Income tax is something that all investors are faced with every day of their investing lives. As governments are struggling to make ends meet, increases in their funding are likely coming in the not so distant future.
It is therefore more important than ever to know exactly where you are when it comes to how much you are currently paying for income tax.
Real Costs to Investing
There are two major obstacles that everyone faces in everyday life. These are inflation and taxes. Inflation is not a major factor these days as interest rates etc. are very low. However, taxes are currently a major factor you must consider with every investment you make.
For instance, do you know how much of your income your government will take from you before you file your yearly tax return? If you don't, you should. How else can you determine where to invest your hard earned money to get the best return.
How Taxes Work
Governments calculate taxes in many different ways. Different forms of income can attract different levels of tax. Each country is different and somewhat unique based on their political ambitions. However, they all have one thing in common. Their main goal is to stay in power and they often use the tax system to enable then to do so.
What To Do
Individual investors must learn to position themselves to pay the least amount of income tax possible. In order to do this, one must first know all of the tax rules of their particular area. You must be able to estimate how much tax you will have to pay on your investment income before you make the investment. Otherwise, you may find yourself unpleasantly surprised by the amount of income you actually keep at the end of the year.
At first you may have to enlist the services of a qualified tax advisor to explain the various forms of taxation in your particular area. This will be money well spent as the tax rules vary from country to country and even from state to state or province to province.
A strategy that works in one place may not be suitable in another. Do not do your planning on word of mouth or what you read on the internet. Do your own research and get help if necessary from a qualified individual in your own area.
Goal of Investing
The goal of investing is very simple. You must try to make the most amount of money with the least amount of risk. As a part of this goal, you must try to make the highest level of income with the least amount of tax payable.
You do not have to be a tax expert yourself to know your tax position. You simply need to know how to access this information and have it explained to you in a way you can understand.
Of course, taxes are ever changing and you must keep up to date on all of the changes that effect you as well.
Do not rely 100% on your advisor. It is best if you truly understand the tax system in your area.
As always, I welcome your comments and suggestions for future topics.
Tuesday, January 31, 2012
Friday, January 27, 2012
How to Get Rich - Use Other Peoples' Money
The use of other people's money, also called financial leverage, can be a great tool for speeding up your growth of wealth.
It can also, however, be a huge disaster if not done properly and at the right times.As with most things in the financial world, become educated before making the jump.
What is OPM
To use other people's money you simply borrow money from your bank etc. for a promising investment. The money the bank lends you is their clients' money that is invested in savings accounts, term deposits, etc.Hence the term "other peoples' money".
Borrowing to invest can make a lot of sense, especially in today's extremely low interest rate environment. For example, if you could buy an investment that paid you a dividend of around 8% or higher and you paid an interest rate of 4% on your loan, you would then be making a net amount of at least 4% income on other peoples' money. That is the basic principle.
Risks using OPM
There are extra risks associated with using other peoples' money. For instance, if something happened to your investment and it's value or rate of income drops, you are still on the hook for making your interest payments as well as paying back your original loan amount. The money you could lose will come out of your own pocket, not just a loss on paper.
It is therefore extremely important to choose your investments wisely. For instance, never borrow to invest in something that is not proven to make it's owners income. Always choose an investment that has a history of making regular and preferably increasing income payments and is operating in a market that has good potential for future growth. Yes, your investment must be near perfect for this to work well.
Types of Investments
Some examples of investments that are well suited to using other peoples' money are as follows :
Revenue Real Estate (always mortgage the property), REITs (Real Estate Investment Trusts), Royalty Trusts,
High Yielding Common Stock, Preferred Stock and High Yield Bonds.
The common element in all of the above types of investment is high income. You will need this high income to make your interest payments. You never want to be paying loan interest out of your own pocket.
There are many types of loans with varying interest rates. Which one you use, or qualify for, will depend on many circumstances. I will be discussing the types of loans in future postings as space permits. Stay Tuned.
As always, I welcome your comments and suggestions for future topics.
It can also, however, be a huge disaster if not done properly and at the right times.As with most things in the financial world, become educated before making the jump.
What is OPM
To use other people's money you simply borrow money from your bank etc. for a promising investment. The money the bank lends you is their clients' money that is invested in savings accounts, term deposits, etc.Hence the term "other peoples' money".
