Moneywise24 Personal Finance

During a discussion with a colleague today, we talked about finance for a bit. He talked a lot about mastering your money . Money mastery… what is that anyway?

It set me thinking. What IS money mastery? Am I doing it right? And how can I genuinely reach a level, where I can say that I am ‘mastering my money’. Yes, I do invest… am I mastering my money when I have 10% annual returns? And what if stocks drop? Am I still mastering my money? What if we get in a 30-year recession, with annual rates of -10%?

To start with, without money there is no Money Mastery. So the first thing you (or I) need in order to reach a specific level of Money Mastery is money. Usually, the first in-flows of money will be either through employment on a regular basis, or by setting up a business. Or the amount may be received one-off. Then, there are specific expenses you will have, like rent or mortgage payments, expenses for living, etc. And finally, what you keep at the end of the month is, let’s say, your profit (or loss for that matter).

Let’s assume a profit. What do I do with it? I can invest it. Stocks? Bonds? Mutual Funds? Some investments react much more volatile on economic changes than others. Some make profits in upwards markets, others make profits in downwards markets. Some have dividend payouts, others do not. And then there is a the classical savings account, with an interest rate currently lower than inflation. But I guess when my bank would go bankrupt in a crisis situation, my money is gone anyway, or at least a large proportion of it.

During our conversation, my colleague talked about Money Mastery being equal to knowing your inflows and outflows. I have to disagree. I feel, true Money Mastery is much more than having your finances visible; it is being able to have a strong focus on your financial goals, and moving your money in a direction in order to reach your financial goals, as well as to anticipate different economic scenarios. I would consider the following steps as absolutely mandatory in order to reach true money mastery:

#1 – Having your finances transparent

The first step to true money mastery means having transparent financials, and knowing exactly what is being earned, spent and saved up each day, month, quarter, and year. Without transparent financials, I can forget about managing my money efficiently.

#2 – Make a profit with all possible assets available

Sure, working hard for a large enterprise is much like business: you are selling your time and expertise to the enterprise in exchange for money. And as long as your expenses are lower than your income, you’re making a profit. But what about the money you have left at the end of the month? By investing that money, you can let that money work for you, and make even more profit, and the money earned with these investments can be re-invested.

Want to buy real-estate? Take into consideration to buy a property and renting it out to generate an extra income stream, which can be used to pay for the mortgage. Or else, you may want to ensure that the property is likely to sell at a higher price in the future.

Depending on how far you want to go, you could even have commercial banners on your car, to cover for some of your automotive costs.

#3 – Prepare for alternative scenarios

What if stock markets crash? What if you become unemployed? What if your bank is about to go bankrupt?

Preparing for alternative scenarios is not easy when you are just starting out. But if you have already gained at least some wealth, it becomes easier to insure yourself against possible scenarios. Do you have a back-up plan if you get unemployed? Perhaps you can already live off some passive income? I read at the Terms and Conditions of the broker Lynx, that they offer an insurance, which protects your seven figure assets should they go bankrupt. And potential recessions can be insured by derivate products, leveling out any, or part of, your losses. There are many people who actually get a lot, and I mean a lot, of profits out of a recession.

#4 – Rigorous expense management

When your money inflows increase, you may want to increase your expenses as well. However, I feel that increase in expenses should always be smaller than the increase in income. In this way, I can make a larger personal profit, readily available to pay off debt or make investments. I want to keep my expense management tight; actually, I want to keep it so tight, so that it does not exceed 80% of one income. This one income is important to me, especially if I have multiple incomes (which I don’t at the moment, but I will in future). Because what would happen if I would lose my second income?

And to recap in one phrase how I would define money mastery:

True money mastery is the ability to build up wealth in different life and economic situations through a transparent income and expense management system.

Possibly Related Posts:

• The Sexy Side Of Personal Finance
• Learning How To Prosper
• Personal Development and How To Manage Change
• The Top Reason Why You Should Stop Looking for a Better Job
• Good Intentions for 2010 – Personal Change Management

If I think about it, I started developing my own personal finance strategy about only 3 years ago, at the age of 30. Although I did study International Business, I had never thought about viewing myself as a business of its own, and I was pretty much stuck in a routine of balancing out income and expenses each month, and avoiding any risk that could eat up my money. However, as I got more and more involved into personal finance, I started to develop a strategy, a vision, which I working towards. I am gaining much more knowledge than previously, since the topic genuinely interests me.

