Monday, 31 October 2011

Money Saving Monday - Emergency Money

Keeping a budget is not enough.  Life always hands us surprises and we often end up with expenses we did not plan for.  Because of this there should be another aspect of your financial picture.  That other aspect is called emergency money.  I like to refer to this your 'OH S#!T' fund.

Emergency money is money that you put away not as an investment and not as savings, but for emergencies.  And these do happen.   It is best to put away about two months worth of income for this purpose.  Some experts say it should be three months.  The actual amount is debatable.   Whatever you decide on make sure it is enough to adequately handle whatever comes up.   The original basis for the three-month rule was the fact that most short-term debilitating illnesses require three months for healing and recovery.

How much should you save for emergencies? Calculating the amount needed should be fairly easy.   What you want is enough money to pay all of your bills and cover the normal expenses you have budgeted for a typical month.   For example, if your net budget and spending income for a month is $3000 then you should put away $9000 for emergency money.   This is not money for investments or for retirement.  Those two categories should be allocated separately.

Emergency money is used for expenses such as accidents, healthcare expenses not covered by insurance, and death and disability or other instances where you did not have a budget made for a particular expense.   Insurance is a separate issue and should be a separate part of your financial plan.   If you do have disability insurance then this will serve in some ways to protect you in the event of short-term disability.   Thus, you should determine what the benefit would be and then reduce the amount needed for emergency expenses by that number.   The bottom line is to make sure that any applicable insurance actually covers all the contingencies without any problems.  You can ensure that is the case by checking the policy or talking with your agent or financial advisor.

Where should this type of money be invested? Ideally it should be in a very liquid investment that is very easy to get to and can be accessed quickly.   Money market funds are the most popular option.  These are short term, liquid investments that most mutual funds and some banks provide for easy access and cash type liquidity.  They usually pay a nominal rate of return somewhere just above the average savings account rate of the typical bank.  The risk involved in these types of investments is nominal but should not be discounted.  The best recommendation is to read the prospectus and verify for yourself that the manager is investing in dependable and safe short-term investments.

Other possible options for emergency money is the savings account, cash or some other asset that can be easily liquidated without taking a loss.  Many CD's would qualify under this category and should be looked at as an option.  Of course when investing your emergency money you should be seeking to get the maximum return possible without compromising on safety.

Monday, 24 October 2011

Money Saving Monday - Principles of Investing

Begin Investing Now
Do not procrastinate. Begin now because an early start can make all the difference. An early start provides a long time horizon for compounding to show its true benefit for the investor.

Know Yourself
Current situation: What is your current net worth, monthly income and expenses? Where can you reduce your expenses? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns?

Your Financial Goals: What are they? How much will you need to achieve them? Are you on the right track?

Risk Tolerance level: How much risk are you willing and able to accept? Risk tolerance is determined by your personality, age, job security, health, net worth, emergency fund, and the length of your investing horizon.

Sort Out your Finances
Before you even think about investing, know where your money goes each month. Track your spending habits. If you're carrying debt at a high rate of interest, especially credit card debt, you should unburden yourself before you begin investing. Amass enough to cover three to six months of expenses for emergencies.

Never invest in anything you don't understand.

Invest Long Term
Invest for the long term. Do not be influenced by short-term fluctuations. These are inevitable as all economies as well as businesses experience the boom and bust cycle. Don't try to time the market. Get in and stay in. Review your plan periodically, and whenever your needs or circumstances change. If you are not confident that your plan makes sense, talk to an investment advisor or someone you trust.

Investing in Stocks and Mutual Funds
A long term view helps you to safely invest in 'riskier' investments, such as stocks, which the market rewards in general. This requires patience and discipline, but it increases returns. This approach reduces your choices to two: stocks and stock mutual funds. In the long run, they're the winners. The additional risk is worth it due to the power of compounding. 10% a year for 20 years is 570%, but 7% a year for 20 years is only 280%.

Arm yourself with knowledge.
Always do your homework. Knowledge is power. Understand personal finance matters that could affect you. Understand your current investments and the risks associated with them. Be cautious when evaluating the advice of anyone with a vested interest.

If you're going to invest in stocks, research companies until you understand them. Consider joining an investment club. Examine historical data or participate in a stock market simulation. If you don't have the time, consider mutual funds, especially index funds.

Get Help If You Need It
The do-it-yourself approach may not be suitable for everyone. If you try it and it's not working, or you're afraid to try it at all, or you don't have the time or desire, then you should seek professional assistance.

If you want others to handle your financial affairs for you, remain involved to some degree, to make sure your money is being spent wisely.

