I do realize that this post is a few hours too late, but there are still some interesting concepts to think about.  The cliche 'spend less than you earn' promotes a mindset of scarcity.  I read in a blog not so long ago that if you simply change the wording of that statement to "earn more than you spend" it promotes a mindset of abundance.  It is easy to turn your brain off when you come home from work and relax, but some of the most successful people are always alert for moneymaking opportunities.

Opportunities to make money are everywhere once you train yourself to notice them.  I still have a great deal of learning to do in that department, but one opportunity that isn't such a secret anymore is the idea that the Superbowl presents people with an opportunity to make money.  Thirty second ads for this years Superbowl cost an average of three million dollars.  Especially in our current economic climate, for a company to be willing to spend such a huge amount of money for so little, really speaks volumes about the state of the finances of a company.  I do understand that there are many eyes watching tonight, but three million dollars is a lot of money to spend. 

I do want to state a small disclaimer that any ideas that I suggest are just ideas.  It is up to any individual investor to do their own due dilligence and their own investigations into every stock that they invest in.  I should also point out that investing in an ad that is so expensive could also signal desperation.  I did notice a Ford commercial during the game tonight.  Interperet that information as you will.

      

I want to start this post by offering a disclaimer.  I am not in any way suggesting that you should choose your friends based on their status in life.  I am also not suggesting that you should ditch your friends that are unsuccessful. 

Many people are starting to realize just how much your group of friends effects your choices and feelings regarding money.  There are several angles to approach this from, and I find them very interesting.

Different groups of people have different standards and different norms for what is acceptable.  If your friends all drive Corvettes, you will probably feel somewhat out of place if you drive a 20 year old VW Fox.  If you are deep in credit card debt, your friends will be more accepting of that if they are in debt as well.

There was an interesting concept that I remember hearing, but I really can't remember from where.  The basic idea was that you are the average of your circle of friends.  There's the rich guy that has more money than he knows what to do with, there's usually someone at the other end of the spectrum, and generally you fall somewhere in between.  The same idea often applies to education or other concepts as well.

I believe it was Warren Buffett said that if you want to be more successful, spend time with people that are more successful than you are.  The reasoning is that hopefully some of the habits and behaviors that made them successful will rub off on you.  I'm not suggesting that you should choose your friends based on their status in life, but it does make sense that if you are around successful people, you will strive to be more successful yourself.

I think that there are many people that have a lot of great ideas to share, and the trick is to find them.  I was recently introduced to the site, www.ted.com, and I haven't had much of a chance to explore it yet.  The idea behind it sounds very intriguing, "The annual conference now brings together the world's most fascinating thinkers and doers, who are challenged to give the talk of their lives (in 18 minutes)."   (http://www.ted.com/index.php/pages/view/id/5)  Its too bad that I am so busy at the moment, because I think that when I do find time to watch some of those videos, I will find some magnificent pearls of wisdom.

It seems that the people who are most successful in life are those who have devoted themselves to a particular activity.  Tiger Woods is a prime example.  He has devoted his life to being as good at golf as he possibly can be.  He is being financially rewarded for being one of the best golfers in history, not for being a decent golfer and a decent baker and a dozen other things.  I've also read that the average musical virtuoso has put in 14,000 hours of practise to reach the pinnacle of their craft.  That is an awful lot of practise. That works out to 4.79 years of days of practising 8 hours a day, 7 days a week.  That kind of devotion borders on obsession.  Such a commitment does not come from the desire to use that activity as a way to earn money. 

Where I am going with all this, is that Tiger Woods did not wake up one morning and realize that he's pretty good at that golfing thing.  That didn't happen with Eric Clapton and a guitar.  It took years of practise.  You cannot ignore your finances and expect that everything will be perfect.  It takes conscious effort.  Becoming more financially successful is possible for people of any income level.  It is much easier for those who make significant income, but it is possible for anyone.  The more effort you put into your finances, the better off you will be.  You need to make a conscious effort to ensure that you spend less than you earn and make the right financial decisions.  It really has very little to do with what you earn, its all about what you keep.

