We might consider professional gamblers—poker players, for example—a breed of speculative investors. Of course, we might also call investment professionals who take wild risks in financial markets gamblers. No matter how skilled the card shark or how practiced the investing maven, one thing is certain: in cards, as in the stock market, there are no guarantees.

Whether we gamble or invest, we take risks in pursuit of potential rewards.

We risk a dollar on a lottery ticket for a potential to win ten million dollars, we risk $25 on a hand of blackjack for the potential to double our money, we risk $5,000 to buy a penny stock for the potential it will triple in three months, or we risk our life’s savings in the stock market for the potential to earn consistent annual returns.

Each risk carries vastly different odds (and potential returns). At the one extreme, the odds you will lose your dollar is good; of winning the lottery, not so good. On the other extreme, the odds of making a modest return on a long-term investment in the stock market is good; the odds you’ll lose a chunk of your savings is much lower.

But are investing and gambling the same? Let’s use an example to find out:

How Three People See Risk

The following describes the attitudes toward gambling and investing held by three individuals: a close friend, my sister, and I.

L (My Friend)

• The Gambler: L became an avid poker player after learning the Texas Hold ‘em in school. He would attend casual tournaments with buy-ins of up to $20 on a regular basis. Also, L funded an account for online poker with at least $400.
  The Investor: L took much interest in the stock market in college as well. He started off small with about $1,000 in a brokerage account. By his senior year, he had an account valued at about $60,000, made possible with $20,000 in margin and $15,000 in credit card balance transfers. Obviously, L doesn’t mind risking borrowed money if he believes it can earn a return. Likewise, L believes it is naïve to leave money in a high-yield savings account if the stock market can offer higher returns.

J (My Sister)

• The Gambler: J has proclaimed that she would never play poker with real money, although she has played a few games “for fun”. J wants to understand the game and enjoy it with friends, but refuses to wager real money.
  The Investor: J does not own any investments whatsoever. Her ideal method of building wealth is a stable, high-paying career. She has shown interest in the stock market and even built a virtual stock portfolio, but that’s where her investing stops. Instead, J funnels most of her cash into her safe but stagnant high yield savings account.

Myself

• The Gambler: Though I am fond of gambling, I rarely put real money down. Aside from occasional friendly poker games, I have only participated in a few “real money” tournaments, none with a buy-in of more than $5. I too caught the online poker bug a while back, but I only funded an account with $25.
  The Investor: I am a conservative investor, but an investor nevertheless. I have roughly $3,000 in a Roth IRA invested in mutual funds and ETFs, nothing yet in individual stocks. I believe investing is necessary in order to prosper, but I take the safe approach by investing in index funds.

This evidence is anecdotal, sure, but I believe that the way a person gambles can predict how that person will invest, and vice versa.

So What?

The parallels between gambling and investing are interesting, but you’re probably starting to ponder a very valid question: Why should we care?

Because we can use the similarity between gambling and investing to measure our own ability to stomach risks and, as a result, make better investments.

Take, for example, the following ubiquitous investing advice:

Your portfolio should reflect your risk tolerance.

That makes sense, but how are you supposed to know what your risk tolerance is? There’s the general rule of thumb that you want less risk as you get closer to needing the money you have invested (in most cases, retirement). But that’s just the start. No two investors are the same.

But if you like a little gamble in your life, in other words, you’re the type who sits down at the blackjack table instead of watching over your friends’ shoulder, chances are you’ll enjoy the ups and downs that come from riskier investments. On the other hand, if dropping a quarter in a slot machine seems like the most foolish use of 25 cents you can think of, you might be more comfortable with conservative investments.

Obviously, the smart investor strives to make sure even aggressive investments are more than just gambles. And a gambler should know that house always wins and that gambling is entertainment…not an investment. Still, the parallels between Wall Street and the Las Vegas Strip endure…and continue to intrigue.

How does your gambling attitude compare to your investing mindset? Does your risk profile for investing deviate from that of gambling? Share your thoughts in a comment.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

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2. Asset Allocation for Investors Under Thirty
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Banks are never short of come-ons for winning new customers; some banks offer new depositors free checks, cash bonuses or iPods (just to name a few).

That’s because banks can’t make money until they have your money.

A Penny Saved Is a Penny Lent

Remember those days when ING Direct and other high yield savings accounts offered interest rates of five percent or more? I used to stash cash into those accounts like crazy and think: “How could banks be handing out money like that?”