Now that I think about it, personal finance is pretty sexy. And there are three main reasons why I think so:

Being independent is sexy

I have always considered myself to be pretty independent. Still, my actions were very much outward focused, getting oriented by what is normal, or what is supposed to be. I would often buy something, because everyone had it, or often I would feel ‘poor’, since others were doing better in their own way.

Personal Finance has taught me to act from an inner peace of mind; my actions are now not based on my environment, the news, or marketing, but largely on what I want to achieve in my life. I take into account my vision, my goals, and work towards it step by step. This way of thinking gives me a true feeling of being independent… and that is very sexy.

Actively participating in the economy is sexy

Active personal finance management means investing a larger or smaller proportion of your money. And as soon as you invest it, you are participating in the economy. You are taking a slice of your own, call them stocks, call them mutual funds, options, or bonds… in the end you are actively engaged in economic developments, and in society. As opposed to someone who does not invest, but only spends his money… he is basically throwing his money to others, who will invest it on their turn.

Bookkeeping is sexy

I am not a professional bookkeeper, but I do track all my income and expenses each and every day. If I ask some person, I find that few can actually tell me how much they earn (up to the Dollar), or how much they spent last month on food and beverage. How much did they invest? How is their allocation between cash, stocks, and other products?

I know all that, and it makes me feel good. It allows me to identify things that go well, things that don’t go well, but most importantly it allows me to track my progress over time. Seeing my wealth grow on the screen is damn sexy.

Possibly Related Posts:

• Modern Money Mastery – A Personal View
• Learning How To Prosper
• Personal Development and How To Manage Change
• The Top Reason Why You Should Stop Looking for a Better Job
• Good Intentions for 2010 – Personal Change Management

If I think back to the development of cellphones, I can still remember my first mobile phone I bought back in 1998. It had a black and white display, was quite big, and got stolen at university 6 months later. Then I bought the legendary Nokia 5110, then another one. Now, I have a smartphone. Thank God for the existence of Smartphones.

Actually, when I went to my telecom provider to buy a new phone, I was still skeptical about buying a smartphone. I thought they would break easily, and actually I simply felt that a cellphone should be able to phone with, and that’s it. I am glad that I didn’t listen to my rational thinking, but rather decided for the smartphone emotionally, since I just love little gadgets. And I am positively surprised; in fact, my smartphone is directly helping me to reach my financial goals, step by step, and helping me directly with 3 of my 24 commitments.

Time Management

One of the best inventions of the last few years is mobile internet. I admit, I am not carrying my laptop around at all times, but my smartphone allows me to browse the web whenever I need to, or want to. Smartphones can directly help you with time management, in a sense that they allow you to do some ‘work’ when traveling between places, or when a computer is not readily available. If you are traveling between places frequently, even if it is only for 10 or 15 minutes, you can use your smartphone and mobile internet to get updated on the latest news or stock market developments, whenever you would like to. Or, you may want to check your e-mail, or perhaps see what the weather will be like this evening.

Not only will you spend your time useful in situations at which you would have normally wasted your time, but you reduce the time required at another time during the day. For example, if you would normally take half an hour in the morning to watch CNBC or CNN before you start your day, you can use that time to do something else, or get out of the house quicker.

Investing

There are thousands of apps available for about everything. One thing I absolutely love are financially focussed apps. Besides the time management aspects of such apps, I find that they help me to track my investments during the day. Many apps are multi-functional, meaning they will only provide quotes, but they would also show some background statistics on the company, provide a chart with a number of common indicators, or provide the latest news on the company. This information allows me to react quickly when required… especially with highly volatile derivate products this is a great benefit.

Taking notes

The last, but perhaps biggest benefit I get out of my smartphone is to take notes immediately, and when I need it. If you install a notebook app, you can take notes whenever you need it, where ever you are. Perhaps you want to write down the name of a stock with solid profit results, or you may want to write down the name of a headhunter you just heard about. Or how about some crazy business idea… you surely don’t want to forget about that.

I find that smartphones have dramatically changed my life. Some smartphones actually come rather cheap with certain telecom subscriptions. But the benefits are tremendous. And to be honest: I never thought I would have needed one, whereas now I could hardly do without one.

Possibly Related Posts:

• Top 3 Financial Reasons For Being Single And For Being In A Relationship
• How To Prevent Yourself From Watching Television
• 8 Smart Finance Management Tips For Singles
• Why Watching Television Randomly Can Prevent You From Getting Rich
• How To Spend A One Week Holiday At Home

I started investing my money actively around three years ago. My first approach was to invest a small amount of my money into mutual funds, in order to secure my retirement. But in addition to that, I wanted to get more active, invest a bit more of my assets, and start to invest in mid-term market movements.

