Tuesday, May 24, 2005

Getting the most out of your Money - Lesson 1

Here is your first lesson from our mini course “Getting the most out of your MONEY”.

What I will share with you through this mini course will allow you to maximize the value of your current income and also let see how to plan financial goals which you know how to achieve. There are just a few keys in life which , if you find them, will help you open the doors to financial success and freedom.

One of them is the key of wisdom. Making sure that you “seek advice from those competent to give it” So how do you determine if someone is competent? Look at their track record. Do they walk the walk or just talk the walk? Do they have demonstrated success in the specific area you are seeking advice from them? You wouldn’t take advice on bricklaying from a plumber and neither would you get your toilet fixed by a bricklayer! However, before taking any advice you will need to gain enough education so that you can ask the right questions when interviewing potential advisors.
Remember that everyone is normally dialed into WIIFM (What’s in it for me) and therefore if you have no financial education you can easily become bamboozled by financial ‘mumbo jumbo’.
The first question I always like to ask financial advisors is ‘How are you getting paid from my business?” This will help me determine what WIIFM looks like for them and help me ask questions which are more slanted in my favour. In these situations knowledge is power and advisors forget that the language they use is not clearly understood.
Terms like debt equity ratio, return on capital, and interest cover can be quite intimidating if you’ve never encountered them before. Get your self educated so you can ask the right questions and also know if you are getting good answers.
Where’s the Money Gone membership and using The Financial Fence® gives you a great framework from which you can ask intelligent questions more easily. You can get in the driving seat instead of often feeling as though you’re being carried along. You can get the peace of mind you’ve always longed for.


Monday, May 23, 2005

Seven Secrets to Money Success - Number 7

Think like a banker , not an accountant Have you ever had a conversation with an accountant about your finances? Chances are that you came away from that conversation a little confused and in some cases not knowing what he or she was talking about. The reason for this is that accountants are taught to think in pluses and minuses. These are called debits and credits and are used to drive the whole process of double entry book keeping. Accountants work out your finances and end up putting all the numbers into a balance sheet which is what you’ve got left.

This is based on the following equation: Owners Equity = Assets – Liabilities

So at the end of the day, your wealth is made up of pluses and minuses and as long as the pluses are greater than the minuses then you’re OK.
A banker on the other hand is always looking to see how the accumulation of wealth can be funded. They know that these days it is impossible to save up for everything.

Think about buying a family home. If you were trying to save for one, you would likely never get there because the prices would be going up faster than you can save. You have to pay rent and try and save at the same time! So the banker thinks like this.
The house you want to buy is Capital. To buy it you will need to find the funds to buy it. You may have saved a deposit (your equity) and the bank will then lend you the difference(your debt).

Bankers have an equation that looks like this: Capital = Debt + Equity

So let’s look at an example.
House value $200,000 (Capital)
Deposit saved $20,000 (Equity) Bank
Borrowings $180,000 (Debt)
So this equation is $200,000 = $180,000 + $20,000

Most people find it easier to think like a banker because they can relate to it more easily and when you think about it, you probably have transactions more often with your bank than your accountant and can gain more value by thinking like the banker. Bankers are always looking to sell you more debt, so that you can accumulate capital more quickly. If you can get a good return off that capital, you are moving to better wealth creation and a chance to move toward financial freedom.


Sunday, May 22, 2005

Seven Secrets to Money Success - Number 6

Equity is not the same as cash Many people think that equity is the same as money. It’s some kind of accumulated bank account that they can draw on when they need to. I have personally met people who build up the equity in their family home and then find that if they stopped working they would have no money to spend. They still have plenty of equity but no money to spend. Imagine going down to the bank and saying, “I need to withdraw 10 % of the equity in my home.” I’m sure the bank teller would look very blankly at you. Of course the lending part of the bank would support the thinking that equity is money and they can give you the illusion that it is true. Because when you draw on your equity by borrowing from the bank, you end up with money to spend. But remember, the money you get to spend is BORROWED money on which you are going to pay INTEREST and when you have spent the money you still have to pay it back or go on paying the interest for the rest of your life.


Saturday, May 21, 2005

Seven Secrets to Money Success - Number 5.

Understand the detail of your finances. Many people tell me that they are BIG picture people. They keep an overall idea of what’s happening in their finances but then have no idea of the detail of their finances. I love to ask these people what their income is. Normally they know this exactly. Then I ask them what their expenses are for the same period and they don’t know. Often they give me a figure and when I subtract it from the income figure they’ve given me it becomes obvious that they have left out quite a few expenses. If you have ever been on a diet or worked with someone in this area they will ask you to fill out a food diary for a period of time. This is because we are often not aware of what it is we are eating and when. Filling out a food diary gives you an opportunity to make sure you are honest about what you eat and without a correct record it is impossible to make any headway with a sensible diet that can control your weight. Getting an idea of your expenses is exactly the same. Until you honestly record them for a period you will have no idea where your money is going. Like the proverb says, ”Your money can be gone in a flash. As though it had grown wings and flown away like an eagle.” Some people are happy if they have a little money left in their bank before each payday. They think that this is going to one day make them wealthy. But think about this. If you were unable to account for $10 each week, in a year this would $520 and over a working lifetime of say, 40 years, would equate to $20,800. That is the value of a small car just frittered away over a lifetime. Let’s say you are trying to lose weight which is why you decided to fill out a food diary. The weight would come off gradually kilo by kilo. You wouldn’t wake up one day and suddenly have lost 10kg overnight. Also, you would make measurable changes to your diet which would make sure you didn’t starve but at the same time you lost weight. So it is with controlling your expenses. You need to know what they are IN DETAIL. Near enough is just not good enough! Because it is the gradual small changes that you make which allow you to have an enjoyable life as well as getting ahead financially. No one wants to go on a crash diet with their expenses. Thinking that to get ahead you have to stop spending totally! So understanding the detail and planning sensibly will allow you to get ahead and have a life as well!