It all ties back to the fundamental way banks make money: Banks use depositors’ money to make loans. The amount of interest the banks collect on the loans is greater than the amount of interest they pay to customers with savings accounts—and the difference is the banks’ profit.

For example: You currently have an emergency fund of $10,000 in a high yield savings account that may pay 1.50 percent APY. The bank uses that money to fund someone’s:

• Mortgage at 5.50% APR
• Student loan at 6.65% APR
• Credit card at 16.99% APR

Your bank may have paid you $150 in a year’s time but they earned hundreds or thousands more from the interest on loans (made possible with your money). Now, think about this process repeated with millions of banking customers and billions of dollars.

Fees, Fees, Fees

Yes, banks make a lot of money banks from charging borrowers interest, but the fees banks change are just as lucrative.

• Account fees. Some typical financial products that charge fees are checking accounts, investment accounts, and credit cards. These fees are said to be for “maintenances purposes” even though maintaining these accounts costs banks relatively little.
• ATM fees. There will be times when you can’t find your bank’s ATM and you must settle for another ATM just to get some cash. Well, that’s probably going to cost you $3. Such situations happen all the time and just mean more money for banks.
• Penalty charges. Banks love to slap on a penalty fee for something a customer’s mishaps. It could a credit card payment that you sent in at 5:05PM. It could be a check written for an amount that was one penny over what you had in your checking account. Whatever it may be, expect to pay a late fee or a notorious overdraft fee or between $25 and $40. It sucks for customers, but the banks are having a blast.
• Commissions. Most banks will have investment divisions that often function as full-service brokerages. Of course, their commission fees for making trades are higher than most discount brokers.
• Application fees. Whenever a prospective borrower applies for a loan (especially a home loan) many banks charge a loan origination or application fee. And, they can take the liberty of including this fee amount into the principal of your loan—which means you’ll pay interest on it too! (So if your loan application fee is $100 and your bank rolls it into a 30-year mortgage at five percent APR, you’ll pay $94.40 in interest just on the $100 fee).

Recently, banks are taking a lot of heat for interest rate hikes and fees going out of control. Giving banks business may seem like putting yourself in harm’s way, but of course, it still beats hiding your money under a mattress. Understand how banks work, however, and you’ll know where to lookout for fees and how to avoid lining banks’ pockets by paying more interest than you’re earning.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

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I like to assume that most people don’t start drowning in high-interest credit card debt on purpose. We don’t choose to fork over billions to credit card companies every year because we feel bad that their execs’ planes are getting a little old.

But we do.

As you hopefully know by now, the overarching mistake that leads to all this debt is using credit cards to spend money we don’t have. But again, many people don’t realize this is happening as they swipe their cards. And one dangerous credit card mistake makes this far easier to do. Do you make it?

Do you fool yourself about the value of credit card rewards?

Cash-back and rewards credit cards can put a few hundred extra dollars into savvy spenders’ pockets every year. But the credit card banks don’t offer rewards to pay off customers who will never make the banks money; they offer rewards to bait customers who will pay the banks handsomely. Could that be you? Here are a few reasons it might be:

1. You Love to Shop

For many, big purchases get a little bit easier if you know that you’ll earn a one, two, or three percent “rebate” from credit card rewards. Whether you get a thrill from shopping and credit card rewards push you to make impulse decisions or you’re a coupon and discount shopper who sees rewards points as a “value-add” or “something for nothing” because you would buy the item anyway, watch out.

You may be walking into stores with a devil on your shoulder saying:

Don’t be afraid to shop. You have a cash-back credit card. The price charged on your receipt isn’t really what you’re paying.

Simply put, knowing that you are being “rewarded” can be a powerful and dangerous incentive for spending.

2. You Carry a Balance

Obviously, carrying a credit card balance is never a good idea, no matter what kind of card you have. As you know, credit card companies charge interest on any positive balance during a billing cycle. The higher the interest rate, the more an unpaid balance costs you—even if it’s just for a month or two.

Now, compare two credit cards: one with rewards and a comparable card without rewards. What do you notice? Most often, rewards cards have significant higher interest rates.

And it doesn’t take much debt to outweigh even the most lucrative rewards points.

Let’s take a look a couple of examples. For both, let’s assume that you spend $500 a month on your credit card and also carry an old balance of $1,000. Every month, you pay $550 towards the card (all of your new purchases plus a token amount towards the old balance).