A great way to do that is to build your own portfolio, using stocks and bonds. However, with stocks I found that you actually need a substantial amount of money in order to profit from it. If I only consider the commission I have to pay for buying the stocks, the smaller the invested amount, the bigger % profit I need to realize to get out with a good profit.

In addition to stocks, I have been using options for quite some time to profit from short-term market movements. However, options are also a great tool to profit from mid-term market movements. The profit can be much more substantial than when you invest in stocks, and a much lesser amount is needed to get out with a good profit. Also, I find options to be ideal if you want to ‘test’ the market, if you are a beginner.

Options may seem a lot more complex than they really are. Basically, options are are rights on their underlying value, in this case stocks, which simply gives you the right to either buy a particular stock at a certain price during a specific time range, or it gives you the right to sell a stock at a set price during a specific time frame. Of course you are not forced to exercise your right; when stock markets move, so will option prices, and you can simply sell the option at a later time.

I find options such a great tool due to the leverage effect they offer; whereas I might have had a 9% profit on a stock, I might have realized a 60% profit with an option on that stock. The key point is that you are anticipating the stock to move in a certain direction within a specified time, in stead of buying and holding your investment for years.

Options are very volatile instruments, and surely your potential to lose money is just as big as to earn money from it. Therefore, I assign only a smaller percentage of my portfolio to options. Still, I find them to be quite a good enrichment to my portfolio, and they helped me a great deal to play the market with only very small investments.

Although option trading has a very speculative image, I feel they can be treated very similar to stocks, if:

• I focus on up-trends. Markets tend to focus upwards on the long run. Speculating on market corrections or crashes can be quite risky, so I tend to focus merely on call options.
• I focus on a 3 to 24 month development. Stocks tend to make very swift market movements, and often stocks can dip for one or two months before increasing for months to come.
• I focus on fundamentally healthy companies only. I use the same kind of company analysis as I would have done with stocks. Technical analysis will also give me a hold on a stock’s trend and turning points, as well as whether the timing is good or not, but I will never invest in poor performing companies.
• Options can be very volatile, and sometimes a tiny negative stock movement can push the value of the option to a -40% loss, before increasing to a 60% profit. Still, if the value of my option drops below -50%, I consider it a loss, learn from the situation, and sell the option. On the other hand, I would sell my option at a profit of anywhere between 60% and 100%. I might buy the same option at a later time, if the timing is right.

You can read more on how options work in my previous post here.

Possibly Related Posts:

• Markets Plummet As The Fear On Europe’s Debt Crisis Dominates
• Rising Stock Markets, But With Caution
• The Benefits Of Periodical And Automatic Investing In Mutual Funds
• The Top Reaon Why You Should Pay Yourself First
• Passively Investing In Turbulent And Insecure Times

I know this topic might be a bit controversial, some people welcome it, others don’t. The keyword is ancillary fees within the airline industry. Basically, ancillary fees are any additional fee paid on top of the ‘naked’ price for a flight. This means, that any additional service apart from the mere transportation from A to B is being charged separately, be it a blanket during a 12-hour flight, meals, beverages, newspapers, earplugs to hear music, internet access, or even a place near the pathway, or at the emergency exit.

Ancillary fees are already for a great part common practice in the U.S. and with low cost carriers in general. You may book a Ryanair flight for $5, but end up paying $130 if you add extra charges for luggage, taxes, and food and beverages. Still, many airlines around the globe have not yet adopted ancillery fees and offer an all-inclusive package, but are discussing the topic heavily.

The introduction of ancillary fees is controversial, depending on what someone is looking for on his or her flight. On the one side, ancillary fees simply means not having to pay for a service which is not being needed. But then again, can we determine what is needed and what is not beforehand?

Another concern is how ancillary fees will shape the fee landscape. Many people claim, that for them flying will become less expense, since they can save on services not required. But the big question is, will the overall price really drop that much? If I would book a flight and pay for all available services on top, would I pay just as much as an all-inclusive flight?

As with real estate, or land plots, there is a lot of money to be made by splitting up property and selling smaller packages. For example, a plot of land, which costed $500,000 might be split up into 4 equal parts and be sold for $180,000 each; that’s a total of $720,000. Similar strategies are conducted in supermarkets, or by marketing agencies, by selling products in smaller packages at a smaller price, where the reduction of pricing is far less than the reduction of product quantity.

Ancillary fees is a hot topic, and I will surely follow this with great interest. Let’s see where we are at in 5 years from now.

Possibly Related Posts:

• Alternatives As Oil Prices Soar
• The Bicycle As A Transportation Alternative