How do you make money.

[TinCow]

Thanks, I have enough info about jobs, what I wanted with this thread is what else there is. I heard alot about stocks, bonds, PACs, interest, saving accounts, but I had little to no idea on what they were and what they do. I'm told to be smart with my money but how can I do that if all I know about economics is what to do for a pay check, I have little to no idea what the market is, what it entails or what is considered smart finances.

In order to make a living off of investments (stocks, bonds, etc.) you have to have a LOT of money to start out with. For example, a good rate of return on an investment will be in the 5 to 10% range, with 'safe' investments (those with low or no risk of loss) being on the lower end of that scale. Thus, your 'income' would be that 5 to 10%. In order for that to be enough to live off of, the principal must be sufficiently large so that that fraction of it can support your lifestyle. If you have a 5% rate of return (a reasonable expectation these days), a principal of $100,000 would earn you $5,000 per year. If you are withdrawing that money and living off of it, your principal will never increase and thus the amount you earn will not change very much. $5,000 is not enough to live off of in most places, so clearly $100,000 is not enough of a principal to sustain yourself. To gain enough of a yearly return to live off of, say $50,000 per year, (assuming a 5% rate of return) you would need a principal of $1,000,000. None of this is counting taxes on your income either, which will reduce what you get every year.

In short, it takes money to make money. You cannot invest 500 GBP per month and live off of the profits; you need much larger sums. This is why most people only start to live off their investments when they are much older and have accumulated far more in savings. Even then, most people draw down their principal. It requires a truly large sum to live off the interest/dividends alone, a sum that most people are not likely to ever see in their lifetimes.

[Lemur]

Lemur's patented, copyrighted, and trademarked financial system:

Deposit big checks, write small checks.

There. You are welcome.

[Greyblades]

Well yeah I'm not saying I have to live off 500 a month, what I would like is to use what I get to learn, I basically am at a practice stage, living off my parents dime in my parents house with a generous allowance with which to pay for transport to university and the leftovers with which to experiment, I don't need to to live off the profits right now but I would like to use said leftovers productively and learning to use money to earn more money seems pretty productive and even appealing.

Sometimes I wish I had better communication skills so the misunderstandings wouldn't take several posts to explain.

[TinCow]

Well yeah I'm not saying I have to live off 500 a month, what I would like is to use what I get to learn, I basically am at a practice stage, living off my parents dime in my parents house with a generous allowance with which to pay for transport to university and the leftovers with which to experiment, I don't need to to live off the profits right now but I would like to use said leftovers productively and learning to use money to earn more money seems pretty productive and even appealing.

Sometimes I wish I had better communication skills so the misunderstandings wouldn't take several posts to explain.

Well, the first and most important step is to learn how to budget. You need to categorize your income into three separate areas. First, determine how much money you need to pay for essentials, such as food, housing, transportation, etc. Do not include any luxuries in here, only the bare minimum necessary. Second, set yourself a specific level of savings to put away for the future. More on this later, but a good rule of thumb is 10% of your income. So, with an income of 500 GBP per month, this would be 50 GBP. Third, everything else left over is your disposable income. If you do not already have them, open two bank accounts, a checking account and a savings account. Every month, deposit 450 GBP into the checking account and 50 GBP into the savings account. Ignore the savings account for now; pretend it doesn't exist. Pay your bills exclusively from checking. Your disposable income will remain in checking and will slowly accumulate. You can do multiple things with your disposable income. First, you can spend it on luxuries, like entertainment, a good meal, or some nice item or piece of clothing which is not covered by your essentials. Second, you can save it for bigger luxuries. For example, you might want to buy a new computer which costs 1000 GBP. Obviously one month's of disposable income is not enough to pay for this. So, don't spend your disposable income for several months and instead save it up. When you've got enough got the computer, then you buy it. Third, make larger than normal deposits into savings.

