Money Basics

The 4 Silly Things You Do with Your Money (and How to Fix Them)

Money is not the most important thing, my dad used to say. But as I grew up, I realised that it is very close in importance to air (LOL).

You need money to live, but whether you’re a spendthrift or a miser, money can make you do foolish things. You'll waste it trying too hard to save, spend it on things you don't need, and simply overpay on regular expenses every month. Here's how to avoid being stupid with your hard-earned cash.

Silly Thing #1: You Spend More by Trying Too Hard to Save

Frugality has its downfalls. When you try too hard to save, sometimes you end up wasting your money in the process. This may seem almost impossible, but it happens when you try so hard to cut costs that you stop paying for things you actually need. Doing this leads to more problems down the road—problems that are far more costly.

For example, skipping regular checkups at the doctor and the dentist can save you a few hundred dollars each year, but there will come a day when your lack of preventative care—which is very important—will earn you a much higher bill.

Buying cheaply made products is another way to throw away your money. It may save you cash in the short term, but you're bound to find yourself replacing it far sooner than a well-made product. If you've ever purchased a cheap inkjet printer, you know this works. It'll print well for about six months to a year before you start to run into clogged ink heads and other issues. ?

It's always better to look for a good deal on a well-made product than sacrifice quality manufacturing for the sake of a discount that will possibly cost you more in the long run.

Overall, if you think your purchasing decisions through before you make them you shouldn't have too hard of a time realizing when your efforts to cut costs will actually hurt you in the long run.

Silly Thing #2: You Don’t Put Money in Savings Because You Think You Can't Afford It

There are numerous benefits to saving even a small portion of your paycheck that you may not realize—benefits that save you even more money in the long run.

While this probably goes without saying, saving money in a monthly savings plan means you have a reserve of cash at your disposal. It's worth mentioning nonetheless because you may not realize that you can end up spending more money in the long run when you don't save at all. 

This not happens because you can quickly rack up credit card debt by buying things you can't afford, but because using your savings to purchase an item means you have the freedom to spend at the most optimal time—such as when a good deal comes along. If you don't have the necessary savings when that deal arises, you'll have to put it on a credit card that you can't pay off immediately and the interest will quickly negate those savings. If you have cash at the ready, you won't face this dilemma.

Contributing to your retirement pot is another great way to save, but many people avoid this because 

  1. retirement seems a long way off, and
  2. they want to build an emergency fund beforehand, so they’re ready in case of a problem. 

Just change your way of thinking. As ace financial advisor David Bach says, ‘Pay yourself first’, and then spend the rest. Basically, put away money each month into your retirement pot, and then you won’t feel guilty about spending money on life’s little things.

He also say, ‘Make it automatic’, which means you can setup a bank standing instruction, or credit card instruction, for the money to go into your retirement pot before you ever see it in your account. This would mean that your savings pot will grow automatically without much effort on your part.

Stupid Thing #3: You Overpay on Bills (and a Lot of Other Stuff)

When you see a price tag on an item you want or receive a monthly bill in the mail, the general assumption is that this price is not negotiable—but that's where you'd be wrong. You can end up easily overpaying by quite a bit if you just accept the price you see. Often times there is a less-costly alternative.

When it comes to your bills, there are two things you can do to lower them. The first simply involves making a few phone calls each year to negotiate your rates. If you pay your bills on time and you've been loyal to the company for the last year or more, it's not hard to get some sort of discount.

As for in-store prices, people tend to think they can't haggle when they often can. Big ticket items like furniture, appliances, and mattresses are rarely set in stone and you can make a deal if you try. This even works at big-ticket retailers. You can negotiate prices on televisions, for example, and often get a lower price and/or free accessories (like those overpriced cables). Cars and home prices are also commonly negotiable.

Stupid Thing #4: You Carry Credit Card Debt

We're lucky enough to live in a world with plenty of great products and so it's easy to turn to a credit card to buy them when you don't have the cash. Just because racking up unnecessary credit card debt is common these days doesn't make it a healthy practice.

Carrying debt that you take time to pay off can amount in huge interest charges that don't take long to get into the range of thousands of dollars even if you always make your minimum payments. There's rarely a good excuse to carry debt on your cards, so if you do you it's time to put together a plan to stop right now.

To eliminate the debt, you need to make a plan. Figure out how much you can pay every month and how long paying that amount will take you to become debt free.

What stupid things have you done with your money and how did you fix them? If you've got advice to share, post it in the comments!

As for in-store prices, people tend to think they can't haggle when they often can. Big ticket items like furniture, appliances, and mattresses are rarely set in stone and you can make a deal if you try. This even works at big-ticket retailers like Best Buy. You can negotiate prices on televisions, for example, and often get a lower price and/or free accessories (like those overpriced cables). Cars and home prices are also commonly negotiable,
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How To Be Wealthy Slowly But Surely
Investing Safely, Money Basics

How To Be Wealthy Slowly But Surely

In the previous article – “Rich or Wealthy, Which is Better“, we saw that Wealth is measured in time, i.e. the more money you have, the more time it will last at a given rate of spending.

So is there a way that we can work for our money once, build our wealth and get paid forever?

Make Money Work For You

This was the question asked to me by a young man starting out in his career. He was around 25 years old when he met me, and was just starting to realise that he needs his money to work for him, rather than work for money forever.

My answer was of course, Yes.

Because there is a way to Create a Second Income through investing as recommended by Robert Kiyosaki and Warren Buffett.

The steps to Accumulate Wealth and Create a Second Income are below:

  1. Accumulate (Save) money, over a period of time by setting yourself clear savings targets.
  2. Once you hit your savings goal, Invest the money to create a second income.

Am I joking, not at all, the process is as simple as it sounds, but it is not easy.

