Final Exam Essay

Dear New College Graduate, 

I suggest you start investing as soon as possible; the earlier you start, the more money you can make. I would recommend you to stay away from actively managed funds because you you can end up losing money due to the high taxes, the high expense ratios, and 12B1fees. There also isn't a guarantee that they will beat the index. And if you do, for some reason, decide to invest in an actively managed mutual fund, don't make your decision based on the past performance of the fund. You should invest in index funds because they have small expense ratios and they include virtually every stock in the market. If you are lazy, there is an easy way to make money from your investments without doing much. Basically what you do for this couch potato investing approach is make sure the bond market percentage of your portfolio I equal to your age, and the stock market percentage of your portfolio makes up the rest. For the stock market section, you need to make sure you invest in both the US stock market (or the stock market of your home country) and the International stock market. Every year you rebalance your portfolio to make sure you increase the bond percentage to match your age and decrease the stock percentage accordingly. Some index funds, like the Vanguard Target Retirement Fund 2055, does this annual rebalancing for you every year.

One way us humans mess up our investments is to let our emotions dictate our behavior. When prices are high we tend to want to buy things, and when prices are low we tend to not want to buy things. This is a big mistake when investing. The stock market is always fluctuating and it is unpredictable. One thing we do know is that eventually, it always rises, and when it does, we have the chance to make money. When the stock market is low, you want to buy as many cheap stocks as you can so that later, when the stock market rises, you can sell them for more and make a profit. Also, it is best to invest the same amount every month instead of investing more when the stock market is doing well and less when the stock market is doing badly for the same reasons: because it is unpredictable and being consistent will make sure you don't do things you will later regret.

Whatever you do, make sure you start investing as soon as possible. When you invest, the money actually compounds so you're able to make quite a lot more money. Over the years, your money can end up going into the millions if you invest annually. If you invest just a little every month, and spend the rest on whatever you want, you could still end up making money and living comfortably. You are also prepared and financially secure for your retirement. If someone started investing later on, they would have to invest a lot more every year to match the person who started investing early. I will use the Money Chimp Compounding Calculator to prove this. Let's say that Tina started investing when she was 16 and she decided to invest $3,000 annually. In this calculator we would put $0 for the current principle because she's starting off with no money, $3,000 for the annual addition, 30 years in the years to grow category, and 9% as the interest rate. Our result would be $445,725.65 after 30 years of investing $3,000 a year. Of course it would probably be more because, as her salary would increase, the amount invested would probably increase too, but for the sake of this example we will assume that she didn't. After 30 years of investing at age 46, she befriends Beatrice who hasn't been saving or investing her money so she's scared of not having any retirement money. Beatrice earns more money than Tina, so she assumes that it won't be that hard. She decides to, in ten years, be able to match what Tina made over those 30 years. After looking at the compounding calculator, it shows that she would have to invest about $27,000 per year to make what Tina earned in those 30 years. Doing this would completely change her lifestyle as well because she would have to save $2,250 a month which would cause her to have to budget herself and possibly have to stop indulging herself in the luxuries she was used to. So you see, making money and being able to spend money on things you want can be done simultaneously if you start investing young.

Also, make sure you spend wisely and when you invest, make sure you invest in items you can make a profit out of. Before buying something, ask yourself if you really need it or if its worth the price. Not buying things that won't put you in debt is also smart, because although it may seem like very little to pay at the start, it can eventually accumulate into an overwhelming amount of money. You also have to be careful with things you buy. Cars depreciate in value very quickly, so it wouldn't make sense to buy a new car that in, a few years, you would have to sell for a lot less, thus losing money. Instead, buy a used car. Real estate is something smart to invest in because houses are appreciating assets and you can rent them to make money or to help pay for that particular houses mortgage. Another smart thing to do is to never let credit card companies make money off of you.

Hopefully this advice will help your financial future.

Sincerely,
Iskra Majewska 

December 10, 2012

So far in my project I've found that a trip to Mexico would cost around $900 in total including the ticket, the hotel, and extra money. I found a car that was about $3,500 dollars with $30 insurance every month. My yearly income after-taxes would be about $38,000 and I found a fully furnished apartment which would $800 monthly with a roommate.
All I have to figure out now is how much I will give to charity, my house insurance and more things about the house I plan to buy, gifts, and financial freedom plans. I also have to add more detail to the investment part of the project.
Today I found the monthly cost of my medical insurance; according to this website, it would cost me $78.90 per month for this plan:

ClearProtection^SM Plus
Combines affordable protection with some immediate benefits

• Innovative plan design helps limit your share of the costs for major medical expenses, such as surgery and hospitalization.
• Immediate coverage for the first two doctors' office visits for covered services.

