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Monthly Archives: April 2017

Gain Control Over Money

Financial freedom means understanding not just what comes in, but also what goes out; more importantly where the money goes. The third step to financial freedom according to Suze Orman is to take back charge of your money, to get back in touch with your money, just the way you did when you were a kid. It is time for you to face the truth honestly and know exactly where you stand today.

What you need to do ASAP:

Grab a piece of paper or a notepad

Assemble all documentation showing all your expenses from 2 years ago. Yes this might take a while, but it’s worth it since it will be saving you so much more time and money in the future (for example for me, my bank sends me each month a computerized statement showing all my spendings and earnings/income. I am able to see where the money went, what I spent it on… almost like an x-ray!). These documents could include ATM statements, credit card bills, cancelled cheques, etc.

Examine each dollar spent and divide the spendings into sections or categories (food, rent, utilities, gas, phone, cable, etc.)

For each category, calculate the sum of how much, in the past two years, you have spent (the total of each area)

Divide each category total by 24 (2 years). This will give you how much you spend on average per month.

Now add up all the averages of each category together. This will tell you what costs you to live each month. Please keep in mind that these are averages. If your average total is $2,000, this means most months you’ll spend less (maybe $800 or $1,200), but it also means that in some months you’ll spend $4,000 or even $5,000. To get the more accurate average or to meet your monthly expenses, you need to calculate the average of each category each month.

P.S. I suggest you add at least 15% more to your total monthly expenses average, as there are always other unplanned for expenses (miscellaneous) or hidden payments we don’t seem to take into account simply because they occur twice or thrice a year. E.g if your total came up to $10,000, the actual figure would be closer to $11,500.

When you’re done, calculate the total of the amount you have coming in (monthly paychecks after taxes, rental income if you own any real estate, pension income, social security income,etc.). Only calculate the amount of which you are sure will keep coming in. If you have loaned money to a friend and they haven’t paid you back, do not count this. Write it all down. This is almost like the Robert Kiyosaki’s CashFlow board game (understanding liabilities and assets). If you’re familiar with it, you’ll understand.

Frugal Without A Budget

Some people consider budgeting a waste of time. I’m one of them. I happen to have a budget. And here’s how I maintain it: I don’t. I do a budget once a year, and then either get too lazy to make adjustments and updates, or just plain forget about it. Yet, my frugality remains… it is a part of my way of life. I am further encouraged to Not keep a budget by what I do every month. It is something I learned from the great Robert Kiyosaki, author of Rich Dad, Poor Dad. What is it?

He called it, Pay Yourself First. This is what I do every single month without anything getting in my way. I take 10% out of my checking account (paid via direct deposit) and transfer the amounts to the Brokerage account I share with my wife, Jessica, and to our individual Roth IRAs. I currently net $6,400 a month from my job as a vice principal. This amount will change next year when I go back to teaching, but it won’t change my strategy. $640 is split into three accounts: $400 to my Brokerage, $120 to my Roth IRA, and $120 to Jessica’s Roth IRA. This $120, by the way, does not represent my lone monetary contribution toward retirement. It’s extra! I contribute $200 to a 403b AND of course I also have my educator’s pension being automatically withdrawn from my pay.

The entire $640 is put to work. I invest in both the taxable, Brokerage, and tax-free Roth IRAs. If you do not have a 401k or other retirement account, I would suggest you “pay yourself first” more than 10% of your net salary. For all of you who have grown tired of the extra chore of keeping a budget, here’s what paying yourself first will do for you:

IT WILL MAKE YOU FRUGAL OUT OF NEED

Just think, if you “pay yourself first,” and in best cases, put cash into a non-liquid account, like an IRA, there’s no coming back. You can’t pull the money out if you’re running short toward the end of the month. Well, you can’t without a penalty, so you most likely won’t do it. You’ll do everything in your power, like watch every expense, all month long to not be in a bind.

Even putting the money in a liquid account, like a Savings (don’t do this, please!) or a Money Market (a little better), will deter you somewhat from cheating, and transferring the money back to checking. You’ll need to stay disciplined. The bulk of my “pay yourself first” money goes into my Brokerage account. But I then turn around and buy stock shares with it. This puts me two steps from liquidation: sell shares and wait for the cash to become available, and then do a transfer request from Brokerage to checking. So you see… it’s a pain in the ass to liquidate, meaning, I better make sure Jessica isn’t going crazy at the supermarket!

Taking Financial Risks

Let’s take a case scenario of two brothers who happen to be farmers in a village far away from any natural source of water supply. Farmer A and Farmer B plant their crops at the same time in a land not too far apart from each other. After a while, the rains stop falling, farmer A is contended with the natural order of things, but Farmer B is not… he seeks ways to provide an all year round supply of water to his crops so he devises a means of transporting water from a faraway stream into his farm land. Now, farmer A tries to dissuade him by pointing out the various disadvantages of irrigation which includes over flooding. Farmer B despite knowing that he risked over flooding his small farm, persisted, ignoring the risk and thinking only of the advantages.