Not easy because you need to be committed to the goal, and not let yourself be distracted by the easy avenues of spending money around you.

Steps to Accumulate Wealth

Pay Yourself First – Practice Delayed gratification

Everybody (including me sometimes) wants instant gratification today. Many youngsters are living a lifestyle of ‘Living for the moment’, because it is supposedly the ‘Cool thing to do’. They don’t want to look bad in front of their peers if they are seen as being stingy and not spending money. The same is true for most adults I know, who are living paycheck to paycheck, driving expensive cars, living in lavish houses, but having no savings at the end of the month.

These people are a ‘Financial disaster – waiting to happen’, where a simple issue like a job loss or health issue that stops them from working could ruin their finances completely.

Have you been in this situation? I know, I have.

I made some changes in my finances, after realising the problem. Today, I have no debts and a significant amount of savings. I still drive a decent car, I still live in a modest home, and don’t sacrifice on my lifestyle in a big way.

I just ‘Pay myself first’ and then spend the rest.

If You Find Yourself In A Hole – STOP DIGGING

This is a statement, I read online. In The Bankers Magazine, it was published in 1964 as: “Let me tell you about the law of holes: If you find yourself in a hole, stop digging.” The part after the colon in that version has also been attributed to American humorist Will Rogers.

This part is relevant to your Debt situation. If you have a lot of Debts, stop accumulating more. Do yourself a favour and cut down on your debts. There are different types of Debt. You can follow the steps in this Debt Consolidation Guide to get yourself out of debt faster.

Decide On An Amount To Save Each Month

The ideal amount to Save Each Month should ideally be atleast 10% of you income. If you can do more, you are a champ.

Just make sure that the amount you plan to save each month should not be too small or too big, it should be something you can afford to put aside consistently.

Start a Regular Savings Plan

I know, you have heard this before, from many people, mostly financial advisors, but it is common sense, isn’t it?

I mean you can save the money in a bank if you wanted to, but that would hardly beat inflation, and it would take ages before you save a meaningful amount, because your money would not be working for you, it would only be working for the bank.

You need to get your money working for you, even when you are saving it.

But don’t go with what I am saying, just because I am a financial advisor, let some logic prevail.

If you need let’s say USD 350,000 in 15 years to buy a house for example,

…you would need to put aside (350,000/12/5) = USD 1,944 per month in the bank.

If you were to use a regular savings plan, to achieve the same figure,

…you would need to put aside USD 995 per month in the savings plan (at an assumed growth rate of 8% p.a. compounded over 15 years)

That’s a saving of almost 50% where you could spend the difference or even invest it.

The choice is simple. Start saving now to accumulate wealth.

Read the next article in the series…

How To Invest Money Safely

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Money Basics

A Vicious Cycle

Debt facilitates production and trade. As the debt supply increases, money just becomes increasingly worthless unless the volume of production and trade in the real world grows by the same amount.

Add to this the realisation that when we hear that the economy is growing at 3% per year, it sounds like a constant rate. But it’s not. This year’s 3% represents more real goods and services than last year’s 3% because it’s 3% of the new total. Instead of a straight line as is naturally visualised from the words, it is really an exponential curve getting steeper and steeper.

More money is needed to fuel this growth and that is generated through debt, so the total debt, and subsequently the total money supply continues to grow, causing money in the system to become more worthless.

This is called inflation.It’s the value of money falling every year that causes inflation,
NOT the rise in cost of goods and services.

No Debt No Money

“That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”(ECCLES, Marriner S.), Chairman and Governor of the Federal Reserve Board.

If this is news to you, you are not alone. Most people imagine that if all debts were paid off, the state of the economy would improve.

It’s certainly true on an individual level. Just as we have more money to spend when our loan payments are finished, we think that if everyone were out of debt, there would be more money to spend in general.

But the truth is the exact opposite where national economies are concerned.
If banks stopped lending there would be no money at all!

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Money Basics

Debt Causes Inflation

“Banks lend by creating credit. They create the means of payment out of nothing.”
(HAWTREY, M. Ralph), Former Secretary of the British Treasury

That’s not all. Banks create only the amount of the Principal. They don’t create the money to pay the Interest. Where is that supposed to come from?

The only place borrowers can go to obtain the money to pay interest is the general economy’s overall money supply. Almost all that overall money supply has been created exactly the same way, as bank credit that has to be paid back with more than was created!

So everywhere, there are other borrowers in the same situation, frantically trying to obtain the money they need to pay back both Principal and Interest from a total money pool, which contains only Principal.

It’s clearly impossible for everyone to pay back the Principal plus the Interest unless every penny of interest the lenders take in is recycled back to those who need this money to make their payments.

This means interest earnings must be 100% spent so that borrowers can earn these dollars repeatedly. While much is spent as interest to depositors, operating expenses and dividends, some of the interest income becomes new loans at interest, or investments, creating additional demand for money and an ultimate shortage of debt-free money available for borrowers to earn.

To maintain a functional society, the rate of foreclosure needs to be low. So, to accomplish this, more and more new debt money has to be created to satisfy today’s demands for money to service the previous debt. Of course, this just makes the total debt bigger, and that means more interest must ultimately be paid, resulting in an ever-escalating and inescapable spiral of mounting indebtedness.

It is only the time lag between money’s creation as new loans, and its repayment that keeps the overall shortage of money from catching up and bankrupting the entire system. However, as the banks’ insatiable credit monster gets bigger and bigger, the need to create more and more debt money to feed it becomes increasingly urgent.

“If two parties, instead of being a bank and an individual, were an individual and an individual, they could not inflate the circulating medium by a loan transaction, for the simple reason that the lender could not lend what he didn’t have, as banks can do. Only commercial banks and trust companies can lend money that they manufacture by lending it.”
(FISHER, Irving, 1935), Economist

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What if I told you
Money Basics

How banks create money

Did you know that by keeping your money in the bank, you are contributing to your own inflation?

