Finances

August 6, 2020

Friends and Money

It is a good thing to be rich, it is a good thing to be strong, but it is a better thing to be beloved of many friends.- Euripides

There’s a Jennifer Aniston movie called Friends With Money that explores the trials and tribulations a friendship group goes through when some of the friends have solid earnings and assets, while some of the other friends make a pittance.

Have you been there? Most of us have been there.

These problems tend to start as we enter our university years. Some people are fully supported by their parents through university. Others have to rely on government grants, casual jobs, or a mix. Some of us don’t even go to university and enter the workforce. Whatever the situation, the outcome tends to be that we are all juggling different wads of cash.

A few years later, things escalate further. Most of us are dealing in careers, not jobs, at this point. Our earning can skyrocket; fluctuate; waiver. Your boyfriend might get a “sign on bonus” while you’re struggling to make ends meet. Another friend might be saving to go travelling, while you want to celebrate your pay rise with popping fancy champagne.

And let’s not forget what comes next. We start to save for marriages and weddings while other friends have children. Some of us want to take round-the-world trips, while others of us are struggling to build businesses or grow a freelance career.

So, the question is, how can we be our best financial selves and live our best financial lives while supporting our friends in their quest for the same? Let’s discuss.

1. Talk about money.

The first step might be the hardest step, but it might also be the most important.

You need to talk to your friends about your money sitch.

Let’s say your friends love having drinks every Friday. Each week, someone picks a new spot. You get the pricey set menu. The drinks are freely flowing. But you — you — are struggling to keep up with the ongoing costs of this Friday night drinks club.

Of course, they don’t know this because you’re oh-so-quiet about the situation.

What would happen if you told them?

Well, they might scoff, wonder why you’re so bad with money, downplay your situation, mock you behind your back, offer to pay in a passive aggressive manner, give you not-so-subtle savings tips, or stare you down when you order a glass of Jameson on ice.

But they’re your friends, so maybe, just maybe, they’d understand you.

By being open about our financial situations — whatever they might be — we are starting a conversation that needs to happen. We are asking for compassion and understanding and also suggesting that we can be compassionate and understanding in return. Who knows, maybe another friend is struggling to keep up.

The short version: Be open and honest with your friends about money. Trust they will understand. And make it clear you’ll do the same in return.

2. Don’t be nosy for the sake of nosiness.

We believe in being open and honest about money — but for the right reasons.

The point of starting a conversation about money is so that we can be aware and sensitive. If you want to ask a question — who paid for their holiday, where does their money come from, how do they divide up rent payments with their partner — consider your motives first.

Are you asking out of curiosity?

Or are you asking because you have a genuine need to understand?

Maybe you and your girlfriend are moving in together and you’re running an informal poll amoung friends so you can make an informed decision for yourself. That’s okay! You’re asking for the right reasons, so all is good in the hood.

On that note, though, if your friends don’t want to answer your questions, don’t be offended. Revert back to coming from a place of understanding and compassion and understand their desire to keep their money situation to themselves.

The short version: Always consider your motivations when starting up a conversation about money and respect your friends, whether they do or don’t enter the conversation.

3. Be your best self when it comes to borrowing and lending money.

This is usually the hot topic when it comes to friends and money. There’s always one.

That is, there is always one friend who borrows $20 from you because they forgot their wallet or their bank card doesn’t work — and then they don’t pay you back. And then you enter this limbo where you want to ask them to pay you back, but you don’t want to appear a nag, but you need the money, and why don’t they understand that it’s the right thing to do?

Both lending money to friends and borrowing money from friends is tricky business. It must be handled with care. So, let’s all agree to abide by a few common guidelines.

To start, if you need to borrow money from a friend, don’t be offended if they say no. That is their prerogative and it’s not up to you to question it. After all it is their money.

If you do borrow money from a friend, pay it back as quickly as possible. Also, remember, it’s your responsibility to pay it back. Your friend shouldn’t have to chase you down for it.

If you lend money to a friend, be clear about your boundaries (and you should have them). You expect to be paid back within a week, say so. If you expect regular payments, say so. It’s best to get everything out in the open at the outset, so there can be no confusion.

And finally, perhaps sadly, if you lend money to a friend, do so with the knowledge that you may never see it again. If you enter into every transaction with that in mind, then hopefully you won’t be disappointed with the outcome and your friendship will not suffer.