 I found this house online for $750,000. I still have to figure out how much I have to put away to be able to save and buy it.

December 6, 2012

Today in class I was looking at part five of the project. Since I am a pretty lazy person I think I would take the couch potato approach in investing. I would open up a Vanguard Target Retirement 2050 Fund account and invest $200 monthly. It only takes $1,000 to open up an account and it is made up of 63% US index stocks, 27% International stocks and bonds index, and 10% Bonds. The percentage of bonds also increases every year. I decided I wanted to be financially free in 29 years, when I'm 45, with $55,000 dollars every year. Now i have to find out how much i would have to earn to get that much and I have to look for a house I want to buy.

December 4, 2012

For this part of the project we had to look at vacationing costs. I decided that I would want to fly to Mexico to discover more about that part of my culture and because it's not that far from California. I found that the cheapest round trip ticket to Puerta Vallarta, Mexico was $369 (SOURCE). When I looked for hotels on Trip Advisor, I found one called Playa Fiesta Beach Club and Hotel which seemed quite nice. When I looked at the prices I found that a standard room is $120 a night. I would probably only stay there for about three days, so it would cost $360 with tax being $68.40. So the total would be $428.40. (SOURCE) I would probably go with a friend so the price would be $214.20

November 30, 2012

I wasn't really sure if I should take public transport or if I should buy a car. So I was talking to my father, who used to live there, which in should choose and he said that the public transportation in San Jose isn't very good so I would need a car. I tried looking for the average miles driven annually in San Jose, but nothing came up for that so I found the average miles driven annually for a female in California which is 12,004 (SOURCE). So monthly that would be about 1,000. I also found two cars that I was interested in. The first one was a 1997 Land Rover Discovery SE for $4,999. I liked that one because I've always like big black cars because they seem safer and nicer, but I realized that it would probably cost more because bigger cars use up gasoline quicker and they are probably more expensive to maintain, so I decided to go with my second choice. My second choice was a 1996 Toyota Tercel for $3,499. 

I used Geico to find the insurance cost which ended up being $60.94 per month, but they had a deal where it would cost $331.10 for six-months so I think I would go with that.  (SOURCE) I looked up my car and found that the miles per gallon were 32 (SOURCE), and the price per gallon of gasoline in San Jose was  $3.28 (SOURCE) So I divided the monthly mileage by 32 and found that the number of gallons I would use up in my car monthly would be 31.25 which would end up costing me $102.50 monthly. $75 would be put aside monthly for any maintenance my car would need.

I haven't been able to really update my expenses because my laptop has been getting fixed, but I have been recording them in a notebook. Yesterday I found out that I'm going to have to get another computer so that will be like another $1500 and hopefully I will be able to get all my files, including my personal expense spreadsheet, back.

November 28, 2012

Today in class we had to finish stage one and start on stage two of our real life project. Since my apartment is actually already furnished, I didn't really have to worry about that. I did have to find, however, the electricity, phone, and internet costs. I found a website (this one) which lets you type in your zip code and find companies that offer services around you. So for the phone bill I found that at&t offered a plan for $24 a month which includes unlimited local calling. For the internet I found that at&t also offered an internet plan for  $19.95 a month. I also found that most of the electricity in San Jose is provided by the Pacific Gas and Electric Co., but their rates differ depending on how much electricity is used. So I searched for the average amount on electricity bills in that city and found that it is about $129 (Source), but I think it might be lower because I'll be living with a room mate and we might not use that much. Also, on that website it said that the average monthly amount spent on food is $116. I also had to think about home savings and I decided that I would save about 25% of my income which is around $800 every month.