Borrowing to invest can make a lot of sense, especially in today's extremely low interest rate environment. For example, if you could buy an investment that paid you a dividend of around 8% or higher and you paid an interest rate of 4% on your loan, you would then be making a net amount of at least 4% income on other peoples' money. That is the basic principle.
Risks using OPM
There are extra risks associated with using other peoples' money. For instance, if something happened to your investment and it's value or rate of income drops, you are still on the hook for making your interest payments as well as paying back your original loan amount. The money you could lose will come out of your own pocket, not just a loss on paper.
It is therefore extremely important to choose your investments wisely. For instance, never borrow to invest in something that is not proven to make it's owners income. Always choose an investment that has a history of making regular and preferably increasing income payments and is operating in a market that has good potential for future growth. Yes, your investment must be near perfect for this to work well.
Types of Investments
Some examples of investments that are well suited to using other peoples' money are as follows :
Revenue Real Estate (always mortgage the property), REITs (Real Estate Investment Trusts), Royalty Trusts,
High Yielding Common Stock, Preferred Stock and High Yield Bonds.
The common element in all of the above types of investment is high income. You will need this high income to make your interest payments. You never want to be paying loan interest out of your own pocket.
There are many types of loans with varying interest rates. Which one you use, or qualify for, will depend on many circumstances. I will be discussing the types of loans in future postings as space permits. Stay Tuned.
As always, I welcome your comments and suggestions for future topics.
Tuesday, January 24, 2012
Real Estate Wealth - Focus on the Cash Flow
It's no secret that many of the wealthiest people on this planet have made their fortunes through investing in Real Estate.
There are many good reasons why every investor should consider Real Estate as a portion of their overall wealth building plan. One of the main reasons is that there is a finite amount of land on this planet. In other words there isn't any more of it being made. This should have the long term effect of gradual price increase. This does not mean however that there won't be setbacks along the way. This we have recently seen the in U.S. real estate market.
Smoothing out the Market
To smooth the ups and downs of the market, one way is to do your analysis based on how much income a property puts in your pocket each month. Of course, we are talking about revenue real estate that generates rental income each month.
As long as the rent you receive each month is more than all of your expenses each month, what the value of the property is each month doesn't really matter.
Dangers of Flipping
There have been a number of tv shows over the past few years that promote the flipping of homes. Basically this is buying a property, fixing it up, and hopefully selling it for more than you paid plus all renovation costs.
This strategy can work well in a rising market, however, in a falling market you could lose your shirt, literally.
You must have a good market to sell into, otherwise you will be forced to wait until the market turns around or sell at a loss. There are always costs associated to holding a property, such as mortgage interest, realty taxes, insurance, utilities, etc.
A Better Solution
A safer way to buy Real Estate is to focus on the long term. Plan to keep your property for a very long time and rent it out. As long as you can receive more rent than you pay out in expenses each month, it would be pretty hard to lose money.
The expenses you must allow for are as follows. Interest costs on the full purchase price plus renovations needed to rent it out, realty taxes, property insurance, property management expenses, repairs and maintenance, an allowance for periods of vacancy, common element (hoa) fees for condos, any utilities that must be paid by the owner.
If the property still has a positive number after the above calculations, it should be looked at further. If this number is negative, toss it out. I would recommend not considering any property that has a positive cash flow of less than $100.00 per month per door. The reason being is that you can make this amount much simpler in other forms of investment.
There are many courses on Real Estate investing available. I would not recommend buying Real Estate until you are well educated in this area. Real Estate investing is much more complex than other forms of investing and there are many factors that should be considered before jumping in.
As always, I welcome your feedback and suggestions for future topics.
There are many good reasons why every investor should consider Real Estate as a portion of their overall wealth building plan. One of the main reasons is that there is a finite amount of land on this planet. In other words there isn't any more of it being made. This should have the long term effect of gradual price increase. This does not mean however that there won't be setbacks along the way. This we have recently seen the in U.S. real estate market.
Smoothing out the Market
To smooth the ups and downs of the market, one way is to do your analysis based on how much income a property puts in your pocket each month. Of course, we are talking about revenue real estate that generates rental income each month.
As long as the rent you receive each month is more than all of your expenses each month, what the value of the property is each month doesn't really matter.
