Monday, December 15, 2008

Dividend Reinvestment Plans - Pros And Cons

A little while back, in my post about building wealth, I mentioned that I thought it was important to re-invest any income derived from your investment portfolio. It is an example of the compounding effect at work. Today I'd like to share my thoughts on dividend reinvestment plans (sometimes referred to as DRIPs). Dividend re-investment is touted by many a being a great strategy for growing your investments over the long term.

What Is A Dividend Reinvestment Plan?

When a company declares and pays a dividend, investors would normally receive that amount in cash. Under a DRIP, an investor can opt to forgo the cash payment and instead receive the equivalent amount in company stock.

As an example, if you own 100 shares in a given company and that company declares a dividend of $1 per share, you would be entitled to a cash payment of $100. But if that company offered a dividend re-investment plan and you decided to participate in the plan then you could take the $100 in shares. If the company's stock was trading at $50, you would receive 2 shares under the DRIP.

Advantages Of Dividend Reinvestment

Participation in these schemes allows an investor to acquire more stock an a company without paying brokerage fees. This means it can be a low cost way of increasing your ownership of an investment. Even though only a small quantity of stock is accumulated each year, this can add up over a number of years.

To make it more attractive, some companies offer stock in their DRIP's at a discount to the current market price (around a 5% discount or so). This can make the plan an even more cost effective way to add to your holdings.

Disadvantages Of Dividend Reinvestment

The main issue I have with these plans is that you may not necessarily be investing your funds in an investment which represents the best value at any given time. I like the idea of re-investing the income from my stock market investments. It creates a compounding effect whereby the amount reinvested increases the income the following year and so on. But I like to choose where I invest my hard earned cash. I prefer to take all of the income received over a given period then plow it back into the opportunity which represents the best value at that time, or perhaps even invest in a new idea.

Another thing to consider is the additional paperwork required. You will need to track each purchase for tax purposes. As your portfolio starts to grow and the number of holding increases, you will need to track the issue of shares twice or sometimes 4 times per year for each holding.


Sunday, November 2, 2008

How Is A Dividend Different To Interest?

When you put your money into a savings account at the bank, it is on the understanding that you will earn some interest on that deposit. It's your reward for letting bank use your money for a while. Alternatively, you could say it's the cost a bank incurs when borrowing your money. Dividends are a little bit like interest but with a number of subtle yet important differences.

A dividend is a payment a company makes to its owners (stock holders) out of any profits it makes in a given period. Dividends are normally paid either quarterly or half-yearly.

While the interest you receive on your deposit in a savings account is typically agreed up front (ie. the interest rate is advertised), the amount a company pays out in dividends is a little more fluid. The payout may fluctuate from year to year. If the company is successful, the the amount will normally go up each year. However, when profits falls, so does the dividend - and if things get really bad, there may be no payment at all.

Another thing to consider about dividends is the chance of capital appreciation (or capital loss). In order to receive a dividend, you must first buy stock in a given company. You may consider this to be the equivalent of making a deposit in a bank savings account. However, when it comes time to take your money back out again, there can be a big difference between a bank and a shareholding.

With a bank account, you would expect to receive back the same amount of money as you deposited, plus your interest (not withstanding the present economic climate). But with a stock market investment, you need to sell your shares to get your money back. And for this, you will be at the mercy of the markets. Stock prices may have gone up - but as we have seen over the past year, they can also go down.

Now it's is not all down and gloom with dividends. History tells us that provided you invest in good quality stocks for the long term, then your dividends, along with some capital growth, will exceed the interest you could get in the bank. Just be aware that a much longer time horizon is needed. Most investment professionals recommend 5 years or more.


Thursday, October 23, 2008

What Are Dividends?

Dividends are payments a company makes to its shareholders out of corporate profits. It is the income you receive for investing in the stock market.

Typically the returns derived from equity based investments like stocks take the form of capital growth (through a rising stock price) and income through dividends.

It's important to note that not all companies pay dividends. Newer companies and those experiencing high growth may decide to re-invest all of their profits back into the business. This may be a better outcome in the long term as it will grow the value of the business. But income investors want the cash now (or at least on a regular basis) rather than at some point in the future.

A convenient way of expressing this income component of return on your stock market investment is as a dividend yield. It's calculated by dividing the amount of the dividend by the price of the share. So a stock trading at $20 which pays a dividend of $1 would have yield of 5% (1 divided by 20).

