Investors and consumers have been paying close attention to the Federal Reserve recently, wondering when they will begin raising interest rates. While the Fed meets this week, I want to walk through what you as a consumer and investor can expect when interest rates do rise. But first, why raise interest rates?

When will interest rates rise?

Why Raise Interest Rates?

In today’s economy, the Federal Reserve would raise interest rates to slow down inflation. While inflation that is measured by the Consumer Price Index is tame, as consumers, we see rapidly rising prices, especially in the grocery store. By raising interest rates, you lower demand and increase the costs to borrow. Here is how rising interest rates impact you first as a consumer.

What to Expect as a Consumer

When interest rates rise, as a consumer it costs more to borrow money. The interest rates on your mortgage, auto loan or credit card will rise. This will mean more money going towards debt repayment (because of a higher monthly bill) and will force consumers to cut back on spending in other areas.

What to Expect as an Investor

When it comes to rising interest rates as an investor, there are many more things in play. First, rising interest rates will mean an increase in the interest you earn on certificates of deposits and bank accounts. However, the increase in the interest rates does not happen overnight. It takes time for the banks to raise the rates they are paying you. Therefore, when interest rates do increase, don’t expect to see better interest rates on certificates of deposit any time soon.

Rising interest rates also will have an impact on bonds. Bond prices have an inverse relationship with interest rates. This means that as interest rates rise, bond prices fall. As a bondholder, you can expect to lose some principal when prices drop, but you will see a larger monthly payment from your bond fund when interest rates rise.

Note, however, that some bonds are impacted more by rising rates than others. Short-term bonds don’t lose as much money when rates rise because the duration is short. Long-term bonds though are very susceptible to rising interest rates.

Don’t Forget About Businesses Too

Rising interest rates could cause prices at the grocery store and other places to rise as well. Remember that rising rates affect everyone, including businesses. It will cost more for businesses to borrow money and run their operations. They need to make up the money somehow. This could be in the form of higher prices, or even laying off workers or suspending hiring new employees.

Final Thoughts

There are many consequences to raising interest rates. Given the current economic climate we are in, raising interest rates now could do more harm than good. While the stock market has done well since the recession, other areas of the economy have not. The Federal Reserve has a lot to consider before raising interest rates. The real question for consumers though is when rates will rise.

When do you think the Fed will raise interest rates?

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Do you know the difference between an ETF and a mutual fund? When it comes to investing, there are many options for what type of investment to invest in. Your options include:

• Stocks
• Bonds
• Mutual Funds
• ETFs
• REITs
• Commodities
• Alternative Investments

Most investors are familiar with the first three on that list. ETFs have become more popular in recent years. Many times, people question what the difference is between an ETF and a mutual fund. I am going to break down each investment product here so that it is clear to you. Note that I will focus more heavily on ETFs since most investors don’t fully understand how they work.

(Photo Credit: jannoon028)

What is an ETF?

An ETF or Exchange Traded Fund is very similar to a mutual fund in that an ETF holds a basket of underlying stocks or bonds and typically tracks an index. ETFs first appeared way back in the late 1980’s. But their life was short lived due to various court battles. It wasn’t until the mid 1990’s when ETFs truly began to gain in popularity.

At the beginning, ETFs were mainly a passive investment, meaning they simply tracked an index. However, in 2008, the Securities and Exchange Commission allowed for the introduction of actively managed ETFs.

What is a Mutual Fund?

A mutual fund also holds a basket of underlying stocks or bonds. A mutual fund uses an index as its benchmark to compare its performance against. Mutual funds have been around since the late 1890’s, but didn’t take off in popularity until the 1970’s.

Primarily there are two types of mutual funds: open end and closed end mutual funds. Open end funds allow unlimited shares to be created for investors while closed end funds limit the number of shares available to invest in.

What Are The Differences Between ETFs and Mutual Funds?

The main difference between an ETF and a mutual is this: you can trade an ETF throughout the day. With a mutual fund, any trade you place during the day doesn’t get executed until the market closes and the NAV of the mutual fund is calculated. (Quick side note: the NAV or net asset value is simply the price of the mutual fund after all liabilities of the mutual fund are subtracted from the assets. The NAV is calculated at the close of business.) Whatever price the mutual fund closed at is the price you get for you buy or sell, regardless of the time you placed the trade.

For example, let’s say I placed an order to sell my mutual fund at 10am. My sell is executed at the 4pm closing price of the mutual fund. This can work for or against an investor. It works in favor of the investor should you be selling on a day when the market is up. If the market closes at its peak for the day, you take advantage of that. However, if the market is dropping, you can’t sell until the market closes.