Dangers of Flipping
There have been a number of tv shows over the past few years that promote the flipping of homes. Basically this is buying a property, fixing it up, and hopefully selling it for more than you paid plus all renovation costs.
This strategy can work well in a rising market, however, in a falling market you could lose your shirt, literally.
You must have a good market to sell into, otherwise you will be forced to wait until the market turns around or sell at a loss. There are always costs associated to holding a property, such as mortgage interest, realty taxes, insurance, utilities, etc.
A Better Solution
A safer way to buy Real Estate is to focus on the long term. Plan to keep your property for a very long time and rent it out. As long as you can receive more rent than you pay out in expenses each month, it would be pretty hard to lose money.
The expenses you must allow for are as follows. Interest costs on the full purchase price plus renovations needed to rent it out, realty taxes, property insurance, property management expenses, repairs and maintenance, an allowance for periods of vacancy, common element (hoa) fees for condos, any utilities that must be paid by the owner.
If the property still has a positive number after the above calculations, it should be looked at further. If this number is negative, toss it out. I would recommend not considering any property that has a positive cash flow of less than $100.00 per month per door. The reason being is that you can make this amount much simpler in other forms of investment.
There are many courses on Real Estate investing available. I would not recommend buying Real Estate until you are well educated in this area. Real Estate investing is much more complex than other forms of investing and there are many factors that should be considered before jumping in.
As always, I welcome your feedback and suggestions for future topics.
Friday, January 20, 2012
How to Start Saving - Develop a Positive Attitude
Have you ever noticed how people with a positive outlook make you feel better ?
I think we all know someone who you just love being around because good things always seem to happen to them. Maybe you hope some of this good luck will rub off and make your day.
On the other side of the coin are the people who always complain and never have a good thing to say about anyone or anything. These people are such a drain on your energy that you just want to stay as far away as possible.
Most of us fall somewhere in between, sometimes positive , sometimes negative.
Positives Attract
Yes, positives attract and negatives repel. If you want to have good things happen to you, which polarity should you be ? Yes, positive of course.
The same principle works with wealth creation as well. If you think you're going to be wealthy some day and focus on doing positive things to help yourself, then some day there is a good chance you will succeed.
On the other hand, if you think it's too hard and you can never see yourself as a wealthy person, guess what ?
You never will be wealthy. You may as well go and buy a couple more lottery tickets.
Get Charged Now
Yes, get charged now ! Think about how you will feel once you never have to worry about money again.
Now don't just think about it, feel it ! Feels great doesn't it.
Repeat the above process many times per day. The more you do it, the longer each positive feeling will last.
It will become a habit. Push away the negative feelings and attract the charge of positive life giving energy.
Repetition is the key. Focus on the positive energy and soon you will realize that nothing is impossible. All of your dreams and desires are within your reach. Believe you can and you can.
Reach for the Stars
Yes, the sky is no longer the limit. You can achieve whatever you believe as long as you stay focused and keep the positive charge. Don't let others drain your charge. Push the negative away. Reach for the stars and never look back. Focus on what you need to do to reach your star.
As always, I welcome your feedback and suggestions for future topics.
I think we all know someone who you just love being around because good things always seem to happen to them. Maybe you hope some of this good luck will rub off and make your day.
On the other side of the coin are the people who always complain and never have a good thing to say about anyone or anything. These people are such a drain on your energy that you just want to stay as far away as possible.
Most of us fall somewhere in between, sometimes positive , sometimes negative.
Positives Attract
Yes, positives attract and negatives repel. If you want to have good things happen to you, which polarity should you be ? Yes, positive of course.
The same principle works with wealth creation as well. If you think you're going to be wealthy some day and focus on doing positive things to help yourself, then some day there is a good chance you will succeed.
On the other hand, if you think it's too hard and you can never see yourself as a wealthy person, guess what ?
You never will be wealthy. You may as well go and buy a couple more lottery tickets.
Get Charged Now
Yes, get charged now ! Think about how you will feel once you never have to worry about money again.
Now don't just think about it, feel it ! Feels great doesn't it.
Repeat the above process many times per day. The more you do it, the longer each positive feeling will last.
It will become a habit. Push away the negative feelings and attract the charge of positive life giving energy.
Repetition is the key. Focus on the positive energy and soon you will realize that nothing is impossible. All of your dreams and desires are within your reach. Believe you can and you can.