But don't worry too much about the maths. These yield figures are available in the business section of most newspapers and on all of the finance and investing web sites (like Yahoo Finance and others). Using this figure, you can then compare the returns on offer for various stocks and get a rough idea of the relative values involved.

You can also compare the dividend yield to the interest rates available on the various bank savings accounts and other income investments. Just be aware the buying stock is not the same as putting money in the bank. The risks involved are much greater - you're not comparing apples with apples.


Friday, September 12, 2008

Benefits Of Budgeting

I firmly believe that a personal or household budget is one of the fundamental building blocks when it comes to the subject of personal finance. A budget allows you to see clearly where your money comes from and where it goes. This is the very first step you need to take if you want to get in control of your finances.

Having said that, I've been a somewhat sporadic user of a budget as a personal finance tool. What I tend to do is prepare a budget and satisfy myself that my income does indeed exceed my planned expenditure by a sufficient margin to meet my savings goals.

What invariably happens then is that once I'm comfortable that my spending habits are roughly in line with the budget, I tend to neglect it until another (normally financial) event triggers me to go back and re-visit it. And that's what happened recently.

My wife has recently quit her job so it means we're down to one income. While it means a more relaxed family life for us all, it also requires a little more attention to the financial details of our lives. So in keeping with tradition, this event has prompted me to go back and update our budget.

The good news is that we still have an adequate difference between income and expenses to allow us to meet our savings goals. But the lower level of income caused me to cast a slightly more critical eye down the list of expenses to see where we could potentially save a little extra money.

Starting with some of the larger annual outlays, I fairly quickly identified 2 or 3 items which deserved closer attention. Adding together our phone and internet bills made it one of our larger regular expenditures. A little research quickly identified a number of better deals available to us for these services. In the end we chose a VOIP option in combination with our internet service. The cost is now roughly half what it used to be.

I plan on tackling some of the other larger expenses in the near future. I'm sure we could get a better deal on some of our other services if we shop around a little.

What prompted this cost cutting exercise was the preparation of a budget. It forced me to have a look at all of our expenditure in one place rather than in dribs and drabs as they actually occur. And we're seeing the benefits already.


Thursday, August 7, 2008

Good Debt And Bad Debt - What's The Difference?

Most of us go into debt at some point in our lives, either by choice or out of necessity. It might be a car loan to finance the purchase of your dream car. It could be the mortgage you need to buy a home for you and your family. It might even be the credit card debt you build up each month (and hopefully pay off within the interest-free period).

But I'm surprised at how many people I've met who have got their personal finances in a mess through the imprudent use of debt. So today, I'd like to put forward some ideas of how you can use your capacity to borrow for good rather than evil.

What Is Bad Debt?

In general, any money which you borrow to buy something which goes down in value could be considered bad debt. This might include so called lifestyle-type assets like expensive cars or consumption items like clothes and food. Money borrowed to finance a vacation would fit into this category as well.

Your credit card is quite often one of the main accomplices in racking up unhealthy debts. This is because credit cards are normally used to buy everyday items - food, clothes, going out to dinner and so on. Then when the balance on the card is not paid off at the end of the month the problem is compounded. At interest rates which often exceed 20%, this is a very costly exercise.

What About Good Debt?

Ideally, the only time you would borrow money would be to buy an asset which appreciates in value or produces income. The total return from the ownership of the asset would need to exceed your borrowing costs in order to advance your goal of building wealth.

An example might be investing in real estate. You would expect to receive some income from such an investment which would help service the interest payments. In addition you would hope to see some growth in the value of your investment as well.


Monday, July 21, 2008

Building Wealth - A Simple Plan

I know that get rich quick schemes are enticing. The lure of making money fast is too tempting for some people to resist. Maybe there are some methods out there which you can use successfully to generate significant wealth over a short period of time. However, I suspect there is either a certain amount of luck, a large amount of risk involved or both. In fact the cynic in me suspects that the only people getting rich from some of these schemes are the promoters.

My plan to build wealth is simple. Spend less than I earn, save the rest and invest my savings in quality investments. I said the plan was simple not easy. And I can't claim it as my own either. It is essentially the story laid out in George Clason's personal finance classic, The Richest Man In Babylon. If you haven't read this book, I think you're missing out.

This deceptively simple formula does take considerable commitment though. Obviously it helps if you can maximize your earnings. This might be through developing your career or maybe via a more entrepreneurial approach.