Eventually, it is harvest time, both farmers cultivated their crops but as you must have guessed by now, Farmer B’s harvest was more bountiful than that of his brother… in the long run, the end justified the means.

Now the difference between this two brothers is that one of them did things differently from what was regularly obtained. He took the risk of irrigating his farm despite the obvious risk of over flooding involved.

Now let’s relate this story to the present day craze for financial freedom by Nigerians as a result of which most people have bought into the now popular mavoriodian network known as MMM.

A lot of people call this scheme a scam simply because they are scared of losing their money, I mean nobody wants to lose hard earned money especially in this period of recession. Most people want financial stability, but not the risks involved in achieving this stability and as such, they remain in the same position, year in, year out.

Bill gates, one of the world’s richest man of all times, took a great risk when he took over the running of Microsoft world… the risk of immediate COLLAPSE but he was not deterred, he knew the rules of success, only the risk takers take it all.

My point being, it is a fact that nothing last forever, the mavoriodian system, might not last due to some situations which includes greediness among-st participants, but those in the business of making money know that a good deal lies in the kind of risk involved… the greater the risk, the greater your chances of gaining financial freedom.

Personally, I see no sense in putting my money in a banking system that finds every excuse possible to deduct minute sums under different pretentious guises of which nobody is held accountable for. Why not put that same sum of money in a system that works and ensures that at the end of the month, I not only get my money back, but I also get 30 percent and some bonuses.

To me, it only makes sense to do the latter. I am not one to be convinced easily, but I have tested and tried this system, I have seen millionaires with better finances than I have try this scheme and it worked for them, how much more me, a simple thousandaire…

A great man once told me, if you want to be great, then understudy great people, if you want to be wealthy, then you might as well understudy wealthy people. watch the way they work, learn from their investment tactics, their risk taking ventures… only then can you truly learn the power of making wealth.

Costs of Passive Fund Investing

Active investing is when someone (a portfolio manager) picks the stocks that are in the fund and decides how much of each one to hold (the weighting). This portfolio manager would also monitor the portfolio and decide when a security should be sold off, added to or have its weighting decreased. Since there is ongoing research, meetings and analysis that must be done to build and monitor this portfolio, this fund manager would have research analysts and administrative personnel to help run the fund.

Passive investing has the same setup as active investing, but rather than someone deciding what securities to buy or how much of each one to buy, the portfolio manager would copy a benchmark. A benchmark is a collection of securities which the fund is compared against to see how well it is doing. Since everything in investing is about how much money you can make and how much risk it takes to make that money, every fund out there is trying to compare to all of the other funds of the same type to see who can make the most money. The basis for the comparisons is the benchmark, and then it becomes comparing between peers or funds managed the same way. Comparisons in general are done only for returns. The risk aspect of the equation is handled by looking at what type of securities the fund holds or how specialized the fund is.

How Do I Know By the Fund Name If it is Active or Passive?

The short answer is that you have to get to know how the fund manager operates the fund. Some clues to know more quickly if the fund is active or passive are given next. If they are intentionally trying to pick securities according to some beliefs that they have about the market, this is active management. If the fund description talks about “beating the benchmark” or “manager skill” then it is actively managed. Another clue is to look at the return history. If returns vary versus the index by different amounts each year, then the fund is actively managed. Lastly, the fees may be expensive and have sales loads.

If the name of the fund says “Index” or “Index fund” there is a good chance that the fund is passively managed. If the name of the fund says “ETF” this could be a passive fund, but you need to make sure of this because some ETFs are actually active funds, but they are managed in a certain way. Most of the passively managed ETFs are provided by BMO, iShares, Claymore, Vanguard and Horizons in Canada and Powershares, Vanguard and SPDR (or Standard and Poors) and others if the holdings are from the U.S. Most of the other companies would have actively managed funds only. If the fund description states that the fund is trying to “imitate” the performance of an index or benchmark, then this implies that it is copying the index and this is passively managed. From the return perspective, passively managed funds will be very close to the index that they claim to imitate, but slightly less due to fees each year. The amount that the returns are under the index will be close to identical each year unless there are currency conversions or variances in cost which may come from currency fluctuations or hedging that the fund may do. Passive funds typically do not have sales loads as they are geared toward people who invest for themselves.

There are some funds that try to mix active and passive management. These funds can be assumed to be actively managed, although their results will be closer to the benchmark than most of the other funds, so this is something to consider if the variation from the index is a factor.

Types of Costs

Whatever product you buy, there will be a cost associated with buying it, keeping it and selling it. This will be true whether you have an advisor versus doing it yourself, and whichever institution you go to. Even buying your own individual stocks will have trading fees which you must account for. How much you are paying for each product however as well as the advice will make a large difference in what return you will get after everything is done.