Reach for the Stars
Yes, the sky is no longer the limit. You can achieve whatever you believe as long as you stay focused and keep the positive charge. Don't let others drain your charge. Push the negative away. Reach for the stars and never look back. Focus on what you need to do to reach your star.
As always, I welcome your feedback and suggestions for future topics.
Tuesday, January 17, 2012
How to Ride the Wave - Investing in the Stock Markets
Investing in the stock markets of the world is one of the most important things all individual investors should learn.
Buying a stock is actually buying a piece of an active business venture. You will share in the profits of that business and will receive monthly or quarterly payments directly to your account. To receive these payments you do absolutely nothing except invest in the shares.
Income producing stocks are truly the best way for the average person to multiply their income streams with very little time involved.
How the Markets Work
Stock markets are where shares of businesses are bought and sold. The value of these shares change constantly based on how much individual investors are willing to pay. There are many factors that determine the price of shares. Some are technical in nature while others are purely psychological.
Many fear stock market investing because they don't want to lose their investment. Many get greedy and want to make big gains on the price swings. The fear and the greed are two of the biggest factors in the fluctuation of stock share prices. When more investors are afraid of the market, prices go down. When more investors are greedy, prices go up.
How to Ride the Wave
Invest for the income you will receive from the businesses. Do not be overly concerned about the ups and downs of the market. You will not lose any money on your investment unless you sell it for less than you bought it for. Invest for the long term in solid businesses that are earning good returns for their shareholders.
You can enhance your gains by adding to your investments when prices are lower. If you must sell your shares, try to avoid selling in the low times in the investment cycle. Above all, do not panic. Money you need for everyday living expenses should never be invested in the stock markets. Spend the income, not the capital
Calm the Waters
The longer the time frame, the smoother the ride. The ups and downs of the market cycles will pass and you will be focusing on the continuously rising level of income from your investments.
The key to stock market investing is to choose good quality businesses that pay good dividends and keep them for a very long time. You should review these businesses periodically to ensure they are still profitable.
After all, you are part owner and should keep on top of what your businesses are doing.
By following the above rules, you should be able to have a very positive and rewarding experience from the stock markets of the world. Use them to build your wealth and multiply your income streams.
As always, I welcome your comments and suggestions for future topics.
Buying a stock is actually buying a piece of an active business venture. You will share in the profits of that business and will receive monthly or quarterly payments directly to your account. To receive these payments you do absolutely nothing except invest in the shares.
Income producing stocks are truly the best way for the average person to multiply their income streams with very little time involved.
How the Markets Work
Stock markets are where shares of businesses are bought and sold. The value of these shares change constantly based on how much individual investors are willing to pay. There are many factors that determine the price of shares. Some are technical in nature while others are purely psychological.
Many fear stock market investing because they don't want to lose their investment. Many get greedy and want to make big gains on the price swings. The fear and the greed are two of the biggest factors in the fluctuation of stock share prices. When more investors are afraid of the market, prices go down. When more investors are greedy, prices go up.
How to Ride the Wave
Invest for the income you will receive from the businesses. Do not be overly concerned about the ups and downs of the market. You will not lose any money on your investment unless you sell it for less than you bought it for. Invest for the long term in solid businesses that are earning good returns for their shareholders.
You can enhance your gains by adding to your investments when prices are lower. If you must sell your shares, try to avoid selling in the low times in the investment cycle. Above all, do not panic. Money you need for everyday living expenses should never be invested in the stock markets. Spend the income, not the capital
Calm the Waters
The longer the time frame, the smoother the ride. The ups and downs of the market cycles will pass and you will be focusing on the continuously rising level of income from your investments.
The key to stock market investing is to choose good quality businesses that pay good dividends and keep them for a very long time. You should review these businesses periodically to ensure they are still profitable.
After all, you are part owner and should keep on top of what your businesses are doing.
By following the above rules, you should be able to have a very positive and rewarding experience from the stock markets of the world. Use them to build your wealth and multiply your income streams.
As always, I welcome your comments and suggestions for future topics.
Friday, January 13, 2012
How to Get Rich - Invest With Your Head Not Your Heart
It seems that the more wealth you accumulate the more attention you attract from people in the business of selling investments.