It doesn’t matter if we are not in the U.S. Our currency is pegged to the dollar and for that reason alone, we are affected by the monetary policies of the United States of America. Moreover the way money is created in the U.S.A., is pretty much the same in other countries worldwide and the U.A.E. as well.

“I am afraid that the ordinary citizen will not like to be told that banks can and do create money …
And they who control the credit of the nation, direct the policy of Governments, and hold in the hollow of their hands the destiny of the people”. - (MCKENNA, Reginald) Past Chairman of the Board, Midlands Bank of England

Let’s imagine that a new bank has just started up and has no depositors yet. Investors have paid for the bank’s infrastructure and have supplied it with sufficient cash to meet the demand for cash withdrawals.

Typically, cash in the vault will amount to no more than one dollar for every 20 or 30 dollars that could be demanded from the bank. The bank has joined the central bank system, which permits the new bank to borrow cash from the central bank if it’s needed.

What if I told you

The doors open and the new bank welcomes its first loan customer. The customer needs $10,000 to buy a car. On approval, the bank creates an account for the borrower and types in that the borrower owes the bank $10,000. This $10,000 is not taken from anywhere.

It is created on the spot. The borrower does not take this money out in cash. Instead he writes a check on his account to buy the car. The seller then deposits this newly created $10,000 check at her bank. At a ratio of 9:1, this new $10,000 deposit allows the seller’s bank to create a new loan of $9,000. If a third party then deposits that $9,000 in another bank, it becomes the legal basis for a third issue of bank credit, this time for the amount of $8,100.

Like one of those Russian dolls, each layer of which contains a smaller doll inside, each new deposit contains the potential for a slightly smaller loan in a decreasing series.

Now, at any stage, if the money created is taken in cash and not deposited at a bank, the process stops. That’s the unpredictable part of the money creation mechanism.

But more likely, at every step, the new bank credit money will be deposited at a bank, and the reserve ratio process can repeat itself over and over until almost $100,000 of brand new bank credit money has been created within the banking system.

All of this new money has been created entirely from debt, and all transactions have been carried out with bank credit. None of the banks involved have needed to use any of the cash in their vaults.

“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.” (FISHER, Irving, 1922), Economist and Author.

What’s more, under this ingenious system, the books of each bank in the chain must show that the bank has 10% more on deposit than it has out on loan. This gives banks a very real incentive to seek deposits to be able to make loans, supporting the general but misleading impression that loans come out of deposits.

Now, it can’t be said that any one bank got to multiply the initial $10,000 of bank credit into $100,000 of bank credit. However, the banking system is a closed loop. Bank credit created at one bank becomes a deposit in another, and so on and so on.

In a theoretical world of perfectly equal exchanges, the banks would owe each other nothing at the end of the day, and the $10,000 created out of thin air as a loan by the first bank could indeed become almost $100,000 of new loan money in the banking system.

If that sounds ridiculous, try this. Actual reserve ratios can be much higher than 9:1. For some types of accounts, twenty to one and thirty-three to one ratios are common. There are also many exceptions where NO reserve requirements apply at all!

So…while the rules are complex the common sense reality is actually quite simple.

Banks can create as much money as we can borrow. Despite the endlessly presented mint footage, government-created money typically accounts for less than 5% of the money in circulation. Someone signing a pledge of indebtedness to a bank today created more than 95% of all money in existence. (GRIGNON, Paul, 2002)

What’s more, this bank credit money is being created and destroyed in huge amounts every day, as new loans are made and old ones repaid. Banks can only practice this money system with the active cooperation of government.

  • First, governments pass legal tender laws to make the use of national fiat currency mandatory.
  • Secondly, governments allow private bank credit to be paid out in this government currency.
  • Thirdly, government courts enforce debts as payable in this currency.
  • And lastly, governments pass regulations to protect the money system’s functionality and credibility with the public while doing nothing to inform the public about where money really comes from.

The Simple Truth

The simple truth is that, when we sign on the dotted line for a so-called loan or mortgage, our signed pledge of payment, backed by the assets we pledge to forfeit should we fail to pay, is the only thing of real value involved in the transaction.

To anyone who believes that the banks will honor their pledge, and that their loan agreement or mortgage is now a portable, exchangeable and saleable piece of paper, needs to think again. It’s an IOU. It represents value and it is therefore a form of money. This money the borrower exchanges for the bank’s so-called loan.

Now a loan in the real world means that the lender must have something to lend. If you need a hammer, my loaning you a promise to provide a hammer I don’t have, won’t be of much help. But in the artificial world of money, a bank is allowed to pass off its promise to pay money it doesn’t have, as money and we accept it as such.

Once the borrower signs the pledge of debt, the bank then balances the transaction by creating, with a few keystrokes on a computer, a matching debt of the bank to the borrower. From the borrower’s point of view this becomes “loan money” in his or her account, and because the government allows this debt of the bank to the borrower to be converted to government fiat currency, everyone has to accept it as money.

Again the basic truth is very simple. Without the document the borrower signed, the banker would have nothing to lend!
Have you ever wondered how everyone…governments, corporations, small businesses, families can all be in debt at the same time and for such astronomical amounts?

  1. Have you ever questioned how there can be that much money out there to lend? Now you know. There isn’t.
  2. Banks do not lend money. They simply create it from debt. 
  3. Since debt is potentially unlimited, so is the supply of money.
“If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. 
If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible — but there it is.” (HEMPHILL, Robert, 1935), Credit Manager, Federal Reserve Bank, Atlanta.
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Money Basics

Money as Debt

Introduction

This topic is very important, and central to the theme of ‘Investing’. To understand the concept of ‘Money as Debt’, one needs to understand how the ‘International Fractional Reserve Banking System’ works.