Controlling expenditure is where most of us run into trouble though. A budget is one of the tools which is critical for managing money in this context. Knowing where your money goes is the first step to controlling your expenses.

Then, by putting a savings plan in place, ensuring that cash is being put away out of harm's way on a regular basis, you'll start to build up some capital to start up your investment portfolio. Untold numbers of books have been written on the subject of investment but the main point I want to make here is that you should strive to re-invest any income derived from your investment portfolio. Use the power of compounding to your advantage.


Tuesday, June 17, 2008

Investing In The Stock Market To Grow Your Wealth

One of the key features of a personal finance plan is the section aimed at building wealth. And investing in the stock market can be a great way to accumulate wealth over the long term. And there are plenty of options to help you get started. You don't need to go out and buy a heap of shares straight away. In this post I'll examine some of the ways you can go about investing in the stock market.

Get A Good Adviser:

First off, find yourself a good adviser. The adviser could be a financial planner or a stock broker or even your accountant. This person must be trusted and must know you current financial situation well and understand what you future financial goals are. Finding the right person is especially important when you're just starting out. A financial planner could be useful if you're looking generally at investments as part of your overall financial plan. A stock broker is more useful when you're looking at making specific stock market investments.

Mutual Funds:

But you don't need to jump straight in. Rather than holding stock of individual companies, you may like to invest via a mutual fund. The managers of these products pool investors' funds together and buy a range of different stocks. One advantage of this approach is that you can achieve a level of diversification even if you don't have much to invest. In fact an investment in one mutual fund may gain you exposure to the stock of 60 to 80 companies or even more.
One thing to be aware of however, is that even though you're spreading the risk across different businesses and industry sectors by using a mutual fund, you are taking on specific risk associated with that mutual fund. Make sure you do your research before choosing a fund and get professional advice if need be. Another way of mitigating the specific risk is to consider buying more than one fund. It's all about eggs and baskets.

Investment Clubs:

This is something I've not yet tried but I'm quite interested in. An investment club is a group of stock market investors (or any sort of investors I guess) who pool their resources - both financial resources and brain power. The idea is that each member of the group contributes funds to the club and the members meet on a regular basis to make investment decisions.
To my way of thinking this has a couple of advantages. By putting your money together with others, you'll collectively have more buying power. This means you can diversify your investments more broadly. Instead of being able to buy stock in one company every one or two months by yourself, you may be able to make two or three purchases each month as part of a club (or even more depending on the number of members).

The other advantage is that you'll be making joint decisions. This means there will be more ideas on what stock you could buy and more people to filter out the poor ideas. Collectively you should be able put together a good stock portfolio over time.

The main disadvantage I can see is that because it's a group thing, you'll need to make sure it's a group of like minded people. Do they all share your investment philosophy? Are they long term investors or short term traders? Will their preference be value stocks or growth investing? And the more people involved, the harder it will be to gain a consensus.

Invest Regularly:

Whatever method (or methods) you choose, my preference is to invest regularly. It's like a regular savings plan. And by spreading your investment activities out over time you can avoid putting all of your money into the market at the very top. Detractors of this approach would argue that you will also avoid buying at the bottom of the cycle as well - thereby not buying as cheaply as you may have. There is some merit in this argument, however, timing the market is notoriously difficult so I'll leave the decision to you.


Tuesday, June 10, 2008

7 Ways To Save Money On Your Fuel Bill

With rising oil prices many of us are feeling the pinch at the pump. And for most of us the cost of running a car is taking up more of that monthly personal finance budget - no doubt eating into our discretionary spending. And discretionary spending is where the fun is after all. So in this post I'm going to share 7 tips to help you cut the cost of running your car.

1. Drive Less

Sounds obvious doesn't it? The less you drive, the less fuel you'll use and the more money you'll save. But how can we achieve this? We don't want to be stuck at home all of the time. The first thing you might consider is cutting out the short trips. I bet many of us could walk to the shops to pick up a few things. By not taking the car we can save money and get exercise at the same time. And if you do need to drive, consider combining trips. Run all of your errands on the one trip instead of making many trips.

2. Car Pool

And speaking of driving less, have you ever considered car pooling? This is not always practical depending on where you live and what your working hours are, but why not give it a try. If you pool with just one other person you'll cut your work travel costs in half. Get more people involved and you'll save even more money.