They all have the best opportunity to make you gobs of money in a short period of time. Or at least that's what they promote. In reality, most of these so called opportunities are very high risk investments and many are actually new ventures looking for start up capital. There is usually no track record of earning any income at all.
What they try to do ( and they are very successful at it) is get investors excited about the opportunity. They show projections of what they think could happen given the parameters that they set. What they generally fail to point out is that there are no guarantees for the investors. Also, once you buy in it can be very difficult if not impossible to sell out if things go wrong.
What To Do
Use one of the biggest rules of investing. Do not invest in something that makes you excited. Invest in something that has a proven track record of earning income for it's investors. There are many out there and most are very very boring. When it comes to investing, boring is good.
Also, know your exit strategy before investing your money. The best investments can be sold immediately if things go wrong or they don't meet your expectations. Know how to get out before you get in. Simple, but very important.
Invest with your head, not your heart. Don't let the excitement of the opportunity cloud your judgement. Always allow for a cooling off period after studying an opportunity. Never let the promoter try to tell you to buy now because the offer will sell out fast or not be available next week. There are an abundance of good opportunities out there and most will still be there next week, next month, or maybe even next year.
Take your time before investing any of your hard earned savings. Take your time to analyse each opportunity to see what best suits your future goals. Take your time to understand exactly what you are investing in.
Investing is normally a very long term activity. Therefore, take as much time as you need to make sure you are investing in something that is comfortable and suitable for your long term goals.
Use your head and not your heart when it comes to investing. Yes, it will probably be boring, but that's ok.
As always, I welcome you comments and suggestions for future topics.
They all have the best opportunity to make you gobs of money in a short period of time. Or at least that's what they promote. In reality, most of these so called opportunities are very high risk investments and many are actually new ventures looking for start up capital. There is usually no track record of earning any income at all.
What they try to do ( and they are very successful at it) is get investors excited about the opportunity. They show projections of what they think could happen given the parameters that they set. What they generally fail to point out is that there are no guarantees for the investors. Also, once you buy in it can be very difficult if not impossible to sell out if things go wrong.
What To Do
Use one of the biggest rules of investing. Do not invest in something that makes you excited. Invest in something that has a proven track record of earning income for it's investors. There are many out there and most are very very boring. When it comes to investing, boring is good.
Also, know your exit strategy before investing your money. The best investments can be sold immediately if things go wrong or they don't meet your expectations. Know how to get out before you get in. Simple, but very important.
Invest with your head, not your heart. Don't let the excitement of the opportunity cloud your judgement. Always allow for a cooling off period after studying an opportunity. Never let the promoter try to tell you to buy now because the offer will sell out fast or not be available next week. There are an abundance of good opportunities out there and most will still be there next week, next month, or maybe even next year.
Take your time before investing any of your hard earned savings. Take your time to analyse each opportunity to see what best suits your future goals. Take your time to understand exactly what you are investing in.
Investing is normally a very long term activity. Therefore, take as much time as you need to make sure you are investing in something that is comfortable and suitable for your long term goals.
Use your head and not your heart when it comes to investing. Yes, it will probably be boring, but that's ok.
As always, I welcome you comments and suggestions for future topics.
Tuesday, January 10, 2012
How to Enjoy your Wealth - Respect your Temple
An old adage once said "your body is your temple" We must learn to respect our temple (bodies) in order to fully enjoy the fruits of our labor.
What is the point of saving and investing and building a comfortable future if we neglect our health ?
Think about what you would like to be doing once you become wealthy. Now think about looking at yourself in the mirror. What do you see ? Will you be physically and mentally up to the challenge ?
I have seen far too many individuals save and invest their entire lives only to fall ill soon after they are able to start enjoying their wealth. What a shame. What a tragedy.
What To Do
You should start by doing an evaluation of where you are starting from today. Maybe you need to stop smoking. Maybe you need to cut down on your drinking. Your eating habits may need to be adjusted. Perhaps you could exercise more. Etc. etc. etc.
Whatever the case may be, you are the best one to determine what you will need to do to provide the longest and healthiest possible future for yourself.
Make sure you have regular check ups with your doctor and dentist. Neglecting these visits could some day result in a delay to getting valuable treatment for many potential disorders. You never know.
A lot of stress in your life could also cause many health problems down the road. Work today at doing whatever you can to reduce the level of your stress. Professional help in this area should never be ruled out.
