Moneywise24 Personal Finance

Sometimes I am wondering, what I do all this for. I mean, all the work, financial planning, breaking my head over my retirement planning. Often, a typical month would look like this:

• I work the hard, the entire month,
• I pay taxes on my salary, and receive about half of my salary on my bank account at month’s end,
• I pay for my loan from college times,
• I pay my rent, and all other bills,
• I cover for my expenses,
• And, with a bit of luck, I will have some money left and the end of the month.

Often, when I have something left at the end of the month, I am so proud of myself that I give myself a treat and spend the money anyway. Or I start traveling and go places… so in the end I have nothing left anyway.

I stumbled on this chapter in “The Cashflow Quadrant” by Robert T. Kiyosaki. Kiyosaki writes, that you should pay yourself first, before spending any of your hard earned money.

The basic principle is, that you should look at yourself as a running business. And the main purpose of a running business is to make profit, and to increase assets. What individuals do in stead is focussing on paying the bills first, i.e. other people’s profits and assets, before they focus on their own life.

So what does this mean? Read the rest of this entry →

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I am encountering quite some articles recently about how to efficiently benchmark one’s own salary, and how to introduce the topic into a conversation. Many people seem to wish for more openness regarding this topic, yet in many western cultures it is still taboo.

Although there are many good reasons to exchange salary information (which I will surely discuss myself in another article), there are some strong points, why it sometimes serves well to keep the salary a secret.

Measurement from within

Question: how do you measure your own success?

There are different ways to measure your success. The first one is from within: you look at your expenses, at your income, net worth, and what you want to achieve. Based on this, you can make a fairly good estimation with whether you are happy with where you are, or where you want to go. This method purely focuses on your own needs and requirements, leaving everything else untouched, and you mainly focus on yourself, and your own desires. Read the rest of this entry →

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In many countries, employees have the benefit of receiving a bonus, such as a 13th month’s salary, or an extra fixed sum for holidays. Often, these bonuses are paid one-off at some point during the year, which is welcomed by many employees.

Many people find this way of being paid an incentive very pleasant; it allows them to not spend the money throughout the year. Still, it might actually pay off to have any form of incentive split into 12 pieces, have it paid throughout the year, each month. Although it does require some discipline, the following should might be considered:

Mental Accounting

One-off bonuses are usually seen as it is, a bonus, or a little extra. Since you did not anticipate this, and it comes on top of your monthly salary, many people spend the money as quickly as they have received it. In fact, many people have a little trick going on in their mind, categorizing the extra bonus as being “extra”, and that spending this “extra” money does not affect their savings account or their investment.

This form of mental accounting is very deceiving. Bonuses, or parts of it, are just as any other form of income, they can be saved or invested as well, and do have to be spent on holidays or expensive gifts. Still, many people behave otherwise as a bonus is being detached from their other means of income.

Having a bonus or incentive split and paid out throughout the year each month makes it part of your monthly salary. By having it paid out on a regular basis, it allows you to see it more as part of what you earn monthly, and therefore make wiser decisions. In addition, you can better anticipate what you receive each month, and do your planning more accurately.

Interest

Any money that is earned has the potential of receiving interest; therefore, any money that is not earned has the potential of not receiving interest. As a result, people who are being paid bonuses one-off are missing out on interest, that could have been earned if part of the bonus would have been paid each month.

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Many books providing financial advice write to pay your bills on time, reducing the risk of late payment, and keeping your administration up-to-date and in good order. Although this is technically not wrong, there is one reason why you may not want to pay your bills immediately: interest.

The bottom line is simple: by postponing payment, you keep the money on your account just a little bit longer, generating interest during that time span. It is what large companies do as well. Consider a multinational company who would have to pay a bill worth 10 million Dollars. By keeping that money in their accounts for an additional 20, at an interest rate of 3% they earn an additional 16,438 Dollars on interest (compound interest has not been considered in this example).

As an individual, the interest earned might be much smaller, but the principle is similar. When you receive a bill, it will become due after a specific number of days. In many countries, it is regulated by law how many days a supplier of goods or services has to allow the consumer to make payment. Often it is also stated on the bill, that payment should be made within a specific number of day.

By not paying immediately, but towards the end of the deadline you can let time work for you. The only thing that you have to monitor closely is to be sure to make payment before the deadline. If payment has not occurred until the due date, the supplier may be entitled to impose an additional interest on you, which can be very high.

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Honestly, it costs me quite some effort and perhaps a bit of courage to write this article; finally, after having seen the book quite some times in my local bookstore but having ignored it due to its simple title, I decided to buy Rich Dad, Poor Dad - if it would have been called “an empiric study about the financial development of… ” I would have bought it sooner, in the end I currently live in Germany. I have still not read the entire book, and read through the first two chapters only yesterday. But still, I can say that those first two chapters have pretty much enlighted me. It is a funny thing, because many of what is written I know in some form of the other, but my entire life I have failed living it.

The book Rich Dad, Poor Dad is a story told by Robert T. Kiyosaki, who grew up in Japan. During childhood, he grew up with two ‘dads’: his real dad, a highly educated man with a good job, but constantly struggling with his financials, and the rich dad of his friend Mike, which is much like his second dad. Mike’s dad is a successful entrepreneur, and the main difference is how the two dad look at money, and the goals they pursue in life.

In the first chapter of the book, Robert T. Kiyosaki writes about how people are told during childhood and adolescence to get good grades, perform well through high school and university, in order to get a good job and a good salary. Thus, young adults graduate from college or university, obtain good jobs, and work hard on their career. They get themselves credit cards, they buy a fancy car, and with the first salary raise perhaps a home on a mortgage. People get married, get children, and as life gets more expensive, they work harder and take on second jobs… I do not want to lose myself in Robert Kiyosaki’s words, but the bottom line is that most people live in an illusion; the illusion of having a secure job, building a secure retirement, and that working hard for a large and well-known company is going to make them rich on the long-term. However, in the end these people end up working solely in order to be able to pay their bills and their liabilities.

In order to lead a truly fulfilled life (and I do not mean rich, simply fulfilled), it is necessary to find ways to let money work for you, in stead of the other way around. This means, for example, investing in stocks in order to see them rise in value, and to obtain dividend pay outs. It means investing in other forms of businesses, hire people to let them do the work for you. It means identifying opportunities, entrepreneurial opportunities, and be in charge. The biggest problem, however, is that most people are so caught up in their thinking of “education / good grades / getting a good job”, that these opportunities pass by without them even noticing.

I let the first chapter reflect for a moment yesterday, and the more I thought about it, the more I identified opportunities in the past, which I had let pass by due to my focus on making a career. I still remember vividly, that when I was 19 or so, I got interested in international trade. I bought some books on international trade, and how to become a trade agent, and in a newspaper I saw some offers from manufacturers of cellphones looking for agents. The costs for starting up an agency were extremely low, and it was a time at which cellphones were just starting about to hit the market… but I was discouraged by my family and friends, and unfortunately I listened to their advice, to get a job. One year later the cellphone business started booming for real…

Throughout my entire life, I have been looking for better jobs, better salaries, promotions, and the like. And I believe this will be one of my top priorities for 2010:

I pledge to stop focusing on making a career and losing myself deeper in the treadmill until I cannot get out. In stead, I will be on the outlook for business opportunities, aiming at gaining financial independence. And I will do anything, that is necessary.

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