The short version: If you borrow money, be mindful about paying it back as soon as possible; if you lend money, prepare for the worst and hope for the best.

4. Split bills fairly.

Picture the scene: You’re out with a few friends. You order a salad and skip the booze, while one of your friends orders a steak and downs a glass of vodka. At the end of the evening, someone suggests you just split the bill evenly. Fair? Not really.

So, what do you do? If the difference amounts to a few dollars, you may feel it’s easier to bite your tongue. Or maybe it all evens out. Maybe last time you went to dinner, your order was a little more pricey, but you split the bill evenly. Consider the scenario.

But if you feel it’s worth speaking up, do so. You can say something as simple as: “Look, I think mine was more like $35, so if you don’t mind, I’ll throw that in and let you guys split the rest.”

By using this method, you’re ensuring you only pay for what you ate, but you’re also not calling anyone out on what they ate. Hopefully, your friends will understand. Or, if it’s you with the steak and the vodka, you’ll understand if a friend wants to pay only his or her share.

The short version: Be happy to divide bills up fairly, no matter what the outcome.

5. Be considerate.

The main guideline to follow when it comes to financial etiquette is to follow your ABCs: Always Be Considerate. (That makes it easy to remember mom said.)

You can apply the ABC rule to even the smallest things.

Let’s say you and your friends are going in on a birthday gift for one of your other friends. The considerate thing for the organiser to do is ask the entire group for suggestions. That way, there is room for people to suggest gifts that fit their budget. By being considerate about these issues at the outset, you kinda nip them in the bud.

You can also apply the ABC rule to bigger life moments. If a group trip is in the works or someone is getting married, it’s up to everyone to be considerate about everyone else’s money capabilities and expectations.

The short version: Keep in mind that everyone has their own financial burdens, worries, expectations — and be considerate of those. Knock ‘em dead!

The few tips above are just to help navigate talking money with your friends. Situations will be different and more complex, but the principles are the same. You own your money, so be in control of it. The last thing you want is to wake up the next morning after a night out and regret going out in the first place.

So next time you are allowed to go chop it up with mates, consider these things. As always, hope you and yours are still keeping safe during these crazy times.

Photo Credit: Photo by muyoka from Pexels

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July 2, 2020

Family Matters

Finances, self growth 0

“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.” – Henry Ford

When Covid 19 hit, it was unexpected and it devastated a lot of families. For me personally it opened my eyes to how easy it is to have something and not have it in a flash. I had to really sit down and think of my family matters. For me this begged the question, how do i set up the next generations for success. This led to researching more on what intergenerational wealth transfer really is and how to get a system going.

The finance industry doesn’t want to talk to younger generations about money. The looming handover of wealth is the $68.5 trillion reason you should. It has been projected that in the next 2 decades, the baby boomers are estimated to transfer about $68 trillion to genX and genY. Though this is a lot of money being passed down, not everyone is fortunate enough to have someone pass down anything to them. This then makes most people the 1st in their family line to actually set up the future generations with wealth.

It is so important for people to have a plan in place before stepping into their parents’ or grandparents’ shoes, and why benefactors should be keen to ensure their descendants don’t slip and fall. Whether you are the beneficiary or provider of the wealth transfer likely to occur in your family over the next decades, here’s what the experts advise to avoid a great wealth transfer becoming a tragedy.

Lay it on the table

While the legal structure and tax implications at the time of death and transfer are important, the best way to ensure a wealth transfer is handled smoothly is to have conversations much earlier.

We have this strange idea of inheritance, probably gained from movies and the like, that the conversation starts with the reading of the will. Just because things have been done that way for a century doesn’t mean they should continue to be. Rather than a legalistic approach that leaves the inheritance conversation as a surprise for after death, implement a “living will”. This is an informal conversation within the family that celebrates the hard work that led to the wealth creation and speaks openly about its size and distribution.

What we know is that where there is a really good conversation between the generations of a family about money and what is coming or not coming and what the intentions are, the whole process is a lot smoother. Where it can be an issue is where there is no conversation around it at all and the recipient has no understanding and the money just appears, which can lead to family arguments and disputes and contested estates.

Get the kids up to speed

Once you have children at least 8 years old these informal conversations and in-family education are an important piece of the puzzle when it comes to transferring wealth smoothly. One of the more useful things a parent or benefactor can do is raise their children with a level of financial literacy and understanding of the fundamentals of wealth creation and preservation, so they are better equipped and prepared at the time of inheritance.

