Fortune Watch

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I said goodbye to an old friend a few weeks ago. We’ve known each other almost thirty years, ever since I started high school really.

We were together on my first date, first kiss, and first trip overseas. We were hand in hand when I left home to go to university.

My friend was there when I started my first real grown-up job, has seen girlfriends come and go, and has been my solace when I had nobody to turn to.

We briefly parted ways from time to time but always managed to find each other. We laughed, we danced, we stressed and we wept together.

We shared our ups and downs. Some times we exercised together and every now and then we even bathed together. That’s a lot of togetherness.

In the past few months I have slowly wakened up to the fact that this friend of mine, who I thought had always been there for me, has slowly been poisoning me from the inside out.

My friend has been digging into my pocketbook on a daily basis for the past 30 years, and stealing my money at the same time as he’s been stealing minutes from my life. My friend has not really been my friend at all.

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When people discuss retiring or having a sea change or chasing their passion, the different reactions usually involve money: “I’d love to do it but I don’t have enough money.”

You reach retirement age and don’t have enough to retire on, you’ll be left with two options, either to delay your retirement or reduce your standard of living in retirement. Which one would you choose?

It always helps to know what you are aiming at and wealth creation is no different. I will assume that you want to build wealth in order to be able to retire and still live well. How much money will you really need?

I was attending a wealth building conference and one of the other speakers, a financial planner, made a statement that when you retire you only need about 50% of you pre-retirement income. I was amazed at this statement and I asked him back stage how he came to that conclusion. He told me that all retired people do is sit around and watch television all day.

My response to him was that this was a description of what broke people do (namely his clients). Retired people who have successfully built a decent wealth portfolio are living the time of their life! What are you aiming at? The lifestyle of the television watching clients of our financial planning friend or the time of your life lifestyle that comes with wealth?

How much will you need for a good lifestyle in retirement?

The short answer is that, if you want to maintain the lifestyle that you are accustomed to then you will need a monthly income equal to your monthly income one month before you retired. Anything less and there is something that you will have to give up.

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In simple economics, there is little distinction between savings and investments. One saves by reducing present consumption, while he invests in the hope of increasing future consumption.

Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds.

Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition! If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term!

The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though; your investment is only growing at a mere 1 percent annually.

Saving and investing are often used interchangeably, but they are quite different! Saving is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies.

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Get real about money. Let’s face it: Most people spend way too much money on things they don’t really need. The more money we make, the more we tend to spend. This endless cycle of materialism has led many people to confuse the word “need” with the word “want.” As in, “we need a big-screen TV for our new home theatre.” Or, “I need a new pair of shoes to go with my new outfit.”

If you want to achieve your vocational passion, where every day you jump out of bed and can’t wait to go to work, then you need to re-order your priorities. Stay away from the purely material.

The pursuit of material success often is the root cause of burnout at midlife. In fact, a recent study found that people primarily motivated by the love of their work grow dissatisfied as they begin to make more money. The first step to breaking free from the materialism trap is to understand the difference between “need” and “want.”

We need food, clothing, shelter, reliable transportation, education, enrichment, and the technology necessary to do our work. Also, we need the occasional small indulgence to treat our children and ourselves.

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Stuff happens. And it usually costs money. If you don’t have an emergency fund equal to three to six months worth of basic living expenses, you’re living on the edge. There’s no time like the present to get started.None of us have the ability to foresee the future or predict the hurdles which lie ahead of us. This makes building an emergency fund a financial priority. People who are living on a lean-and-mean budget will have the toughest time setting aside money for emergencies. If it’s possible to squeeze out another $40 or $50 each month and put it in a money market account, it’s worth doing.

Establishing an emergency savings account is vital in good times and in bad. The purpose of the fund is to sock away three to six month’s living expenses. But this money could also be used when you’re staring at major, unplanned expenses such as a car breakdown or a leaky roof.

Housing a small rainy day fund should be a vital part of an individual’s financial goals. This is of high importance if you don’t already have readily available funds in your account for covering any unanticipated expenses. They provide financial security because they give you funds to fall back on if you become ill, or if you or your spouse loses your job, you incur large medical bills, or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit.

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Seriously you dont…

I advise people on personal finance including banking, budgeting, saving, and investing. How to save your money-tricks, how to budget, and using credit cards, etc. How to make more money by investing? What are stocks? Bonds? Mutual funds? What can you do to start today and maximize returns?

All you need is three ingredients, income, discipline and time. Chances are, you already have two of them, income and time. All you need to do is add the third, discipline.

There’s a saying in economics “expenses rise to meet income”. This means money that’s easily available to you is certain to be spent. That’s why most people’s paychecks disappear before their next payday. They get used to having a certain amount to spend, and habitually run down their bank account.

Here’s how it works: Say you start with nothing, invest $500 (of your income) a month (a healthy discipline), and let your money ride (over time) in diversified investments. Long term, the stock market returns at least 10% annually. Assuming a 10% return, you’d have $102,000 after 10 years, $380,000 after 20 years, and $1.1 million in 30 years.

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Do you ever wonder where your spending money goes or how you can spend so much on practically nothing in so little time? In the old days people brought their paychecks to the bank, deposited most of the money and pocketed the rest in cash. The cash was supposed to last until the next check. If it didn’t, it was an obvious cue that too much money was being spent.