Over a year, with a credit card that pays a standard one percent cash rewards and has a 16.99 percent APR, you’ll pay about $227 in interest and earn $60 in rewards for a net cost of $167. If you did the same with a credit card that has no rewards but a lower 10.99 percent APR, you would pay $142 in interest—a savings of $25.

Now let’s assume you have a $5,000 balance, still spend $500 a month, but pay back $600 a month (your new purchases plus $100 towards interest and the old balance).

With the 10.99 percent no-rewards card, you’d pay about $574 in interest annually. Ouch. But look that that rewards card. You would pay about $913 in interest over the year. Even if the rewards card paid you three percent cash back (less common, but not unheard of), you would still have a net loss of $733 and could save $159 with the lower APR non-rewards card.

Obviously, the bigger your balance, the longer you carry it, and the less you spend in new purchases, the more a lower APR card helps. But the bottom line is any interest you pay quickly cuts into credit card rewards.

3. You Spend Too Little

Have you avoided joining the millions Americans currently swimming in credit card debt? Congrats: you’re living within your means. And unless you’re super-rich, that means you probably don’t spend all that much.
Unfortunately, by spending little, you’ll never unlock rewards cards’ potential.

Some of the most generous rewards cards, like Amex Blue Cash, only dial up their rewards percentage after you meet an annual spending minimum. And most cards have minimum rewards levels that cardholders must meet before they can redeem cash or points rewards. Sometimes rewards may even expire.

If you spend $5,000 a year on your card, a one percent reward is worth $50. Sure, 50 clams is nothing to scoff at, but is it worth going with a card that may have less favorable rates and fees? Only you can decide.

4. You Have So-So Credit

If you have bad credit, you want to improve it. Two things that will not improve your credit are applying for several credit cards and, of course, taking on any new debt.

Especially in the post-2008 credit world, rewards cards require applicants to have good to excellent credit.

Apply for a card with only marginal credit, and you may be declined, which isn’t great for your credit. Even if you get the card, perhaps it shouldn’t be a rewards card. To improve your credit, you want to avoid any temptation to go into debt. If you do need a credit card to start building or reestablishing credit, stick to the most basic card with the lowest APR that you can get approved for. Period.

Would you agree with these reasons to not get a rewards-based credit card? Did any of these points apply to you and you avoided a difficult financial situation? Are there any other reasons that someone shouldn’t get a rewards card?

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Editor’s Note: Thanks to Darwin’s Finance for hosting this week’s Carnival of Personal Finance!

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But can you blame me for dreaming about it? After all, I assumed that anyone would just lend me money (even $1 million) without peeking at my credit history. Was it my fault I didn’t know what “credit” was?

At 18 or 19, I was, like the majority of my generation, completely naïve about even the most basic financial concepts: credit, saving and investing. I’ve become more cash-savvy since. I can’t say the same for all of my peers although, fortunately, the recession may mark the beginning of an era when frugality, financial literacy and saving savoir-faire become as hot as Facebook and iPhones.

Gen. Y’s Financial Literacy Track Record

How many high school and college graduates have ever taken a class covering personal banking, credit management, basic investing, and retirement planning? Not many. Stroll the corridors of any teaching hospital and you’ll find medical students who know the majority of biochemical processes in the human body but do not understand what factors determine their credit scores. You’ll find brain surgeons-in-training paralyzed by the thought of repaying $150,000 of student loans. They don’t know where to start.

Sometimes I imagine what I would have done if, at age 17, I knew what I now know about personal finance. That year, I earned about $3,000, but had little to show for it except a closet full of popular sneakers.
Back then, I think I was about five years behind in financial literacy. Fortunately, I think I’m now about five years ahead of where I’m supposed to be.

If I had been ahead of the curve back then, my dedication to saving and investing just may have led me to hoard paychecks and buy a few shares of a breakthrough company (maybe even Google). Even keeping the money in a savings account with a modest interest rate would have done wonders.

Financial Knowledge May Save Lives

Like it or not, we will deal with money for our entire lives. That makes money management an essential survival skill. We don’t all need to learn how to use a scalpel, but we do need to know how to pay bills on time and keep food on the table.

As humans, our instincts would tell us to run away from a lion. We do not, however, know how to run away from debt. (Even though, as young adults living in America in the 21st century, debt is probably more hazardous to our health).

