Fortune Watch

What is the first thing that almost any personal finance blogger that tends to align themselves in “Camp Frugal” will tell you when it comes to saving money? Most likely it is a variation of the mantra, “Spend less! Save, save, save! Quit spending money!” Is this really the best way? It seems that many people, myself included, can leave an important variable out of the cost saving and wealth maximizing formula. This “missing variable” is opportunity cost.

Opportunity Cost Explained

What exactly is opportunity cost? Let’s say that you have two different things that you could do with an hour of your time: Activity A or Activity B. You can only choose one of them but not both. If you choose to do Activity A then you cannot do Activity B and vice versa. If Activity A is your #1 choice for what you would choose to do for that particular hour and Activity B is your #2 choice then when you choose to do Activity A, and are therefore excluded from doing Activity B as well because remember you can only choose one or the other, your opportunity cost is the cost to you in not being able to partake in Activity B.

The technical definition of opportunity cost is therefore the cost of the next best alternative (the thing that you have given up) whenever you are making a decision between two or more mutually exclusive choices.

It’s important to remember that opportunity cost is not necessarily always measured in financial terms (although it is a smart thing to do to ultimately convert all opportunity costs into a financial measurement so that you can better compare options).

Let’s take a look at some different scenarios to see if strictly adhering to the “Spend Less” rule in all circumstances is the best way to go or if there are times when taking a closer look at the opportunity costs involved might help us to improve upon our cost savings and wealth maximizing “formula” and ultimately create wealth and skyrocket our net worth even faster.
Read (more…)

Try a budget to keep yourself out of financial trouble!

Draw up a budget? What a mad suggestion. The average reader will find his eyes glazing over at the mere thought of something as hideous as drawing up a budget. That’s surely an activity reserved for geeks and weirdos.

And that’s the problem isn’t it. Most people don’t consider budgets a big issue. They will gladly perform a myriad of tasks daily that bring structure to their lives. Set the alarm clock. Munch through some horrid tasting cereal because it’s good for the digestion.

Get to work to perform boring and monotonous tasks. Live daily life in a totally structured manner until very few minutes in the day are available for spontaneous experiences. Yet, something as structured and necessary as a budget is frowned upon.

A budget provides the basic information to allow spending decisions to be made. Most people have a set income with which to work. It is only the monthly expenses where some control may need to be enforced.

It seems an almost impossible task for the average person to be able to work out what is left over after all set expenses have been deducted. Yet it is hardly a skill requiring an Einstein type of mind.

Fill in the amount coming in every month and deduct all expenses that come off every month such as mortgage repayments or rent, motor vehicle instalments or transport costs, costs of services such as electricity and gas and an allowance for food.

Don’t forget to allow for annual deductions such as licenses and memberships or pleasurable items such as holidays. The rest is available for arbitrary spending or saving.

This calculation seems to be beyond most people’s capability. In fact women in particular seem to roll their eyes in despair, fish out their credit card for some retail therapy and leave the bank account to look after itself.

So for the New Year’s Resolution number 2 in 2010 compiling a budget every month could be a novel experience. For those who find self-discipline a problem, putting away those credit cards, cancelling the bank overdraft could be a method.

Stop spending money when it runs out during the month. During the first few months it might even be necessary to eat with parents and friends. Making the drawing up of budgets a habit could be the best Resolution anybody could bring on board.

For those people with complex income structures and diverse expenditures a budget might need to be prepared by an accountant. Whatever the set-up, it is not an impossibility. It could certainly have helped such celebrities as entertainers Burt Reynolds and Mickey Rooney, Willie Nelson and Jerry Lee Lewis.

Industrialists such as Henry Ford and Henry John Heinz has similar fate befall them. Even Donald Trump mismanaged his budgets. Mind you, Donald Trump would probably not have been helped with a budget!

For Joe Average though a budget is a great tool to help with keeping their financial boat on an even keel. Try it in NOW.

Living in mansions and driving BMWs was never my passion. But right from my childhood I wanted to be rich enough to fulfill my small but expensive desires like having a Rolex watch on my hand or drive in a Toyota Camry. But as I grew and saw the world advancing, I slowly began to understand the meaning of a very old saying that “only if you aim for the sky, you will land among the stars.” And that applies for almost every living soul on earth.

Becoming a millionaire is one dream that people see with open eyes and spend their life toiling to reach their goal of being counted amongst the rich people of the world. There are those who succeed, but many are pulled back by the others in the race. But there is an interesting intermediary class of people who the world calls the ‘pretenders’. Any guesses why? Because no matter how hefty their debts are, they never compromise on their social status. But here is a piece of advice for such people, “Stop Acting Rich . . . and Start Living Like a Real Millionaire.”