With that said, say you decide to sell you mutual fund at 6pm. What happens then? In this case, you would get the closing price for the next business day. Same thing holds true if you were to place a trade on the weekend as well.

With an ETF on the other hand, if you sell at a time when the market is open, you will sell at that time. Taking the example above, if I place a sell at 10am for my ETF, I will sell the ETF at the 10am price. If I place a trade after hours, I will get the price once the market opens on the next business day.

ETFs also allow you to place stop and limit orders as well. With mutual funds, you don’t have this luxury.

ETF Advantages and Disadvantages

So why are ETFs so popular? First is because of the ability to trade the ETF throughout the day. The second benefit is low expenses. Most ETFs have a lower expense ratio than mutual funds. This is a big reason for the popularity of ETFs.

Of course, there are some downsides to ETFs as well. First off, most brokers charge a commission to trade an ETF much like a stock. Every time you place an order for an ETF, expect to pay a commission ranging from $6 on up. With that said, there are some brokers that waive the fee for trading their own house brand of ETF. Schwab is a perfect example of this. You can buy and sell Schwab ETFs for no commission. They also allow for you to trade a few other ETFs for no fee as well.

Another drawback of an ETF is that much like with stocks, you have to buy round numbers. With a mutual fund, you can invest $500 and buy fractional shares, such as 12.4956. With ETFs, you can only buy whole shares. Using the $500, you could only buy 12 shares. This, along with the fee for trading ETFs makes them more costly than mutual funds.

A final drawback that some people make regarding ETFs is that they encourage you to trade. Some people claim that Wall Street invented ETFs so that they could have another way to earn a fee. Add this to the fact that you now have the ability to act on your emotions and buy or sell at any point during the trading day hurts investors. I’m not 100% certain I buy into this logic, but I can see the argument.

Final Thoughts

There are certainly benefits to investing in ETFs, most notably the lower expenses. If you are disciplined enough to not act on emotion and stay invested for the long term, the ability to trade ETFs is not an issue. When it comes to trading commissions, you have two options: either pay the fee or invest in ETFs with brokers that don’t charge the fee. This is what I do with Schwab.

I still own mutual funds as well, since I am at a point where I still invest a small amount of money each month. Overall, both mutual funds and ETFs have benefits and drawbacks. I find that using them both in a diversified portfolio is a good compromise.

Do you invest in ETFs or mutual funds?

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The topic of retirement comes up all of the time on the news, in the newspapers and magazines and in personal finance blogs. With so many different people talking about retirement, it not only gets confusing, it can also get overwhelming. Luckily, I am here to help. I will give you the guide to making sure you can retire. What we waiting for, let’s get started.

(Photo Credit: Stuart Miles/FreeDigitalPhotos.net)

Step 1: Define Retirement

This is the crucial first step that you have to take. Spend some time writing down how you envision your retirement. Will you be playing golf all of the time? Traveling? Working part-time? Moving to Florida? While you don’t need to know exactly everything you want to do in retirement, you need to have some sort of idea here. You also need to know at what age you plan on retiring as well.

For me, I write all of the things down that I want to do in retirement. I do this so I can go back and change things up. Nothing is set in stone. Maybe you love photography now, but in 10 years realize you want to learn how to paint and would love to paint in retirement. This is fine. By writing things down, you have a record of everything.

Also, when completing this step, don’t limit yourself to 15 minutes of thinking and writing. Take a few weeks to really think things through before moving to step 2. You need to be honest with yourself and your dreams. Take the time necessary to do this.

Step 2: Figure Out How Much Money You Will Need

This is probably the most difficult step in the process. There are all sorts of numbers thrown around, but a good bet is the 8x rule. This rule says that you should have saved 8 times your salary when you plan to retire. So if you make $100,000 per year, you need 8 times this, or $800,000.

For me, I am conservative in nature when planning things. To me, there are all sorts of things that could go wrong and at the end of the day, I’d rather die with $100,000 in the bank than be flat broke at 85 and live another 10 years. So for me, I use the 12x rule. It’s the same as above, just 12 times instead of 8. So for a salary of $100,000 I would need $1.2 million saved.

(Another approach is using your expenses instead of your salary and calculating your needs based on the 25x yearly expense multiplier.)

Note that I am not taking into account Social Security in these numbers. I expect to receive Social Security, but since I don’t know if the age limit will be raised or benefits cut by the time I retire, I just don’t factor it in. Whatever I get will be treated like a bonus.