Let go of the past. Do not obsess with the days that have passed. There is nothing that can be done about the past anyway. Do not fear for the future. It may never happen. Live in the present and do what you can now to improve your situation.
There is an old saying that says, it's not always what you eat, but what eats you that is a major cause of health problems. So True. Don't Worry, be happy.
Having a healthy mind and a healthy body will greatly improve your chances of being able to enjoy your future wealth. This is not to say that bad things will never happen. You never really know. However, it will give you a much better chance to truly realize your dreams.
Start respecting your temple today and work towards a long and enjoyable future.You owe it to yourself and your loved ones.
As always, I welcome your comments and suggestions for future topics.
What is the point of saving and investing and building a comfortable future if we neglect our health ?
Think about what you would like to be doing once you become wealthy. Now think about looking at yourself in the mirror. What do you see ? Will you be physically and mentally up to the challenge ?
I have seen far too many individuals save and invest their entire lives only to fall ill soon after they are able to start enjoying their wealth. What a shame. What a tragedy.
What To Do
You should start by doing an evaluation of where you are starting from today. Maybe you need to stop smoking. Maybe you need to cut down on your drinking. Your eating habits may need to be adjusted. Perhaps you could exercise more. Etc. etc. etc.
Whatever the case may be, you are the best one to determine what you will need to do to provide the longest and healthiest possible future for yourself.
Make sure you have regular check ups with your doctor and dentist. Neglecting these visits could some day result in a delay to getting valuable treatment for many potential disorders. You never know.
A lot of stress in your life could also cause many health problems down the road. Work today at doing whatever you can to reduce the level of your stress. Professional help in this area should never be ruled out.
Let go of the past. Do not obsess with the days that have passed. There is nothing that can be done about the past anyway. Do not fear for the future. It may never happen. Live in the present and do what you can now to improve your situation.
There is an old saying that says, it's not always what you eat, but what eats you that is a major cause of health problems. So True. Don't Worry, be happy.
Having a healthy mind and a healthy body will greatly improve your chances of being able to enjoy your future wealth. This is not to say that bad things will never happen. You never really know. However, it will give you a much better chance to truly realize your dreams.
Start respecting your temple today and work towards a long and enjoyable future.You owe it to yourself and your loved ones.
As always, I welcome your comments and suggestions for future topics.
Friday, January 6, 2012
How to Start Saving - Time For the B Word
Yes, I know it's a painful word for many, but before you run for the exit or click on another site, please hear me out.
Budgeting. There I said it. Not so bad was it ? For those who have difficulty resisting temptation and therefore saving money, a budget may be just the thing to start them on the right path to becoming rich.
As mentioned in a previous post, you have to know where your money is going every month.If you haven't done the exercise yet, it's time to go back and reread my previous post "How to Increase Your Savings - Know Where Your Money is Going" . The first step to developing a budget is to know where your money is currently being spent.
Once you have an idea of where you are spending your money, add up all the categories and list them in order of importance. The ones at the top should be life's basic needs such as food, shelter (rent or mortgage payment, utilities, etc.- this does not include cable tv, cell phones etc.) and clothing. The basic needs are things we cannot survive without. We all have to eat. We all have to live somewhere (preferably).We all have to have basic clothing.
All other categories are what we call discretionary expenses. What this means is that we have a choice on how much we spend in these areas. We would still be able to survive without them.
Now, add up all your income for the month (take home pay) and subtract the totals from each category. Hopefully you are left with a positive number. If this number is negative you will need to cut your spending on some discretionary categories just to survive.
The goal of your budget is to have at least 10% of your total take home income left over after all categories have been subtracted out. Think of the categories that are least important to you and start reducing those categories first. Reduce until you have at least 10% of your income left over.
This left over amount will be the amount you will start saving each month. Set this amount aside at the beginning of each month and don't touch it. Keep it in a separate bank account without bank card access.
You will now be living on the rest of your income. You must follow the guideline amounts you have set up previously under each category. These will be your budgeted amounts that you can spend.
By sticking to your budgeted amounts for a few months, you will likely find it not too difficult to live with the changes. The longer you stick to the budget, the easier it will become. It is a spending habit that you are now learning. As in all habits, it takes time to develop, but once learned will become second nature over time.