Do not run up debt. Credit cards are good things, and I recommend using them. They are easier than carrying around cash, will build a credit record for you (which is important in future years), and you can even save money with them if you've got a card that gives you some kind of cash-back or reward system. The important thing, though, is to NEVER run a balance on the card. Always pay the balance of the card in full every month. If you do this, the credit card costs you nothing (avoid annual fee cards like AMEX, you don't need them). If you cannot afford something based on the amount of money in your checking account, you just don't buy it.

Continue this way until your savings account has enough money in it to allow you to live off of that account with no other source of income for six months. That money is now your emergency fund, and you will never touch it. It exists to bail you out of bad situations, such as unemployment or unexpected medical expenses. It is a safety net for your financial life, and you should always keep it safe in a savings account and never invest it or put it someplace where you cannot access it immediately and in full. From this point on, your monthly savings can instead be diverted into investments. These are the stocks and bonds that you hear so much about. There is a lot to learn about this stuff, but you're still at the beginning of the process so you don't need to worry about it yet. When you get there, find someone who's knowledgeable about it and pick their brains. As your income level increases, your lifestyle will increase as well and you should regularly rebalance the 'essentials' and the savings to ensure that they keep up with your means and your needs. Also make sure that your six-month emergency fund remains a six-month fund. If your lifestyle has changed such that your emergency fund will now only cover four months of living, you need to spend some time topping it up again. You also want to immediately top it up if you ever have to take money out of it.

Above all, do not go into debt for unnecessary things. You will probably need a loan to buy a house or a car, but those are special cases and worthy of their own discussion. Other than that, if you cannot pay for the item in full, do not buy it.

[caravel]

Just blow it all on booze and women...

Or save it all up 'til you get married and your wife will blow it all on shoes and slimming...

[Greyblades]

Ah, but 'tis my curse to be adverse to that sweet liquor you sup,
Booze, that elder sap that some do tap to fill thier wanting cup...

Drat. I try to write drunkenly and I end up getting poetic.
I dont like the taste of alcohol and the brothels in the area are bloody well hidden, why else would I be taking economic advice?

[Papewaio]

What Uni course are you studying? (Helps to understand your mathematical ability)

Use your local library and indeed your Uni library. Just like a physical fitness program use your libraries to build up knowledge in what are stocks, bonds and other investment vehicles.

Use the Internet. I've seen self learning modules produced by stock exchanges ie: http://www.asx.com.au/resources/shares-courses.htm

Once you understand the vehicle then understand the company and what it produces or services. Easiest way is to invest in things that you use on a day to day basis that you like. If you buy it in a supermarket and you don't like it then don't buy it. Essentially buy shares that would make up your personal preferred CPI. This does require you to do the shopping, also you can look at getting up early and going to farmers markets and buying fresh bulk produce. Just make sure you don't waste it.

Read up about great investors and entrepreneurs particle focus on how they got started.

Start with Warren Buffet for instance.

[Greyblades]

Well I was told to do what I like doing and not what I think others think is good for me, so I'm on a creative writing course (irony in 3..2..1..), not sure what I was thinking there but it could have been worse, before that I was doing a mathematics A-level.

[Gregoshi]

...and the brothels in the area are bloody well hidden, why else would I be taking economic advice?

I gather because you want to be screwed any way you can get it.

[Papewaio]

Well turn your passion into an income stream before you leave Uni.

Start writing and aim for magazines to publish in. Just be prepared to be rejected.

[caravel]

I dont like the taste of alcohol and the brothels in the area are bloody well hidden, why else would I be taking economic advice?

Then you have no money problems......?

(and btw I wasn't suggesting brothels)

[Greyblades]

When I was your age I was buying tailored suits from Hong Kong - I wasted the money I had, just not as much as most people, that's what you should be taking from me. I also wasted the opportunity to get ahead. If you want to be a writer, fair enough, but you won't money at it for a long time and that degree won't get you a lot of other places other than journalism.

You are restating the advice I've been given for the last 12 years, advice I've already taken partially to heart otherwise I wouldn't be asking for advice and explanations on how to make the most of my money.

Then you have no money problems......?