Step 3: Assess Your Current Situation

Let’s say you need $800,000 and you plan to retire at 65 and are currently 45 years old. If you only have $25,000 saved for retirement, you are going to need to do some serious savings over the next 20 years. You will need to save about $14,000 per year, assuming an 8% annual return to reach your goal.

Since most Americans are saving nowhere near as much as they should for retirement, chances are your savings are underfunded too. If this is the case, you need to make some changes. Either start saving more now, change when you plan on retiring, or change how you envision your retirement. Those are really your three options.

Since I would rather keep my dreams alive, I would make some changes now. Find ways to increase your income while at the same time decreasing your expenses. If you do both, you should be able to make up the amount that you are short. Depending on your age, you can also take advantage of retirement catch-up contributions.

Step 4: Get Everything Lined Up

As you near retirement, you need to make sure you have other things in order. This includes insurance coverage, specifically health insurance, and to make sure you have all of your debts paid off, including your mortgage.

When it comes to your mortgage, here is why it is so important to get that paid off before you retire. If your monthly payment is $800 per month (just principal and interest), that is close to $10,000 a year. By having it paid off, you just freed up $10,000 in retirement! This will benefit you if you are behind on your savings goal because you will have freed up some extra money.

The same idea applies for other debts too including credit card and auto loans. Here is a helpful Retirement Planning Checklist with many more tasks to complete before retiring.

Step 5: Review Your Investments

In reality, you should be doing this all the time but I wanted to talk about it separately. As you age, you should be changing up your asset allocation to a more conservative mix. However, be careful that you don’t become too risk-adverse. Many investors think that once they reach retirement, they need 100% of their investments in bonds. This might have worked 30 years ago, but not any longer.

The reason for this is because we are living longer and longer. Back then, you could get by with 100% bonds because you were only expected to live another 10 years. Now that we are living into our 90s, we need the growth from stocks to keep us from running out of money.

Also, as we have recently seen, we might need the higher income (dividend) payments from stocks when interest rates are low. In order to survive financially in retirement you need to go as long as possible before dipping into your principal. The only ways to do this is to get a decent yield on your money or get a decent return.

Final Thoughts

So there are the 5 steps to follow to ensure you retire. Not too complicated right? The first step will certainly take you the longest to complete. From there, it is all about making sure you are saving enough. As time goes on, you may lose some interest in saving for a goal that is 10 years or more away. If this is the case, refer back to your goals from step 1. This will help you stay motivated to keep saving as much as you can so your retirement dreams become a reality.

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Compound interest is the most powerful force in the universe, which was supposedly said by Albert Einstein, though there is no proof that he actually said this. Nonetheless, compound interest is an amazing thing.

Previously, I talked about how to calculate simple interest. Now, I am going to show you how to calculate compound interest. But before we get into the calculation, we have to understand what compound interest is.

What Is Compound Interest?

As I pointed out in how to calculate interest, when you earn simple interest, you only earn interest on your principal amount of money. With compound interest, all of this changes.

Compound interest allows you to earn interest on your interest. You read that right – you earn interest on both your principal and the interest you earn. Let’s look at an example. Let’s say you have $100 and you are earning 10% interest. If you are earning simple interest on your $100, at the end of the year, you have $110. But, if the interest you earn is compound interest and it compounds monthly, you have $110.47 at year end. You earned an extra $0.47 because of the effects of compounding.

How to Calculate Compound Interest

To see how this works, we need to look at the formula for compound interest. Here is the formula for compound interest:

Let’s plug in some numbers so you can see how this works. Let’s assume this time we have $1,000 and we are earning 5% interest on our money. Interest is compounded monthly and we leave the money alone for 3 years. How much money do we end up with? Here is the formula with our numbers:

$1,000 (1 + 0.05/12)^12(3)

The answer is $1,161.47. The great thing about compound interest is, the more frequently you compound, the more interest you earn, up to a point. If we take the same example we just used and instead of compounding monthly, we compounded interest daily, we would have $1,161.82. Because of the increased frequency of compounding, we earned an additional $0.35. I know that doesn’t seem like much, but if we had more money saved, we would have earned more money from compound interest. Likewise, if we had more time, meaning more compounding periods, we would end up with more money as well.

The Limit of Compound Interest

Remember above how I said that the more frequently you compound the more interest you earn, to a point? Let’s look at an example for proof. In the above example, we had $1,000 earning 5% interest for 3 years and compounding daily. We ended up with $1,161.82. If we were to compound hourly instead of daily, over the course of three years, we would earn an additional $0.01. That’s it. But don’t confuse the frequency of compounding with years. When I talk about frequency of compounding, I am only talking about how often interest is compounded – quarterly, monthly, daily, etc. Ideally you want daily compounding and you want to let compound interest work for years.