Research says that usually recipients in the Gen X and Y demographics are not prepared, but that is starting to change with Gen Z and younger people. Millennials don’t have money hang-ups. They are quite happy talking about how much they’re earning and spending. And kids are learning more about money in school and via fintech solutions. So make it a priority in your family to discuss money and wealth. Personally, my 8 year old son understands how he can make pocket money by doing chores around the house and for the neighbours. This I hope will teach him to value work and how it frames your ability to earn.

This is also an opportunity for the wealth bearer to explain in clear terms what their hopes are for the use of the money, for example to spend it on property or education, rather than holidays or more lifestyle-oriented consumption. While some older people may be culturally awkward about these kinds of open money conversations, I suggest emphasising that it is a way to help ensure they have a say in what their legacy provides. From an African standpoint, money is a taboo subject, it is barely discussed within the confines of a family unit which i believe needs to change.

Declare a constitution

Informal conversations can be helpful, but Credit Suisse advises formalising them in the form of a “family charter or constitution”. This middle-ground measure is a kind of governance document that avoids some of the most common wealth transfer mistakes. Failing to document properly what has been agreed among all family members is a common oversight, as well as ensuring it has sufficient flexibility to deal with unforeseen future outcomes. To make it work, a good family constitution should be a written agreement among family members and several generations should be involved in its formulation. Though it is not a legally binding document, it can inform the legal structures that should also be put in place.

Plan trusts carefully

Rather than leave all your assets in superannuation, or retirement accounts some Australians – particularly wealthier people – have taken steps to establish a legal structure for the specific purpose of transferring wealth to future generations. Often this is in the form of a testamentary trust.

Michael Marr, head of private banking at Credit Suisse Australia, advises that rather than structuring the trust as one central vehicle, which benefactors often like the concept of, they should create sub-trusts for each child or recipient in order to help avoid disputes.

“Separate trusts enable the children to invest differently and in the longer term run their finances independently of their siblings,” Marr says. This is particularly useful when leaving money to Millennials, many of whom have indicated a strong preference for investing in line with personal values and principles, such as environmental, social and governance issues.

The younger generation – typically, though not always – wants to invest the wealth to achieve a purpose, rather than a sole focus on wealth preservation or growth for future generations to enjoy. Some 63 per cent of young investors see the value of working with a professional investment adviser but want the power to make final decisions themselves, partly because of this desire to invest in line with their values, Credit Suisse research shows.

Where there’s a Will

The most important thing is to make sure you have an up-to-date Will that truly reflects your current situation and your wishes. And make sure your family knows where your Will is kept. It’s good to get financial advice as there may be many hurdles and unforeseen consequences. This, I have learned, should be done by EVERYONE who earns an income and has assets, no matter how small. It is good practice to plan how you want your assets distributed in the event you are no longer there. You are never too young to have a Will.

Where I am from, most estate planning issues centre on giving assets evenly among family members. For instance, if one child gets the family home and the other the holiday home then the holiday home beneficiary may feel like they deserved the family home or vice versa.

Asset protection is another area that requires careful planning. You may be worried about an adult child’s inheritance being lost in a divorce settlement or through financial mismanagement, or you may have a disabled child who will need ongoing financial support. One way to protect your assets in such situations is to set up a family trust. Conversely, you may decide that your adult children are already well established and don’t need a large inheritance. With so many young people finding it hard to break into the housing market and repay debt, you might consider bypassing your children and leaving your estate to your grandchildren.

Succession planning

If you have your own business or a farm, then you also need to consider succession planning. Do all or any of your children want to stay in the business? How will you compensate those who don’t? Successful succession planning needs to start early so the next generation can plan their future with some certainty. So do not wait until you are old to start looking at a succession plan, because you run the risk of living a business to someone who doesn’t want to run the business.

A super strategy

If you are the first in your family to create a system of wealth generation and preservation, you need a system that will outlive you. So is it a business, is it an investment portfolio, whatever it is it needs to survive way past you. Strategy becomes key, what you are trying to achieve here is to make sure you have in place a plan that suits you as an individual and your family and their families. I will tell you that, no one plan fits all. As individuals we are unique in what we desire to achieve and our purpose in life is different. The constant though is the fact that you need a system. A classic example is the Barcelona Football Club and their La Masia Academy, it’s a youth project that trains kids from as young as 6 years old to play Tiki-Taka which is a style of play. This system is effective to the point that the 11 players on any Barcelona team move like 1 unit, they are seamless. This is how your strategy for wealth preservation needs to look like, it needs to be fluid that even when you introduce new things into the system iot doesn’t break. When a pandemic like Covid 19 hits, you should still bounce back and continue moving financially, if you get divorced or eventually you die, the system can operate without you.