November 26, 2012

For my real life project I decided to major in marketing in a university in California, probably University of California Los Angeles or University of California Berkeley. After searching for the starting salary on Google, I found a website which does salary surveys every once in a while, and I found one from September of this year which said that the average starting salary in marketing is $53,400. (SOURCE)
I then Googled for an income tax calculator and I found one here. This calculator included the federal tax rate, the social security tax, and the medicare tax. So for the calculator I had to find the state tax rate, and since I decided that I was going to live in California, I had to Google the income tax for California which ended up being 9.3%. That ended up leaving me with and after-tax salary of $38,032.52. The image of what it looked like is below:

I then divided my after-tax salary by twelve to represent the months in a year and ended up getting a monthly salary of $3,169.38.
Afterwards, I searched the internet to see what were the best places to get marketing jobs and I found this website. I wanted to live in California because that's where I was born and that's where I lived for the first few years of my life, so it's pretty significant to me. The website said that the number one place to get a job was New York City, but then it said that the second and third best places were in San Jose (where I was born) and San Francisco. So I decided that I would live in San Jose.
After searching for quite a while, I found two apartments that seemed like nice places to live in with a room mate. I wanted a room mate because it seems like it would be a lot easier and because when I looked at studio apartments they would be the same or more in price than half of a normal two bedroom apartment. The first apartment I found was this one which would be $1,755 a month ($877.50 each) and included these things:

The second one I found was this one which would be $1,674 a month ($837 each) and included these things:

So, I thought that the second was would be best because it was cheaper and it seemed to have a lot more. So if I were to share this apartment with a room mate I would spend around 26% of my monthly salary which means that every month I would be left with $2,332.38.

November 20, 2012

Today in class we talked about the future and how it would help us a lot if we started investing at this age so that we could be more prepared. It's always better to start saving earlier because you end up getting more money. So Mr. Hallam made us write how much we would have to make every year to sustain our lifestyle and in how many years we would want to be able to retire. I put $50,000 every year to be able to live comfortably and I put that I wanted to be able to retire in 29 years which would make me 45. Then we used the MoneyChimp calculator and discovered how much we would have to save to be able to achieve that. Mine ended up being about $3,000,0000.

I talked to my father about opening a Vanguard investment account, probably for the retirement fund, and he thinks it's a good idea. He said that we will probably be able to do it during Christmas break. He's really glad I decided to open one because he knows the benefits of saving earlier.

This thanksgiving break I spent quite a lot of money because we had two days off and I took advantage of that to spend time with my friends and most of the time we went shopping.

November 16, 2012

Today in class we watched some of the other groups presentations. We watched them do their projects on the Tulip Bubble, the South Sea Company, and the Vanguard Investment Account opening project. They were all really interesting. Especially since the Tulip bubble and the south sea company bubbles happened so long ago and our project, on the US housing bubble, was based on something more recent. The investment account projects were also really great because they were so detailed and they made me want to open an account for myself.

We were also introduced to our new project which is based on real life. We will have to incorporate a lot of aspects like cars, housing, education, and everything we need for the future. So, I think this will help us a lot.

November 9, 2012

Today in class, we finished researching our project for the Housing Bubble. We also divided the slides between us. We found a page full of psychological effects on people, so we incorporated all of that in our powerpoint. We also got our expenses checked, and mine ended up being around $12,000 in total for the whole year because I added my part of the rent. For our project we also divided the slides into causes which included the bad lending practices, homeowner mania, and  the dotcom bubble, the psychological and toxic asset effects, and prevention.

This weekend I didn't spend very much because the only time I left the house was to dance in the dance show and I didn't really need to spend money for that. But then over the diwali day off, I spent a lot more because I had to buy my little sister a birthday present and I spent a lot of money for the worst dinner of my life when I went out with my friends.

November 7, 2012

Today in class we learned that we shouldn't pay sales commissions for funds because you lose a lot of money from it. In a taxable or non-taxable account, the lower the expense ratio, the higher the probability of high performance. This is because funds which have succeeded in the past usually don't usually succeed in the future. And you usually end up having to pay a lot in the end. Also, you should never touch funds with load fees, so if you compare different funds and one of them has load fees and the other doesn't, it would be better to go with the one with none. To check the expenses of funds, the best website to use would be morningstar.com. In class, we compared fidelity, Franklin, JP Morgan, and Vanguard for their small cap, large cap, and balanced funds. A website that affirms these things is http://www.cbsnews.com/8301-505123_162-37640470/the-best-predictor-of-future-fund-performance/ .


I read Tamara's Latest Blog Post and I realised that I had missed out the fact that "The other plus side to the low expense ratio is usually they come with low risk and made on average 1% more than high expense ratio funds." in my blog post. 