Final Thoughts

The power of compound interest is great. The more money you save and the longer you leave it alone to grow, the more compound interest will work its magic. But just like with anything in life, the power of compound interest won’t make you rich overnight. It takes time to work its magic and it needs you to be smart with your money and continue to save more and more. If you can do this, you will experience the power of compound interest.

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I get many questions about how to calculate interest. If you are trying to figure out simple interest, the calculation is, well, simple – no pun intended. If you want to calculate compound interest, that gets a little bit more involved. I’ll be writing about compound interest soon, so be sure to keep an eye out for that post. But for now, let’s focus on simple interest.

(Photo Credit: Keerati)

What is Simple Interest?

Simple interest is the most basic way you earn interest on your money. It is interest that is earned on the principal alone. Some loans also charge interest based on simple interest. In the case of a loan, simple interest is interest charged on the principal alone. Here is the formula for simple interest:

P x I x N = Simple Interest

P = loan amount
I = interest rate
N = time or number of periods

Examples of Simple Interest

Let’s look at a few examples to make sure you understand how it works. Let’s say I borrow $1,000 from the bank at an interest rate of 10% for one year. The calculation would look like this:
P = 1,000
I = 10%
N = 1

1,000 x .10 x 1 = $100

My interest charge is $100. Now let’s use the same example, but this time, I borrow the money for five years:

P = 1,000
I = 10%
N = 5

1,000 x .10 x 5 = $500

In this case, the interest I am charged is $500. In most cases, you won’t owe the bank the entire interest charge at the end of the loan. The bank will want the interest paid back to them on a monthly basis. So taking the $100 interest that I owe the bank for the one year loan, we would divide the loan by 12 months to figure out the monthly payment. In this case, it would be $83.33 of principal and $8.33 of interest for a total monthly payment of $91.66.

If you have a savings account in which you earn simple interest on, the calculation would be the same. If you opened the account with $1,000 that is the amount you earn interest on. The only difference is that instead of owing the bank the interest, the bank owes you the interest.

Compound or Simple Interest?

When looking at deposit products, you want to seek out those that pay compound interest as opposed to simple interest. The reason is because with compound interest, the interest compounds upon itself and grows faster. I’ll explain this concept more in my compound interest post.

When it comes to loans, many loans work off of simple interest while many more work on the daily accrual method of interest. I am not aware of any loans that use compound interest. If you know of any or come across any, let me know in the comments below.

Final Thoughts

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Almost anywhere you turn, you see news stories about the widening gap between the rich and the poor. As a result of this inequality, many prominent figures have come forth with their thoughts on how to fix things. Some want to raise taxes on the rich. Others want to raise wages for those working certain jobs.

Why the Rich Keep Getting Richer

What I don’t hear a lot of talk about though is why the gap really is widening. The reason is twofold: the rich invest their money and the government taxes income, not wealth. Let’s look at these two in more detail.

(Photo Credit: worradmu)

The Rich Invest

If you create an investment plan and hold a diversified portfolio for the long-term, you are going to experience an increase in the value of your investments. Just look at any historical chart of the stock market and you see that over the long-term the market trends up. Note when I say long-term, I am talking 20 years or more. Even with recessions and stock market crashes, in time the market always comes back.

The rich know this and they invest in the stock market, both for price appreciation and for income. I’ll get to the income part shortly. But the price appreciation is where most other investors fail. The market takes an unexpected drop and people sell out. I bet with the recent volatility a bunch of people ran for the hills. This is exactly the wrong thing to do. When an airplane hits turbulence, does the pilot land the plane and cancel the flight? No, he pushes through knowing that it’s just a little bump along the way. If most investors could take this same view, they would experience the price appreciation of the stock market over the long-term as well.

Read More: 3 Steps to Successful Investing

Taxing Income, Not Wealth

As it stands now, our tax code is set up to tax income. If you make $500,000 from a job this year, you are going to pay close to 40% of that in federal income taxes. On the other hand, if you earn $500,000 from your investments as long-term capital gains or qualified dividends, you are looking at a maximum tax rate of 20% (plus a portion which could be subject to the Investment Tax). That is a huge difference!

The rich know this and “earn” a good amount of their money from investments and not a job like you and I have. This allows them to keep 20% more of their money.

Read More: Do the Rich Pay More or Less in Taxes?

