Blog about Personal Finances, Investments, Money Management and Financial Freedom

When investing, do it wisel

 

One of the big differences between saving and investing is that by investing you are engaging part of your savings in hopes (which is not certainty) of earning some more money, which is fine, but every time you invest you will be accepting a risk , which does not happen with saving.

By investing you risk some of your money to get more money. This is one of the ways you have to make money work for you, even while you sleep, you’re on vacation or having dinner with friends; but investing is very different than playing roulette or any other casino game (where chance intervenes), so you have to do it with intelligence. To invest wisely it is not enough to have luck or intuition; you must also have a reasonable expectation of profitability, which depend on the quantity and quality of the information you have about the investment and the judgment with which you draw conclusions from it, besides the risk you are willing to take.

Even with the uncertainty and the risk involved, smart investments will grant you more control of your money and the financial independence you’ve always wanted, but never forget that by investing you will be using some of your savings and therefore, you are compromising your financial capacity.

Always invest wisely, and never risk money you need to pay immediate or short-term obligations.

How to keep your money from leaking

 

Many times we complain about not having enough money to cover our monthly expenses; it seems that we never have enough money, because the greater the amount entered in our bank account, the faster we spend it.

Although the issue of money is a sensitive subject for most of us, it is very likely that we are unaware of what we spend, or do not know for sure what we do with our money (we just realized that we no longer have it ), and those little recurring and regular expenses are the main routes where it escapes from us. Unnecessary purchases, unnecessary expenses, certain habits and certain social compromises, undo our pockets allowing our money to “Drain”, significantly reducing our ability for saving and investing.

If you take out your pen and play around with the numbers, try to calculate what you spend on coffee, bottled water and cigarettes; sum the monthly payments you make when you invite your classmates or workmates; try to calculate all the money you spend making small purchases of what you like or what attracts you, even when you don’t really need them.

It is not about depriving yourself of the things that please you, but to become aware of what you do with your money and the need to preserve some leeway that allows you to handle unforeseen situations.

If you want to prevent your money from leaking, try to get enough discipline to stop eating at fast food restaurants, reduce your consumption of coffee and cigarettes; have fun with outdoor recreational activities such as parks and rides that do not require large outlays of money activities. If you go to the movies, think about what you spend on popcorn and soda (these costs are quite significant). Try to go to work on foot or by public transport, and attempt to reduce the use of your own vehicle to avoid payments for fuel, parking and even an occasional fine which you would be exposed to.

And if you go to groceries stores, do it after eating; that way you can resist the lure of buying what you do not need, or purchasing too much (remember that the more you earn, the more you consume). Of course, avoid buying items for their beautiful packaging, as well as articles and magazines that are on the waiting lines of the cashiers (if they are there, it’s because they are not really needed).

In short, start identifying the small holes from where your money is escaping. You may be surprised when you see that without realizing it you’re losing up to 30% of your salary, and that that amount can be used far more intelligently to reduce some of your debts at your own pace, and make investments that increase the value of your money.

If you really want to save, you can do it

If you are one of those who wait until they have some leftover money to start saving, you are missing a golden opportunity to achieve financial freedom.

Do not be of those people who still think that savings don’t get along with the debts. It is true that most people believe that what we call “saving” is the money that is “left over”; and it is a mistake to think that way because money is never left over. Consider that saving is simply the part of your income that is not destined for consumption; if you see it this way you will understand that Mr. Savings and Ms. Debt can live together happily ever after; you just need to be aware of what is truly important to you, to have ideals, will, and a certain discipline in terms of how you manage your money.

If you still haven’t started saving, this is the time to do it. There are many reasons, but here are some:

Saving makes it easy to plan your future and achieve goals in life; you will reduce economic dependence on family and friends; you will have greater capacity to respond to emergencies or other unforeseen contingencies; You will not need to contract certain debts that may be difficult to pay; you will be able to plan your trips, holidays or any other recreational activity that you like; you will have some economic slack to help improve the quality of life of your family; you will feel less stressed or overwhelmed against the economic problems of everyday life; You’ll make better decisions regarding your future, your studies or work; you will go building a financial profile that will be helpful when you want to borrow money to purchase your home or buy a vehicle; you also will go consolidating a way of thinking that will allow you organize your income, prioritize your expenses and live without major upheavals after retirement.

You see, saving has advantages that although almost everyone recognizes, many decide not to use. If you are one of those people who find it difficult to start saving, I recommend that at the very moment in which you receive your monthly or biweekly income, set aside a small portion for savings and power it up by trying to spend less on candy, soda, coffee, outings with friends or eating outside the home. Believe me, it is not difficult; you should just keep your commitment to grow the amount of money saved and in the end you will see that it becomes a healthy lifestyle.

REMEMBER: never think you’ll save the money left over and do not expect to have a better chance to start saving. Saving is one of the great tools we have at hand to build the future we want.

Let’s talk about financial intelligence

Financial intelligence incorporates multiple dimensions and transcends the mastery of the concepts of finance.

Robert Kiyosaki says: “Financial intelligence refers not so much to how much money you earn, but how much money can you keep, how hard that money works for you and for how many generations it has been preserved.” Obviously, obtaining financial independence by  constructing a business system (quadrant D) or by investing (quadrant I) requires that we have a degree of intelligence applied to the world of finance.

But financial intelligence is not only essential for those who live on the right side of the Cash Flow Quadrant; it is also needed by those at the left side: those who are not comfortable in their role of employees (quadrant E) or who independently and on their own work long hours to ensure economic sustainability (quadrant A). With certain knowledge and enough willingness to break emotional attachments, these people can begin to design a system of self-generating money and thus cross the threshold of their respective quadrants.