      

I am no expert in personal finance or accounting, but I do know a few of the basics of both.  It is quite interesting to see how a few of the basics of accounting can be applied to your finances.

One of the topics that I have harped on before is the idea of recording everything that you spend.  I have started and quit doing this several times, before my current attempt, which has been successful since March of 2008.  It is much easier to do this once it becomes a habit.  It is very important to understand where your money is going, because you really can't make an accurate budget without it.

Another concept from accounting that is surprisingly applicable to many aspects of personal finance is amortization.  Amortization is just a fancy word for depreciation.  Most businesses use accrual accounting, which is mostly beyond the scope of this blog, suffice to say that one of the aspects which is most relevant is that an expense must be incurred in the same time frame as it was incurred.  It is not important when cash changes hands.  For example, and for simplicity, if a car is purchased with cash, for a price of $12,000, the money leaves your hands immediately, but you expect to use that car for many years.  The simplest form of calculating amortization involves estimating how long you will keep the car and a rough idea of what you expect to sell it for when you dispose of it. If I expect to keep that car for 5 years, and to receive $2,000 when I dispose of it at the end of that time, that means that this car will cost me approximately $2,000 per year plus maintenance, fuel, insurance, and other related expenses.  This calculation is done by subtracting your salvage value from the amount that was spent to acquire the item and dividing that by the length of time that you expect to keep the item (12,000-2,000)/5. You can find your monthly cost by further dividing that number by 12. (2,000/12) Your actual monthly cost to own the vehicle in this example is $166.66 per month.

This cost can be more important to your finances than your monthly payments because it shows the value that is depleted by your ownership and use of your vehicle.  Obviously, it is important to choose a vehicle with monthly payments that you can afford, but once the car is paid off, it is still not free.  It is continually losing value the entire time that you own it, and that must be considered in your decision to own and operate it.

This can be applied to any item that you plan to purchase.  For example, you might be looking at purchasing a dishwasher.  In comparing two dishwashers with similar features, you find that one sells for $1,000 and you expect it to last for 10 years.  If the second dishwasher only sells for $750 and you expect it to last for five years.  You might initially think that you're saving money by buying the cheaper one.  Upon doing the amortization calculation, you find that your annual expense to own the first dishwasher is $100 per year.  The second dishwaser is $150 per year.  Both calculations assume that you will receive nothing at the end of its life.  The difference in cost is because the expected life of the second is so much shorter, but the price does not reflect that.  I also want to emphasize that these expenses are not cash expenditures.  This is how your purchase price gets spread over the life of your item.

These calculations can be applied to any item, whether it be a car, running shoes, a blender - pretty much anything.  In my mind, this simple calculation helps to quantify the balance between price and quality that must be found when trying to save money.  The cheapest is not necessarily the best.

      

It has been an extremely long time since I've last written anything, and its been really bothering me.  Its been very hectic lately with school, guitar lessons, work, etc etc.  I'm going to try yet again to resume posting more regularly.

Much has changed since my last post, including the introduction of the TFSA - Tax Free Savings Account.  I have one, and I think they're the greatest thing since sliced bread.  The interest that I earn on my emergency fund is now tax free.  I can now earn interest income, and actually earn a tiny bit of money without inflation and taxes taking it all away.

I've also had a bit of a realization about how powerful goal setting can be.  It seems every year between Christmas and New Year, I tend to think back over the previous year and my accomplishments or lack thereof.  I find that I am often disappointed at how little has changed for another year of time that has passed.  Coincidentally, this year, when I had my little retrospective period and was thinking about how little I  accomplished during 2008, the blogs that I read were in a frenzy about setting goals instead of making resolutions.

I started to think, at the end of this year, what would I have to see to look back on this past year and feel that it was successful?  I had a few 'resolution' type ideas, improve net worth, decrease debt, and increase savings.  I realize that decreasing debt will automatically increase my net worth, but both goals are important to me, so they're both there.