3. Drive More Smoothly

When you do need to drive, consider your driving habits. Do you accelerate smoothly and evenly applying gentle pressure to the accelerator? Do you move smoothly with the flow of the traffic? Or do you change back and forth between lanes - speeding up to squeeze into a gap then having to brake and slow down once you're there? Try driving more smoothly and you'll use less fuel and save money. My grandfather used to say you should try to drive as though there were an egg between the sole of your foot and the gas pedal.

4. Lighten The Load

How much junk to you cart around in the car with you? Have checked what's in the trunk? You'll be surprised how much stuff you can do without and how much fuel you'll save. So go through your car and make sure you're only carrying what's necessary.

5. Keep Your Tires Fully Inflated

Another great way to use more fuel is to drive around on under inflated tires. I'm a cyclist as well as a motorist and I can tell you it takes much more effort to pedal when there's not enough air in my tires. It's the same with your car. More air in the tires means less rolling resistance and more cash in your pocket at the end of each month.

6. Regular Servicing

A well tuned engine will use less gas as well. Make sure your car is maintained properly. Get it serviced regularly by a good mechanic to make sure the engine is running smoothly. And a well tuned engine not only uses less fuel but produces less pollution as well.

7. Buy A Smaller Car

Now this isn't something we can all do straight away. But next time you're due to upgrade your vehicle, consider a smaller model. It may go against the grain, but I suspect higher oil prices are here to stay. So If you buy a car with a smaller engine you could be laughing all the way to the bank. And if you're willing to invest a little more up front you might even consider a hybrid or something similar - again it's good for the environment.

Bonus Tip - Public Transport

7 tips sounded better than eight, so I've made this one a bonus tip. Public transport - do you use it? I know it's not practical for everybody, but it's well worth consideration. Depending on the quality and efficiency of you local transit system, you may be pleasantly surprised. And if you have to commute any sort of distance it can be a great way to catch up on your reading.

So there we have it. A whole bunch of ways to improve the way you travel. Not only will you be helping the environment in most cases, but you'll be saving money of your fuel bill as well.


Wednesday, March 12, 2008

Emergency Cash Fund

What is an emergency cash fund and what does it have to do with personal finance?

What if you lost your job tomorrow? What about if your car broke down - or your fridge or washing machine. Would you be able to cope with this unplanned expense without undue financial stress? Would you need to borrow money at some exorbitant interest rate to cover the cost until the next payday?

An emergency savings fund is a store of cash or cash buffer put away to cover life's emergencies. No matter how well we plan things, life will always throw unexpected situations at us. This is where the personal emergency fund money comes into play. By having this extra cash put aside, you will be able to meet these challenges without the stress of trying to come up with extra cash at short notice.

There are almost endless possibilities when it comes to unforeseen financial emergencies. Here are some you might like to consider:

  • Breakdown of an important household appliance like a refrigerator,
  • A medical emergency,
  • Loss of employment,
  • Car repairs,
  • House repairs.
Some of these situations may require you to come up with hundreds, if not thousands of dollars at short notice.

If you can't come up with these funds at short notice, what are your options? In the worst case scenario, you may have to borrow money from a short-term money lender (think cash advance, payday loan or something similar) at very high interest rates. If you have a credit card, you may be able to use that, but once again you may face a steep interest bill. If you're lucky, you may be able to borrow the money from friends and family. However, not everybody is this fortunate, and even those that do have this option may prefer not to go down this path. Borrowing money from friends or family can place undue stress on relationships.

So how do you get started with an emergency cash fund?

Hopefully, you're in a situation where you're able to save some money on a regular basis. If you currently aren't saving any money, I would suggest you review your personal financial situation. You may need to cut back on your spending - have a look at your expenses and think realistically about what you can do without. Start with your discretionary expenses.

Assuming you are putting aside a little money each week or month, this is the money you should be putting into your family emergency fund. Set yourself a target (say $1,000) and concentrate on putting this much aside over a number of months. This should be your top priority and all of your saving efforts should go towards this goal until you feel you have enough put away.

It's important for this money to kept separate from the rest of your finances. You will need to resist the temptation to dip into it for special purchases - that new large screen TV or the holiday. Even worse, you don't want it to be frittered away on everyday living expenses. You need to make sure that the funds will be available should the need arise. Remember, it's for emergencies only.

How Much Is Enough?

I mentioned a figure of $1,000 earlier. This figure is somewhat arbitrary. I think it's a good starting point and is far better than not having an emergency fund at all. But I would suggest that most people would need more than that.