The history of the Federal Reserve System in the US is also important to understand how the world economies work. The central banks of most countries follow very similar fractional banking systems that are governed by the Bank of International Settlements (BIS). The top bankers in the world run the BIS. Thus their fates are tied to the fate of the US dollar and the US economy.

“Each and every time a bank makes a loan (or purchases securities); new bank credit is created — new deposits — brand new money.”
(WALTERS, Graham F, 1939), Director, Bank of Canada

Over the years, the fractional reserve banking system and its integrated network of banks backed by a central bank has become the dominant money system of the world. At the same time, the fraction of gold backing the debt money has steadily shrunk to nothing.

Money used to represent VALUE – Money now represents DEBT

The basic nature of money has changed.

In the past, a paper dollar was actually a receipt that could be redeemed for a fixed weight of gold or silver. In the present, a paper or digital dollar can only be redeemed for another paper or digital dollar.

In the past, privately created bank credit existed only in the form of private banknotes, which people had the choice to refuse just as we have the choice to refuse someone’s private check today. In the present, privately created bank credit is legally convertible to government issued “fiat” currency, the dollars, the loonies (Canadian dollars) and the pounds we habitually think of as money. Fiat currency is money created by government fiat, or decree, and legal tender laws declare that citizens must accept this fiat money as payment for debt or else the courts will not enforce the obligation.

So, now the question is… If governments and banks can both just create money, then how much money exists?

In the past, the total amount of money in existence was limited to the actual physical quantities of whatever commodity was in use as money. For example, in order for new gold or silver money to be created, more gold or silver had to be found and dug out of the ground.

In the present, money is literally created as debt. New money is created whenever anyone takes a loan from a bank. As a result, the total amount of money that can be created has only one real limit – the total level of debt.

“The process by which banks create money is so simple the mind is repelled.”
(GALBRAITH, John Kenneth, 1975), Economist

Governments place an additional statutory limit on the creation of new money, by enforcing rules known as fractional reserve requirements. Essentially arbitrary, fractional reserve requirements vary from country to country and from time to time. In the past, it was common to require banks to have at least one dollar’s worth of real gold in the vault to back 10 dollars worth of debt money created.

Today, reserve requirement ratios no longer apply to the ratio of new money to gold on deposit, but merely to the ratio of new debt money to existing debt money on deposit in the bank. Today, a bank’s reserves consists of three things: the amount of government-issued cash that the bank has in its vault, the amount of credit it has with the central bank, and the amount of already existing debt money the bank has on deposit.

“Permit me to issue and control the money of a nation, and I care not who makes its laws.”
(ROTHSCHILD, Mayer Amschel), International Banker

Previous – How The Monetary System Works

Next – How Banks Create Money

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Investing on Savings Bonds
Money Basics

How the Monetary System Works

One of the most commonly asked questions to me is ‘How does the monetary system Work’. To understand this concept let’s look at the differences between ‘Wealth’, ‘Cash’, and “Money’. As simple as it may sound, people do not know the basic differences between these three terms.

Investing on Savings BondsWhat is Wealth?

‘Wealth’ is measured in ‘time’ or the number of months you can maintain your current lifestyle before you run out of money.

So, if your monthly expenses are $5,000 and your bank balance is $50,000, you are wealthy for 10 months.

What is Cash?

This question may sound silly, but most people equate money with cash. Cash is just the physical money you have in your wallet or at home. Money in the bank is not cash.

Money that is physically not in your possession is not Cash.

What is Money?

Now I am going to challenge your definition of money. If there is one idea you can take away by reading this post, I really hope it is this one. Think about it for a moment, if ‘cash’ is money in your possession, what is that stuff in the bank?

Money in the bank is ‘Debt’

How? If you want proof, ask your banker. Bankers call customers deposits in their bank accounts ‘Liabilities’. This means ‘they are legally bound to pay you back your money in your account as ‘Cash’, should you wish to withdraw it.

Next – ‘Money as Debt’

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Manage Debt, Money Basics

7 financial mistakes you must avoid

Everybody makes mistakes. The repercussions of a mistake could be trivial or grave. A financial mistake is one such blunder that can create big problems if they are not Mistakeresolved immediately.