Future planning is key and very intentional. Your work should outweigh your want, what this means is you have to work like a billionaire if you want to be a millionaire. Go the extra mile. Educate yourself and your family on what is really necessary, you are your biggest assets. And, of course, all of the experts suggest seeing a specialist financial adviser to help navigate a successful family transfer of wealth so you don’t have to resort to robbing banks.

Hope you and yours are safe, share with us your thoughts and questions in the comments section.

Photo Credit: Photo by Jimmy Chan from Pexels

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May 28, 2020

Investment : What I Know

Finances 0

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” – Warren Buffett

I have a lot of people interested in investment asking me how to successfully do it. They feel like they need just a little bit more knowledge in order to tackle it without an advisor. As a disclaimer I am no financial expert or an investment guru but what I will share with you in this blog is the information I know about investment and doing it yourself.

You’re keen on achieving financial freedom and you’re ready to start investing.

But you’re not sure where to start.

You’ve heard that fees can devour your gains and that the perfect financial advisor is hard to find. You decide to do it yourself (DIY). I mean you were smart enough to finish high school, and diligent enough to start saving some of your little money.

You can do this. Here’s how you get started.

1. Read a book.

Or two or three. The internet is full of great information, but it can be difficult to know where to begin. A good basic personal finance book is organised into a cohesive package of well-written and professionally edited chapters designed to teach you what you need to know and understand to be comfortable managing your own money.

A few I can recommend:

The Only Investment Guide You’ll Ever Need by Andrew Tobias. The first investing book I read. An updated edition was just published April 26, 2016.
The Little Book of Common Sense Investing by John Bogle. It’s not a how-to guide, but it gives a good overview of how the markets work, with some fun parables and loads of wisdom from an investing hero.
The Bogleheads’ Guide to Investing by Taylor Larimore, Michael LeBouf, and Mel Lindauer takes the logic and ideologies of ‘Saint’ Bogle and applies them to everyday investing for people like you and me.

2. Harness the power of the internet.

Once you have some baseline knowledge from reading a book or two, refine that knowledge with a little browsing. Read some articles and blog posts. Read the forums. When you’re ready, ask questions on the forums. You’ll be amazed at the quality information you’ll receive on a quality forum, two of which are listed below.

A few sites to get you started:

Bogleheads. An extensive wiki and a great forum.
WhiteCoatInvestor. five years of great posts and an active forum.
Rockstar Finance. Features three inspiring posts daily Monday – Friday.

3. Estimate your net worth.

It’s hard to figure out how to get somewhere if you don’t know where you are starting from. Look up your balances and add them up. Add home equity if you’ve got any. Look up your debts and subtract them from the assets.

Anonymous people on some internet forums like to quibble about what to include and exclude in the calculation. What about jewelry? And art? The Beanie Baby collection?!? I like to stick with property, cash, and investments, but whatever you decide to use, be consistent. See my formula here.

4. Determine your risk tolerance.

Harnessing the power of the internet in a different way, take a quiz to determine how comfortable you are in taking calculated risks with your investment portfolio.

Here are a few resources to help you with this task:

Vanguard – Investor Questionnaire
Merril Lynch – Risk Tolerance Evaluator
Yahoo – What is my Risk Tolerance?
Wells Fargo – Risk Tolerance Quiz
Index Fund Advisors – Risk Capacity Survey

Use the answers to determine a ratio between stocks and bonds for your portfolio. The quizzes are a guide. Some people use a simple formula, such as “age in bonds” (70% stocks / 30% bonds for a 30-year old) or a more aggressive version, i.e. “age minus 10” in bonds or “age minus 20” in bonds.

When breaking down your portfolio into two broad categories, the “stocks” allocation includes US and International Stock funds, and alternatives such as REIT (Real Estate Investment). The “bonds” portion includes fixed income vehicles including bonds, CDs, and cash.

I have set mine as 90% stocks / 10% bonds for now, but please you do what works for you.