Fast-forward to these days when paychecks are deposited electronically and we stuff our pockets with debit and credit cards. Beaten-up dollar bills and heavy coins never dirty our hands. It’s so much nicer than the old days. Unfortunately, it makes it too easy to bust the budget.

Without that dwindling pile of cash it’s harder to recognize how much is being spent. Sure, you can log on and look at your bank account every day, but most people probably don’t. When they finally see their balance they think, “no way!” More than likely it’s not the mortgage that’s killing them; it’s the daily money drain. If that scenario fits your life, the seven-day money challenge may help you get on track.

Use this challenge to give yourself a wake-up call to those who don’t realize how much they’re spending. I ask some of my clients to guess to the best of their ability how much cash they’ll need for a week’s worth of spending. It’s just the day-to-day stuff like gas, groceries, going out for meals. The usual outcome is they’re out of money by Wednesday.”

Learn your weaknesses. “I was trying to go from Monday to Monday, I carried a little notebook and would write it down if I stopped for coffee or went to the drugstore. Wednesday night I went to buy gas and I didn’t have enough cash. I had to resort to my credit card to get me through the rest of the week. I was shocked and a little disappointed.” Thats what some of them say.

The Money Diet: READ (more…)

It takes time, sacrifice and consistency to join the million-dollar club

Quit fantasizing about marrying a millionaire, winning the lottery or walking off with a TV-quiz-show jackpot. By making your money work harder and smarter now, you can become a millionaire by the time you’re ready to kick back and trade work for play.

There’s no magic involved in reaching the million-dollar mark. If you set goals, do the research and start investing now, you can hit your wealth-building target on schedule. And you don’t have to be a financial whiz! What are needed are time, sacrifice and consistency.

Time is most significant: The longer you invest, the smaller the amount you need to put away each month to reach $1,000,000. Thus the younger you are when you start investing; the younger you’ll be when you join the million-dollar club. Many of the estimated 8 million millionaires began investing in their teens, and always with a long-term goal. Let’s say you’re 28 years old now, with no money saved or invested and would like to have a million-dollar portfolio of investments by the time you turn 60. You will need to invest $300 a month in stocks or stock mutual funds that have at least an 11 percent annual rate of return. If you increase your monthly investment to $500, you’ll hit your mark by age 54.

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Obviously the answer lies somewhere in the middle– but where? We take pride in making responsible choices for the future instead of thinking only of today, but do you ever feel like you’re going too far? Not appreciating the present enough?

I hear that suggestion a lot regarding how much money frugalites and penny-pinchers spend: that we’re not enjoying life enough because we’re not willing to spend much money. The thing is, I don’t think that spending more money would make me noticeably more happy! I mean, certainly there are some things that I could spend more on and enjoy– probably more expensive vacations, maybe going out to eat more and/or at fancier places– but in general I’m very comfortable with the way things are. I find ways to enjoy myself that are just good values for the money… and if there’s something that comes up that’s expensive but would be really wonderful, I weigh it carefully but am pretty good about letting myself go for it if it’s worth it.

However, it’s the flip side that concerns me. The amount you save is a combination of how much you make and how much you spend, so it follows that to save the most for tomorrow you need to make as much money as you can today. A lot of personal finance bloggers like to stress the importance of increasing your income as much as possible.

For me personally, while I’m not earning as much as I could if income was my only priority but I’m still doing a job I like and one I feel is good for society. The thing is, I’ve never really envisioned myself following a standard “career path”. Yet most of the other options will likely pay substantially less, in some cases perhaps as little as half as much. So the question is, how long should I stay at a good-paying job that I’m fairly but not completely happy with? I definitely want to try other work, but don’t I have plenty of time for that later on?

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Don’t fall behind. Finance charges, interest payments, getting discouraged about your finances… all problems that can occur if you let yourself fall behind. Whether it’s bills, credit cards, or student loan payments, falling behind can be a very difficult problem to come back from. The more you have to pay out in charges, the less you will have to invest in your future.

Set goals. If you don’t know where you are headed, how do you get there? In order to accumulate wealth you need a plan. Write out your goals, a way to achieve them, and you’ll be on your way to an early retirement.

Invest early. The greatest thing you can do to build wealth is start early. Even if you can’t invest much, start with what you can and let your money grow over time. As Albert Einstein said, “compound interest is the greatest mathematical discovery of all time.”

Invest in what you know. Whether you are looking to invest in real estate, stocks, or anything else, make sure you know how the investment works. The great Warren Buffett was often criticized for not investing in technology during the dot-com boom. His answer was simple. If you don’t know the business model, what the company does on a day to day basis, or how it generates revenue now, and in the future, then stay away from it. This principle can be applied to all types of investing.

Don’t do what the crowd is doing. When everyone is starting to get into an investment, that is generally when the smart investors are getting out. If everybody knows a stock is hot, or that their real estate market is booming, it generally indicates a bubble and that it’s time to cash out. Investors make money buying low and selling high. If an investment is hot and lots of money is flowing into it, you can’t buy low.

Don’t try get rich quick schemes. Don’t get greedy. This is easier said then done, but don’t try to gain too much too fast. Building wealth takes time and hard work… there is no easy way to get rich.

Save more. This is another one that sounds pretty basic, but can be difficult to achieve. Often times people want the instant gratification and go out and treat themselves. If you have some money burning a hole in your pocket at the end of the month, save it. Think about how nice it will be when that money is working for you rather than heading out shopping.