November 5, 2012

Today in class we learned about small cap stock indexes, mid cap stock indexes, and large cap stock indexes. Small cap stock indexes are comprised of small companies, mid cap stock indexes are an index of middle sized companies, and large cap stock indexes are made up of large companies who are part of the S&P 500. Also cap stands for capitalization. There are also many different types of funds. Value funds find and buy cheap stocks for their fund which aren't doing very well and with low recent returns. They do this because they see potential. Growth funds usually buy stock from companies with fast growing profits. Value funds usually outperform growth funds by getting better returns. Balanced funds are basically made up of 60% stocks and 40% bonds; they also rebalance every year. Target retirement funds are similar to balanced funds except that they change over time by gradually increasing their bond percentage over time. They also invest in the US stock market, the international stock market, and the bond market. Another type of fund that exists is the commodity fund which invests in commodities such as grain, oil, gas, and gold. Real estate income trust funds own certain buildings like malls or blocks. We also learned that the cheaper the active fund, the higher the probability for it's success.

I went to Patti's blog post for November 1 and found the savings blog she found really interesting. I've always really liked websites that show DIY crafts you can do and this blog shows you how to do it affordable which is really cool. I also think it's really great that the owner of this blog is willing to share her story and tips for other people who are trying to save.

November 1, 2012

Today in class we took a quiz on what we learned last class. We had to answer questions about the two reasons why people don't get very much money when they invest. The first reason is human behaviour; they let their emotions dictate their decisions, and the second is fees. We also had to remember the percentages of what the market made and what the average investor made in the US stock market and the bond market. The US stock market made 9.14% while individual investors in the stock market made 3.83%. The bond market made 6.89% while individual investors in the bond market made 1.81%. With the data it seems that investors aren't reaching the full potential of what they can earn. Thankfully, I got all the answers right. Also, we discussed Mr. Hallam's article about how people working here need to start saving because they don't have social security and apparently it caused a lot of anger.

For our project, we're doing the US Housing Bubble option. We were having a bit of trouble finding the emotional ways it affected people; it seems like all that is on the internet is how it affected the real estate market or the economy. We knew that obviously people got upset, but we wanted to get actual stories from individuals. I found this website which is called How Did the Housing Bubble Hit all of America?  and although it doesn't show the emotional effects, it shows more unemployment which probably affected families and made things harder for them. So, we can probably use information like that to infer people's feelings.

I read Patti's blog post from October 30th and I found the quote from Warren Buffet she posted to be very interesting. It was "Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." It means that anyone can invest, but you just can't let your emotions make decisions for you.

October 30, 2012

Today in class we learned about the market in the past 20 years. We saw a graph which showed the average percent returned for the markets and the individual investors. The stock market made 9.14% while individual investors in the stock market made 3.83%. The bond market made 6.89% while individual investors in the bond market made 1.81%. This makes it seem like the individual investors aren't really reaching their full potential. Why is there such a great difference between how much the market made and how individual investors made. There are two reasons why they aren't exactly investing their money very well. One reason is the fees they have to pay when their money into things like actively managed funds. The second reason is human behavior; people tend to allow their emotions to make  decisions for them so sometimes, for example, they will buy stocks when they are more expensive instead of buying them when they are cheap. By doing that they make it difficult to make a good profit out of it.

I thought to my father briefly about this and he wasn't really that surprised that there was such a big gap, but that was because he had already known about it. He thought it was really sad, however, that the average person doesn't really get very much money because of bad investments. He says he would be one of those people because he is absolutely horrible at dealing with finances. He also figures that if they invest wisely, they can definitely earn more. But since he's bad with finances, instead of him worrying about them, he makes my mother take care of them.

During the October break I spent a lot of money because I hung out with my friends quite a bit. So, I ended up spending like over $100.

October 16, 2012

Today we got assigned a new project. My group consists of Tamara, Charles, and I. We could choose from opening an investment account, the tulip bulb craze, the dot com bubble, the US housing bubble, and the south sea bubble. We chose to do the US Housing Bubble project. We have to find the causes, history, the psychological effect, and how we can prevent it in the future. So far we have found the causes which also kind of relate to the history. Some of the causes were that too many people with too little money were owning lots of homes, mortgage fraud, people were invested in high price real estate, there were bad money lending practices going on, and the interest rate was low. So basically, loans were being given out way too freely to people without enough money to buy homes, so people were in debt. People were also rushing out to buy lots of homes, especially high priced ones which weren't very good investments. The home ownership increased from 64% in 1994 to 69.2% in 2004. I think we still need to research more so that we can get more facts and go more in depth into the causes. We also need to get the psychological effect on people, and how to prevent it in the future.