5. Decide if you want international stock and bond exposure.

Depending on which part of the world you are reading this from, this is a very important point. The aforementioned John Bogle of Vanguard fame has stated that international funds are not a necessity in the average investor’s portfolio. Interestingly, Vanguard’s target date funds recently increased the international portion of its target date and all-in-one funds to 40% in 2015.

While it is true that many American companies do substantial business overseas, and owning them gives you some international exposure, there are some very large corporations based outside of the United States, particularly in developed markets throughout Europe and Asia.

Recommendations for international allocations range from 0% to 40% or more. Being in Australia I’ve decided to allocate 30% of my portfolio to international stocks, or 35% of my stock allocation. What this simply means is I keep an eye on Aussie companies more than international ones, but like i said based on where you are investing from you can play around with this.

6. Decide if you want Real Estate Investment Trust (REIT) exposure.

Ownership in an REIT or a fund of REITs is a way to profit from real estate without the hassles of managing rental property yourself. It’s also a good way to diversify your portfolio. While there is some correlation with the overall stock market, over the long term, it tends to be rather low, at least according to this article from Financial Advisor Magazine.

If buying, renting, and selling actual real estate is part of your “investment” plan, I suppose you should determine how that’s going to work at this point. I’m not going to speak much to that, as it is not my area of expertise, and I consider that to be a form of part-time or full-time work more than an investment. This post is designed to help you create a simple, hands-off DIY investment plan. Landlording is not a part of that plan.

I’ve chosen to allocate 10% of my portfolio to Vanguard’s REIT index (VGSLX), although it has come to my attention about 3.6% of Vanguard’s Total Stock Market Index (VTSAX) and 16.4% of their Small Cap Value Index Fund is in REIT, so my exposure actually exceeds 10%.

For further reading on asset allocation, check out the Bogleheads lazy porfolios, including the three-fund and four-fund portfolios.

At this point, you should have your target asset allocation nailed down. You’ve got mine, too (50% Aus stock, 30% international stock, 10% REIT, 10% bond).

7. Learn about tax-efficiency.

Alrighty! you’ve got your very own asset allocation. Now keep in mind that you will have multiple retirement and non-retirement (taxable / brokerage) accounts. You aren’t going to try to recreate your desired allocation in each account. You will apply the asset allocation across all accounts. Understanding how tax works on investments should be your next task (and it’s a tough one but doable).

Tax-efficient fund placement describes a manner in which your assets are placed in the accounts which will provide the best (or least deleterious) tax consequence. Tax-inefficient assets that would be taxed the most are sheltered in a tax-deferred or tax-free (Roth) retirement account.

Tax-inefficient funds include REIT funds, actively managed mutual funds with high turnover, and high-yield bond funds.

The most tax-efficient funds will be ideal choices for a taxable account. These include municipal bond funds, passive stock index mutual funds, and international stock funds with low turnover (index funds). Including tax managed funds such as municipal bonds in a tax sheltered account can be counterproductive. You are sacrificing yield for a tax benefit that won’t be fully realized.

International funds will generate a foreign tax credit that you can report to your country’s tax authority. Growth funds tend to be more tax efficient than value funds, due to lower dividend payments.

8. Start a taxable account.

A taxable account sounds like a bad idea, much like spinal anesthesia, but like spinal anesthesia, it is a good option associated with a scary word.

Also referred to as a brokerage account, or after-tax account, this is simply a collection of investments you buy with money left over after you’ve exhausted your tax-advantaged options.

Although dividends and capital gains in this account can be subject to taxes, there are good ways (keep taxable income low) and bad ways (death) to minimise or completely avoid those taxes. If you are paying taxes on them, they won’t hurt you that badly. Australia has a high-tax rate and so the tax drag on my taxable account in the accumulation phase is also high per year.

If you were paying attention in Step 7, you will fill your taxable account with passive index funds, including international funds if you chose to include them in your portfolio. Municipal bond funds can be a good option too, especially if you can find one that is also tax-free in your country.

9. Sweat the Details

If you’ve followed the first 8 steps, you’ve probably come across some recommendations in your reading that you’d like to implement in your portfolio. You’ve got a plan that will allow you to be a successful DIY investor, but there is some fine tuning you’d like to enact.

Now is the time to do that. Slice and dice. Implement a small value tilt in your local stocks or an emerging market tilt in international. Plan for future tax-loss harvesting in your taxable account. Weigh the merits of various fixed income options like CDs, TIPS, I Bonds, and bond index funds. These details aren’t going to make or break you, but you want to have a plan, and this is your opportunity to make it your own. So do not rush this process, take your time because this investement is for a lifetime essentially so do sweat the small stuff, do not just breeze through.

