocurrency. The data trail can be used as a date/time stamp, a transfer of information, or even to certify voting and elections. So, even though you probably can’t and won’t mine bitcoin, it doesn’t mean you won’t develop some technology that will still make you a pretty retirement.

Good Debt, Bad Debt

College is overpriced. Looking at amortization tables and college loan calculators might make you feel all’s hopeless. It’s not. You must recognize the difference between good debt and bad debt.

Good debt gets you to where you want to go. Bad debt puts you in a hole you can’t escape. How do you know the difference?

Here are some examples. You’re starting a business. You borrow a thousand dollars to get you off the ground, but you’re working your day job, so God forbid something happens, you can make the payments. Your business succeeds. You pay off that debt.

Good debt is debt that helps move you forward: 

You pay for your gas with a card and pay it off once a month. Good debt.

You finance a used car. You know it costs $200/month, but you can afford the payments. Your goal is to establish good credit with the loan.

You want to go to college for nursing. A degree is required. You look at several colleges, choose the one that gives you a great financial aid package, and borrow the least amount of money you can. You borrow some money but work a second job over the summer and pay down the debt as soon as possible.

You buy a car at 0% interest and pay only the payment–you don’t overpay the loan. Instead, you invest the rest of the money you have, making a return, effectively using that car loan to give you money to make money.

Bad debt is debt that can bury you. 

You fall victim to a credit card offer at a 21% interest rate then start carrying a balance.

You buy a car that you can’t really afford.

You take loans to pay for a college that doesn’t give you the maximum aid, then say, “It doesn’t matter, my career in XX should make enough.”

You overextend borrowing for your business or expand too fast using other people’s money.

Critical questions: 

How can you use debt to your advantage?

What types of debt can save you, and what types of debt can bury you?

What are the effects of compound interest on any loan?

Math moment: 

We’ve been using calculators to look at compound interest. Here’s the math behind the calculator. Try one or two compound interest problems. Have a victory moment. Here are a few you can defeat. Check your answers. Don’t cheat. You’ll get bad karma.

P.S. Compounding works both ways. You can spend money with debt but you can make it on the flip side investing. More on that later. Learn the effects of the math.