Once you attain age 18 you have legal capacity to engage in transactions including obtaining a credit card. Once you start to borrow money you will start to have a credit score. The three companies that will follow you and build your credit score are TransUnion, Experian, and Equifax.

The scoring model that they use is called FICO®. FICO uses a range in scoring from 300 to 850 and here is the breakdown of what the numbers represent:

300 to 650 – poor or worse
651 to 700 – fair
701 to 750 – good
751 to 850 – excellent

Your score is important because it will affect the cost of borrowing on important purchases. The best example is a car. The amount of interest you will be charged can vary greatly depending on your credit score. The better your credit score, the lower your interest rate should be.

The main factors in your score are payment history, the amount of debt you owe, how long you have been using credit, any new or recent credit, types of credit used, and your capacity for credit. These are weighted, and are weighted differently by the three companies, thus your credit score may not be the same for each of the three companies.

Further explanation:

Payment History – are bills paid on time, sometimes late, or always late

New or Recent Credit – Anything new will lower your score, at least for a while as you are adding debt

Types of Credit Used – A car or home purchase with a reasonable down-payment will not be as negative on your score as adding an additional credit card

Capacity – The unused amount of credit available to you. Each credit card has a limit. If you are close to the limit, this can negatively affect your score. Conversely, if you are paying the balance off in full each month, thus not using up capacity, this will have a positive effect on your score.

A great goal starting out is to obtain a good or better credit rating. There are many ways to get your credit score but be careful since o lot of sites with free credit scores are trying to get you to sign up for something. Hopefully the first credit card company you choose will have free credit score monitoring available.

Money is just a way to keep score on property. Before societies, clans, or countries started to print money or use some other item as currency, commerce was accomplished through bartering. For example, I will trade one of my cows for two of your pigs. As you can imagine this is very cumbersome. What if I want two of your pigs but do not have a cow? Now we must agree on something else that I have that you want and that you think is a fair trade for two pigs.

Enter currency.

If the going market value for a healthy cow is $100, and the going market value for a healthy pig is $50, then the buyer can exchange currency rather than handing over a cow.

Ancient societies often used objects before the printing press was invented and paper money appeared. China, for example, used tea bricks as money. The bricks looked like giant divided chocolate bars, and the buyer would break off sections to pay for the goods or services they were acquiring. Other examples include cowrie shells, feathers, and tulip bulbs as money.

Paper money or  electronic money allows for a much faster flow of goods and services.

What the price of something tells us is the value of an item or service relative to other goods or services.

The norm, or conventional wisdom, is that after high school one attends college. Time to ask ourselves why. What is going to college going to accomplish for me? If the answer is I want to be a doctor, a lawyer, an engineer, a rocket scientist, or any other highly specialized field, then a direct route from high school likely makes sense. But if you are in the category of unsure of what you want to be later in life, which is probably most high school graduates and are just looking for additional education, to refine your interests, and hoping to get a “good job” upon graduation, let us look at some other options.

Scenario 1
Willie, who I will refer to as he, since I am eighty years old and have not had gender sensitivity training, is raised in a family that believes in advanced education. In a discussion with his parents during his junior year in high school, they inform him that they have set aside $100,000 for college. They add that they think it is enough to fully fund college if he goes to a state school. Willie says to them that he is not sure he wants to go to college, he has no idea what he wants to do later in life, and that he would like to think about it.

A week goes by, and Willie asks his parents for a follow-up discussion. He relates to them that he has given this a lot of thought and would like to propose an alternative plan. His parents give him that skeptical look that only parents can give but allow him to continue. Willie takes a deep breath and begins, “I will get a job when I finish high school and use some of my earnings to continue my education either through night classes or online programs. You still give me the $100,000 which I will invest and not touch until I have enough money to not have to work.” Now his parents look as if their heads are about to explode. Willie jumps in before they can say anything and says, “Please let me show you what this does for me.”

Here is what he prepared and showed them:

$100,000 invested at Willie’s age 18, earning a net annual return after taxes* of 8.5%, left untouched until age 60 would grow to $3,076,444. If he waited until 70 to start using the money, it would be $6,955,788.

If you were Willie’s parents, would you approve his request?

*In my book I recommend an all-equity portfolio which historically has produced an annualized return of 10% or slightly more. I have reduced the return to allow for taxes.
 