(and btw I wasn't suggesting brothels)

No I don't, but I have a sword hanging over my head that tells me that the good times will not last and I find myself less than all knowing on what I can do before it falls.
(I was joking.)

[Andres]

Well, the first and most important step is to learn how to budget. You need to categorize your income into three separate areas. First, determine how much money you need to pay for essentials, such as food, housing, transportation, etc. Do not include any luxuries in here, only the bare minimum necessary. Second, set yourself a specific level of savings to put away for the future. More on this later, but a good rule of thumb is 10% of your income. So, with an income of 500 GBP per month, this would be 50 GBP. Third, everything else left over is your disposable income. If you do not already have them, open two bank accounts, a checking account and a savings account. Every month, deposit 450 GBP into the checking account and 50 GBP into the savings account. Ignore the savings account for now; pretend it doesn't exist. Pay your bills exclusively from checking. Your disposable income will remain in checking and will slowly accumulate. You can do multiple things with your disposable income. First, you can spend it on luxuries, like entertainment, a good meal, or some nice item or piece of clothing which is not covered by your essentials. Second, you can save it for bigger luxuries. For example, you might want to buy a new computer which costs 1000 GBP. Obviously one month's of disposable income is not enough to pay for this. So, don't spend your disposable income for several months and instead save it up. When you've got enough got the computer, then you buy it. Third, make larger than normal deposits into savings.

Do not run up debt. Credit cards are good things, and I recommend using them. They are easier than carrying around cash, will build a credit record for you (which is important in future years), and you can even save money with them if you've got a card that gives you some kind of cash-back or reward system. The important thing, though, is to NEVER run a balance on the card. Always pay the balance of the card in full every month. If you do this, the credit card costs you nothing (avoid annual fee cards like AMEX, you don't need them). If you cannot afford something based on the amount of money in your checking account, you just don't buy it.

Continue this way until your savings account has enough money in it to allow you to live off of that account with no other source of income for six months. That money is now your emergency fund, and you will never touch it. It exists to bail you out of bad situations, such as unemployment or unexpected medical expenses. It is a safety net for your financial life, and you should always keep it safe in a savings account and never invest it or put it someplace where you cannot access it immediately and in full. From this point on, your monthly savings can instead be diverted into investments. These are the stocks and bonds that you hear so much about. There is a lot to learn about this stuff, but you're still at the beginning of the process so you don't need to worry about it yet. When you get there, find someone who's knowledgeable about it and pick their brains. As your income level increases, your lifestyle will increase as well and you should regularly rebalance the 'essentials' and the savings to ensure that they keep up with your means and your needs. Also make sure that your six-month emergency fund remains a six-month fund. If your lifestyle has changed such that your emergency fund will now only cover four months of living, you need to spend some time topping it up again. You also want to immediately top it up if you ever have to take money out of it.

Above all, do not go into debt for unnecessary things. You will probably need a loan to buy a house or a car, but those are special cases and worthy of their own discussion. Other than that, if you cannot pay for the item in full, do not buy it.

This exactly the advice I wanted to give, but I was too lazy to type it. Excellent post

The six month rule is golden and very important to keep in mind for the rest of your life. Living as if you don't have a savings account is another golden rule.

Next to stocks and bonds, you may also want to look if your country gives fiscal stimuli for certain types of investments. In Belgium, for instance, you get an important fiscal stimulus if you put money into a pension fund/life insurance. There's a stimulus for acquiring a house and from time to time, there are stimuli for certain investments to improve your home. You also always have to look out for taxes; the profits you make on some products are taxed, others are not. Once you're going to get into it, it'll feel like a whole new world opening for you.

I wouldn't put too much trust in professionals though, certainly not when they are busy trying to sell you products or when they themselves are working for a financial organisation. Listen to them, pick up a few things but educate yourself on the subject as well; never decide on the spot, but go back home first, look a few things up and then decide if you're going to follow the advice they gave you.