10. Allocate up to 5% of your portfolio to “play money”

Index investing is boring. You’re not going to hit any home runs or beat the indexes. Of course, you will get market returns, which is better than most active managers do, as Boglehead Larry Swedrroe demonstrates in Swedroe: Active Funds Whiff Again.

But you want that home run, i mean who doesn’t right. You want to pick stocks; and you want to invest in the healthcare sector because you hear and see that pharmaceuticals make a killing. You want to be an angel investor. Or want to own part of a big company like Facebook or Apple. Or a restaurant or distillery (anyone say Gin?).

These investments may offer a higher reward, but the potential reward is often paired with a side of equal or higher risk. A common recommendation is to limit these investments to 5% of your portfolio. If you have a basket of many individual stocks that is reasonably diversified, you don’t have to count that as part of your play money. Doubling down on biotech is another story. Have fun but don’t bet the microbe farm. With the Covid 19 pandemic right now everyone is throwing money at the possibility of a vaccine, keep your ear to the streets but prepare to risk big!

So those 10 tips are what I know, trust me there is more but that is a good place to start. These are the very very basics as far as I am concerend, but have fun with it.

Maintaining the plan simply means making the required contributions each year, purchasing additional shares (or investment properties) as needed, and rebalancing the account from time to time, usually with new purchases.

Once you have a reasonable investment plan, the most important thing, perhaps just as important as your savings rate and far more important than your asset allocation, is sticking with the plan through thick and thin over decades, yes I said decades. No plan will work if you cannot stick with it.

Share with us any questions or suggestions/additions in the comments section. Or if you need any specific topic covered on investment. As always, hope you and yours are safe.

DISCLAIMER: #Teamknowyourpurpose is not a registered investment, legal or tax advisor or a broker/dealer. Instead, the information they provide is based on what the owner of the site has personally experienced. Use at your own risk and seek appropriate assistance where needed.

Photo Credit: Photo by Lorenzo from Pexels

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January 23, 2020

7 Tips to Becoming Wealthy

Finances, Habits money 0

“If you are born poor it’s not your fault, but if you die poor it’s your mistake.” – Bill Gates

The maths behind financial independence is incredibly simple. So why do so few people achieve financial freedom? I personally don’t think it’s for the lack of knowledge – there are so many money blogs, videos and podcasts out there. Instead, I think it’s a combination of our mindset, habits and behaviours that rule our financial destiny. If becoming wealthy is the goal, why do we fail?

So let’s look at 7 tips that could help you with your finances:

1. ‘If you are born poor it’s not your fault, but if you die poor it’s your mistake.’

This quote is often attributed to Bill Gates, a self-made multi billionaire who is now helping the world through his philanthropic work. What he’s getting at is that you have to take responsibility for your financial future. You have to become financially literate. The problem for many is that becoming wealthy is a long journey and it’s not easy. But then again why should it be easy? If it were easy, then the rewards would not be so great. Intentionally planning your finances is important in you realising the goals you want in your future.

2. Don’t follow the herd.

Each of us has been hardwired by evolution with a desire to be part of a herd. In the early days of humanity, being part of a herd meant survival. With a herd, there was always someone on guard for predators or danger and also certain herd members identified opportunities that could be beneficial to the herd.

However, that’s not the way it works with money, unless you want to be average and follow the crowd of average folk. But if you want to achieve financial excellence, one of the best things you can do is not follow the herd. You need to break away from the pack, take your own path and make the best choices for you as an individual.

Successful investors know that to get to the top of the property ladder, they need to overcome the fears that hold most people back from ever stepping foot on the first rung, or of not waiting for the perfect time or the perfect investment. And they also understand the importance of, wait for it, going against the crowd!

Warren Buffet said it best, “Be fearful when others are greedy and greedy when others are fearful.”

3. You should know how many months you have left in your wealth window.

Your “wealth window” is the time from now until when you stop receiving an earned active income. How much are you going to earn in that time? Think about it…if you earn $100,000 a year for the next 15 years you will have $1.5 million passing through your hands.

The big question is: how much of this will you keep?

