Personal Money Management 101 Blog

Tips on acquiring, maintaining and growing wealth

1 Know yourself. You can’t begin a journey if you don’t know where you’re going. Set your financial goals, ie a holiday, a deposit on a first home, clearing your mortgage, putting your kids through school, a comfortable retirement… Make sure you know what you want. As well as defining your goals you should also be aware of your own psychology. How much risk can you stand? If it keeps you awake at night, you probably shouldn’t be doing it, so find out before the sleepless nights begin.

2 Money doesn’t buy happiness. Despite what the marketing men would have you believe. Get out into nature, walk by the sea, watch the sunset… Spend some quality time with family and other loved ones. Borrow a decent book from the library. Listen to some great music. The best things in life really are free.

3 Get your own home. Paying a mortgage is like transferring money from one pocket to another, and you get utility from it in the process. However humble nothing beats the sense of security and pride that comes from knowing you own the roof above your head.

4 Avoid personal debt. Remember Mr Micawber’s maxim: income more than outgoings, result happiness; outgoings more than income, result misery. Credit cards can be convenient – but whatever you do settle them each month – the interest rates are exorbitant. If you really must borrow for essentials (eg a car), increase your mortgage instead. Secured borrowing is much cheaper.

5 Minimize your tax bill. Paying taxes is an unavoidable evil, but make sure you don’t pay a cent more than you need. A paid-for appointment with a tax advisor might be one of the best investments you’ll make. One simple, but often neglected, tactic is for a couple to transfer all assets into the name of the spouse in the lower tax bracket.

6 The best time to start a pension is yesterday. You really can’t start too soon. Employer’s schemes often have the benefit that they contribute as well as you. Otherwise acquaint yourself with the tax breaks on offer for pension money. If you join a formal scheme make sure the management etc fees don’t outweigh the tax breaks.

7 Acquire income-producing assets. Instead of spending your hard-earned money on today’s pleasures, be a little patient and build up some income-producing assets. You can then spend the income on your pleasures, enjoying them more in the knowledge that the income wll not only keep coming, but increase.

8 Diversify. Split your assets between cash, real estate and stocks. Make sure you have rainy day funds of 3-6 months salary in cash, but beyond this you ought to consider other investments. If you can’t afford / don’t want to own individual properties Real Estate Investment Trusts (REITs) are a good alternative. Index trackers are a good way to start in stocks. Avoid managed funds as evidence consistently shows they don’t beat the market.

9 If you don’t understand it, don’t do it. The financial industry is littered with pushy sales people chasing their next commission by getting you to part with your money. Make sure you know exactly what you’re letting yourself in for, and read all the small print. If it seems too good to be true, it probably is.

10 Let yourself off the leash once in a while. Frugality will boost your net worth, but it’s a lot easier to pursue if you allow yourself to spend a little extra on something you really enjoy once in a while. Perhaps as a reward for hitting a financial milestone.

© twinIsles 2007

This week leading English mortgage lender Northern Rock had to run cap in hand to the Bank of England (the country’s central bank) to beg emergency funding.

Northern Rock’s problems are the latest knock-on effect of the US sub-prime mortgage crisis resulting from the nation’spoorest borrowers defaulting on their debts.

Despite reassurances from “experts” that their money was safe a large numbers of Northern Rock savers have been withdrawing their funds from the institution. Its stock price has crashed 32%. I must say if I had savings with Northern Rock I’d have been at the front of the line to get them out.

But if an institution that lends money secured on real estate can get into trouble, where is it safe to keep your money?

An initial thought might be under the bed, but can you run the risk of burglary, fire, flood, rats… And you don’t get interest.

Government backed savings are about as safe as you can get, eg government bonds, or National Savings products (in the UK).

The old adage of don’t put all your eggs in one basket definitely applies here. By spreading your money around you limit what you can lose in the event of one institution failing.

Check out what compensation, if any, you’re entitled to should your bank fold. In the UK the Financial Services Compensation Scheme applies to institutions authorised by the Financial Services Authority (FSA) and offers 100% of the first £2,000 and 90% of the next £33,000.

Updated with a new chapter that draws on behavioral finance, the field that studies the psychology of investment decisions, here is the best-selling, authoritative, and gimmick-free guide to investing. Burton Malkiel’s Random Walk Down Wall Street evaluates the full range of investment opportunities, from stocks, bonds, and money markets to real estate investment trusts and insurance, home ownership, and tangible assets such as gold and collectibles.

A Random Walk Down Wall Street is the book the fund managers/analysts don’t want you to read! This academic / businessman / successful investor tests the performance of technical and fundamental analysts using modern computerized research methods. Both are found wanting.

In this time-tested strategy for successful investing Malkiel provides conclusive proof that no one can consistently beat the markets, and that any attempt to do so simply results in wastage through dealing/management fees. A must read for every investor / would-be investor. Instead Malkiel recommends buying the index through low-cost tracker funds to maximize long-term returns.

This edition includes new strategies for rearranging your portfolio for retirement, along with the book’s classic life-cycle guide to investing, which matches the needs of investors in any age bracket. A Random Walk Down Wall Street long ago established itself as a must-read, the first book to purchase before starting a portfolio. So whether you want to brief yourself on the ways of the market before talking to a broker or follow Malkiel’s easy steps to managing your own portfolio, this book remains the best investing guide money can buy.