The point is: Financial literacy could be a key to creating a better overall standard of living for the general population…especially for young Americans who are currently in college or have recently joined the workforce.

Higher education costs are soaring, meaning students who take out loans will graduate with more and more student debt. Dealing with increasing student loan debts may be inevitable, but we can at least help young adults avoid compounding the problem by taking on credit card debt and failing to save for emergencies and retirement.

The Recession as Wake-Up Call

The recent economic turmoil is a lesson to Generation Y that we need to become more financially literate. The New York Times reported that teenagers have been cutting back on spending. Even middle school students can probably grasp the basic concept of what a recession is by now. Hopefully, today’s young people won’t forget the recession’s lessons too soon. If not, these lessons are one more case for the argument that the recession is good for the economy.

Even the Credit CARD Act of 2009 by the Obama administration has a section that requires federal agencies to examine and report on available federal financial and economic literacy programs. They must also provide recommendations and develop strategies for funding and promoting financial literacy.

It is reassuring to see that the government is taking action, but parents can play an even larger role in teaching sound financial principles to their children. Little activities such as taking the child to save money at a bank, playing Monopoly, or creating a virtual stock portfolio can be great for family fun while, at the same time, providing valuable money lessons.

In the meantime, those of us who are already grown up are on our own. If you’re reading this, chances are your already on track to take control of your financial future. But what about your friends, classmates, coworkers, and siblings? Have they experienced a financial awakening, too? Do you think the recession is having a positive effect on young people’s money habits? Think we still have a long way to go? Share your thoughts in a comment.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

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These days, some argue that a cashback credit card is a necessity. After all, if you’re going to shop with a credit card, it doesn’t make sense to swipe a card that doesn’t give you something back in return—whether that’s cash, rewards points, or airline miles.

But the savviest spenders have taken cashback credit cards to a whole new level. Every cashback or rewards credit card works a little differently, but many cards pay higher rewards in specific spending categories like gas, groceries, dining, or air travel.

Pulling out one card while shopping for groceries, another at the gas pump, and another one at your favorite restaurant isn’t that out of the ordinary. Having an arsenal of cashback credit cards at your disposal serves one primary goal: Earn as much cash back as possible.

Let’s look at how a few popular cashback credit cards can work in tandem to optimize your cashback earnings. In this example, my army of credit cards includes:

1. Discover More
• Five percent cashback on rotating categories (for January to March: airlines, hotels, car rentals, cruises)
• 0.25 percent cashback on all other purchases; one percent after spending $3,000
2. Chase Freedom
• Three percent cashback on rotating categories (for January to March: dining, education, childcare, utilities)
• One percent cashback on all other purchases
3. American Express Blue Cash
• One percent cashback at supermarkets, drugstores, gas stations; five percent after spending $6,500
• 0.5 percent cashback on all other purchases, 1.25 percent after spending $6,500
4. American Express TrueEarnings
• Three percent cashback for gas; one percent after the first $3,000 in gas purchases
• Three percent cashback at restaurants
• Two percent cashback for travel
• One percent cashback everywhere else

As you can see, no single credit card will give more than one percent cash back on everything. There are a few guidelines (i.e., “the battle plan”) that I’ve determined to stick to while using this group of cards:

• The Discover More card is used only on the rotating categories.
• The Chase Freedom card is used only on the rotating categories and only if another card doesn’t offer more than three percent cashback.
• The Amex Blue Cash card is always used whenever another card won’t get more than one percent cashback. This helps me reach the higher cashback tier on the card.
• The Amex Blue Cash is used for gas once it reaches the upper cashback tier (instead of the Amex TrueEarnings).

If I were planning a ski trip for January, I’d use the Amex TrueEarnings card to book the bus ticket, the Discover More card for the hotel, and the Amex Blue Cash for the gear rental. Or, in a typical day, I’d fill up my tank with the Amex TrueEarnings card, but pay my electric bill and take out my lady friend with the Chase Freedom card.

These four cards will cover plenty of ground in a world where we can’t escape never-ending expenses. But, I do not suggest that everyone start applying for cashback credit cards on a whim just because they are an aspiring frugalist. There are a few things to consider:

Cashback Limits, Payouts, and Your Spending Habits

• Some cards have a maximum amount of cashback that you can get any single year. Reaching these maximums is a great endeavor but it also means you’ll be saving less for the remainder of the year.
• Every card has a minimum cashback balance that you must reach before you are able to collect it. The more cards you have, the more your cashback will be spread out. It will take longer to redeem your cashback balance.
• If you are not spending enough to make this whole process worthwhile, then it is best to just stick with one or two cards.