I've heard in the past that when setting goals, its very important to make them measureable.  Saying I want to save more money will not likely lead to much of anything.  If you say, I want to save $1500 by a particular date, that is much more specific.  As a part of my own goals, I've created a spreadsheet and broken down how much I need to save monthly to accomplish the goals I have set for myself.  For every month from January through December, I have a column that shows my monthly target, or the amount that my various categories need to be by the end of that month, as well as the amount it actually is, and the difference between the two.  There are more columns, but those are the ones that are the most important to me.

It is often said that you won't know how to get where you're going if you don't know where you are.  It does no good whatsoever to know where you are and where you're going unless you have specific directions how to get to where you want to go, and my monthly targets serve as those specific directions.

I am not too sure about the idea of sharing my specific account balances on the internet for everyone to see, but at various points this year, hopefully at least quarterly, I will post the progress on my various goals in terms of percentage of the monthly target.

On that note, I have met or exceeded all of my goals for January.  My savings was 20% above the monthly target.  When you look at the dollar value of that one, its not as significant as it sounds.  My debt reduction met the target, and my net worth will exceed that target, but I'm a little unsure of exactly how to value that because all of my payments leave my account in the first few days of the month, and my net worth at the end of this month includes all of that extra cash that I know is leaving.

Does anyone have any experience in setting goals vs making resolutions? Which did you find more successful?  What are your current goals?

      

It can be absolutely amazing how expensive things actually are when you sit down and add up the numbers.  Several years ago I was looking for a new television and in exploring the various options, I looked at a flyer from one of those rent to own places.  It had various household items in addition to televisions, but I was actually astounded at what the true cost of rent to own would actually be.

The television that I settled on ended up being a 21" projection television.  This was before plasma and LCD became all the rage.  I believe the total cost to me, from a smaller family owned store was $500 including taxes.  When I calculated the "low monthly payments" from the rent to own scam, it turned out that a similar sized television would have cost me approximately $1500 over three years.   For the priviledge of spreading my payments out, I would have had to pay more than triple the cost of the television.  I can't think of a single excuse why something like that is a good idea.

I remember having a conversation with someone also a few years ago about this very topic.  This person had very poor financial sense, and I remember hearing a comment to the effect of, "but who can't afford whatever dollars per month?"  This immediately makes me think of the question that I often consider in various circumstances.  I can afford it, but should I?   This sort of monthly payment dilemma also pops up with cars, furniture purchases and a laundry list of other things.

At this point, I am really undecided as to whether I would take another car loan.  It can be difficult to find a reliable used car, and it can be even more difficult to afford to save enough cash for a car if the one you're driving breaks down.  The only item that I can say right now that i would definitely be willing to make payments on is a house.  When it comes to buying furniture, I firmly believe that it should be done with cash.  I think that the constant "no interest"  offers that we are bombarded with from furniture retailers should be handled very carefully.  The interest payments can be very expensive if you are even one day late in paying the bill.

I really am buying into the theme of one of my recent posts about how simplifying your financial life can actually help reduce your debt and stress levels.  Even though you are paying just a few dollars a month, or you don't have to pay until 2009, or whatever the deal may be, it is another bill that you have to worry about paying on time.  Don't you think its nice to simply pay for something at the point of sale and not be concerned with repaying debts related to it later on?

      

The very foundation of financial planning depends on one number.  Without this one number you can't save for retirement, pay off debt or really accomplish any other financial goals.  The number that I am talking about of course, is your cash flow.  This is the number that you get when you take your income for a certain time period, whether it be a week, month or year and subtract all of the money that you've spent. 

To begin to actually save money, you need to spend less than you earn.  Simply depositing money into a bank account is not saving if you accumulate a greater amount of debt.  If you're spending more than you earn, you are accumulating debt to finance that lifestyle, and there is no way around that.  Your cash flow must be positive in order to accomplish any financial goals.

If you want to have a complete understanding of your cash flow, you need to track your spending.  You need to know where your money goes, and how much of it goes there.  That is the hardest part of finding your cash flow.  The only thing that matters is that your cash flow is positive.  It really doesn't matter how much.  The beautiful thing about keeping your cash flow positive is that it makes your net worth go up.  When your net worth goes up, it can either be from increasing your savings or decreasing your debt.  The more you increase your net worth, the easier it gets to increase further.  If you put money into a savings account, you begin to earn interest.  Those interest payments add to your cash flow.  If you use your extra money to pay down debt, you will spend less on interest as a result.  The money that you saved on interest will no longer need to be paid every month. 

