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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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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Last week I have started writing a series about investing and fundamental analysis. But then it came to my mind, that I had not yet even devoted an article to some of the basics, which I believe would benefits each investor (or upcoming investor). Therefore, I want to take some time now to elaborate my personal golden rules of investing.

#1 - buy low, sell high

Ofcourse! Buying a stock when the price is low and selling when it is high makes sense. But yet, many people buy a stock when it is quite expensive already, or when it is about to reach a top. It is a psychological phenomenon: many people will only buy what has been proven to be a good product in order to avoid risks. The problem with stocks, however, is that those good and popular stocks are quite expensive already.

#2 – Research well and take your time

Investing is not about speculation. If you are a serious investor, or if you would like to become one, you should not take hasty decisions or trying to make a 35% profit until next week. Research the market well. Apply the fundamental and technical analysis if you want to, and know what you are buying; be aware of the potential gains, potential losses, and development over time.

#3 – Don’t put all your eggs in one basket.

Diversification is the key word here. Don’t put all your money on one company, but diversify between different companies, different industries, and different regions. This way, if a company or industry is not performing as expected, the other stocks in your portfolio might absorb some of your losses. Additionally, you may want to think about diversifying the products you buy; invest some money in obligations and perhaps real estate too.

#4 – Accept your losses.

Losing some money now and then is part of the game. Therefore, it is smart to identify a stop-loss limit. This means, that you can set a rule such as “if my stock drops 8% I will sell it”. You can simply set the minimum selling price at your broker, and as soon as your stock reaches this limit, it will be sold automatically. Also, as your stock rises, you may want to increase the stop-loss limit also. Many people hold on to their stocks when they are making losses. Although some companies recover fairly quickly, others might not, and you may end up having a non-performing stock in your portfolio for years.

#5 – Selling is as important as buying

Continuously track the performance of your stocks, and attempt to predict future developments. If you thinks that a stock has reached the peak of its potential, you may want to think about selling in order to convert the stock into cash. Selling is just as important as buying, unless you aim at receiving a steady return in the form of dividends.

#6 – Reinvest dividends

Reinvesting the dividends you receive can make a huge impact on the long run; do not underestimate the power of receiving dividends.

#7 – Go your own way

Try to identify what works best for you, and do not follow the main stream. Once people start investing in certain stocks massively, chances are that the really smart investors have already long sold their positions in search for other high-potential stocks.

#8 – Have a long-term vision

Investing is something you do for your long-term development and growth. Therefore, let go of the idea of making fast and immediate profits, but look at investments as a contribution to your personal long-term growth.

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I was thinking a few things over last night, amont others how my financial situation would look if everything crashed: stocks plummet and I would lose my job due to a financial crisis. In my case, this wouldn’t look good at all.

Currently I keep 3 different bank accounts:

• a checking account, where my employer transfers my monthly income, and which I use for day-to-day expenses.
• a short-term savings account, which I use to park money which I do not need immediately. I use this money for clothes, a new computer, furniture, etc.
• an investment account, which I use to buy shares and make other long-term investments.

I figured, one thing is missing. What happens when I would lose my job, and my investments would plummet? Or if my house is burnt down and I need money immediately in order to start up again with having nothing? It came to me, that having an emergency account is actually of great importance. For me, an emergency account would ideally be an account which has virtually no risk of the money being lost. Probably, the best solution is a savings account, with a potentially low interest, where the money is ‘parked’, but always readily available, for situations when I would need money fast.

The Bank

Different banks have different policies. We may assume, that each bank will invest our money and our savings into some form of investment, share, or fund, and in exchange we receive an interest. My biggest concern when selecting a bank, is the amount which I am guaranteed to have when things go heavily wrong with the economy. We have probably all heard about the Iceland banks and its account holders, who lost all its money since the bank did not have enough reserves available when shares plummeted with the financial crisis in 2008. Myself, I am Dutch, and I know that my bank guarantees reserves of at least 25,000 Euros per account holder; the governement is thinking about raising this amount to 100,000 by law. Surely for those having some million Euros on their bank accounts, it poses a great risk. But for my purposes, it will definitely do.

Availability

The second criteria is that my money is always readily available when I need it. Firstly, this means that the account type itself is not locked for a specific number of years, and I am allowed to transfer money from that account to my checking account when necessary. Second, it means that the bank should have an online banking system available, which operates in real-time, and that transfers are conducted immediately. I currently have accounts at two different banks; one of them, for example, would withdraw the transfer amount from my account but keep it for a couple of days before transfering it where I want it. This means that the money which I might need in an emergency situation is not available for a few days; not good.

Interest

I do not want my money to sit around without any interest being paid. Since I will not be investing this money anywhere, I will look at the best interest deals available, within the frame of the two previous points mentioned. As such, my money can grow over time.

Amount

The amount, which should sit on the account, should be enough to either be able to live off it for a period of 6 month in case I have no income, or it should be enough to build a new existence from nothing. The exact amount, which someone needs should be determined on a case-by-case basis, but below is the calculation I made for myself:

• My monthly living expenses are approximately 1,200 Euros per month. These are only necessary expenses, which I will have in any case, and does not include clothing, excursions, or anything which I do not need to get by. 1,200 Euros over a period of 6 months is 7,200 Euros.
• Looking at the 7,200 Euros above, this is also quite sufficient to build up something new; initial costs for renting a new apartments, costs for moving existing furniture to the new place, or buying new furniture.

The biggest trick, ofcourse, is not to touch this money whatever happens. If I do not badly need it, it should simply rest on my account. Should I not have needed the money until my retirement, I can then use it as a small retirement bonus.

By the way: if I leave this 7,200 Euros sit on the account for 30 years at an annual interest rate of 3.0%, it will be worth 17,476 Euros by the time I retire; that is a really nice trip around the world.

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