A former university professor and the co-author finance books like “The Millionaire Next Door”, Thomas J. Stanley has once again shared his experience of examining the truly rich people in his book, “Stop Acting Rich . . . and Start Living Like a Real Millionaire.” (Wiley, $17.79). The author highlights that the credit, recession and crisis have presented us with the opportunity to treat and cure the pretenders.

“For the treatment to work, you must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich,” he writes.

Stanley has bought very interesting facets of the life of real millionaires and the ones trying to emulate them. He points out at the major difference between the income and net worth and explains what counts to be a true millionaire. Some quite intriguing findings of his study include:

• 86% percent of all prestige or luxury makes of motor vehicles are driven by people who are not millionaires.
• Typically, millionaires pay about $16 (including tip) for a haircut.
• Nearly four in 10 millionaires buy wine that costs about $10.

His only aim behind the research is to make people aware of a very simple truth of life that only if people stop acting rich, they would be able to achieve the kind of happiness money can’t buy.

“For the treatment to work, you must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich,” he writes.

The realistic book will help people get closer to reality, that pretending will never bring contentment or the real joy. Only accepting the fact that acting rich is far away from actually being truly wealthy will help them find the bliss of happiness.

Just before Christmas scores of people feel compelled to write lengthy articles, present lectures, compile videos for YouTube and in general create hot air about the topic of excessive Christmas gift buying.

Picture Courtesy
Some pontificate about this subject throwing clever economic theories about and others tug at emotional strings while further proponents try to reason that Christmas gifts are a waste of money because most people hate the ones they get.

They certainly have a point. The shopping malls hum at their busiest just after Christmas when people come in to exchange their unwanted gifts.

So why do it?

Picture Courtesy

Easy answer really. It’s all about guilt. Parents showering their children with gifts do this because they feel guilty that they don’t show their love and caring enough. Adult children give gifts to parents because they feel guilty that they don’t show their love and caring enough. Husbands give their wives gifts because… You get the drift of the argument here.

If this is the reason for the excessive gift season, how did it get so out of hand? Enter the advertising industry whose reason for existence is to ensure their clients sell more and more products.

Holidays based on emotional reasons such as Christmas, Valentine’s Day, Father and Mother’s Day, Teacher’s Day and most other man made public holidays are an advertising executive’s wet dream.
Picture Courtesy
Emotions and message. They work so well together. If you love your kids, parents, friends, auntie and any other folk you can think of then you have to buy that latest game, just launched designer label perfume, bit of jewelery or that cute little Ferrari.

The bigger the purchase the more perfect is your love. Not always of course. Sometimes   it’s the latest toy that causes the most obsessive gift purchasing quest. Many parents have felt compelled to shred their nerves chasing around the shopping malls to find that last Nintendo game, most recent Bratz doll or zebra striped iPod.

Picture Courtesy
For many businesses this period of gift feeding frenzy is the main income generating quarter. This is what keeps them going. Sure there are other times during the 12 month trading period where the flat-lining turnover figures show a blip of life, but it’s the Christmas trading period that provides the bulk of their trade.

Florists have a similar love relationship with Valentine’s Day. And chocolate manufacturers have jumped on the bandwagon of Easter for their rush of income. So why should shopping malls not similarly pursue the Xmas dollar.

That’s exactly what shopping malls are doing with great gusto. How else would it be possible for you to find the biggest decorated Christmas tree in an Arab country? And have you noticed how early in the year those Christmas decorations are put up and the cheesy jingles are played? October already.

In the end it’s truly a win-win situation. Business makes its money. Human beings get to calm their guilt feelings about how the stress and busyness of their lives forces them to neglect their friends and family during the year.  It’s a season of goodwill to all folk all round.

What is your take on this seasonal topic?

Can lawmakers who don’t have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Hmmm.

Developing a fairer tax environment is much less an economics problem than it is a political dilemma and, as many of you observed, it is unlikely that anything “tax” will be improved upon until there is some serious facial (and cultural) change in Washington.

Politicians focus on one issue at a time, and pretend to have problems dealing with inter-related programs. Tenured politicians have a vested interest in resisting any change that involves their spheres of influence. Both parties are embarrassingly mired in twentieth century class warfare that stifles all forms of productive debate.

Tax cuts don’t just benefit the rich. In fact, they provide the opportunity for everyone to attain greater wealth. Demand directs resources far better than punitive taxation. Money in consumer hands will fuel social and environmentally friendly change.

“You cannot eliminate revenue from one program without replacing it from another, equally complicated, one”, career politicians will say philosophically.