  1.  Lack of goals: Most people don’t plan to fail; they just fail to plan. A good percentage of people are still not aware of what is financial planning and how to go about it. In simple words, financial planning is taking a disciplined approach to achieving your pre-determined financial goals. A good financial plan is based on strong goals. Well-articulated goals with a detailed break-up into long-term, mid- term and short-term, specific steps on how to achieve them and checking the progress periodically are basic ingredients of financial planning. As you can see it all starts with a goal.
  2. Lack of income protection: Living without income protection is just like “flying without a net”. A financial plan is incomplete without adequate cover. One major goal of a financial plan is to maintain the life style of your family whether you are with them or not. A common mistake we make is buying life insurance policies such as endowment plans or money back and hoping to reap returns. Remember, returns from such policies are much less compared to traditional investment products such as stocks, mutual funds, gold or real estate. So why not separate investment and insurance completely? Most salesmen will not give you this advice because the commission in plain vanilla term policies is the lowest. Protect yourself with an inexpensive term policy providing sufficient life cover. The thumb rule for your life cover is your annual income multiplied by 20. You can add family floater mediclaim or health insurance policies for self and family members. It’s a way of making sure that your family will continue to enjoy the current life standard.
  3. Lack of investments: Start saving as early as possible. Generally, a person should start saving and investing money from the day of getting first salary. By starting your financial plan at the earliest, you are allowing your money to grow by the sheer power of compounding. Don’t be over-enthusiastic about it either. Develop a regular and disciplined investment approach. Select a few good equity funds and do a Regular Investment Plan. Increase the investment amount as your income increases. Don’t wait for a lump sum amount to be accumulated to invest and don’t try to time the market.
  4. Too much of loans and debt: Don’t stretch yourself too much with a mortgage. Buy within your means. It’s not worth the sleepless nights. It’s always advisable to resist the temptation and control unnecessary expenses. It includes loans, mortgages and credit card expenditure. House loan and car loan may be necessary but do some analysis about how much you really need and what can you comfortably be able to pay back. Keep a tight leash on personal loans and credit card debt. They can be a drain on your finances as the interest rates are much higher. You must have a plan to reduce the loan and pay off the debt gradually.
  5. Only debt/fixed income instruments: Putting your entire investment amount into the debt instrument is like settling for a bonsai instead of a huge teak wood tree which you could have. It’s good to be safe but too much of safety will not make your money grow. There are many among us who keep their money in FDs (fixed deposits), PPF, insurance policies, National Saving Certificates (NSC) etc. It’s good to have them but they should not have all your money. You must have a healthy mix of equity and debt in your portfolio. Equity gives you growth and debt gives safety with peace of mind.
  6. Over-indulgence in stocks: By watching too much of business news channel and reading business journals we start believing that we know all about stocks and the way companies work. Listening to equity analysts gives us more encouragement. We think we can beat the market. But the truth is most people fail to make money at the stock market and end up wasting their precious time and wealth. Sit with a certified Financial Planner and chalk out a long term plan for yourself. Remember “slow and steady wins the race”.
  7. Owning too many products: “Wide diversification is only required when investors do not understand what they are doing.” The unavoidable risk from over diversification clearly articulated in this powerful quote by Warren Buffett. The right portfolio should be built by optimum allocation into different asset classes. A good financial planner should be able to tell you the right proportion as per your profile. Within a particular asset class it’s better to do thorough research and put your money in a few select products. For example if you are investing in mutual funds then buying too many of them is not advisable. Similarly if you are an investor in stock market it’s advisable to pick the right stocks and stick with them. We keep adding more products to the portfolio because we fall for what the salesmen and advertisements tell us. Do your own research or consult a certified financial planner for such decisions. It’s important to own the right ones and not too many.
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Money Basics

6 simple steps to help you build your wealth

Building wealth and getting rich is a topic often spoken about by many, but followed by very few. The reason for this, is that wealth creation involves time and a lot of effort. Although the process of building wealth is not complex, it is difficult to implement, simply because of the discipline it requires.

Here are 6 simple steps to help you build your wealth:

  1. The earlier, the better: It is often said that the earlier one starts investing, the better it is to grow your money. As with anything else in life, investing also Rich Imgbenefits with an early start. The principle of compound interest works magic on building money. When you begin your career it is understandable that the initial salary will be low. However, even small amounts of savings in good investments will help in slowly and steadily building your wealth. For example, let us look at the case of Raj and Shyam. Raj who is 25 years old needs to invest Dhs. 1,500 per month for the next 35 years to build a corpus of 5.74 million at the return rate of 10 per cent per annum. Now Shyam who is 30 years old will need to invest close to Dhs. 2,525 per month at the same return to accumulate the same corpus after 30 years, assuming both retire when they are 60 years old. A difference of 5 years in investing results in a difference in savings needs of over Dhs. 1,000 per month over the entire tenure of investment. Hence remember to understand the power of compounding and start your investment plan early in life.
  2. Regular Investment Plans: Another mantra to build your wealth is regularity and discipline in investing. Often, a break in investing plans disrupts your goals and hampers the growth of money. The best way to make sure you are not irregular in saving is by starting Systematic Investment Plans in good quality mutual funds. Try and automate this so that you do not forget your monthly investments. Also, if at any point, you happen to miss investing in a particular month, make up for it in the subsequent month by investing double the amount. You must also look at raisning your investment amount gradually, as your income increases.
  3. Long term investing: Often, people complain that despite being regular in investing, they do not see a growth in wealth. This is because they withdraw the money invested frequently, not giving it a chance to grow. Remember that the longer you leave money invested in a good investment option, the higher it will grow due to the compounding effect.
  4. Review regularly: Having said that, remember to regularly review your investments to assess its performance. If you find a particular investment giving you very poor returns, you must immediately withdraw your money from such an investment and invest in better performing assets. Also remember to track your investments regularly and modify your asset allocation pattern depending on your age and risk profile.
  5. Keep yourself updated: Another important thing to be remembered is making sure you have the required knowledge in an investment class before investing in it. For example, Priya had heard a lot about derivatives and how investing in derivative instruments gives handsome returns. However, she did not have any knowledge about it. Nevertheless, she blindly went ahead and invested a sizeable amount of her savings in various derivative instruments. The global recession saw a crash in stock markets, and as a result she lost almost all of her investment. Hence you must always have knowledge of both the pros and cons of any investment, and must invest in learning and upgrading your skills for the same. However, remember to always do your research before investing and do not blindly follow advice.
  6. Understanding the ratios: Track all your income and expenses regularly to understand your cash flow positions. If you are left with a surplus cash flow month after month, it means you should start investing more in order to grow your wealth. On the other hand, a constant deficit in your cash flows spells trouble and it means you must watch out for your expenses or look at ways of boosting your income.

These simple steps will help you grow your money steadily and systematically. Building wealth requires a dedicated effort from your end, as there is no short cut to achieving wealth.