How much more? Well the consensus seems to be about 2 - 3 months pay (or even more). It will depend very much on your personal circumstances though. Factors to consider include the following:
  • How many dependents do you have?
  • How much if any health or medical insurance do you have?
  • How secure is your job?
  • What are your monthly expenses?
A young single person with no dependents could obviously get by with a much smaller emergency fund than a married couple with 3 dependent children and a mortgage. Consider each of the likely scenarios and work out how much you would need to meet the unexpected costs.

For example, you may allow $1,000 for a replacement refrigerator. You may also consider $2,500 to be enough to cover any major car repairs. And you may think that 2 months would be long enough to seek alternative employment, and if your living expenses are $2,000 per month then you would need to put aside $4,000 to cover this eventuality.

In the above example, you might like to set the amount for you emergency fund at $4,000 as this is the greatest figure out of the scenarios you have considered. It's unlikely (but not impossible) you would encounter all of the above situations at once, so I would just make sure I have the most expensive one covered.

Where Should You Keep Your Emergency Cash Fund?

Because in the event where you need to make use of your emergency fund you will need access to the money at short notice, I would suggest you keep it in cash or a cash equivalent. This means an at call savings account (maybe on online savings account to maximize the interest you can earn). Or you may want to consider a short dated term deposit or CD (certificate of deposit). The main thing to remember is that should you need to call on your emergency fund, you will most likely need the cash in a matter of days.

Many personal finance experts may consider an emergency fund to be an inefficient use of your resources. In some cases this can be true, but it will depend on your personal circumstances. In my next post, I will discuss more advanced concepts in managing your emergency cash fund.


Thursday, March 6, 2008

Personal Finance Basics - Where To Start

Are you trying to get your personal finances organized? This article will help get you started.

Lots of people have good intentions when it comes to personal finance - they just don't know where to start. And it's not always easy. Everyone's situation is different - there's no one-size-fits-all solution. You may be in a situation where you have trouble making ends meet from week to week. Or you may have a decent income coming in each week but never seem to have any money left at the end of the pay period. There are even those among us who have managed to save a little money but are not sure what to do next.

Take Stock Of Your Personal Finances Now!

The first step you need to take is to work out where you are now. This is essentially establishing what you financial position is now. What are your assets and liabilities? How much income do you have each month? How much do you spend?

What Are Your Assets?

This can be a tricky question. How do you work out what an asset is? The simplest asset to identify is cash in the bank. Next will be any investments you have - stock market, real estate, retirement fund and so on. Then, if you own (or have a mortgage over) your own house you might like to include this next.

Now comes the gray area. Some personal finance books will tell you that lifestyle purchases like cars, boats, televisions and stereos are not assets. They argue that these "assets" wont appreciate in value and in many cases will have very little resale value. And in the worst case scenario, they may have high maintenance costs associated with them. I'm not going to say whether or not you should include these things in your list. I tend not to include them, but it's up to you. You should be going though this exercise (establishing your financial position) on a regular basis and the most important thing is to be consistent over time in what you record.

For each of the assets you've listed, assign a dollar value. For financial asset (like cash, mutual funds and stock market investments for example) this will be easy. For other things you may like to record the purchase price. In cases where the monetary value of the asset diminishes quickly over time, you might like to allocate a value based on how long you've had it and how long you think it will last. Better (and easier) still, just don't include it as an asset. Consider it as an expense - like a night out or a weekend away.

What Are Your Debts?

This should be a little easier than the assets - as most lenders will remind you frequently of how much money you owe them. Write them all down. Include any money owing on your mortgage, personal loans, car loans, credit card debt, student debt, store cards and so on. Now write the amounts next to them.

Do You Owe More Than You Own?

The next step is to add up all the values you allocated to all of your assets and write down the total. Now add up all of your debts and write down the total. Now the moment of truth - subtract your total debt figure from your total assets figure. What do you get? Is it a positive number or a negative number.

If you got a negative number, don't panic. At least we know where we stand. You should be happy that you now have a basic idea of your personal finances and how they stack up. Knowing how much net debt you have will give you something to focus on. Each month, you will want to try to reduce the deficit of assets to debt. You may not improve every single month, but overall you want to see a steady improvement over time.