Every time there is a change to your total take home income your budget should be adjusted. The guideline here is to always ensure that after category adjustments are made you still have at least the 10% left over for savings.
Your continuous and increasing savings amount will become your foundation for your future wealth. As in all things, a solid foundation will provide a strong future for whatever you have planned.
There, I'm finished with the B word and will never bring it up again. I promise. Well, unless someone requests more on it later that is.
As always I welcome your comments and suggestions for future topics.
Budgeting. There I said it. Not so bad was it ? For those who have difficulty resisting temptation and therefore saving money, a budget may be just the thing to start them on the right path to becoming rich.
As mentioned in a previous post, you have to know where your money is going every month.If you haven't done the exercise yet, it's time to go back and reread my previous post "How to Increase Your Savings - Know Where Your Money is Going" . The first step to developing a budget is to know where your money is currently being spent.
Once you have an idea of where you are spending your money, add up all the categories and list them in order of importance. The ones at the top should be life's basic needs such as food, shelter (rent or mortgage payment, utilities, etc.- this does not include cable tv, cell phones etc.) and clothing. The basic needs are things we cannot survive without. We all have to eat. We all have to live somewhere (preferably).We all have to have basic clothing.
All other categories are what we call discretionary expenses. What this means is that we have a choice on how much we spend in these areas. We would still be able to survive without them.
Now, add up all your income for the month (take home pay) and subtract the totals from each category. Hopefully you are left with a positive number. If this number is negative you will need to cut your spending on some discretionary categories just to survive.
The goal of your budget is to have at least 10% of your total take home income left over after all categories have been subtracted out. Think of the categories that are least important to you and start reducing those categories first. Reduce until you have at least 10% of your income left over.
This left over amount will be the amount you will start saving each month. Set this amount aside at the beginning of each month and don't touch it. Keep it in a separate bank account without bank card access.
You will now be living on the rest of your income. You must follow the guideline amounts you have set up previously under each category. These will be your budgeted amounts that you can spend.
By sticking to your budgeted amounts for a few months, you will likely find it not too difficult to live with the changes. The longer you stick to the budget, the easier it will become. It is a spending habit that you are now learning. As in all habits, it takes time to develop, but once learned will become second nature over time.
Every time there is a change to your total take home income your budget should be adjusted. The guideline here is to always ensure that after category adjustments are made you still have at least the 10% left over for savings.
Your continuous and increasing savings amount will become your foundation for your future wealth. As in all things, a solid foundation will provide a strong future for whatever you have planned.
There, I'm finished with the B word and will never bring it up again. I promise. Well, unless someone requests more on it later that is.
As always I welcome your comments and suggestions for future topics.
Tuesday, January 3, 2012
How to Deal with Mutual Funds - The Good the Bad and the Ugly
Mutual Funds have been around for many years. They have developed and adapted to the changing times.But are they really something you should invest your hard earned money into ?
What mutual funds do is pool the money of many investors and purchase investments with this money. They could invest in stocks, bonds, Real Estate Investment Trusts, or many other forms of derivative securities. The individual investor has no control over what is purchased and what is sold. ( or when it is purchased and sold)
The fund hires a manager to do all of this for the investors.
These managers operate within guidelines that are set out when the fund is originally set up and must follow the rules. Mutual Funds are sold by a legal document called a Prospectus which every investor must read and understand before investing.
The Good
Mutual Funds started out many years ago as a way for the small investor to gain a better rate of return than leaving their money in their bank accounts. A small investor, otherwise, would not have been able to afford the fees of professional management.
Mutual Funds have many good features such as, instant diversification of investments with a single small investment, professional management, liquidity (you can sell your shares at any time), reinvestment of income, etc. You can also arrange to invest a specific amount each month to add to your investment.
They are still a good vehicle for someone starting out. Also, for anyone having trouble saving, funds are harder to get at and can not be accessed from your bank card.
The Bad
The annual fees that Mutual Funds charge can be up to 2.5% of the value of your investment. What this means is that you will automatically be making up to 2.5% less each year than the investor who invests directly in the underlying securities. This amount is called the MER (Management Expense Ratio) and can be found in the fund's prospectus. Check this amount before investing.
Managers of funds always get paid, even if the fund loses money. In bad years this will add up to 2.5% to the loss of your investment if you should sell. The key here is not to sell when your funds are down (as with all other investments, normally) You must trust that the manager will make more gains for you in the future.