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Manage Debt, Money Basics

Indicators to know that your financial life is in trouble

The condition of an individual’s financial life is not apparent only based on the income he earns. Sometimes, even after earning well, your financial life may not be in the best of colour. Many people are also comfortable living in the assumption that all is well. However, there are some broad signs or indicators which will tell you that your financial life is in trouble. Remember that the more valid these signs are, the more are the chances that you are heading towards financial disaster, and the more critical it is for you to take proactive steps to rectify the problem. Let’s look at some indicators which tell you that your financial life is in trouble:

You cannot survive without an income for 3 months Income is different from wealth. It is seen many a time that people earn pretty well, but if they lose their job suddenly, they are grappling for even the basic expenses. This is because they have not saved up enough to meet contingencies. If you have been working or in a business for a few years, then you should have a good back up in place which will help you survive for atleast for 3 months. When your expenses are very high and you do not have much left even when you are earning, you are stepping in to financial disaster. This is the first indicator to show that your financial position is shaky.

You pay high EMIs on depreciating assets Having too many liabilities on your books is not good. It is worse if you have debt which does not result in an appreciation of your assets. For instance, having high amount of personal loans, credit card debt or even car loans which result in high EMI outflow from your monthly salary is a very unhealthy practice. As a thumb rule, your total EMI outflow should not exceed 40% of your monthly take home pay. If you have a home loan, the EMI towards this will constitute a sizeable portion. It is therefore better to avoid other kind of debt which does not increase your asset value. When you realise you are paying high EMIs on depreciating assets, this is another indicator of financial trouble. It is not easy to get a better paying job with the skills you possess: Professionally, you must grow and advance in your career, such that it translates to better income and higher savings. However, if you find that you are not able to move upwards in your career despite repeated attempts, it means that you are going to be stuck with the same salary every year, or be happy with a small hike. This is turn means that your investments will be limited, resulting in limited wealth building opportunities. Take a proactive step in honing your skills and building your career for a better financial life as well.

Spending on social functions Majority of people in India believe in spending unnecessarily on social functions, either as a status symbol or keeping in line with traditions. Although this may be an important part of your life, spending too much on social functions is a mere waste of money and does not yield anything. If you realise that you have been spending too much on such functions, you can be sure that you are headed for financial trouble. A good way of finding this out is to list out all the expenses you incurred in the past 3-5 years on various social functions and see how much of your income has not been put to good use.

Working for long, but no ‘asset’ If you have been working for at least 3 to 5 years, but still have no asset, then it means your financial life is in trouble. You should have some investment in fixed deposits or gold or mutual funds or have a small part of down payment saved for your future house. If you do not have any of this, it means you have been very careless in your financial life and must immediately put your finances in order.

The initial signs of a troubled financial life will not take long to manifest into a bigger problem which can be very difficult to handle. It is important to start at the earliest and rectify your past mistakes.

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Money Management for Kids
Money Basics

7 Ways How I Teach My Son How To Manage His Money

So, we went to the mall the other day and passed a toy store. My son saw a toy he wanted, and I knew he has many of these types of toys. Naturally I tried to stall this by saying; I didn't have any money. Big mistake !!!

He simply said, "Dad, just use the ATM to withdraw money". Not his fault, I hadn't taught him the value of money.

I realised it was high time I started teaching him the value of money and how to manage money.

Money Management for Kids

1. I started giving him pocket money

Giving pocket-money to your kids is a great way to introduce money management to your children. Always make sure that, the pocket-money you are giving is age appropriate.

I set him a pocket money budget of AED 10 per week. It looks small on the face of it, but it is a great way to start him thinking about the value and importance of money management.

I make sure I never increase the amount or give any additional money within the fixed period. This is money he can spend in any way he wants except on online games or video games. These are no-no at the risk of addiction.

2. I introduced him to budgeting

I don't buy him everything that he takes a fancy to, as this will spoil. Instead I ensure he child agrees to a budget before we go for shopping. For instance, let’s consider the agreed budget is AED 100, I tell my son to pick up anything he likes within the budget we have fixed.

Through this, he will not only develop a habit of comparing prices of objects and the value attached to them, but also helps him improve on his mathematical skills.

3. I don’t use money as an incentive for things he is supposed to do

Giving money to children after completing certain work is good. But I do not reward him for things like doing homework or showing good behavior.

I know that if I give money for things which he is supposed to follow on daily basis then he will do it just for monetary gains.

I make him understand the difference between doing work and completing homework.

4. I started saying 'No'

Like all parents, I want the best for my son, but I draw a line between his needs and wants. If I give in to all his demands today, he will turn out to be a spoilt child and suffer when he grows up tomorrow.

When I say no to his demands, I make him understand why I refused to buy him what he asked for. I know my answers might temporarily affect him, but eventually he will realize what I did was right.

5. I try to discuss money matters him when it makes sense to do so

Since my son is 11, I try to discuss our financial matters with him to an extent that he can understand them. I talk to him about the advantages of saving money, our liabilities and investments.

I give examples from real-life stories to help him relate to these concepts easier. I tell him about the plans that I have made for his future like college education expenses, etc...

Many children are very curious to know what is happening around them. So I make sure I keep my mind open for all his questions and answer them patiently.

6. I practice what I preach

Children learn certain habits by observing their parents. Hence, it’s very important for you to do what you say. I pay our bills on time, spend smartly, and manage money well, so my son will also follow in my footsteps.

While teaching him about finances, I always make sure that I keep it simple and fun so that he takes it positively.

7. I gave him a wallet and a piggy bank

A wallet is the simplest way you can teach short-term money management to your kids, and a piggy bank is a wonderful way to develop money-saving habits in children.

The wallet I gave him makes him aware of how much or how little money he has in his possession and encourage him to work for money when he wants to buy something he likes.

My son loves to fill up his piggy bank with money he gets, especially coins. The most fascinating thing is, he is now able to understand the value of money that goes into his piggy bank and does not like to give it away easily.

On the other hand, I sometimes agree to give him some money for completing a task such as cleaning up the room or helping in everyday household work. Through this, he understands the true value of money. I make sure that the money I give goes into the piggy bank and not spent elsewhere.