You have two important stages in your life: a saving and investment stage – this is what I call your “wealth window” and your spending stage – your retirement. For many people their biggest asset is their income earning capacity over the rest of their “wealth window.” Your financial future will depend on the balance between enjoying your money now and planning for “then.”

Which leads to…

4. Practice delayed gratification.

If you want more money and freedom in life, you’re going to have to practice delayed gratification. Successful people possess higher patience and an aptitude to postpone the enjoyment of their work. They have an ability to work hard to accomplish a goal which isn’t achieved for a long time.

Learning to delay gratification rather than seeking immediate satisfaction is essential for success, particularly when it comes to things like investing, business and making money. Yet it’s not easy to change ingrained habits and the approaches to life that you’ve been practising since childhood, but once you’re aware of the importance of the concept of delayed gratification, it’s entirely do-able.

The problem is the average person focuses on survival and instant gratification. They don’t think beyond the moment. However, the very rich think and plan very far into the future—five, ten, or twenty years.

I’ve found, the poor think about the moment— they can’t wait for their pay at the end of the week. The middle class are hoping to make it through the month. The rich are planning a year to several years into the future, and the multi-millionaires are thinking a decade or two future. Remember, if it comes too quickly, chances are you will lose it again just as readily. All good things take time.

As Warren Buffet wisely said: “Wealth is the transfer of money from the inpatient to the patient.”

5. Don’t think you can ever make money overnight.

Whether it’s property, financial commodities, shares etc.; trading is really a form of gambling and the only people who seem to make quick money out of this are the trading “educators” and the “bookmakers.”

It’s interesting how people with an ego bigger than their experience believe they can beat the odds. No they can’t. Instead stick to the wealth creation strategies that have always worked; either investing in income earning real estate, a business or a share portfolio.

6. Avoid credit card debt

While credit cards can be very useful at certain times of your life, don’t use them to maintain an expensive lifestyle to impress people who you barely know.

This is a huge financial mistake. Remember the balance on your credit card isn’t your money, it’s the banks’ and they’ll charge you for the privilege of using it. So do not use it unless it is an emergency, buying the latest Air Jordans or iPhone is not an emergency. Many of the wealthy got where they are by living within their means and investing a big portion of their earnings. Warren Buffett still lives in the same home he bought in 1958 for $31,500.

It can be difficult to avoid the temptation to spend beyond your means, but it’s crucial that you resist. Otherwise, you could find yourself in debt, which will hamper your ability to save for the future even more.

Set a budget for yourself, if you haven’t already, and strive to set aside at least 20% of your income for savings whenever possible. When you get a raise, raise your monthly savings amount before doing anything else. And if you’re already in debt, take steps to pay it down. A balance transfer card is a nice option for tackling credit card debt. You could also try a personal loan.

7. Time is your most valuable currency

Adding to tip #3, when it comes to investing, your most valuable asset is time. Money you contribute earlier in your life is more valuable than money you contribute later, thanks to compound interest. At first, you’ll just earn interest on your initial contributions, but over time, you’ll also begin to earn interest on your interest, helping your balance grow much faster. Consider this: If you invested $10,000 when you were 25, it would be worth over $217,000 by the time you turned 65, assuming an 8% annual rate of return. But if you waited 10 years to invest that $10,000, it would only be worth $101,000 in the end.

So even if you can’t afford to invest much money today, your small contributions could still grow into a large sum over time, so you’re better off starting now rather than waiting until later. Automate your investments whenever possible so that you don’t have to worry about remembering to set aside the money on your own every month.

The bottom line

Becoming financially fluent will be the best gift you can give yourself. And getting sound impartial financial advice along the way is not a cost, it’s an investment.

It’s interesting that all the wealthy people I know have advisers and are happy to pay for them, while the average person gets their financial advice from Facebook or Twitter or doesn’t get any at all (a survey in the UK found out). Find someone to educate you on how to become financially sound and from there plan your financial future accordingly.

Share with us your investment tips in the comments section.

January 16, 2020

5 Tips to Create Passive Income

Finances, Habits habits, Income, money 0

“The key to financial freedom and great wealth is a person’s ability or skill to convert earned income into passive income and/or portfolio income.” – Robert Kiyosaki

This month we are focusing on finances and here are 5 tips to create passive income. Earning money takes effort, but once they’re set up, these five ideas can help you earn while you sleep.

The phrase “passive income” is a bit misleading though. Unless you inherit it, making money always requires some level of work on your part. What’s nice about passive income is that you earn in a way that calls for less structure than a regular 9 to 5 job. And with time, what you earn can add up.