Obviously, financial intelligence is not limited to the mastery of the concepts of finance, but also is associated with leadership, strategic thinking, personal marketing, communication, negotiation, conflict management, social skills and management of emotional heritage, and others.

A good way to identify to what extent you possess financial intelligence, is checking the following items:

  • Your income is greater than your expenses (you have capacity for saving).
  • You manage to find new forms of income (in several quadrants simultaneously).
  • You have identified your financial goals and you have designed your task list to achieve them.
  • You know how to optimize and earn higher returns on capital.
  • You feel you are on the right track to achieve your financial freedom.

The people possessing a meaningful financial intelligence always think big, and regardless of the circumstances surrounding them, continually design plans to enhance their assets and reduce their liabilities, thereby obtaining greater profitability and liquidity while they improve their quality of life.

If you want to have a financial culture that is your ally in the life project you’ve designed, you must start by understanding the functioning of money as well as the psychological aspects that drive people to use it in a certain way.

How to set your financial goals

Your financial goals should be the product of your convictions, and will always be adjusted to your principles, values and priorities.

One of the first difficulties when organizing personal finances has to do precisely with setting financial goals; that is, the destination to which we are going. There are no good or bad goals; you also can’t pretend to set your financial goals by copying those that other people have imposed for themselves, far from it; financial goals vary according to your attitude, your needs, your heritage and your current financial situation.

First, before you get to work on establishing your goals, keep in mind that any goal must be expressed in numbers or percentages. If you think your goal is to have enough money saved to pay for unexpected expenses of your home and vehicle, you are not really saying anything; what is “enough” for you? How will you know if you’re getting close to the goal you set if you can not see your evolution? You should rather say: I’ll save 15% of my income as of the month of January 2016. As you can see you must not only concentrate on your desire, but also quantify what you want.

A second aspect to keep in mind is that goals are the expression of a balance between ambition and realism. It’s useless to establish poorly ambitious or easily achievable goals (eg, reduce weekly coffee spending, knowing that that’s what it costs a modest breakfast of churros with chocolate) Similarly, it is not useful to set unrealistic or difficult to reach goals (eg, to reduce by 80% the monthly utility bill for next month). In the first case, if the goal is very easy to accomplish, there would be no reason to change financial habits that contribute to achieving the medium and long term plans. In the opposite case, if you set very hard or hardly achievable goals, you will feel frustrated at not being able to reach them and in the end, dismiss the possibility of establishing new guidelines to put your finances in order. You may already have noticed that goals should involve some additional effort; In other words, your goals should require you to maintain some discipline and rigor in your daily action; therefore, that’s why you should avoid goals imposed by other people. Keep in mind that your financial goals should be the product of your conviction and consequently adjusted to your principles, values and priorities.

A third element to consider when setting your financial goals is that they can not be contradictory; all of them form part of a gearing that lets you achieve the welfare state you want. If you set a financial goal like this: save 30% of my monthly salary, and another defined in terms of: allocate 80% of my salary to reduce the outstanding balance of my credit card, which one are you going to fulfill?. Obviously both contradict each other, and at least one of them is not doable.

Finally, formulate your goals in the short, medium and long term. Don’t put them all in the same boat. For a financial objective of higher order, as might be the case: ensure financial freedom after retirement, you can set a short term goal, for example: Hiring a pension plan before the end of the fist half of 2016. You can also set a goal to medium term that contributes to achieve the same goal: for example: Acquire within the next three years, a house on the beach to rent it; and finally: A long-term goal might be: To reach retirement age without mortgage commitments and maintaining ownership of the two houses.

As you can see, setting goals is a dynamic process that requires constant review and adjustment, but the faster and at an earlier age you begin to establish your long-term goals, much better; for example, can you imagine that you start planning today how to earn income after your retirement, if you think that will happen next year? It would not make much sense, right?

Diversifying investment: a rewarding experience

If you are an investor you need to dominate the art of diversifying

Similarly as in the world of real estate, it is said that the key for a good purchase is in the location of the property, in the investment world is also considered that the place (or places) where the shares are located is the key for avoiding shocks due to market fluctuations. If you are an investor, it is very healthy to master the art of diversification, because if you combine a portfolio of well-diversified investment with a horizon of three to five years, you will be able to resist the majority of financial storms.

As we can never guarantee what will happen in the market, regardless of their condition or current characteristics, diversification is and will continue to be the rallying cry for planners, fund managers and investors. Before you decide to invest your money, you should spend time in designing an investment portfolio. Here are some tips related to diversification:

  1. Do not put your wealth on the same place, extend it by creating your own investment fund in companies that inspire confidence, either by the strength they show or simply because you feel comfortable when you use them in your everyday life.
  2. Consider including funds in the bond market. In the long term, it is healthy to incorporate this type of asset which, though less profitable, provide you some coverage against uncertainty and market volatility
  3. Invest regularly. Do not make the mistake of making an investment and sit and wait for the evolution of the price of those shares. Your financial “building” must be built daily, constantly putting your bricks one by one.
  4. Learn to sell. Investing usually associates with the purchase of a given set of shares, hoping to achieve profitability within a reasonable time; that’s fine, but you can’t put the investment in automatic mode. It is absolutely necessary that you keep up with your investment, meet the forces operating in the market and the general conditions in a given time; you must know what is happening in those companies in which you invested, so you can identify the right time to get out of that market, by selling all or part of your actions.

Even in the worst of times, investing should be a fun experience. With some knowledge, a lot of discipline and focusing on diversification, the investments you make will become a highly rewarding habit.