Generate Investment Income: How To Make The Transition

Obviously, you should want to make the transition from generating most of your income from a job to your investments. How do you go about doing this?

First, you need to start investing in the stock market and then stay invested, no matter what happens. By staying invested, I mean keep the holdings you currently have. You can’t jump from one mutual fund or ETF to another every 6 months or year. You have to hold the same positions for the long-term.

But, you can’t just invest $20 here and there and expect to see any results. If you truly want to reach a point where you are living off of the income from your investments, you need to invest a decent amount of money. In order to do this, you are going to have to make some sacrifices. Question the things you buy. Do you really need the new iPhone 6? Can you shop around for insurance coverage and get a better deal? Does refinancing make any sense for you? The more ways you can cut costs and invest more, the better off you will be.

Read More: Why You Should Save 1% More Each Year

An Example of Making The Transition

Let’s say you really want to make the transition. Start by looking at how much you spend in a year currently. Let’s say you spend $40,000 per year. We will assume that the investments you choose (a healthy mix of stocks and bonds) will throw off around 3% worth of income each year. If we do some fancy reverse engineering ($40,000 divided by 3%) we get $1.3 million. This tells us that you need to invest $1.3 million. That amount will generate an annual income of roughly $40,000. (Note that I did some rounding to make this easier to follow.)

You are probably looking at this and thinking there is no way I can save/invest $1.3 million. While it may not be easy, it is possible. You just have to do some thinking outside of the box. How close are you to paying off your mortgage? If you get rid of that expense, your annual expenses will be much less than $40,000 meaning you need to save less than the $1.3 million. Same goes for getting rid of a car loan or buying an older car so your insurance coverage is lower. Or maybe even moving to an area where the property and school taxes aren’t so high.

I’m not saying you have to do any of these things, I am just showing you it is possible if you expand your thinking. Maybe none of those things are worth it to you. If this is the case, then maybe you revise your goal. Maybe instead of living off of 100% investment income, you replace 50% of your income with investment income. This would allow you to quit your job and work in a field that pays less, but makes you much happier.

I am certain that if you just take some time to think about various ways to cut your expenses or to change the overall plan, you can find something that will work for you and allow you to earn an income through your investments. Don’t give up hope too quickly, there are always other options.

Final Thoughts

The real reason why the rich are getting richer is because they are investing their money in the stock market and taking advantage of lower tax rates. You too can take advantage of the lower tax rates, you just have to start investing for the long-term. While the challenge of building up your investment income might sound overwhelming, focus on the benefits that it will provide you and how much happier you will be.

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Do you want to become a millionaire? I’ll assume you answered yes to that question. What are your plans for getting there? Rob a bank? You will probably have to rob a good number of banks to get to a million dollars and then you will most likely end up in jail anyway. On second thought, robbing a bank isn’t such a good plan. Here is a better plan – follow the 5 tips below and you will greatly improve your odds at reaching millionaire status. It won’t happen overnight, but it will most likely happen (and you won’t go to jail for doing any of these either).

How to Become a Millionaire

1. Look Long-Term.
   There is a big difference between how the rich and the poor approach financial decisions. The rich look at the long-term while the poor look at the short-term. Here is an example when buying a car. The rich will look to see how much they will pay overall for buying the car. This includes purchase price, interest on the loan, and ongoing maintenance costs (or the cost of ownership). The poor on the other hand look solely at the monthly payment. If they can “afford” the monthly payment, then they can “afford” the car.

   You need to switch your outlook to long-term thinking if you want to become a millionaire. Before you buy anything, you have to think about the long-term costs associated with it, not the short-term. Are You Focused on Today or Tomorrow?

2. Have A Plan.
   I asked you earlier what your plan was for reaching millionaire status for a reason. If you have no plan, how do you know where you are going or how to even get there? A good plan doesn’t need to account for everything, nor does it need to include every obstacle you can think of. If you make your plan too concise, you will quit before you even start.

   But you do need a solid plan. When do you want to reach millionaire status? What are your investing plans, goals and risk tolerance? What are your career goals? Where do you plan on living? All of these things factor into your plan for reaching millionaire status. Once you have your plan, keep it in plain sight. It does no good sitting in a drawer where you never see it.

3. Protect Yourself.
   As your net worth rises in value, you need to protect yourself. No longer can you get the cheap auto insurance plan or forego life insurance policies if you have children. Sadly though, this is the one area where so many people fall short. Just one accident and all of your hard work can be wiped out in a lawsuit. I don’t need to remind you how litigious our society has become. You can probably get sued just for looking at someone the wrong way – and they will most likely win! Suddenly you have lost $500,000.