For instance: some banks will try to talk you into funds organised by themselves. They promise you an expected return of investment of 5 to 6 % which is good nowadays, certainly if you don't have to do anything yourself but transferring money. However, what they sometimes don't tell you, is that there's an annual fee to pay when you step into the fund and you return goes down with a percentage. Then there's also a cost to step into the fund; again 1,5 % gone. Etc. Read everything before you sign into something.

[Vladimir]

Power Ball is up to $550 million: http://www.powerball.com/pb_home.asp

[Vladimir]

I would literally poop myself if I won that kind of money.

I won the PowerBall! Literally! I only got the PowerBall number, none of the rest match.

[Papewaio]

I won the PowerBall! Literally! I only got the PowerBall number, none of the rest match.

That's what Hitler said.

[ajaxfetish]

Spoiler Alert, click show to read: 

Well, the first and most important step is to learn how to budget. You need to categorize your income into three separate areas. First, determine how much money you need to pay for essentials, such as food, housing, transportation, etc. Do not include any luxuries in here, only the bare minimum necessary. Second, set yourself a specific level of savings to put away for the future. More on this later, but a good rule of thumb is 10% of your income. So, with an income of 500 GBP per month, this would be 50 GBP. Third, everything else left over is your disposable income. If you do not already have them, open two bank accounts, a checking account and a savings account. Every month, deposit 450 GBP into the checking account and 50 GBP into the savings account. Ignore the savings account for now; pretend it doesn't exist. Pay your bills exclusively from checking. Your disposable income will remain in checking and will slowly accumulate. You can do multiple things with your disposable income. First, you can spend it on luxuries, like entertainment, a good meal, or some nice item or piece of clothing which is not covered by your essentials. Second, you can save it for bigger luxuries. For example, you might want to buy a new computer which costs 1000 GBP. Obviously one month's of disposable income is not enough to pay for this. So, don't spend your disposable income for several months and instead save it up. When you've got enough got the computer, then you buy it. Third, make larger than normal deposits into savings.

Do not run up debt. Credit cards are good things, and I recommend using them. They are easier than carrying around cash, will build a credit record for you (which is important in future years), and you can even save money with them if you've got a card that gives you some kind of cash-back or reward system. The important thing, though, is to NEVER run a balance on the card. Always pay the balance of the card in full every month. If you do this, the credit card costs you nothing (avoid annual fee cards like AMEX, you don't need them). If you cannot afford something based on the amount of money in your checking account, you just don't buy it.

Continue this way until your savings account has enough money in it to allow you to live off of that account with no other source of income for six months. That money is now your emergency fund, and you will never touch it. It exists to bail you out of bad situations, such as unemployment or unexpected medical expenses. It is a safety net for your financial life, and you should always keep it safe in a savings account and never invest it or put it someplace where you cannot access it immediately and in full. From this point on, your monthly savings can instead be diverted into investments. These are the stocks and bonds that you hear so much about. There is a lot to learn about this stuff, but you're still at the beginning of the process so you don't need to worry about it yet. When you get there, find someone who's knowledgeable about it and pick their brains. As your income level increases, your lifestyle will increase as well and you should regularly rebalance the 'essentials' and the savings to ensure that they keep up with your means and your needs. Also make sure that your six-month emergency fund remains a six-month fund. If your lifestyle has changed such that your emergency fund will now only cover four months of living, you need to spend some time topping it up again. You also want to immediately top it up if you ever have to take money out of it.

Above all, do not go into debt for unnecessary things. You will probably need a loan to buy a house or a car, but those are special cases and worthy of their own discussion. Other than that, if you cannot pay for the item in full, do not buy it.

I'll just second Andres in saying that this is some of the best starting financial advice I've ever heard expressed. Very well and succinctly said.

Ajax

[TinCow]

I was doing some financial work today and in the process noticed this article: 13 Steps to Investing. It's a very good primer on investments and money management and is worth the read if you're interested in doing something with your money. Note that this is what you do with your extra money AFTER you've taken care of the things I discussed earlier.