Friday, July 30, 2010

Football Players Deserve Every Penny They Can Get!

There was an interesting article in USA Today about the financial woes of football players.  Generally speaking, people have a certain stereotype about what life is like as a pro athlete.  They live a rock star lifestyle that most of us wish we could have, while playing a kid's game.  Because of that, when most people hear pro athletes complaining about money and contracts, it garners very little sympathy from Joe and Jane Sixpack.  However, if you really stop and think about it, football players aren't that well off.  Seriously.

The article states that the average NFL career is 3.5 years, and the average salary is $1.9 million a year.  Now $1.9 million a year might seem like a lot, but is it really?

Thursday, July 29, 2010

Extended Warranties Considered Harmful

Back when I was a young pup working my way through school, I had a job at an electronics store.  For many of the gadgets that we sold, we offered consumers to opportunity to buy extended warranties for them.  In order to give we salespeople an incentive to sell these warranties, we were given a 6% commission for every plan that we sold.  In addition, the salesperson who sold the most during the course of a month would get some sort of a bonus on top of the commission.  This brings me to my rule of thumb when it comes to commissioned salespeople:

If a business provides an incentive for its salespeople to sell something, it must be a moneymaker for the business.  The bigger the incentive, the more of a moneymaker it is.

Obviously, a business is not going to give salespeople an incentive to sell something that loses money for them (unless they don't want to stay in business for very long).  I can tell you from first hand experience that businesses make a lot of money off of extended warranties.

Monday, July 26, 2010

Credit Cards Can Be Good, Too!

In a previous post, I talked about how credit cards can drain the life out of your finances if used incorrectly.  However, in the right hands, they can be used as a force for good.  Specifically, if you follow the rules that I outlined, they can actually make you money.

The key to making money from credit cards is to pick cards with no annual fee, pay off the balances every month, and use cards which pay you back with rewards.  Of course, in order to be eligible for these cards, you need to have a good credit rating.  If you are following my rules, though, this should not be a problem.

Now I will let you behind the curtain and share with you how I try to maximize my rewards.

Sunday, July 25, 2010

Risk and Reward

"Fortune favors the bold"
-Latin proverb

A CD at a bank is the quintessential risk-free investment.  You give your money to the bank, and the bank guarantees that they will give you your money back with interest at some future point in time.  Even if the bank goes out of business, the Federal Deposit Insurance Corporation (i.e. the U.S. Government) will guarantee that you get your money.  The only way that you will not get your money is if society as we know it collapses. 

[Astute readers might argue that there is risk because if interest rates rise before the CD comes due, you will miss out on the opportunity to invest your money at the higher rate.  This is very true.  However, when I use the term risk, what I mean is that there is no variation in the amount of money that you will get in the end.  If you invest $100, and the CD rate is 2%, you will get $102 99.99999% of the time.]

Let's assume that the one year rate for your CD is 2%.  Now let's assume that somebody comes along and offers you the following deal.  You give him $100 at the beginning of the year.  Then at the end of the year, he flips a coin.  If it comes up heads, he will give you 2% interest or $102; however, if it comes up tails, he will take all of your money.  Will you take this deal?

Wednesday, July 21, 2010

Credit Cards Can Be Evil

Normally, the U.S. Government's modus operandi is to take a good idea, shove it through the meat grinder that is known as politics, and out comes a terrible idea.  However, in the case of the changes that they mandated to the humble credit card statement, I think they got it right.  My favorite feature is the little box that shows you the effect of paying the minimum balance each month.  I think for a lot of people, this section is going to prove illuminating to say the least.

Saturday, July 17, 2010

The Power of Time

"This thing all things devours:
Birds, beasts, trees, flowers;
Gnaws iron, bites steel;
Grinds hard stones to meal;
Slays king, ruins town,

And beats high mountain down."

-The Hobbit, J.R.R. Tolkien

My father is always talking about the good old days when you could go to the movies and pay a quarter for a double feature, newsreel, cartoon, and a cellphone-free environment. I am always quick to remind him that in the good old days, salaries were a fraction of what they are today, so that quarter was quite a big expenditure. He just mumbles something about kids today and walks away.  The main point here is that time has a crazy effect on money.  It devours it and beats it down so it becomes worth less and less as the years go by.

Thursday, July 15, 2010

Don't be a Poor Boy

"I am just a poor boy though my story's seldom told. I have squandered my resistance for a pocket full of mumbles, such are promises. All lies and jest. Still a man hears what he wants to hear and disregards the rest."
- The Boxer, Simon and Garfunkel

Imagine for a moment that a stranger approaches you. He informs you that he has found a magic potion that will keep you forever young, instill unlimited virility, regrow your hair, and generally improve your quality of life by leaps and bounds. He is willing to sell you this amazing drink for a paltry sum of $10,000. On the one hand, anything that could confer those gifts would be a bargain at $10,000. Most people would be willing to pay a lot more than that for something as wonderful as eternal youth. On the other hand, you weren't born yesterday. Unless you are one of those people who responds regularly to spam from Nigeria promising millions of dollars, you have a well honed BS detector that reminds you that the gifts that this man is promising will not materialize.

However, if you were to replace the fountain of youth with a guaranteed 10% annual return on your money, and the man was Bernie Madoff, and this was ten years ago before Bernie was thrown in jail, you might have given him a lot more than $10,000. For over a decade, Madoff convinced thousands of people to give him millions of dollars based upon an investment scheme that was as equally unlikely as the aforementioned magic potion. Why did it work? It's because when it comes to money, most people do not have the ability to separate truth from fiction.