Every month, I go through my Quicken data and look at the reports.  I compare my net worth from month to month and challenge myself to increase it.   I tend not to update the values of my stocks for the simple reason that they have no bearing on my day to day life right now.  The main purpose of Quicken is to keep track of my spending and to challenge myself to improve my financial situation.  It is easier to follow my success and failures if I ignore those wild 3-5% swings in the value of my portfolio from day to day. 

I have also found a very strange phenomenon with my cash flow and my net worth.  The more that I manage to improve it, the more I find that I want to improve it.  I find myself trying to find ways to earn more and spend less.  I actually think that these concepts have helped me to avoid some really dumb impulse purchases.  My quest for greater net worth has led me to think a little differently when I make purchases.  I often find myself next in line at the cash register thinking that if I spend this money, its going to drop my net worth.  It sounds strange, but as a result of that, I have actually decided not to purchase some things that I really don't need. 

I think that starting to pay attention to my cash flow and net worth are some of the best financial decisions that I have made.  One of the easiest ways to spot a problem developing with your finances is to notice that you're spending more than you earn.  If you notice your spending getting out of hand, it allows you to take corrective measures before there is a problem.

      

This seems like a mundane topic, but I have been giving this a bit of thought lately.  I wonder how much of an issue this really is.  In the past, I have had my bills occurring at different dates through the month, and at that time I felt the constant need to find money.  I was always worried about coming up with the money to pay the car insurance, the car payment, the credit card, pretty much everything.  This was several years ago and I had made some very unwise financial decisions.  This is very different from the way that my finances are organized now.  At that point, my bills took up almost every dollar that I earned. 

At the present time, I have set my payment dates to be concentrated between the first and third of every month.  I find that I feel much more organized this way.  I know that I need to have a certain amount of money in my account by the 30th or 31st.  I don't spend all month worrying about the next bill that is coming up. 

Having a system in place to simplify my finances this way makes it very easy to tell when I will have a surplus or a defecit in a given month.  I think that this is one way for people to help themselves get out of debt, or save to achieve their goals.  Making things simpler reduces the opportunity for mistakes as well as stress. 

I would be very interested in hearing ideas that people have for ways to simplify their finances.  There is a service that I have heard of, that will send my bills directly to a page at my online banking website.  An email will then be sent to my inbox that tells me that the email is there.  I have resisted trying it, because its much easier to procrastinate and say I'll do it later to an email than to a bill that shows up in my mailbox and sits on the kitchen counter until it gets paid.  Maybe it would be easier to have my bills emailed to me, but I wouldn't want to try something like that and find that some companies participate and others don't.  That would complicate things and require more energy to keep track of it all.  That is my main reservation. 

Have you made any attempts to simplify your financial life?  What changes have you made?  Does anyone have experiences that they can share regarding email billing?

      

There is no such thing as a guaranteed way to make money in the stock market.  The people that say anything else just want to sell you a membership for "only $29.95 a month!"  It reminds me of a story I heard about the great gold rushes of the wild west.  Very few prospectors actually made their fortunes through finding gold.  Most of the people that actually did get rich from gold rushes were the ones that sold things to the prospectors.  Jeans, boots, shovels, etc. 

Do you see the similarities?  Everyone wants to have that one big find that makes them rich.  They want to stick a shovel in the riverbed and find more baseball sized gold nuggets than they can carry.  People want to buy a stock this morning and quadruple their money by mid afternoon.  Unfortunately, success in the stock market takes time and patience.

There are essentially two ways to make money in the stock market.  To buy a stock for a certain price, say $10 per share, and to sell it to someone else at a later time for more than the $10 you paid.  That is called capital gains.  When people think of the stock market, that is usually how they think of making money.  To buy a stock, and end up selling it for less than you paid for it is called a capital loss.  The other basic way to make money in the stock market is for the company that you own a portion of to pay you a dividend.  A dividend is when a company gives a portion of its profits back to shareholders.  When companies are smaller, and management feels that they have significant growth prospects, they often choose not to pay a dividend so that they can invest in those opportunities.  When companies get larger, and their growth prospects aren't quite as strong, they often choose to give some of their profits back to shareholders.  That has become one of my favorite ways to make money. 