   Make sure you have adequate insurance coverage to protect you in the event something happens. Hopefully you never have the need to use the insurance. But having it will allow you to sleep at night.

4. Perform Regular Checkups.
   As you go through the years building up your wealth, you are going to have to perform regular checkups to make sure you are on track. If you are on track, great, nothing needs to be done. But if you are off track, then you need to figure out why and make the needed changes.

   Personally, I do an annual checkup with my wife. We will sit down and review everything. We look at the prior year versus this year and then the overall picture. We try not to get too caught up in the year to year changes as things happen along the way that can make things look better or worse than they really are. For example, maybe last year you didn’t save as much because you needed a new roof and there was an unexpected medical procedure. While this looks bad, if you look at your overall picture, you will see you are still on track with your plan because you saved so much extra during the previous 3 years.

   Remember, focus on the long-term. If you see a long-term trend though, you need to correct it so that you can ensure you reach your goal.

5. Learn To Delay Gratification.
   Arguably one of the most important tips is to learn to delay gratification. The longer you can wait to buy something the better. This is because when you wait to buy, you instead save your money. Thanks to compound interest, your money grows and you become richer. Many times, you will forget about the item and will never buy it. Also, depending on what you are looking at buying, you can get the same item for less money.

   For example, I had an iPhone 3G for the longest time. I wanted to upgrade, but waited until the iPhone 5 came out. When it did, I bought the iPhone 4. Why? Because it was now $100 cheaper with a 2-year plan. It was a nice step up from my previous phone and I was happy that I saved the $100.

   My Dad did a similar thing. He always wanted a Porsche. When it came time to buy one, he shopped around and found a used one with low miles and a low price. He saved thousands by being smart and delaying gratification.

   Don’t look at delaying gratification as going without as you will get what you want, just not right at this moment. Also, don’t look at it as punishment or a bad thing. Remember your goal is to reach millionaire status. Delaying gratification is only getting you closer to your goal. Be happy about that.

   Most people have a hard time with this one because we are wired now to need instant gratification. If you can learn to think long-term, the urges for instant gratification will subside.

Final Thoughts

These tips will help you become a millionaire. Overall, they are fairly simple. You don’t have to do a lot of hard manual labor to reach millionaire status, you just have to be smart and give yourself time. If you can follow these tips, I am certain you will become a millionaire.

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The other week I was traveling for vacation and while sitting on the plane, my seatmate started talking to me about the various marijuana stocks that are now being traded in the stock market. He was selling this one stock in particular (I won’t mention it since it’s a penny stock), telling me how he’s made so much money from it.

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Questions To Ask Before Investing In Marijuana Stocks

We all know when random people start offering you investing advice, the party is about to come to an end. Curious, I decided to look into the stock, not to buy mind you, but rather to just learn about it since I enjoy investing so much. The company sounded interesting enough, but the idea of investing in marijuana stocks is not so black and white. In fact, it’s very gray. Here are some things you need to consider before investing in marijuana (or investing at all).

Is It Ethical?

For many, marijuana, regardless of how strong a drug, is still an illegal drug and as such should not be invested in. For others, they see marijuana not as a drug at all, but as a natural remedy for some health issues. I am not here to debate one way or the other. But I am here to tell you that you have to know where you stand on the issue before you invest.

Is It Legal?

While states like Colorado and Washington, among others, make marijuana legal, the rest of the country does not. This includes the federal government. Remember that when you buy a share of stock, you are part owner of that company, regardless of how small your equity stake is. Should the government come after the company for selling in states they aren’t authorized, or selling things they shouldn’t be selling, you could be on the hook since you are part owner.

Now in all honesty, I have no clue of the likelihood of this happening, let alone the government coming after you, the owner of 0.002% of the company. But, I have to admit that it is a risk that has to be taken into account and assessed. The last thing anyone wants is to be held liable for something they had no clue was happening.

In addition to the above issue, is the possibility of the federal government overruling the states in some manner. Again, I have no idea of the likelihood of this either, but the government could strike down the law and ban sales of the drug. Your good investment is now worthless overnight.

Is It A Good Investment?

This depends on how you look at it. On the one hand, this could be an opportunity to get in on the ground floor of something big. If other states begin to legalize marijuana, the current crop of companies have a head start on everyone else. They already have a process in place for how to profit. They can simply copy the model from Colorado and begin applying it to other states.

But on the other hand, as states legalize marijuana, the federal government could say it wants to get in on the money and become the sole supplier for the country. If that happens, the stock becomes worthless.

