Financial Thinking

There are eight stations on the way to having your personal finances on track. Money is a means to an end, and the ultimate goal is to eliminate worry about money so that you can focus on other, more meaningful areas of your life. When these eight stations are completed, you will feel confident that your chances for success are maximized. You will then feel more comfortable spending your time in other areas that move you toward having a great life. Read more

There are two things I don’t discuss in depth: money saving tips (how to spend less) and stock picking (investment choices). It isn’t that I don’t know about these topics. On the contrary, I am very confident in my expertise.

The reason that I don’t discuss money saving tips is that it’s a function of your lifestyle. You know better than I do which expenses are reasonable and which could be reduced and you can take stock of your spending habits by reviewing what you’ve spent over the last three months. When I discussed this topic with friends, one of them said that she was sure she could spend less by bring a lunch instead of buying food in the cafeteria. The way she said it, though, made me think that it was something she wasn’t prepared to do. Instead of feeling guilty, recognise that it’s a lifestyle choice, perhaps spending more time with your children and less time in the kitchen.

In the above example, spending less money equates to spending more time. We all have a limited amount of time and I am convinced that the quality of my life is a function of  how I spend my time. In that perspective, it’s sometimes wise to spend more money.

Further, spending less up front may cost more later. As an example, buying an unreliable car will cost less now, but may become a burden as repair bills add up. It’s also worthwhile to consider quality over quantity. My wife has a few pairs of shoes that I would consider expensive, but which are extremely comfortable. I think she is smart to have a small number of great shoes rather than a large variety of shoes that are showy but cheap.

If you really need some help, give yourself a time limit (so you don’t spend all day) and search Google. What is there in your lifestyle that has the biggest impact on your monthly spending? You may write your answer in the comment area below.

The reason that I don’t discuss stock picking is that entire books have been written on the subject and there’s not just one right way. The important thing is to save and invest. How you invest is a matter of personal preference, and needs to match your style and philosophy in order to work as a long-term strategy. Further, if you don’t want to learn to invest, you can hire people to invest for you. If you’re going to do that, be sure to get referrals from people you trust. Then meet at least three potential partners before choosing the one you are most comfortable with.

If you prefer to invest yourself, I highly recommend the website of CXO Advisory. Start with the Investing Demons section for a synthesis of the information contained on the site.

What is your personality? Do you get excited about researching companies and stocks, interest rates and credit ratings, or would you rather delegate that drudgery to others? Please share with us in the comment section below.

There is no mystery to personal finance.

If you walk into almost any bookstore, you can find shelves and shelves of books covering topics ranging from getting out of debt to saving for retirement to investment strategies to questionable topics like “buying real estate with no money down.” The library is another source of the same range of material. The more helpful books are dull or in textbook format. The more entertaining books may contain questionable advice or impractical suggestions.

The internet adds to the array of information. Huge websites are dedicated to telling us how to spend less, how much to save, what to invest it in and “ten secrets your broker doesn’t want you to know.” There are enough articles and calculators to keep you busy for the rest of your life. But most of all, there are ads and pitches. I have found that when you have money, everyone is willing to help you decide what to do with it, especially if some of it might come their way.

Ironically, the mountain of available information complicates matters. First, it’s not easy to tease out the useful advice. Second, just knowing what to do isn’t enough to help you progress toward your goals. The trick is in taking action and getting stuff done.

Many of the resources mentioned above remind me of a joke. A man sees an ad in the newspaper that catches his attention. He reads, “How to Get Rich! Send $5 to PO Box 123 with a self-addressed reply envelope.” Thinking that it’s worth a try, he puts five dollars in an envelope and sends it to the address in the ad, with a return envelope. Two weeks later, he receives his envelope in the mail. Inside is a short note with the following instructions: “Place a newspaper ad that reads How to Get Rich! and instruct people to send you $5 each.” How many authors got rich, then wrote a book about how they did it? How many of them are getting rich by writing books or articles on the subject?

There are certain steps to take in order to get and keep your finances on track. They fall into eight different categories, or “stations” along the path that leads to your goals. As you take action in each area, the probability of reaching your goals increases. Nothing in life is absolutely certain, but it is wise to take steps to increase your odds of success, rather than leaving the outcome entirely to chance.

Once you’ve completed the steps at each station, you will be confident that your finances are on track. After that, reviewing each step will help keep you on track. You should review each area briefly, but regularly; once or twice a year should be sufficient. Perhaps your situation will change, or maybe your purpose will change, but it should be a simple matter to adjust your heading, accounting for your new reality.

These ideas are not for everyone. Some people are dreamers, who hope that good things will happen for them. Other people prefer to create their own destiny (as far as possible). This second group tends to have goals and plans, using their time to move forward and taking whatever steps are necessary.

I find having a very detailed goal to be highly motivating. I know a couple who want to quit work in five years and live six months of the year in Canada and six months in Central America. Because they have a detailed vision of what their lives will be like, they are motivated to pay off their mortgage as quickly as possible. They have also taken the step of buying a home in Central America. They are more likely to be careful of what they spend, to save and to end up reaching their goal.

If you still have trouble moving toward your goal, tell everyone you know about it. People will tend to ask you about it and you will want to tell them that your are making progress. When a friend of mine mentioned that he wanted to buy a larger house, I started asking questions. Where will it be? How large and how expensive? What kind of schools are in that area? I also shared ideas that I thought might be helpful. Every time we talked, I asked about the house hunting, until he finally found the right one.

Ideally, what will your life look like in five, ten or twenty years? Write it down, then talk with everyone you know about your plans. Dream big and feel free to share your plans in the comments section.