Money is always not enough for me!

Again it have been sometime i have not write, anyway have you always wonder why, no matter how much you earn its never enough. Read the list below and you might find an answer for it.

1 Financial Ignorance

It seems almost fashionable for some to plead ignorance over finances with the result that we either make the wrong choices or abdicate responsibility to some kind of adviser who may or may not act in (or even fully understand) your best interests. You don’t have to be Warren Buffett, but acquaintance with the basics is within most people’s grasp. Spend a few hours with a book such as Personal Finance For Dummies by Eric Tyson.

2 Inertia

Though money is pretty important to most people we don’t always act like it. By taking a little time and trouble to find the best deal you can save a small fortune on insurance renewals, savings rates,  credit cards, mortgage etc etc. And with the Internet, and the many comparison sites, it’s never been easier to find the bargains.

3 Failing to Follow the Fundamental Financial Formula (FFF)

ie Money Gained (Lost) = Income – Expenditure

Dickens’ Mr Micawber expressed it thus: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Yet burgeoning credit card debts show many of us continue to spend beyond our means with the inevitable problems tomorrow. A simple but effective exercise is to calculate your total income and expenditure  for just one week or month, and if the FFF’s in the red you know you’d better make some changes.

4 Lack of Planning

You wouldn’t start a journey without knowing where you’re going and having a (vague idea of a) route. But many people’s financial `goal’ is just to have plenty of money some unspecified time in the future. You need to set specific goals, eg a vacation, car, house deposit, school fees, an amount you’d like to retire on…

Once you’ve done this, you can work out how much you need to save/invest, at what rates, in order to realize your dream. of course, when you do the math you might find some of the goals need scaling back (or you need to raise the amount you save) at the level of risk you’re willing to assume. But at least you’ll end up with a specific and realistic plan.

5 Mental Accounting

This describes the tendency to treat some money differently than the rest. You might, for example, be over-cautious with an inheritance from a loved one, over-reckless with an unexpected lottery win, or maybe you hold large balances on low rate savings while keeping expensive debts on a credit card… Mental accounting can be a good thing if it encourages you to budget better, but beware you don’t lose sight of the big picture.

6 The Sunk Cost Fallacy

Or throwing good money after bad. For example, you’ve spent a small fortune fixing up your old car, yet it still keeps breaking. Though logic tells you to buy another one you’re reluctant to do so because of the amount you’ve spent on repairs. The same tendency can make us reluctant to get out of a bad stock. Remember, what’s gone is gone, and shouldn’t sway your analysis in the present.

7 Paying Too Much in Fees

Time and again research has shown the average managed mutual fund underperforms the market (index) after fees. Sure, some do come out on top, trouble is you can’t identify them in advance. Low cost index trackers or ETFs are a much wiser choice for most investors.

8 Impatience

This manifests itself in frequent buying and selling of stocks, dumping those that don’t provide instant gratification in the ceaseless quest for those elusive winners. The only person this is likely to benefit is your broker as counts your commission fees. Impatience is evident in our spending habits. The desire to have everything now means we often pay twice as much by getting it on credit. You can save a bundle by doing without while you save up to buy cash. Also by spending less on “things” today and instead investing in quality assets we can have a lot more “things” tomorrow.

9 Failure to Diversify

Markets fluctuate – fact! We need to protect ourselves from this roller coaster by not putting all our eggs in one basket. Something to particularly guard against is investing too much in your employer’s stock. This is good for employers as stock-holding workers are likely to be more motivated, but could be very bad for you. If your employer goes bust you lose your savings and your livelihood. Other ways to diversify are through different asset classes (cash, stocks, bonds, real estate) and geographically, most people hold most assets in their own country, but these days it’s easy to invest elsewhere (most easily through an appropriate index tracker).

10 Not Understanding Your Risk Tolerance

Risk and reward go hand in hand. The higher the returns, the greater the risk. There’s no right answer to the amount of risk you should assume, it’s an individual thing. Generally though, the younger you are the more risk you can take. You can allocate different portions of your funds to different levels of risk, eg keeping most of your money in a broad index tracker with, say, 10% in penny stocks. The choice is yours, just be sure you make it consciously.

Mon

How Compounding Effect of Money works?

The compounding effect of money is extremely important when making any financial decision. The compounding effect of money is often overlooked or underestimated by people when making decisions. When applied to all of your financial decisions, this effect is the KEY to  long-term success! To illustrate the compounding effect of money, let me use some financial examples:

Suppose you had invested $1,000 today in a 5% savings account. In one year, that account would be worth $1,050 [$1,000 + ($1,000 x 5%)], yielding a $50 gain. However, in year two, that same initial  investment would be worth $1,102.50 [$1,000 + ($1,000 x 5%) + ($1,050 x 5%)], yielding a $52.50 gain. And in year three, the same $1,000 would be worth $1,157.63, yielding a $55.13 gain. By year ten, the  initial $1,000 investment would be worth $1,629 and by year 25 it would be worth $3,386.

From looking at this example, you can see that investing $1,000 today is much more valuable than investing $1,000 even a couple of years from now. To accumulate wealth, you MUST use the time value of money and the compounding effect of money to your advantage. Click here to  see how long it will take to save a million dollars.

This second example shows how the compounding effect can work against you:

Suppose you borrowed $20,000 to purchase a car and your auto loan was at a 10% interest rate (for 5 years). Your monthly payments would be $424.94. Because the $20,000 loan continues to compound over the life of the loan, you actually pay $25,496.45 over the five-year period, meaning that you’ve in essence paid$5,496.45 because you spent the money before you had it. In fact, in your initial payments, the interest alone will account for almost 40% of your monthly payments. In this case, the bank or lender that gave you the loan uses the time value of money to their advantage.

Now look at this scenario, where instead of making the $424.94 car payment, you invest that payment at the same rate as what your car loan was (granted it’s a little high for a savings rate, but not unreasonable for other investments) . Now, instead of paying the bank, you are actually earning interest and compounding the benefit yourself. After one year you will have saved $5,340 and have earned $240 in interest. After two years, you will have saved $11,239 and have earned $1,039 in interest. By the third year, your investments will be worth almost $18,000 and you will have earned $2,457 in interest. By month 40, you will have enough money to purchase a $20,000 car in cash!

So let’s weigh the differences between the two scenarios above. In the first case you paid the bank $5,496 to borrow the money and in the second case you earned $2,457 and could buy the car in cash after just 40 months (just over 3 years)! The opportunity cost of the first alternative versus the second alternative results in a net difference of $7,953 (a $2,457 gain versus a $5,496 loss). That means that by making a simple deferral decision (buying the car in 3 years versus today), you can get ahead by almost $8,000!

Mon