If you subtracted your debt from you assets and got a positive number, well done. Don't become complacent, but you must be doing at least something right to be in that position. Either though hard work or maybe just good fortune you are ahead of the game - but by how much? Or maybe a better measure would be to look at the total interest you are paying on any debts you may have, then compare this to your income. You may have more assets than liabilities, but are you moving in the right direction?

In my next article I will be looking at what our next step should be. How does our income stack up against our expenditure? Please come back tomorrow to read the next article in the series on personal finance basics.


Tuesday, March 4, 2008

What Is A Personal Finance Budget?

How does budgeting apply to personal finance?

Budgeting is one of the most basic personal finance tasks you can undertake. A surprising number of people have never even given this subject any thought and fewer still have even attempted to prepare one. So I have deciding to write a series of posts on personal finance budgets - what are they, why do you need one and how do you create one?

Today I will answer the questions - what is a budget and how does it apply to your personal finances?

So What Is A Budget?

A budget is generally a plan which is financial in nature and which maps out expected income and expenditure. Governments have budgets as do corporations. Governments need to understand how much expenditure is planned in what area and when the expenditure is due to occur. This then allows the government to plan what income is needed to cover these expenses. They then have the choice of adjusting taxation policies and debt levels in and effort to match expenditure against cash flows. In a similar way, corporations of all sizes will undergo similar activities to ensure continuing operations and profitability.

A personal or household budget is essentially to same as a government or corporate budget except that it is done on a smaller scale and at a micro level. Granted, an individual wont have the same financial resources as a government does, but the principle is the same.

So a budget is all about understanding what your expected income is over a given period and what your planned expenditure is.

Income could be salary or wages from paid employment. It could be interest on a bank deposit, dividends from stock market holdings or some other form of investment income. Income could equally be a government benefit, pension or other allowance. If you are helping your children set up a simple budget, it could just be their pocket money. Income could even be your regular winnings from the blackjack table or at the racetrack (only joking - nobody wins on a regular basis playing blackjack or betting on the races do they?).

Expenditure is anything you spend money on. This will be things like food, fuel, utilities, clothing and medical expenses. It also includes things like credit card payments, mortgage repayments and other debt servicing costs.

The other items that will appear in the outgoing section of your budget will be things like savings and investments. By this I mean the money you want to put aside each month to contribute to savings and investment plans. It's important to include these items in your personal budget so that they are part of your plan. Planning to save money is the first step on the way to saving money.

How Has A Budget To Do With Personal Finance?

A budget is one of the fundamental building blocks of your personal finance plan. It helps you to understand where your money is coming from and where it is going. You will use it to determine how much excess cash flow you have available each month (or maybe even how much shortfall there is). You can then put the excess towards debt reduction strategies to help you get out of debt. Alternatively you can put the excess to work in the stock market, a mutual fund, a real estate investment or any other type investment that will help you to grow your wealth.

And if you budget has a shortfall, you'll be able to identify it then take steps to address it. Maybe that car loan is too expensive. Maybe you need to re-think your personal loan rates. or you may just be living beyond your means.

Your budget doesn't have to be complex - a pencil and paper will do. However I suspect that excel spreadsheet budget planning is probably the most common method. In an upcoming article I will describe the process of actually preparing a budget.

For now, start thinking about where your money comes from and where it's going. Then keep an eye out for my upcoming article on how to prepare a personal finance budget.


Thursday, February 28, 2008

What Is Personal Finance?

What is the definition of personal finance?

Personal finance is a remarkably broad subject. The simplest way to define personal finance might be to take a look at each of the topics which come under the personal finance umbrella.

Record Keeping.

One of the fundamentals of personal finance is record keeping. It provides the foundation for everything else to build on. Keeping records means keeping track of all of your financial transactions. This includes what you earn, what you spend, what and where your savings (if any) are, insurance, and the list goes on. Record keeping can be as simple or as complex as you like. Some people will be thrive on tracking every individual cent that gets earned, saved and spent on a daily basis. Others will find this way too much overhead and will instead record approximate figures on a weekly or even monthly basis. Most people will find a working solution somewhere between these two extremes.

However you decide to do it, the main thing is to keep at it. Record keeping will enable you to understand what your financial position is now and how you've progressed over time. It will also provide valuable input into the planning process.


Budgeting could be considered the counterpart of record keeping. The two go arm in arm. Budgeting is the practice of estimating future income and expenditure. To create a budget you would normally offset your expenses against your income month by month for the next year (and beyond). That way you can see what the surplus or shortfall is each month. This can help with planning your investments or by identifying where your future cash flow problems might lie.