As with anything related to investing, with high risk comes high rewards. These marijuana stocks fit that bill perfectly. There is a ton of uncertainty with them and as a result, there is the potential for something big. But there is equally as big of a chance as something going wrong and the stocks becoming worthless. If anything, an investment in a marijuana stock should be done with money that you can not only afford to lose (because there is a very high probability you will lose) but also in a play account and not your long-term investment portfolio. For example, if you still need to make trades in your Motif account to earn your $150 sign up bonus, you could buy some of the marijuana community motifs to play with.

Final Thoughts

Back to the stock in question from earlier, I followed it for a few days and watched the price decline daily for about two weeks. Over this time, it lost about 25% of its value. For me, I don’t know if I could handle a 25% decline in my investment over the course of a few days. It’s one thing when the stock market as a whole declines 40% over the course of a year, but over a few days? That’s just crazy.

If you are thinking about investing in marijuana stocks, I urge you to take caution and think things through. Don’t make any quick decisions. You can very easily lose your entire investment.

Would you invest in marijuana stocks? Why or why not?

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If you pay any attention to business news, you will no doubt hear stories on how so-and-so company is implementing a stock buyback program or how they are increasing the amount of their current stock buyback program. The question is, what the heck is a stock buyback program and as an investor, should you care? Is this good for you or bad for you?

What is a Stock Buyback?

Before we get into the advantages and disadvantages of stock buybacks, we need to talk about and understand what a stock buyback is in the first place. A stock buyback is when a company goes out and buys back and retires shares of its own stock.

A little background on this: when a company goes public, it issues a set amount of shares, say 10 million. The money earned from issuing these 10 million shares goes to the company, which they then use to fund growth of the business – buy plants, equipment, etc. Once those 10 million shares hit the open market, the company never sees another dime when they are traded. Now the two parties involved are you and I when we buy and sell to one another through our brokers.

Along the way, if the company needs more money, they can issue new stock. The same logic above applies here, when the shares hit the open market for the first time, the company reaps the reward.

A stock buyback is simply this in reverse. Instead of issuing more new stock, the company buys back or retires stock. So, if the company above that issued 10 million shares issues a 5 million share stock buyback, there will be 5 million shares outstanding when the program is complete.

Why Conduct a Stock Buyback?

There are a few reasons why a company would complete a stock buyback. The first is to own a larger percent of the company. Taking the 10 million shares example above, the company would not issue all 10 million shares to the public. This is because a share of stock represents ownership in the company. The company wants to maintain control and decision-making power so they will only allow 49% or less of those 10 million shares to go public. So, by issuing a stock buyback, the company could increase its ownership from say 55% to 60%.

Another reason why a company issues a stock buyback is to stop others from gaining control of the company. This is essentially the same idea as above. If the company sees a rogue investor buying up shares and increasing ownership stake in the company, that investor may try to do a “hostile takeover” of the company. By increasing the amount of shares the company owns, they can avoid this.

How Does a Stock Buyback Benefit You?

The main way a stock buyback benefits you is by increasing your ownership in the company. Let’s say you own 1,000 shares and there are 10 million shares outstanding. You own 0.01% of the company. But, if they conduct a stock buyback program and end up with 5 million shares, your ownership went up to 0.02% without buying any more shares.

Another benefit to a stock buyback is that by having fewer shares outstanding, the ratios that the company is measured by improve. This gives the illusion to new investors that the stock price of the company is a good value and those investors buy into the stock. The buying pushes up the price of the stock and thus makes shareholders more money.

What are the Downsides of Stock Buybacks?

There are two potential downsides to stock buyback programs. The first is potential growth. When a company decides to buyback its own shares, it does so with cash. This cash could be used to reinvest in the firm in order to buy new equipment, expand operations, buy a new plant, etc. In order to conduct a stock buyback, the company has to forego the reinvesting of cash. Of course, many companies do highly detailed analyses on this and can make a strong case as to why a stock buyback is a better use of money than reinvesting back into the company.

The second potential downside of stock buybacks is when management conducts a stock buyback for all of the wrong reasons. Instead of doing so to improve financial ratios and increase shareholder value, the company will conduct a stock buyback in order to give more compensation to executives. In this scenario, the company will issue a stock buyback program, but instead of retiring the shares, the shares will be granted to top executives which provides them with higher compensation. Understand though this practice is not very common.

