The three videos scheduled for today were going to cover hedge funds. After watching them, however, I've decided they're not necessary for basic financial literacy. Unless I've missed something, hedge funds are targeted primarily at institutional investors. If you want to learn more about them, you can visit the SEC or watch Michael's videos at YouTube:

• Hedge funds 1: What is a hedge fund?
• Hedge funds 2: What is short-selling?
• Hedge funds 3: Different strategies

Instead of covering hedge funds, we'll move on to Michael's discussion of timing investments and dollar-cost averaging:

https://www.youtube.com/watch?v=WfVniuX_UCE

Last month Stephen Popick shared his home-grown budget spreadsheet with GRS readers. He listened to your suggestions and went back to the drawing board. Here is an updated version.

Growing up, I was taught the importance of having a budget.  It wasn't until I finished college that I understood it.  I started reading and listening to financial experts such as John Bogle, Clarke Howard, and a lot of folks in between.  Their recurring themes were simply to save as much as you could, live below your means, and choose wisely how you spend your money.

Before I started with my Budget Sheet, which has evolved over the years (and which has been greatly enhanced for GRS), I always thought I budgeted well.  Making an actual budget showed that, in fact, I did not.  It's amazing how far $50 can be stretched when you're aware of it.

Having a financial plan is a lot like having a travel plan — it identifies where you're going, how and when you'll get there, how much it'll cost, and things do along the way. Like planning a vacation, your financial plan can be loosely structured or highly detailed based on your individual needs. But having no plan at all could leave you stranded in the middle of nowhere.

A financial plan answers three primary questions:

1. How much, when, and where should you save while you're spending less than you earn? Examine your wages, debt payments, living expenses and other budget items to determine how much to contribute to your plan (when you have a cash-flow surplus), and decide which account the money should go in.
2. How should your savings be invested until they're needed? Identify which asset classes to invest in, how much to put in each, and which actual investments to use. Diversification helps you manage investment risk.
3. How much, when, and from where will you access savings when it comes time to spend them? Address situations when financial needs exceed available cash from income (a cash-flow deficit) and must be supplemented by withdrawing savings from your plan. This might be a limited-term need such as paying for a child's college education, or a lifetime need such as partial or full retirement.

To properly address these questions, identify your financial goals. Questions to ask yourself include: Continue reading...

Have you ever wondered what all of those numbers on the nightly business report actually mean? Michael Fischer explains:

https://www.youtube.com/watch?v=5xfpVSSzeY0

Just as you cannot accurately gauge the health of a garden from the growth of a single plant, you cannot gauge the health of the market from the performance of s single stock. Stock market indexes — or indices, if you prefer — allows us to track groups of stocks instead of simply following individual stocks.

Yesterday we learned about bonds, which are small slices of debt. Today Michael Fischer defines stocks, or small slices of equity:

https://www.youtube.com/watch?v=gYh4S0fSXrc

The stock market has its own unique vocabulary, with "puts" and "calls", "preferred stock" and "P/E ratios", "dividends" and "spread". I'll cover more of these later, but for now here are some basic concepts.

Sabino sent me an MSNBC article about the unfolding subprime lending crisis. The piece provides a glimpse at the deceptive practices used to prey on people like Kerrie Russo, who chose to refinance her mortgage on a promise of lower payments. When she failed to read her loan documents closely, she found herself deep in expanding debt. Though the mortgage broker lured her into this loan, she signed the papers. Because she didn't know how to protect herself, she faces a financial crisis.

Learning to avoid problems like this is an essential component of financial literacy. It is your responsibility to protect your money. Here are seven skills that can keep you safe from hucksters:

1. Ignore anything that sounds too good to be true

There are no short-cuts to wealth. If the son of a deposed Nigerian bureaucrat e-mails you offering to pay $100,000 for a few hours work, you know you're being scammed. Beware of similar deals on a smaller scale. If a mortgage broker tells you that you qualify for a more expensive home than you expected, double-check her figures with another broker, or with an on-line calculator.

Today's episode of "Saving and Investing" features three short videos, each of which is an introduction to a particular financial statement. Learning to read financial statements can help you evaluate the companies in which you would like to invest. (These statements are mandatory parts of corporate financial reports.)

First, Michael Fischer explains balance sheets:

https://www.youtube.com/watch?v=v_EpPu5tiXY

I've accumulated $3500 and I don't know what to do with it.

As you may recall, I am carrying the remainder of my credit card debt in the form of a home-equity loan (or HELOC). The current balance on this debt is $15,000 and I'm paying a 9.25% finance charge. I intend to have this debt eliminated by March 2008. It's an ambitious goal.

In order to make this happen, I've had to forego investing in my Roth IRA. I established this retirement account last spring, but only put $650 into it before focusing on the HELOC. Now I have the money to fully fund it, but don't know whether to do so, or to continue attacking the debt aggressively. There's a time-pressure to this decision: Roth IRA contributions for 2006 must be completed by April 17th.

In today's episode of "Saving and Investing", Michael Fischer explains a concept I've heard mentioned a lot, but have never understood. The term "leverage" is used in many financial books and articles, often referring to real estate investments. The concept has always puzzled me, even when I looked it up. Michael's explanation is short and to the point. Leverage makes perfect sense now.

https://www.youtube.com/watch?v=GBsyA0JGFLA

A simple example of financial leverage: Say you have $10 that you want to invest in a stock. If you invest that $10 and it goes up 10%, you've made $1. However, if you're able to borrow an additional $90 to purchase that stock, you'd have $100 total to invest. If that stock goes up 10%, you've made $10. This is leverage: borrowing money to magnify returns. (Of course, losses are magnified as well.)

I've made great progress with my personal finances over the past year. I am paying off debt. I established an emergency fund. I even opened a Roth IRA. But I'm not out of the woods yet — I still do stupid things from time to time.

Spending for the sake of spending

For example, I just returned from a trip to the bank. I deposited a couple of checks which caused my balance to increase to what, for me, is an enormous sum. (Next week I'll share my dilemma over what to do with this money.)

Rather than come directly home, I had to stop at the comic book store. This isn't necessarily bad. I've been training myself to buy only comics I genuinely want, not to buy for the sake of buying. Today there wasn't anything that I had to have. I should have left empty-handed. I didn't. Instead, I found a couple of books that looked mildly interesting. I spent $50. Continue reading...