Once he grows up, I will encourage him to open a bank account. This will expose him to the concept of banking.

have a question?

Ask me a question about any topic related to your financial goals.

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Manage Debt, Money Basics

Tips To Control Your Spending

Control your spendingIncome levels have shot up over the past decade. Higher income levels have also brought about a change in lifestyle and spending patterns. Nowadays, it is very easy to spend compared to saving and investing it, as the incentive to spend is huge. Advertising and marketing have reached new heights, with each brand claiming that it is the best in the market. In such a situation, it is very important to have a control on spending, with discipline and planning. Unrestrained and random spending can be very harmful, both in the short term as well as in the long term.

Here are a few tips to control your urge to spend:

Draw a budget and spend in line with this: As much as you may hate it, a budget is a strict yes and an important pre-requisite to efficient financial planning. A budget helps you track your expenses, cut back on unnecessary expenses and improve cash flows. A clear budget helps you to prioritize your spending patterns and avoid wasteful expenses. Put together a spending plan by listing both necessary items like food, grocery, utilities and transport as well as discretionary items like entertainment, dining out etc. A budget is the first step to help you control your expenses. When you do not have a tab on your expenses, you tend to over-spend and exceed your limits.

Avoid impulse spending: Impulse spending refers to reckless, unplanned spending which comes at the cost of your monthly investments. Such expenses are always out of your budgets and come in the way of realising your financial goals. Avoid such expenses and always try to distract yourself by doing something else to keep you from spending impulsively.

Unsubscribe from online shopping emails: Many a time we subscribe to mailers which give details of online deals and offers. Sometimes we are included in the mailing list of such mailers without our knowledge. While such mailers can be advantageous as they help you get good shopping deals, you should remain subscribed to them only if you know to control your shopping desires. Most people get carried away by such mailers and are tempted to shop for things they may not even need, just because they get it for cheap. Just because something is on sale doesn’t mean you have to buy it. If you think you will be swayed by such offers which results in impulse buying, it is better to unsubscribe from such mailers.

Use credit cards smartly: Credit cards are the most dangerous weapons which can get you tangled in a debt trap if not used with care. Remember to read the terms and conditions of the card before applying and getting the same. The interest rates and penalties on late payments are humongous and can deplete your cash balance faster than you imagine. Try and pay off the entire outstanding amount before the due date, as unpaid amounts carry exorbitant interest rates. Nowadays it is also possible to convert large ticket purchases on your credit cards into Equated Monthly Installments (EMIs). Always avoid the EMI route, as this also carries an interest. If you are unable to pay EMIs, it can result in a debt loop and increase interest outflow. Borrowing cash on credit cards also is expensive and should be avoided.

Take a break when you are confused: If you are shopping in a mall and find something which is very attractive, but quite expensive and not necessary for you, then take some time off to think if you really need it at that point in time. Walk away from the shop and spend some time analysing if you can do without the product for some time, and if yes, wait for the right time to buy it.

Keep yourself occupied to avoid ‘boredom shopping’: It is often seen that some people start browsing online shopping sites simply because they are bored and want to do something different. This can spell trouble for your wallet, as randomly browsing shopping websites may result in you spending unnecessarily. Keep yourself busy to avoid this.

Do not visit shops unnecessarily: Window shopping is okay, but if your ‘window shopping’ translates to actual shopping every time you step out, this is not healthy. Do not visit shops and malls simply to kill time. Experts also recommend leaving behind your credit card when you step out, in order to cut back on impulse spending.

Be strict with children: Although it is good to cater to your children’s needs, allowing them to dictate your monthly budget is not good. Kids are an important contributor to impulse spending. Teach them to earn their toys and not take it for granted that they will get it at any cost.

Spending is like a craze and can get dangerous if not kept in check. The critical factor in controlling excessive spending habits is to have a control of your needs and wants and following your monthly budgets strictly.

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Credit Card Debt
Manage Debt, Money Basics

Situations when you shouldn’t use your credit card

"Life just seems to be getting simpler by the day," remarked 22-year-old Swati, a software developer with a leading MNC. She was referring to the convenience provided by modern-day living aids like plastic money, online shopping, e-payments, deferred payments and the like.

"Really," quipped her grandmother. "We never had any of those in our days, but we did manage to save some money out of whatever little your grandfather brought home." After discussing the pros and cons of credit cards, Swati realized the trap she was getting into.

Credit Card Debt

Typically, credit cards would temporarily boost her purchasing power, allowing her to give into temptations and spend money that she did not as yet have in her account. But in case she is unable to pay in time, there would be a pile of accumulated charges and higher bills for delayed payments that she will have to deal with.

Here are the rules for minimizing the use of credit cards:

1. Keep some cash in hand or pay 38 per cent rate of interest
It is better to have some cash in hand as withdrawals through credit card from an ATM are subject to interest at around 2.85 per cent compound interest per month. The clock starts ticking from the day of withdrawal and effective annual rate of interest would amount to almost 38 per cent. Besides, a transaction fee will be  levied on the amount withdrawn.

2. Swipe only when you are sure
Banks generally offer an interest-free period of 20-50 days to credit card holders. Try not to use your card if you are not sure of repaying the amount within this period. Credit card defaults are not only charged a late payment fee but also attract an interest of up to 3 per cent on the outstanding amount from the date of transaction.

The whole point of credit cards, the way they are rendered most profitable, is that we dig ourselves into debt and stay trapped there forever.

3. Avoid jumping your credit limit
Avoid using your credit card if your expenditure is already close to your credit limit set by your bank. Some banks permit overshooting the original credit limit, at an additional charge on the overdrawn amount.