Monday, 17 October 2011

Money Saving Monday - Save and Build Wealth

Start Investing and Building Wealth

There are some people who are gifted with the ability to save money and there are some that are not.  Unfortunately, most people are of the later type.  Saving money is something that requires an inordinate amount of effort for most people and only with effort can they accumulate any substantial amount.   If this profile fits you then the only way to save money is to use a system and discipline.  There are different forms of wealth, however I’m only going to focus on financial wealth.
Saving money is one of the necessary requirements of building financial wealth.  No matter how much you make, your income must exceed your expenses if you are ever to build wealth.  And the only way this figure can be adjusted is by increasing income or decreasing expenses.  Therefore, if you are unable to save money now then you have no choice but to decrease expenses.
The most obvious question to ask yourself for every expense that you incur is the question, Do you really need this right now at this point in time?  There are actually very few things that are necessary for our immediate existence.  However, as human beings we have a way of rationalizing even the most obscure purchases for the sake of necessity.  Break yourself of this habit.  Realize exactly what things are needed and what things are not needed.
The next thing to do is to create and stick to your budget.  A budget will allocate a certain amount to frivolous expenses (i.e. anything non-necessary) that should not be adjusted.  Whatever amount you decide to allocate toward frivolous expenses stick to it.  Whatever amount left over is devoted to your savings.  It is this that you must continue to build to accumulate wealth.
A good rule of thumb is to take 10% off any income you receive and set that aside for savings.  And I do mean to physically take it out.  That means you actually cash the cheque and get the 10% in cash and then do something with it like put it into a savings account or an investment account or even a retirement account.  Whatever the case, the bottom line is that the money is being placed somewhere that you can get to only with some difficulty.  This will discourage you from using that money when you have the desire to make an impulse purchase.
Once this savings account has accumulated a sufficient amount, you should then take that money and purchase an investment with it.  This is much more efficient than simply leaving it in a savings account where it will receive a minimal amount of interest.   So in a nutshell the steps are as follows:
  1. Take 10% off the top of your income.
  2. Place that money in a savings account or something similar.
  3. Let that money accumulate until it is a sufficient sum for purchasing a better investment.
  4. Repeat the process.
If you follow these steps month in and month out then you will begin to build a savings account that will make you more financially secure and much closer to your long-term financial goals.

Monday, 10 October 2011

Money Saving Monday - Dining Out

Look for Kid’s Night Deals - Many families are going back to the more traditional one income situation, so Kids Night deals are critical to being able to take the kids for an evening out. Most restaurants have a special kids night where kids under a certain age (usually 12) eat free or at a reduced cost.  Look for the places near you and make a list on your calendar so you know which restaurants have deals on any given night.

Share entrees - Entrees are growing (along with our waistlines) and so are the cheques at the end of the night. To decrease all of the above, share an entre with a friend or family member. This will ensure both of you receive your fill, pay less, and walk out a little lighter than you might have if you had tried to eat the entire portion.

Plan your budget - Many people spend too much money on eating out because they eat out too frequently and dont plan it into their week. Pick a specific night every other week or so to go out but decide in advance which restaurant you want to go to.  Pick up a menu in advance of that night to help you plan how much you will spend as well as choosing your food in advance!

Appetizers and Desserts – These were designed with one idea in mind, to get you to order more food than you would ever eat if you cooked it, thus spending more money than you may have planned. In advance of your restaurant visit, determine whether or not you are going to order the appetizer as your meal (provided it is large enough) along with a small salad, or not at all. In doing so, you will save money and room in your stomach for after-dinner coffee. Having coffee at the end of the meal will also help you avoid the $7 desserts with the $2 portions. You will be full and wont want dessert, thus saving you even more money and inches to the waistline.

 Sides - Many restaurants now offer sides as ala carte items. Choosing 2 or 3 sides, such as a salad, a baked potato, or a side of steamed veggies will help you choose less expensive and potentially more healthy options.

 Eating out is fun and it should remain that way. It can be done in such a way that everyones budget should be able to afford it on a regular, planned basis.


Monday, 3 October 2011

Money Saving Monday - Pay yourself first!

I know you’ve probably heard it before but I’m surprised by the number of people who fail to do this.  I come across lots of people who are really good at paying their bills, but not so good at saving money. 

So make it automatic and soon you’ll think of it as just another bill.   Have the money come from your account monthly basis and direct it to a savings account or Tax free savings account (TFSA) if you don’t already have one.  This may be the only thing you need to do to reduce the spending on the stuff that adds no value to your life.

With this in mind, you may also try giving yourself a pocket money allowance.  Your spending on ‘stuff’ should never exceed your allowance.  Once the money is gone – it’s gone until next week, month or whatever time frame you wish to use.