Final Thoughts

Overall, a stock buyback program is a good thing for investors. They increase your percentage of ownership in a company and they also encourage other investors to buy shares, which in turn drives up stock prices. This results in more value for you as a shareholder. As of today, over 400 of the 500 companies in the S&P 500 are or have conducted a stock buyback program recently. As stock prices continue to rise, the question becomes how many of these firms will continue to buy back their own shares, since it costs them more money to do so as stock prices increase.

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A reader recently wrote in wanting to know how to become a billionaire. There is no set path to becoming a billionaire. If there was, you can be certain that I would have majored in it in college along with everyone else. Realize from the start that odds are against you becoming a billionaire. I am not saying this to stop you from trying, but if it were easy, everyone would be rich beyond their wildest dreams. Let’s discuss many of the various ways you can become a billionaire anyways.

Have Billionaire Parents

The easiest way to become a billionaire is to have parents who are billionaires. Odds are that they will leave their money to you to inherit and then you can sit back and relax because you are a newly minted billionaire, unless you are the child of Bill Gates or Warren Buffett who are giving away their billions to charity.

Of course, you can’t choose who your parents are at birth and if you are asking how to become a billionaire, I am assuming that your parents aren’t billionaires, so this option is off the table you.

Become A Movie Star

Tom Cruise earned $20 million for starring in Oblivion. Sandra Bullock earned $56 million for The Blind Side and The Proposal. While these earnings aren’t in the billions of dollars, if you string along enough movies and are smart with your money, billionaire status is achievable.

Achievable but not likely.  Before you run over to your mirror and start your best Jack Nicholson impression, understand that the big-time movie stars are the exception and not the rule. Take a trip to Los Angeles and ask any waiter that serves you food what they do for a living and odds are they will tell you they are an actor. Sure someone has to make it, but when millions are trying, the odds of you making it are slim.

Become a Sports Star

See the above point about movie stars here. Less than 2% of college athletes in football and basketball make it to the pros. An even smaller number of high school stars make it to the professional sports leagues.

Again, there is a chance. I would never tell someone to quit their dream, but you have to be honest with yourself at the same time. I’ve heard many people talk about how much faster the NFL is compared to college football. It makes sense. Only the cream of the crop plays professional football.

In college, Reggie Bush of USC would outrun everyone on the field. In the NFL, he routinely gets caught. He is no longer the faster person on the field. However, if you do have the skills be sure to read the Financial Advice for Pro Athletes.

Become The Leader of a Drug Cartel

Leading a drug cartel will yield you billions of dollars. But, the drugs you would be working with are illegal and you run a very high risk of ending up in jail. Actually, odds are more likely you will end up murdered since other leaders and defections in your own gang will be looking to take power from you.

Having to look over your shoulder all of the time and questioning everyone you know doesn’t sound like much fun. You want to lie on an island beach, soaking up the sun all day, not locked in a room worried about whether you are being targeted every day.

Win The Lottery

You won’t become a billionaire by winning the lottery, but if you win a large enough jackpot and invest the money wisely, you could easily end up one.  But, the odds of winning the lottery are slim and the fact that 90% of lottery winners go broke within 5 years is sobering. And don’t forget You Have to Pay Tax on Lottery Winnings.

Start Your Own Business

Creating a successful business and then going public with your company stock is a great way to become a billionaire. Of course, you’ll need to come up with a great product or service that people need and want to buy and then be able to make certain your product is the best.

Even then, many small businesses don’t survive, so this path isn’t guaranteed either.

Follow Your Dream to Become a Billionaire

What we have learned here is that there is no certain path to becoming a billionaire. If there was, many more people would be a billionaire. Here is my advice on your best shot at becoming a billionaire:

Find something you love and start working in that field. If you are truly passionate about the subject matter, you will want to always know more and stay on top of the latest news and developments. Work won’t feel like work. It will just be fun. Through all of this knowledge you gain, you will begin to see shortcomings in the industry that you might be able to exploit.

Maybe there is a better way of doing something. Maybe a product or a service that isn’t offered could be offered. Then create that service or product. If you do it right, you will have customers and will be making money. But here is the key: you can’t spend the earnings you make on cars, houses and vacations. You have to save the money.

By re-investing the money into the company you have a greater chance of staying on top and fending off future competition. Trust me, if your product or service is good, you will have competition eventually. As your company grows, you will earn more money which will allow you to re-invest more money. Compound interest will take over and your company will be worth millions.

Ideally, you will either go public and offer investors stock in your company or someone will want to buy your company. Either way, you are well on your way to becoming a billionaire. Of course, none of this is guaranteed. You can follow my advice and never become a billionaire. But many times, the journey is worth more than you can imagine.