We also discussed opening an investment account with Vanguard and Mr. Hallam mentioned that you could open one by investing $1000. I was curious to see if my parents would actually give me the money to start investing right now so I asked my father.  He said that he thought that it's better than spending it on other things. Then he told me to wait a minute while he did a bit of research and then he told me that it would be a good idea. He said that they had many different investment options available, and that if I wanted to open one I would have to do all the research on my own and he would only help me if it was absolutely necessary so that I could learn to do things myself. Also, he thinks it's a good idea because it will save money that I can use in the future after I graduate from college and it will help me learn more about investing and saving my money. I would also be able to use that money later on to pay for a house or at least a down payment.

I think this fall break I will probably spend more money than I usually do because I will be spending all of it here in Singapore, so I will be going out with my friends a lot. Also, I'm getting the new iPhone during the break, so that will be another expense. This week I spent quite a bit because I bought a Polaroid camera for $180 and a birthday present for my friend which was $52.

October 12, 2012

Today in class we presented our Car Opportunity Cost project. I think we did very well, except that apparently our last few slides which talked about the opportunity cost weren't very clear. I think we included all the variables we were supposed to for the new, used, and leased car like the oil, brake, and filter changes, the gas price, and the insurance cost. Tanya also made the intro and conclusion interesting by using herself as an example of a college student who needs to get a car, but doesn't know anything about them. So, I think that made the presentation more interesting and relatable. We also looked at the mean comments on finance articles on Global and Mail. Some of them were written by ignorant people, and instead of writing a respectful critique, they were just writing rude comments. So we would thumb those comments down or write replies to them.

October 4, 2012

Today in class we had to work on our car opportunity cost project. We had already finished most of it, but we still had to get the insurance cost. So we searched for a lot and eventually settled for Geico insurance. Using their official website we found out that it would cost $648 every year and $3,240 for five years. Before they found out, we had to input our personal data, however, so we basically made things up and just got the price. I think now the only thing we really have left to do is make a powerpoint so that we can present it to the class on Wednesday.

This weekend I didn't leave the house to work on my art project so I didn't spend any money. I still have to find out what my phone bill is and I still have to add in more groceries to my spendings.

October 2, 2012

Today, for our project, we found that the cost of an oil and filter change is around $27, so for five years it would be about $404.50. We used this website to get our information. We had a bit of trouble with this because there were so many options depending on the type of engine; for example, it would cost double the usual amount if your car used synthetic oil. Since our knowledge on cars is very limited we weren't sure what to choose, so we picked the regular oil change after searching it some more. At first we thought that the oil and filter changes would be included in the warranty for the car because that's what Tamara's mom had said, but when we looked at the Ford website it said it didn't, so the oil and filter changes for both the used and new cars are the same. Mr. Hallam told us that one of his friends, Gerald, leases cars just because he doesn't want to pay for the oil and filter changes. This is ridiculous because you only have to change the oil and filter about three times a year which is only like $81. When we researched the average cost for leasing a Ford Taurus, which was the car we had picked, it was about $6000 dollars per year. After five years it would accumulate into about $30,000. It would be smarter to just buy a car because you could buy a car for less than that. I think leasing would only be for the people who worry about their appearances and feel the need to do so by upgrading their car every couple of years, but can't afford to buy new ones.

September 28, 2012

Today in class, my group worked on the car opportunity cost project. We tried to find how much it would cost to get an oil change, but we realized that there are a lot of factors that contribute to that. Apparently the price depends on the engine type and the type of oil that goes in that. So we still have to figure that information out. We did, however find the cost of the brake change and the average insurance cost. I also found the depreciation cost for the used car using a calculator.

This is the website I used for the car depreciation. You enter the purchase price, the current vehicle age in years, and the time in years the vehicle is owned. When you click calculate, it tells you the first year depreciation and total depreciation for the low rate, average rate, and high rate of depreciation. I found it when I was googled "car depreciation calculator" for the project. When I searched some more I found that the depreciation rate is around 15% each year.

This weekend I spent money on materials I needed for art, I bought some clothes, a wallet and I bought some stationary that I needed. Together, everything was around $32.

September 26, 2012

Today in class we got ourselves in groups and we had three choices to choose from: the car opportunity cost one, the investment plan one, and the real estate one. My group decided to do the car opportunity cost project. It took us a while to find cars to compare but in the end we found a new car (a Ford Taurus) for $26,600, a used car (a 2000 Ford Taurus SES) for $3,100, and a leased car (a 2010 Ford Taurus SHO) for $499.99 every month. I also found a calculator that finds the depreciation cost at a low, high, and average rate of depreciation.

I don't think I really spend that much money, usually I pack food and I usually only buy food during my free.