No matter the stage of life you’re in, creating streams of passive income is a smart way to make your money work for you. This list is by no means exhaustive, but does offer five passive or semi-passive income ideas that have worked for others.

1. Invest in dividend stocks (passive)

Dividend stocks provide the ultimate in passive income. Here’s how it works: You purchase shares of stock in a dividend-paying company called ABC. If they’re like most companies, ABC pays dividends quarterly. Say you own 100 shares of stock and ABC pays an annualised dividend of $0.40. At the end of each quarter, they pay one-quarter of $0.40 for each share you own ($0.10). Multiplied by the 100 shares, your quarterly dividend would be $10, simply for owning their stock. No, it’s not enough to blow your hair back just yet, but imagine how this would work if you used your dividends to buy more ABC stock — or other stock. Over the years, your number of shares would grow and your dividends would grow with them.

2. Invest in real estate (semi-passive and passive)

If you have the patience to wait until home values in your area drop, purchasing rental property can make good financial sense. But be aware that even if you buy while values are depressed, you may not enjoy a positive return on investment right away. Plus, becoming a landlord only works if you’re willing to be on call when things go wrong with the property, have money put away to make needed repairs, and don’t mind chasing someone down for rent. At best, this is a semi-passive investment.

Investing in a real estate investment trust (REIT) is a truly passive investment. You have the option of putting money into a REIT or even into crowd funded real estate. There are several different types of REITs, all of which allow you to join other investors in owning a piece of the real estate market. Like most investments, you should plan to let your money work for at least five years.

3. Market your expertise (semi-passive)

Do you know how to repair garage doors or clean an entire building using inexpensive, all-natural products? Share that knowledge by creating a YouTube channel, or writing an eBook, or starting a blog so others can learn your tricks. Amazon will walk you through the steps of uploading your manuscript to their site and you will earn money each time someone downloads it to read. Get my book here to help you overcome yourself and guide you to a better version of yourself.

You can earn money in a couple of different ways by sharing videos on YouTube. If you connect your channel to AdSense the money you make is based on how many views your video receives. If your channel becomes popular enough, you can sell ad time to sponsors. Blogging is monetised by placing ads on your site, selling private ads, and including affiliate links to your site. Market yourself and your skill so that people want to learn from you, this way you earn from just sharing your knowledge.

You become financially free when your passive income exceeds your expenses. Click To Tweet

4. Rent out your space and stuff (semi-passive)

Going to be away from home for a while? List your property as an AirBnB rental. The more popular your area, the more you’re likely to earn each time you rent this property out. If you have more house than you use, consider renting out a bedroom, bath, and kitchen privileges to a college student or young professional.

If you have equipment people might want to rent, place an ad in a local paper, Facebook or on your neighbourhood website. Whether it’s a rototiller, riding lawn mower, spray paint gun, extension ladder, scaffolding, snow blower, or chainsaw, someone is likely willing to pay per use.

5. Sell handmade items (semi-passive)

If one of your hobbies is creating unique items, there is likely a market for them. You can sell your goods through sites like ArtFire, Zibbet, Meylah, eBay, Etsy, and Amazon. The fact that you don’t have to do any selling of your products once they’re listed is what makes this a semi-passive stream of income. Depending on which site you sell them through, you may still need to take care of shipping and customer service, but wouldn’t it be fun to make money doing something you love anyway? You could even get your kids involved in the crafts-making, make it fun for the whole family.

Words of caution

While none of these ideas will make you wealthy overnight, they can slowly, steadily become profitable. If the money doesn’t flood in right away, stick with it. Be patient and consistent.
Avoid get-rich-quick schemes as they are designed to make someone else rich by fleecing you. Pyramid schemes only exist to steal from you.
Also beware of spending money you cannot afford to lose in order to create a passive income opportunity. Only invest in areas you fully understand, if it’s stocks find out as much information as possible before making an investment. Learn how stocks work, learn how real estate works, when you are comfortable then put your money in.
Remember to include income from passive and semi-passive streams on your taxes in order to satisfy the taxman. In order to make it easy, keep good records from the beginning.

Ideally, we would all find a way to earn passive income while we’re sleeping, money we could then use to save for emergencies and invest in our futures. Start small but be intentional about your investments and side hustles.

Share with us your thoughts in the comments section.