Stop Wasting Your Life & Do Something (8 page)

The only limit to the ideas is your imagination. I currently have several websites that make me small sums of money each month. But the beauty of it is, I don’t have to work to get that money. I’ve done the work, and now they pay me whether I’m sat at my computer, sleeping, or out having fun. This can take a bit of time to learn, but it has to be better than watching crappy TV right?

Decreasing Your Expenses

Again, this, if done correctly will pay big dividends. I see a lot of people that are broke within a week of getting paid. When I ask what they’ve been up to, they tell me about the wild weekend they had where they spent hundreds of pounds on shopping, clothes, and going out. Do you do this? If so, you’re eroding your future wealth. Every penny you spend on unimportant things doesn’t just cost you what the item/experience cost. It also costs you the interest you could have earned if you had invested that money.

Here are some things you can do to decrease your expenses.

Keep a strict budget. If you know where every pound or dollar you spend goes, you are more likely to be frugal with your purchases. Try this: For one month, take a little note book out with you everywhere you go. Every time you spend any money at all (even 50p on a cup of tea), write it down. This will accomplish two things. One, you will see exactly where all of your money is going. Two, it will stop you spending on things you don’t need as you will have to take your notebook out every time, and this will put you off.

The trick to this is to make sure you do it consistently. If you have a joint account, then you need to both do it, otherwise one of you could end up continuing to cause financial difficulties, and the other could be trying to make things better. You can’t fix what you can’t see.

The next thing you need to do, is go through your bank account/accounts, and see where you can cut back. Are you still paying for breakdown insurance on the TV you bought eight years ago, and just haven’t gotten around to cancelling? Are you paying £100/$100 for satellite TV when you could cut down on some of your channel subscriptions and pay £40/$40 instead?

Do you shop around for things like insurance, or do you just renew with your current company? If so, you could be paying a lot more than you need to. Are you paying high interest rates on any cards/loans? Can you reduce them?

You can write to your creditors and request a reduced monthly payment. Quite often, they will do this for you. I had to do this in my early twenties, and every single one of the financial institutions I contacted agreed to reduce my payments. Most of them also agreed to suspend the interest temporarily as well.

Write a list of all the things you HAVE to buy each month. This should include mortgage/rent, gas/electric, phone, food, transport, clothing (the ones you need, not £300 jeans), taxes, etc. Anything that isn’t on the list, create a small budget for and try to stick to it. Make sure that paying yourself first to create future wealth is on this list.

Stop “Treating” yourself. Just because you’ve had a bad day or a bad week, doesn’t mean you need to go out and spend a load of money to make yourself feel better. Make yourself feel better with a nice hot bath, and some relaxing music. If you go and spend a load of money that you can’t afford to lose, (or even worse, put it on the credit card), you will actually feel worse because you KNOW you shouldn’t have done it! For men, this often means spending time at the pub drowning your sorrows with your mates. All you’re really doing is drowning your future wealth.

Ok, so now you’ve built up a bit of cash flow, what are you going to do with it?

You’re going to save it. Your goal should be to save no less than 10% of your net income each month. If your monthly income is £1,500 after tax, you should aim to save £150. If your income is £5,000, you should aim to save £500. Put this money somewhere that you can’t just take it out as soon as you get the urge to go on holiday or something. If you can find an account where you have to give 7 days notice, then perfect. You can’t just take it out because you fancy a night out on the town.

I appreciate that not everybody will be able to do this straight away. If you can’t then that’s fine. If you have to start with saving 1% and build it up, then at least you have started. You’re on your way!

The aim of this exercise is to start increasing your net worth. Every time you put a little bit of money aside; your net worth is going up. Every time you pay off a portion of your debt, your net worth is going up.

If you have a computer, keep all of this information on a simple spreadsheet so that you can track your progress. It gets very exciting when you start to see your assets increase, your debts decrease, and your net worth going up. It motivates you to keep going and keep building.

Chapter 21

Asset Allocation

Asset allocation is just a fancy way of saying “Where I’m keeping my money”.

If you imagine taking all of your savings and investment money, and dividing it into two pots. Pot one is your safety pot. This is where your money grows slowly, but is safe. A Cash ISA (UK) is an example of a safe investment. The interest is low, but your money is protected.

The other pot is your growth pot. This is where your money can grow a lot faster, but is higher risk. You can lose your money in this pot.

You need to decide on your attitude to risk, but my advice is to never keep less than 40% of your money in the SAFE pot. If you have £1,000 to invest, keep £400 minimum in a safe, low interest (high interest if you can find it) account. The other £600 you can invest in investments that can pay you a much higher return.

Before I discuss where to invest, I am NOT giving you investment advice. If you go and put all your money into a poor investment and lose it all, don’t contact me and ask me to cough up,as it’s not going to happen!

Here are some of the things I recommend you do when investing your money.

One – Only invest in things you understand. If you don’t understand something, how can you know it will return your money? If you choose to invest in stocks, find out everything you can about the company. Who runs it? What do they do? What sort of business is it? How do they make their money? Who are their customers? How do they invest their profits? Are they likely to be around in ten years? If not, why not?

Two – Only invest what you can afford, or are comfortable losing. All growth investments carry some risk. If the thought of losing your money makes you feel sick, put it somewhere safer.