They have little to gain from simplifying the tax collection system — yet it is obvious that a whole new approach would solve most of the economic woes plaguing us today, domestic and international.
Read (more…)

The mantra of the times is cost cutting. The axe of cost cutting invariably falls on the employees. It is either through wage reduction, reduced bonuses, reduction of other benefits, reduced work hours or in a worst case scenario in the form job losses.

In most countries unemployment rates are hitting close to double digits, the worst case scenario might soon become a reality for anybody including you. In such a situation, it is imperative that you should have a plan B ready.

Instead of waiting for a surprise and acting re actively, it is important for you do a realistic assessment of your current situation.

Each and every one of you must have an understanding of your employer’s financial situation and strategy, your own function/department current state and whether there is any danger of retrenchment at your level. Once you access the macro and micro level picture, you need to play your next steps accordingly.

You may not have a choice but to look out for alternate employment if you feel that you may be in the firing line. It may not be easy in the current situation. However the current economic situation gives you an excellent opportunity to do what you always wanted to do.

Read (more…)

A couple of days ago, I watched a short interview with the legendary investor Warren Buffett on an investment news channel. The interview was conducted shortly after the annual general meeting (AGM) of Buffett’s company Berkshire Hathaway. Buffet said many interesting things—as he always does—but the really educational part of the interview was the contrast between the world that Buffett inhabits and the world that his interviewer seemed to come from.

It was like listening to members of two different species talk. If a fly (which lives for perhaps a few hours) and a tortoise (who can survive for a hundred years or more) had a conversation, it would probably sound like Buffett and that interviewer.

At one point, the interviewer asked Buffett to comment on how his companies would cope with the downturn. Buffett replied that things were certainly down at the moment but he expected them to be OK in three to five years. I could see that the mere mention of a time scale like three to five years had derailed the interviewer’s thought process. Coming as she did from a world where three to five hours or at most three to five days is the standard unit of time, the idea of an investor talking in years seemed to have thrown a spanner in her works.

Next, she pulled out the day’s newspaper and drew the old man’s attention to a news item that US unemployment was up to 700,000. She wanted to know what he thought of the news. Buffett said that he was sure that five years from now, the employment situation would be much better than it was today. Again, this epic timescale put an end to that line of questioning.
Read (more…)

Everyone I know is sick of this recession, and sick of hearing about this recession. For one, the media’s attention to the global financial situation is depressing. But as many have pointed out, we are in this situation because of our own devices. On the individual level, poor financial and debt management, have exacerbated outside factors such as the housing market collapse and high rates of unemployment. For others, indiscriminate consumer debt has led to a number of individual crises. But in such a climate, there is a lot that can be learned. While it would have benefited everyone to know this several years ago, here are twelve personal financial lessons that can and should be learned during this recession.

Learn How to Plan Ahead

Source

It’s no secret that poor planning contributed to why so many people are currently in untenable financial situations. Don’t Panic. Figure out where you are at, where you want to be and put in place a realistic plan for getting there. The majority of businesses without plans in place before they start operations do not succeed. So if you are serious about creating a way to get ahead, or even just caught up, this step could not be more necessary. Unique circumstances will come up and cause you to stray from your plans temporarily, but structure is necessary in order to monitor your progress, and stay focused.

Read (more…)

Well the stimulus package is finally finished. A tough new bank-rescue plan to boost lending and limit outrageous pay are part of President Obama.. Even troubled homeowners may even get some relief. All said and done, the government could spend more than $3 trillion to help end the recession.

All we have to do now is sit back and watch the economy grow, am I correct?

One risk of the unprecedented government intervention is that it won’t do all that much to speed up the end of the recession. Another risk is that consumers, expecting a magic fix, could fail to prepare for tough times that still lie ahead. Obama himself said at his first press conference. “This is going to be a difficult year, If we get things right, then starting next year we can start seeing some significant improvement.”

Next year? I’m afraid not. A large number of economists agree that it will take that long, at least, before the biggest problems – mounting layoffs, the housing bust, the banking crisis, and plunging confidence – start to turn around. Whether the stimulus package is actually working, and when the economy might start to mend, here are a few things to watch.

Improvement In The Unemployment Rate. Of all the economic indicators, this is probably the single most important. But you might want to avert your eyes for awhile.

If the stimulus plan works it might come close to creating 3 to 4 million jobs which Obama has talked about.. And that – over several years, combined. But it’s almost certain that through this summer and into the fall, there will be a net job loss, not a gain. Most economists expect the unemployment rate, now 7.6 percent, to hit at least 9 percent by the end of this year. That represents up to 2 million more lost jobs.But the pink slips haven’t all gone out yet, so the layoffs haven’t shows up in the official numbers.
Read (more…)