4. Discounts and sales: Look the other way
A batch of credit cards fattens a wallet before it thins the wallet.

If you are a compulsive shopaholic, try to leave your credit cards at home when you go for a first round of window shopping. Come back and thoroughly check your wardrobes to figure out what you really need to buy. Next time take your cards along and try to avoid the temptation to overspend.

5. Reward points might not really be rewarding
Spend only when you really need something, and not for accumulating 1,000 reward points on the first swipe of your credit card.

6. Use money cards or travelers cheques while travelling abroad
It is always safer and wiser to carry travelers cheques or money cards for which you have paid in the local currency. Transactions through international credit card are billed at the rate of exchange prevailing on the date of purchase and additionally attract a charge of 3 per cent on the amount.
ATM withdrawals through international credit cards are levied with huge transaction fees and service charges.

As a thumb rule, try to restrict your spends through credit card to 40 per cent of the credit limit.

7. Is your online transaction secure?
Crosscheck the genuineness and safety of the website when using your credit card for online transactions.

So, be judicious not only in your expenditure, but especially so in your expenditure through credit cards. Remember that it is not only the amount that appears when you swipe, but also an added compound interest that you might finally end up paying if you are not able to afford the expenditure at that point of time.

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Manage Debt, Money Basics

How to Create a Monthly Budget

budgetCreating and following a budget is one of the most difficult things for many people to do. Just thinking about all of your finances can make you wish you were getting your teeth drilled as the better alternative! However, making a budget and sticking to it is important to a strong financial future and can help you prevent a bankruptcy filing. Truth be told, creating a budget can be fun because it allows you to take control of your life.

Gather Your Expense Materials

The first step to creating a budget is to find and gather all of your monthly bills. This includes everything that you pay on a monthly basis, such as credit cards, utilities, cable, Internet, etcetera. You will also need to find any bills that you have to pay less frequently than every month, such as perhaps auto insurance or car registration. Once you have all of your expenses together, you are ready for the next step.

Determine Your Income

Figuring out your monthly income should be a far easier task than getting together all of your bills. Most people are paid every two weeks, so your pay stubs or bank statements should do. If you receive any other type of income on a monthly or less frequent basis, make sure to take note of it. You will want to make sure to only account for your after tax income, it makes little sense to include income in your budget that will be immediately taken by the government!

Create the Income Portion of Your Budget

You can begin creating your budget in a word processing program on your computer or the old fashioned way (by hand, of course). Create a monthly income column. Divide the column into regular income and irregular income. It would look something like this:

Calculate your irregular income by calculating the total amount of income you receive in a year that is not your regular paychecks, and divide by 12 (12 months in the year). For example, if you are paid $3,000 once a year in June, divide $3,000 by 12 months to get an average additional income of $250 per month.

Create the Expenses Portion of Your Budget

Start creating the expenses section of your budget below or next to the “Monthly Income” section. Create a category for each type of expense you have each month. For example, your expense section may start to look like this:

Monthly Expenses

Remember to also create an Irregular Expense category, just like you did for your irregular monthly income! For example, if you have to pay $150 a year for car registration and $1000 a year for auto insurance you would have a category of Irregular Expenses for $95.83 per month. You get that number, as before, by dividing your total yearly irregular expenses $1,150 by 12 months. For your irregular expenses, set aside that $95.83 into a savings account so that you have the full amount when the time comes to make the payment!

Savings Expense Category

Don’t forget to create an expense category for savings! Some people do not like to think of savings as an expense, but in reality, it is being subtracted from your monthly income. It is very important to save money each month not only to buy gifts, go on vacations, but to create an emergency fund. Many financial planners recommend people have an emergency fund of  6 months worth of income in case they lose their job. If you save each month, you can get to your savings goal much more quickly.

Subtract Expenses from Income

Subtract your total expenses each month from your total income each month from your budget table. Anything left over can be put into savings or other categories. If you have a negative balance in your budget, you need to reduce your expenses (or increase your income).

In my opinion, it doesn’t matter how much you are earning, its about what percentage you can save from your earnings.

Please feel free to comments or questions in the box below.

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Emergency Fund, Money Basics

Do you pass the Acid Test?

The Acid Test of Personal Finance

The Acid Test of Personal Finance
The Acid Test of Personal Finance

We expats come to Dubai to make money and enjoy a better standard of living, but somewhere along the line our financial goals get diluted or forgotten. This is because we get caught in the rat-race and the fast paced life in Dubai.

The prime example of this phenomenon is a case I recently read in the Gulf News about the homeless Polish woman entrepreneur who in spite of being a business woman, and living in the UAE for many many years, is penniless today.

So, the million dirham question is –

Will you pass the Acid Test of Personal Finance, and
find out for yourself how long your money will last you in case of loss of income?

Note – This is a personal exercise. I am not interested in knowing your numbers. These are for you to know and act upon. Get a pen and piece of paper and do this exercise for yourself. You may also need a calculator handy.

Step 1

Write down your current monthly income on the first line.

Step 2

Write down your current monthly outgoings (not just expenses, but all outgoings) on the second line.

Step 3

Subtract your outgoings from your income and write your monthly disposable income on the third line.

Step 4

Write down the number of months you had the same disposable income on the fourth line.

Step 5

Multiply your monthly disposable income into the number of months and write this number on the fifth line.

Step 6

Divide the answer in Step 5 by your outgoings and write down the number in the sixth line. This is how long your money will last you in case of loss of income.

Now, here is the Acid Test,

  • Is your bank balance equal to the answer in Step 5? (Remember your investments don’t count, as you need to have at least 6 months of survivability regardless of your investments.)
  • If not, is your bank balance at least equal to 75% of this amount?
  • What about 50%?
  • Is the answer in step 6 greater than or equal to 6 months at least?

If you have answered ‘No’ to any of the questions above, YOU NEED HELP.

If you have any comments, please feel free to leave them below.

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