The Ugly
Many investors in Mutual Funds have no idea what their money is invested in. They do not understand that most Mutual Funds change in value on a daily basis. They rise in value and fall in value, quite often below the amount of the original investment.
When prices fall too far some Mutual Fund investors panic and sell their shares. Too much panic can force managers to sell good investments when they are at a low point, therefore causing all investors to lose money.
The biggest drawback to Mutual Funds is the lack of understanding on the part of most Mutual Fund investors. They simply don't understand the risks of investing and can pull everyone else down with them.
Choices
The Mutual Funds I talked about above are termed open mutual funds which are sold through most banks and financial advisers. You buy and sell your units through the mutual fund company itself and receive the cash directly.
Another form of Mutual Funds are the closed Mutual Funds. These are listed on the various stock exchanges and you buy and sell their units on the open market to individual investors. Closed Mutual Funds eliminate the risk of the Ugly part above but still have the costs associated as in the Bad part above.
Mutual Funds whether they be open or closed still have a place in most investors' portfolios. The important thing to remember is their inherent advantages and disadvantages over purchasing individual investments.
When investing, the more control you have will usually mean the less diversification you will have. As in most things, having a balance of both mutual funds and individual securities is usually the best choice. However, that is completely up to the individual investor to decide.
As always I welcome your comments and suggestions for future topics.
What mutual funds do is pool the money of many investors and purchase investments with this money. They could invest in stocks, bonds, Real Estate Investment Trusts, or many other forms of derivative securities. The individual investor has no control over what is purchased and what is sold. ( or when it is purchased and sold)
The fund hires a manager to do all of this for the investors.
These managers operate within guidelines that are set out when the fund is originally set up and must follow the rules. Mutual Funds are sold by a legal document called a Prospectus which every investor must read and understand before investing.
The Good
Mutual Funds started out many years ago as a way for the small investor to gain a better rate of return than leaving their money in their bank accounts. A small investor, otherwise, would not have been able to afford the fees of professional management.
Mutual Funds have many good features such as, instant diversification of investments with a single small investment, professional management, liquidity (you can sell your shares at any time), reinvestment of income, etc. You can also arrange to invest a specific amount each month to add to your investment.
They are still a good vehicle for someone starting out. Also, for anyone having trouble saving, funds are harder to get at and can not be accessed from your bank card.
The Bad
The annual fees that Mutual Funds charge can be up to 2.5% of the value of your investment. What this means is that you will automatically be making up to 2.5% less each year than the investor who invests directly in the underlying securities. This amount is called the MER (Management Expense Ratio) and can be found in the fund's prospectus. Check this amount before investing.
Managers of funds always get paid, even if the fund loses money. In bad years this will add up to 2.5% to the loss of your investment if you should sell. The key here is not to sell when your funds are down (as with all other investments, normally) You must trust that the manager will make more gains for you in the future.
The Ugly
Many investors in Mutual Funds have no idea what their money is invested in. They do not understand that most Mutual Funds change in value on a daily basis. They rise in value and fall in value, quite often below the amount of the original investment.
When prices fall too far some Mutual Fund investors panic and sell their shares. Too much panic can force managers to sell good investments when they are at a low point, therefore causing all investors to lose money.
The biggest drawback to Mutual Funds is the lack of understanding on the part of most Mutual Fund investors. They simply don't understand the risks of investing and can pull everyone else down with them.
Choices
The Mutual Funds I talked about above are termed open mutual funds which are sold through most banks and financial advisers. You buy and sell your units through the mutual fund company itself and receive the cash directly.
Another form of Mutual Funds are the closed Mutual Funds. These are listed on the various stock exchanges and you buy and sell their units on the open market to individual investors. Closed Mutual Funds eliminate the risk of the Ugly part above but still have the costs associated as in the Bad part above.
Mutual Funds whether they be open or closed still have a place in most investors' portfolios. The important thing to remember is their inherent advantages and disadvantages over purchasing individual investments.
When investing, the more control you have will usually mean the less diversification you will have. As in most things, having a balance of both mutual funds and individual securities is usually the best choice. However, that is completely up to the individual investor to decide.
As always I welcome your comments and suggestions for future topics.
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