Financial Position.

Another key area of personal finance is your financial position. Knowing this is key. When used in conjunction with your record keeping and budgeting, your statement of financial position is a key tool in meeting your financial goals. In it's simplest form, it's a document which lists your assets and your liabilities and which will hopefully show a surplus on the asset side. Even if it doesn't show a surplus of assets, it will provide you with a starting point on your road to freedom from debt.

Credit and other forms of Personal Debt.

And speaking of debt, this is another broad topic within personal finance. Not many of us can go through life without resorting to some sort of debt. Whether it's a mortgage to fund the purchase of a house, a personal loan to buy the car of our dreams or credit card debt to be used for day to day living and the odd larger consumer purchase, most of us will be in debt at some time or other.

But there are different types of debt. Borrowing money to finance investments can be a powerful wealth generating tool. However payday loans and other forms of cash advance are normally to be avoided if at all possible.

Saving and Investing.

Saving money is something we should all aspire to. It could be saving enough money to put aside in an emergency fund to provide a financial buffer in unforeseen circumstances. Or it might be saving for the kids' education or maybe even an overseas trip. And saving ties in nicely with budgeting. Saving is what we can do what the money which our budget tells us should be left over each month.

Then once you've accumulated some savings, you may look at how to invest them. Investing is a complex area with many complex investment products available. You might buy shares, real estate or a mutual fund. You can even invest in non-financial asset like art or wine providing you know what you are doing. Investing is how you take your accumulated saving and put them to best use to grow your wealth over the long term.


What does insurance have to do with personal finance? Well, what's the point in doing all of that hard work to get your personal finances in order just to see some catastrophic event wipe it all out? That's why insurance is such an important part of personal finance. Whether it's your house, your car, your income, your health or even your life, you need to make sure you have enough insurance for the worst case scenario.


Nobody likes paying tax, but with some careful planning and good advice, you can at least minimize the amount of tax you need to pay. I'm sure most people would agree that we pay more than enough tax already. And by organizing our personal finances better, we may be able to reduce our taxes freeing up more money to save and invest.

Retirement Planning.

For some people this is what it's all about. You need to make sure that nest egg has grown large enough to support you once you stop paid employment. By putting the right strategies in place earlier in life you can help ensure you have a comfortable retirement.

Mastering each of the above topics should put you well on the way to living large in retirement.

Estate Planning.

They say that death and taxes are the two certainties in life. While nobody likes to think about their own mortality, it's important to consider your estate. How should it be distributed? Do you have any special wishes? Is your will up to date? A little planning and forethought may at least remove some of the financial worries from this difficult time.

I think the topics above cover this broad subject area reasonably well. In future posts, I will refer back to this "What Is Personal Finance" post often as I drill down on each of these topics.


Tuesday, February 26, 2008

How To Contact Me

If you have any questions, comments or suggestions you can reach me at:

Feel free to drop me a line.


Monday, February 25, 2008

About The Money Management Personal Finance Blog

What is the Money Management Personal Finance Blog about?

I have finally decided to start a Money Management and Personal Finance blog. After many months of reading the writings of other personal finance bloggers and many years of successfully managing my own finances, I thought I would share what I've learned with the world at large.

But before I start, I need to make one thing clear. I am not a professional financial planner or money manager. I am not qualified or licensed to offer personal financial advice. What I publish on this blog will be my own thoughts and ideas. There will be rantings and ramblings about my own experiences. I'll write explanations of things I've learned or feel strongly about.

So keep this in mind while reading what follows. I would suggest you seek professional advice before taking any major decisions. What appears on here is my own personal view and may not be suitable for some or all of my prospective readers out there. Having said that, I'm hoping that I can provoke some thought and discussion with some of my posts.

I intend to write about financial planning, budgeting, saving money, investing and different forms of debt. I don't have any real plan for what I will write about when. I will just write about whatever takes my fancy on a particular day, but over time I will try to organize my writings into some semblance of order - something fairly easy to navigate for newer readers.

Also, I have quite a lot of other projects on my plate, so my posting frequency wont be very high. I'm thinking about writing 2 - 3 times per week but I suspect this will vary as both my time available and my motivation fluctuate.

So you have been warned. Read these writings at your own risk. That's it for now. In my next post, I plan on writing something about money management or personal finance.