Friday, May 20, 2005

Seven Secrets to Money Success - Number 4

Money in the bank doesn’t mean available to spend Do your income and expenses arrive at exactly the same time each week or month? Or do they have a habit of arriving at the most awkward time? Like a few days before you get paid. For many people, understanding this principle allows them to plan their income and expenses separate to their bank account. Remember there are two aspects to your finances. What you are doing and what you have left. The money that you have in your bank is what you have left after your previous income and expenses. So using your bank account as the basis for deciding whether to spend or not would be fine if everything stopped at the same time. If ALL your expenses had been paid for, then what was in your bank account would be available to spend on whatever you wanted. HOWEVER expenses are quite likely to arrive BEFORE you next pay and therefore the money that is in your bank account is not available to spend frivolously. Your bank account balance is at a point in time and does not take into account what is coming up before your next pay. So just because there is money today doesn’t mean it is not needed for an expense which needs to be paid before your next pay packet. You need to have a method of planning your income and expenses which is separate to your bank account because, as stated previously, your bank account is only a point in time and does not take into account what is coming up in the future. Keep a separate sheet of paper and on it write down all you income and expenses. Use this as the basis on whether you can spend or not because it can cater for future activity. If you have additional income or you can minimize an expense on the sheet of paper, this will give you additional spending power. If not, the money in your bank is only there for a short time and will be swallowed up with expenses you have already planned for.


Thursday, May 19, 2005

Seven Secrets to Money Success - Number 3.

The BIG picture is what counts The big picture brings context to a situation. Have you ever been caught by missing the context of something? Suppose I was to take you out and ask you to run 100 metres in competition to ten other people. You would likely run as fast as you could for that distance. If, at the end of the 100 metres I told you that this was the beginning of a marathon, then you would ask me why I hadn’t told you that BEFORE you began. You would probably have run the distance more slowly to conserve your energy for the whole distance. Another example of this is when an architect looks at the plans of a building. It is the overall picture which is important rather than any particular piece of the design. Whilst the individual pieces make up a design, it is not until they are all together that the building can be viewed as a whole. The same is true when you look at finances. It is not simply a matter of getting more income than expenses. What happens after that? What do you do with the excess? You need an overall BIG picture to see your finances from the correct perspective which will have two aspects to it. What have I been doing for the last period of time AND what have I got left to continue onto the next period. This is simply a NET INCOME STATEMENT (what I have been doing during the period) and a BALANCE SHEET (what I have left to take into the next period). Without this kind of perspective you can spend all your time trying to get more and more income and nevcer work out what’s left and what you are accumulating as wealth. The BIG picture has both aspects. What am I doing and what have I got left.


Seven Secrets to Money Success - Number 2.

Financial Statements are not made to be easily understood. No one ever went to an accountant because they WANTED to. They normally go because they HAVE to. In the same way, no one ever asked an accountant onto the management team of a company because they WANTED to. They realised that the HAD to have someone to ‘look after the books.’ As a result of this, the accounting profession has been able to happily survive without having to truly explain what they are up to at any point. Think about the businessperson that goes to the accountant and asks “Did I have a good year?” This shows that they might have a great ‘gut feel’ for the business but could be held to ransom by their accountant because only he understands the ins and outs of the financial statements. The same goes for financial planners who ‘look after the numbers’ for their clients and help them build a better future. Financial Statements have often been presented in a way that the normal person can not really understand. They understand the income and expenses but beyond that, everything is a mystery. The key to financial statements is to understand the difference between a balance sheet and a net income statement. One statement shows a point in time (balance sheet) and the other shows activity for a period (net income statement). This fact is often not told to people and they look at both statements as if they were the same. When they don’t understand the balance sheet they ignore it. Remember that the balance sheet is what you’ve got left after taking into account you net income statement for a period of time. If you have nothing left, you have consumed all your income and you’ll end up working for money instead of having money work for you.


Wednesday, May 18, 2005

Seven Secrets to Money Success - Number 1.

Make money work for you, don’t work for money Many people spend all of their life selling their time for money. This means they remain an employee and spend most, if not all, their money on supporting their lifestyle. As a consequence they do not invest their money into opportunities which will bring them passive income. They work hard, spend hard and never have anything to show for it. This is like the person who makes a little out of a lot. Contrast that to the person who makes a lot out of a little. This is the person who invests their money into income producing capital and over time their small amount turns into a lot. They truly have turned the tables. They start out in life working for money and end their life having money work for them.