The thoughts, stories and advice of Bill Riddell.

Money Matters Part 2 – Investing Saves You Credit or Something Like That

July 23rd, 2009 Posted in advice

It’s time for part two of some of my theories, thoughts and personal rules regarding all things money. You can track down part 1, right here.

Take or leave my advice, it’s up to you. I’m not rich – I don’t even have an above average income. I am however a great saver (though I do have incredibly low overheads – mostly by design) with some quite healthy lifetime financial habits.

In this, my final missive on the things money related, I will cover the basics of personal finance that so many people ignore at their own peril – saving, investing and using credit and loans correctlly.

Budget and Save

I have always been a bit of a scrooge. I guess this was instilled in me from when I was young, my parents just got by on one small income. I don’t obsess over it, but I do pay attention to what I spend and it would be beneficial for you to do the same.

There are plenty of other websites that will teach you how to make and stick to a budget, no sense reinventing the wheel – that’s why we have Google.

Once you have your budget down, try and divide the money you save from each pay check into categories and separate sub-accounts in your bank. One should be for emergencies, another for the holiday you want to take, a deposit for a house, your next car, investment, and so on.

Pay attention to your daily life and look for win-win opportunities where can you save money while also improving your quality of life. If you enjoy running or bicycling, then you can potentially save on transport costs and free yourself from those expensive gym memberships, while enjoying great health.

Take a regular look at your credit card statement and look for what shouldn’t be there and what you can do without. Back when I was a full time journalist it was the $8.70 I would spend almost every morning on hot chocolate (I don’t drink coffee) and yummy (fattening) treats that I believed were “writing fuel”. Also the regular purchases of DVD’s and alcohol were very expensive and were cut back (I even quit drinking for six months last year which saved me a nice little sum).

However…

Don’t Be a Miser

Now while I advocate keeping track of your spending by budgeting, eliminating unnecessary expenses and trying to find good deals, you can take things too far. After a while the time you spend on saving money could deliver a much greater return by simply working more. Spending time to make money is much more effective than spending time to save money.

There is quite an army around the net that preach frugality (scrimping and saving – making small incremental changes to your spending habits and daily life). Instead, focus on eliminating or cutting down on your 3 or 4 biggest monthly expenses, make sure you pay the lowest possible on big purchases and simply try to eliminate unnecessary spending.

Spending any extra effort saving money will give incredibly diminishing returns on your time. Make money instead of saving it, get an extra part time job or start a small internet business to create extra income rather than fussing for hourse over small expenses.

Saving Is Not Enough, Invest for Success

It’s great to save money, but it’s not enough just to have it all sitting in a bank account. Put it to use earning you money trough investments. If you’re not earning interest equal to or greater than the rate of inflation you are effectively losing money.

The golden rule is to invest in what you know. If you don’t know much then pick the right person to follow, such as Warren Buffet.

At present I keep the bulk of my money in term deposits and high return cash management accounts. Provided you put them in a sound financial institution, they offer consistent, very low-risk, secure returns and in the case of my cash management account I can take my money out at any time, in any amount, at no cost.

In the long term, property is the safest investment and will typically produce nice returns. Make sure you own land, because that is the part that increases in value. Apartments may get reasonable returns in the short term, but as soon as the building deteriorates so does your money. Focus on the location rather than the house. Also don’t buy a house that you can’t afford to pay off when interest rates sky-rocket back up. Just because they are low right now does mean they will stay that way for the 20+ years it will take you to pay off the property.

The share market is a gamble. Just like in a casino, you can win big, but most lose even greater sums. Invest in companies and industries where you are knowledgeable. My first mistake on the share market was on a local gold mine. I had a little knowledge (which can often be more dangerous than no-knowledge), I knew the local area was littered with gold. However I did not have any knowledge in the company, that through faulty equipment and possibly negligence, was grossly over estimating their expected returns. If you do play the stock market stick to blue chip companies, big trusted businesses that have been around a long time, and invest medium to long term (5+ years). Despite market crashes, over extended periods large companies will bring gradual profits over the long term. Also invest in a variety of companies, so when one sector goes bad and those stocks fall others will rise often rise and offset the loss. Do not put all of your eggs in the one basket.

Give the Man Some Credit

Credit and loans can be incredibly useful tools, but they are grossly misunderstood and misused by the vast majority of people. This current economic crisis was cause by greedy financial institutions lending money to people who were ignorant of the system and lacked the ability to pay them back.

Pay off your cards before they are due. Don’t spend more on them than you know you can afford to pay back.

Loans cost money – so make sure what you are buying will at least retain value or ideally increase. Most people buy cars they cannot afford using a loan. Most loans contain fees that cost money initially and then you are charged interest over the duration of the loan. The longer it takes to pay off the loan, the more you pay. The same applies to personal loans for holidays and whatever else you may take one out for. If you must take one out ensure you pay it off as soon as possible. Also shop around to find the lowest fees and rates.

Over time most property will increase in value (the land will, the house will not unless you improve it) so the interest and fees can be, at least partlly, absorbed by the increase in value of the property. A car, unless it is a true classic that will be kept in excellent condition, will dramatically lose value. A new car will lose at least 20% of its value when you drive it out of the dealership. On average they will continue to lose between 5 and 15% of their value each year.

Resources

Ramit of the IWillTeachYouToBeRich blog has some superb advice, I wish I had found it when I was a little younger.??Also take a look at his book of the same name, I haven’t got my hands on a copy yet but I’m sure it is great.

  1. 2 Responses to “Money Matters Part 2 – Investing Saves You Credit or Something Like That”

  2. By Susan Kishner on Jul 23, 2009

    Just wanted to say HI. I found your blog a few days ago on Technorati and have been reading it over the past few days.

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  2. Jul 23, 2009: Money Matters Part 1 - The Art of Buying the Right Things at the Right Price | Bill Riddell

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