Are You Sensitive When it comes to Talking about Money?

Money is a sensitive topic. When you talk about it a lot of people get uneasy. You can lose your best friend or fiancée with an argument over money. People commit criminal offences to get their hands on money. When it comes to financial education, most people have little to none. Few people know the differences between a chequing and savings account at a bank, never mind creating and maintaining your own investment portfolio. Why do you think so many people get suckered into paying bank fees for services they never use?

Confidence
One part of money being a sensitive topic has to do with how little confidence people have in their income. Of course, if you compare yourself to the likes of Bill Gates, you could be making 6 digits annually and still think you’re poor. However, if you have a good grasp of your financial net worth and monthly budget, you actually could be wealthier than people that make significantly more than you. Sound like I’m contradicting myself? Not at all, just because you make more money doesn’t mean you’re actually wealthier than another.

Wealthy vs. Rich
One of the people I respect greatly is Robert Kiyosaki, well known for his Rich Dad Poor Dad series. He defines wealthy as someone that has more passive income than expenses. Basically, that means you have financial freedom. That doesn’t necessarily mean that you’re rich though. Rich people make a lot of money but they could be spending more than they make. The average US consumer is said to be spending more than they save, they’re actually accumulating debt! I’m Canadian, but we aren’t too far behind in terms of accumulating debt.

Your goal should be to become wealthy first and then rich second. If you can pay your bills just from your investments then you will have no problem increasing your net worth. (Take a look at my net worth article for to understand net worth.) If you invest intelligently then you can watch your money grow as long as you can keep your expenses reasonable.

My Favorite Investor
Take Warren Buffet for an example. Despite being the second richest man on Earth, he lives conservatively. Sure he has a private jet, but that’s to avoid people like me who would hound him with the million questions if I were to bump into him. But he still lives in the same old house he bought a long time ago and really doesn’t buy anything crazy, well except for the couple billion-dollar company here and there, nothing serious.

Face Reality
Money is here to stay and so is your financial health whether if it is good or bad. So get used to it and don’t be sensitive about it. You don’t have to tell everyone person you walk by how bad a credit you have, just be realistic and don’t stray away from who you are financially. Don’t say, “I’ll do it eventually.” Think about it, now! The more you think about your financial well being and the more you educate yourself, the greater your chances of being successful.

Conclusion
We all have different tastes for food and clothes. Money is no different. Some might consider a $1,500 monthly paycheque to be enough and quite frankly it’s more than enough in plenty of countries in this world. For some a million dollar annual salary may not be enough. What with the two Porche 911s and four Subaru STis they buy annually of course it’s not enough.

You need to grasp the idea that you can control your living style. It doesn’t matter if your next-door neighbor has a tennis court, swimming pool, bowling alley, and a rooftop movie theatre, guess what your next-door neighbor might be completely in debt. Understand what you need to live comfortably and strive to become wealthy. If you aren’t at that stage yet, have the thirst for financial knowledge! Don’t be shy to talk about it with people who care, don’t be sensitive about money. Be confident with it and surely you’re financial health will improve.

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Turn Time Into Your Favor!

Ah, one of my favorite themes. This will be a recurring topic but I figured I should get into some detail to give you a better idea as to how time actual is on our side once in a while. (Nice for a change eh?)

Compounding can work for you as long as we aren’t talking about debt, which I’ll get into another post. The most important figure you should remember is the number 72.

The rule of 72
The number 72 is crucial so memorize it! To double your money invested you just need to think 72! Ok, Mo2 you dummy, you need 100% to double your money. Anyone knows that.

Well, quite true. However, if you compound your money you simply need to divide the term yield by 72. So say you have a 6% annual yield and you want to double your money. You simply need to divide 72 by 6 and you get 12 years. It’s that simple! I used the work “term” because it doesn’t have to be annual, if could bi-weekly, monthly, semi-annually, even a minute for that matter.

So when you’re making your next investment just take a minute to think about how long it will take to double your money.

Monthly Compounding, Semi-Annual Compounding, and Annual Compounding
Ok now that I’ve shown you the rule of 72. The obvious thing here is that the more your money compounds the quicker you can double your money. Well, true but remember the yield has to be the same as the other compounding options. It could very well be that one investment may compound less but may have a higher yield rate.

The Rate of Return
I may be stating the obvious to some, but when there is rate of return for an investment, even if it is compounding monthly or bi-weekly the rate of return is usually an annual rate of return. This is the case for most investments unless stated otherwise. However, if the investment compounds more often than annually, then the Effective Rate of Return will actually be different from the rate given.

The Sound Investment
Now, just because something compounds a lot and has a decent yield doesn’t mean it’s a good investment! Always “know” what you’re getting into. Never simply listen to your banker or financial planner just because he/she tells you it’s a “sound” investment. You have to understand what you’re investing in. Always take that extra step to educate yourself financially. It will definitely pay off in the longer run especially when you have to ask for advice to.

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How to Save Money Automatically!

The Automatic Savings Plan
The automatic savings plan is where you have a set amount of dollars that are taken out of your paycheque automatically. This means that you won’t have to “think” about saving and it’ll be done for you automatically. You can have this money taken out pretty much at anytime that you please; it could be everyday, (although that could be meaningless and could just rack up bank fees) bi-weekly or monthly.

This strategy is for the undisciplined ones although it does help even those that are disciplined but don’t think they have enough money. Whenever I recommend this to anyone, the response I usually get is, “I don’t have that extra cash to put away right now.”

The Pain
But really, how much would $50 a month really hurt anyone? Let’s face it, Starbucks isn’t the only coffee company that makes a Latte, unless you want a Decaf Quadruple Tall Nonfat 215 degrees No whip but extra mocha Mocha, then you can simply buy a regular cup of coffee. For those that order such high-calorie drinks, have you looked in the mirror and called that drink to yourself before? It might sound cool but it actually doesn’t and you probably wouldn’t notice the difference even if it was caffeinated and was whole milk. Anyhow, before I start talking about the food chain, back to the point.

$50 a month isn’t anything if you don’t see it. Most people don’t budget, fine. But that also means that you just spend money on pretty much every you see and save whatever is left, like the $4.27 for laundry and Snickers bar that you put in the wrong coat. So now you’re looking at me blankly thinking, what good is $50 every month? That’s a measly $1.67 a day.

Compounding
Ah, the power of time. Time isn’t always against us, and compounding is probably the most powerful argument to support that. $50 a month will translate to $600 a year. Now, for five years and with the fast paced world that we live, that really isn’t a lot of time. That amounts to $3,282.86 at a measly 3.5% interest rate. That’s not too bad is it?

Now let’s make this $100 a month at 6% for 5 years.
After Year 1: $1,239.72
After Year 2: $2,555.91
After Year 3: $3,953.28
After Year 4: $5,436.83
After Year 5: $7,011.89

You get the idea. 6% a year by the way in my mind is still pretty conservative. If you polish your financial knowledge and skills you should easily be able to make 10-15% a year. And I don’t see why you couldn’t make more.

The Plan
Mo2 thinks that putting away $50-100 is easy. Think that’s too little but don’t have any idea as to how much you can put away? How about setting a certain percentage of your paycheque. For example, putting away 10% of your paycheque away per month. This way, if you have a pay raise, (hurray!) then you can add more to your monthly contribution. It’s all about having a plan.

So now you have absolutely no excuse not to setup an automatic savings plan. It doesn’t even have to be $50 it could be $10, it’s the process that counts. Change is hard to come bye, but if you don’t start somewhere you’ll never finish. Happy investing!