Three – Know the difference between investing and gambling. Putting all of your money into a stock because your mate told you it was going to be good is not investing. It’s gambling. I know all about this as I’ve done exactly that myself. There was a great oil company that were about to make it big time. I put several hundred pounds into it, only to watch that money slowly shrink by the week. It still hasn’t recovered.

Four – Invest in things that you can exit quickly. If you invest in a buy-to-let property, it can take you years to sell it. If you invest in a stock, it takes a couple of days or so to get out of the deal.

Five – Invest for the long term. Another one of my (many) mistakes was getting into day trading. Again, I lost my money. Put your money where it will grow over time, rather than trying to make a killing in two hours.

Six – Compound your money. If you find something that is working, reinvest your profits. If you’re always moving your money about, you won’t be able to take advantage of the compound interest.

Seven – Watch your investments, but don’t stress about them. Keep an eye on them and make sure they’re doing what they should be, but if the market dips every now and then, this is normal and don’t panic.

Chapter 22

Savings & Investing

The root of your investments will be savings. I’ve said this already, but in order for you to be able to invest, you need some money. In order for you to have some money, you need to save some. In order for you to save some money, you need to not spend it. This means that you need to spend LESS than you MAKE.

Once you’ve sorted out your expenses and are able to put some money aside, you need to do this. You want to aim for ten percent, but if it’s less, at least you’ve started.

So stage one is to actually start. If you don’t take this first step, your financial future is unlikely to ever change.

I’d suggest you set up a standing order or a direct debit so that on payday, your money goes straight out of your account. If you don’t see the money, you A) Won’t miss it, and B) Won’t be tempted to spend it. If you just leave the money in your account for a week or two, I can guarantee that something will come up that needs that money. The washing machine will break down, or you’ll see some gadget that you just have to have.

Save yourself £1,000/$1,000 and then start putting your money into your allocated finance pots. Remember, keep a minimum of 40% in your safety pot.

Set up an online or telephone stock broker account and start investing. You’ll soon learn the ropes of how to place trades, how to purchase funds, and how to sell them.

Now watch them grow or shrink in value, and make your decisions based on what you’re seeing, and how you’re feeling. Remember, just because your share/fund is going down in value, it doesn’t mean the company/fund is becoming less investable. You need to do your research before making buying and selling decisions. There are other books a lot more specific than this one to do this, so I won’t go into too much detail now, but I would just like to explain the concept of dollar cost averaging, as it’s a useful one to understand.

Dollar Cost Averaging

Let’s say that you decide that you will invest £100/$100 every month into a fund on the stock market.

Every month you take your £100/$100 and invest it in the same fund. Some months, the stock market likes your fund so says that each share in your fund is worth £1/$1. This means that on that particular month, you purchase 100 shares.

The following month, there is a national dip in stock prices, but your fund is still just as valuable as it was last month. However, due to the dip in stock prices, your fund is now valued at £0.50/$0.50. That means that this month you have been able to purchase 200 shares in that fund. You now have 300 shares.

The following month there is a bull market, and the shares are up to £2/$2 each. So unfortunately, your £100/$100 only buys you 50 shares this month.

This is the concept of dollar coast averaging. Your money will purchase different quantities of shares each month, depending on the price of your shares. So if the market is lower (providing your fund is still good) you will simply buy more shares in that month. This is one of the ways your holdings will grow over time as over the months and years, the stock should increase in value.

Chapter 23

Pensions

When I was young, I wasn’t really interested in setting up a pension. I thought I was too young, and was never going to get to retirement age. However, that soon changes. Now I wouldn’t be without a pension fund for my retirement.

If you work for a medium to large size company, there is a very good chance that they will have a company pension scheme. Most companies will contribute to your pension, whether or not you put anything in yourself.

What this means in layman’s terms is: THEY WILL GIVE YOU FREE MONEY FOR YOUR RETIREMENT. What a bonus!! All you have to do is sign a few pieces of paper, and they will put a percentage of everything you earn into a pension fund for your future.

The way pensions work (at the time of writing and in the UK) is this:

Most pensions operate with funds similar to the pot theory I described earlier. They will allocate your money into low risk/low return, medium risk/medium return, and high risk/high return pots. You can also choose different
types
of funds such as real estate, retail, or international funds that invest in companies from other countries. You normally get a choice of funds/risk levels.

There is normally a management fee that the company that runs your pension will charge, but it’s normally so small that it’s not worth worrying about.

When you reach retirement age, you can either take your pension fund as a full pension that is paid monthly, or you can take a proportion of your fund as a tax-free lump sum, and a smaller monthly pension. The choice is up to you.

I would strongly recommend that you also contribute to your pension fund if you have the option. A lot of firms will match your contribution up to a certain amount, so if for example, you put 7% of your wages into a pension, your firm will match that 7%. This means that 14% of your wages goes into your pension fund, and it only costs you 7%. Sounds like a good deal to me!

The other benefit of contributing is that your contributions are deducted BEFORE tax. So you’re not paying tax on that portion of your income. Also, they take the money out at source, so you won’t miss it, as it’s never hit your bank account.

Obviously, this is an overly simplified description of how a pension works, but it gives you the gist of it without having to read a lot of boring brochures or workbooks.

Chapter 24

Insurance