After All, They Are Still Credit Cards

No matter how you look at it, they are still credit cards—the quickest portal to debt. Don’t let your eagerness to “save” (in quotes because you are technically spending before you save) put you in a position that could lead to financial ruins. First, learn to use your credit card responsibly and then slowly incorporate these cashback credit cards into your repertoire for smarter shopping.

Do you also have an army of cashback credit cards? Which cards make up your army and what is your “battle plan”? Let us know how savvy of a consumer you are (and hopefully provide some insight for others to build their own “army”).

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

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A few weeks back, I hastily bought a coat online when I came across a site having a one-day sale. The subtotal was $100 less than the retail price, but tax and shipping ate up about $25 of that discount. Even worse, when the coat arrived, it didn’t fit. Then, when I exchanged the coat at a store, I received a small refund for the sales tax I paid; the Website charged me more sales tax than I would’ve paid by shopping at a store in my state!

Although I still saved money on the coat with this online sale, the experience taught me there are plenty of little things to watch out for when shopping online. Overlook just one of these things and a deal could turn out to be less fabulous than it looks.

1. Taxes

Taxes follow us wherever we go (just like debt), and that includes sales tax. When you shop online, the tax rate can actually differ from the rate in a local store. For example, I was charged 9.35 percent tax online for my coat but when I exchanged it at a New York City store, the tax was changed to 4.375 percent, entitling me to a refund of the difference. On the flip side, some retailers don’t have to charge sales tax to customers in states where the retailer does not have a physical location. The catch? You may still be responsible for reporting the purchase and paying the sales tax yourself on your state tax return.

Bottom line? Especially on big ticket items, always remember taxes. That price on the tag may not be the price you end up paying, and how much tax you pay will depend on where you buy.

2. Shipping and Handling

Often, the biggest difference between buying something online and in-store is what you have to pay for shipping and handling. (Of course, you have to live through anxious days as your order journeys from the warehouse to your home, too!)

Some online merchants offer free ground shipping on all orders or if you spend a certain minimum amount. Many online retailers charge for shipping and, of course, the faster you want your stuff, the more you’ll pay for shipping, and those charges can quickly negate any price advantages to buying online.

Finally, beware online merchants that advertise super-low prices on popular items but charge inflated shipping fees. On the flip side, merchants offering free shipping may just be marking up their goods to compensate. Buyer beware!

3. Size and Compatibility

It really sucks to find that something doesn’t work for you after have paid for it. Exchanges and refunds may not be much of a hassle if there is a local store affiliated with the site you made your purchase. Of course, that time and effort could have been better spent by making the original purchase in-store in the first place!

What do savvy shoppers do? They visit the store and try on clothing before hopping on their computer to get a better price.

4. Return Policy

If you shop online, then refunds and exchanges can end up costing you.

In case an item doesn’t fit or function correctly, you should get to know a store’s return policy before you decide to submit an order. (For example, although some sites offer totally free returns, some make you pay for return shipping and again for re-shipping the item).

If, for example, I wasn’t sure if a sweater would fit and it could cost me $7.99 to ship it back to the company and another $7.99 to send me the right sweater, that lovely sweater could end up costing me $16 more. No thanks.

5. Cashback

Smart spending is still spending, but getting a little cash back when you do it never hurt. Most people know about cash back credit cards. But a lot of shoppers don’t know about the many online cash back programs available.

Once you are 100 percent sure you want to order something, go through some of the best cash rebate sites such as Bing Cashback or FatWallet. Even I tend to forget doing this once in a while, but I’ve realized that the cash back really can add up.

The decision to buy online (and where) comes down to far more than five factors. You might be worried about who will be home to accept the package or if the delivery service will leave it in the wrong place. Some people have reservations about providing payment details online. These days, the chances of something going wrong with an online purchase from big-name retailers is pretty slim. If, however, you don’t recognize a site, use a third-party service like PayPal or Google Checkout to pay. That way you have an intermediary in case something goes wrong.

What about you? Do you have other concerns about shopping online? If so, what are they and how did they affect your online shopping experience? It may serve to be useful advice for all other online shoppers.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

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