Scenario 2
Suzie has a very similar discussion with her parents except, in Suzie’s case, her parents have not been able to save anything to help pay for college. Suzie has applied to several colleges, filled out all the college aid forms, and has learned that based on her family’s financial situation the cost for college will be $15,000 per year. The college recommends that she can take loans for $10,000 and her parents can also take loans for the remaining $5,000. Suzie lets her parents know that she has no idea what career to pursue and would like to think about it.

A week later, Suzie asks her parents to continue the discussion. She opens their talk with the following, “If I take loans for college, I will have to start paying them back once I start working. It is my understanding that I will have to pay back the loan in 10 years. If I ignore interest and some of the other complications on the pay back rules, and for simplicity’s sake, I am looking at this costing me $4,000 per year from the time I am 22 until I reach 32. If I could invest the money, the $4,000 per year, in a Roth IRA instead, have it grow at 10% average annual return, at 67 I will have $1,970,683. There has got to be a better way than you and I taking on this debt.”

If you were Suzie’s parent, how would you respond to this?
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These situations are not presented to denigrate college or any advanced education but to rethink your approach to how that learning is achieved and when it should occur in your life. From a personal experience, I did college immediately out of high school and then military service. I know that I would have gotten a lot more out of college if I had done those in reverse order.
 
 
 

Early in my career I attended an investment conference where various money management firms made presentations on their approach to investing. A company that specialized in large U S growth companies was asked why they did not hold a particular stock that appeared in most other growth portfolios. The answer was that when they interviewed the management, the management could not effectively communicate the details of their business. The company that was subject of the question was Enron. Three years later Enron was bankrupt.

Stock selection takes time, talent, and temperament. I cannot imagine any individual being able to outperform the professionals over a long period of time. Every industry study backs up that thought.

Time – If stock selection is not your career, you do not have the time to do it properly.

Talent – If you are not trained in how to research companies you do not have enough information to make effective decisions. With no exception, every time I ask a do-it-yourself stock picker what their sell discipline is, I get a blank stare. A good money manager has a sell target on every stock they select. They are periodically reevaluating whether to sell or hold a stock.

Temperament – When we shop, we look for bargains, we look for goods on sale. Typically, when stocks are on sale, we are afraid of them and when they soar in price, we want to get in. In other words, our emotions drive us in the wrong direction.

The beauty of mutual funds is that they allow the small investor to access professional money management at low cost. We are hiring people with the time, talent, and temperament to make good decisions on our behalf.

Every business day millions of shares of stock are bought and sold by individuals and institutional investors. Every transaction has two sides, a buyer, and a seller. Each side has a different opinion about the company whose stock they are buying or selling (unless the seller is motivated by a need for cash).

What are the buyer and seller looking at to make their decision?

An easy answer could be the book value of the company. This would be determined by the total assets of the company minus all its liabilities, which would give you the company’s net worth. For example, the net worth of XYZ company is $1,000,000. There are 1,000,000 shares of XYZ outstanding. Therefore, the book value of each share is $1.00.

Yet you look at the current price of XYZ and the current market has it priced at $10.00 per share. You dig deeper and find out that XYZ company paid a dividend in the prior year of $0.50 per share. If the stock were priced at book value, this would be an annualized return of 50%. You look at more information and find out that XYZ has increased its dividend by 10% every year for the past 10 years. Theoretically the price of a stock should reflect the present discounted value of all future dividends. Since the future dividends of any stock are an unknown, opinions of what this number will be vary greatly.

Given the facts you have on XYZ it would not make sense to pay $10 for a share of stock unless you   had a reasonable expectation that the company would be able to continue to increase its dividend every year. The current dividend is a 5% annualized return. In today’s market fixed income, bonds, are available that pay 5% with much less risk than stock.
Back to any transaction in XYZ, the seller believes the growth in dividends will not continue, and the buyer believes it will continue and may even increase in its rate of growth.
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Here is an interesting phenomenon about stock prices and dividends. Tesla has yet to pay a dividend, yet if one bought Tesla 5 years ago, the growth in the price of Tesla’s stock has far exceeded the growth in the price of Apple, Walmart, and many other well-known companies over the same time frame. And these companies pay dividends! What is this telling us? Investors expect Tesla to pay dividends, and lots of them in the future.