I like the idea of a company paying me to own its shares.  In a way, it feels kind of like getting an interest payment from the bank.  The really great thing about receiving dividend payments is when you save up that money and are able to buy even more shares.  Once you do that, you get to keep the shares of the company that paid you the dividend in the first place, and then you can go and buy more shares to pay you more dividends.

The downside to this idea is that there's no get rich quick appeal.  I have found one company that has paid me exceptional dividends over the last year, but there are very few like it.  So far, between dividends and capital gains, that stock has earned me approximately 64% which is a phenomenal return in a one year time frame, especially with what has been happening in the markets this year.  Its still not the same kind of return as the "up 10,000% in one month!"  that I keep getting emails about. 

I think the whole point of this post is just to explain what capital gains and dividends are, and also to try to counsel readers to be patient.  Don't expect too much, but also don't allow yourself to fall into a blind panic as soon as things go the wrong way.  If you have made your investment choices based on reason, there is absolutely no reason to panic right now.  As gut wrenching as the current market events may seem, in twenty years it will be just another blip on the graph.  The stock market is having a going out of business sale.  All of the investment banks are going out of business, so almost all of the other stocks are on sale!

      

First off, I want to apologize for the scarcity of my posts lately. Since school has started again this fall and I have found my self with very little free time, and when you combine that with an unreliable internet connection (its been much better recently) with a healthy dose of laziness...well, I'm going to do my best to begin posting regularly again.

Today, I'm going to discuss the various ways that a company can be structured. It seems extremely elementary for some, but there are many that don't entirely understand how these kinds of things work.

The first and simplest way for a company to be structured is what is called a sole proprietorship. This is where a business is owned by one person. Although the business is a separate legal entity, the income of the business is included in the owners income for tax purposes. Many small businesses operate this way.

Another way to structure a business is to have a partnership. This is where a small group of people own a business. It can be as few as two, but I'm not sure about limits on the maximum number of owners. As a partnership, owners may or may not own an equal portion of the business depending on their financial and non financial contributions.

The way to structure a business that is the most relevant to future discussion on this blog is what is called a corporation. This is where the company arbitrarily chooses a number of pieces (shares) that the company will be divided into. Whether there are ten shares or 10,000,000 it makes very little difference. If the business you want to purchase is worth $100,000 and there are 1,000 shares, then each share will cost you $100. If there are 10,000 shares, each share will cost you $10. If you are going to purchase $25,000 worth of shares, you will end up owning 25 percent of the company regardless of what the individual pieces cost or how many of them you have. The advantage to this type of structure is that it allows hundreds or even thousands of people to own a tiny piece of the business for a very small financial investment.  It is also easier to sell your piece of the company if you're trying to get rid of a piece that costs fewer dollars.

There are some very specific regulations that must be met for a company to be listed on the stock exchange. With my limited knowledge, and the purpose of this blog, it is enough to say that a company must be a corporation to be listed on a stock exchange and not just any corporation can be listed.  That is pretty much where my knowledge ends.

Most orders on the stock market are electronic nowadays, and the purpose of the stock market is to match all of the people that want to sell stocks with those that want to buy. Each stock has a three or four letter ticker symbol that is essentially an assigned abbreviation for the stock market.  On the New York Stock Exchange, Caterpillar is CAT, Bank of America is BAC, McDonalds is MCD.  There are thousands of listed companies and they each have a different ticker symbol.

When you want to buy or sell shares, you enter an order. This order will say whether you want to buy or sell, the ticker symbol and the number of shares that you want to buy or sell. Shares are normally traded in blocks of 100, which is known as a round lot. If you purchase 304 shares, for example, that would be known as an odd lot, and your stock broker would charge you a slightly higher commission because it Is more difficult to buy or sell an odd lot.

Here ends my brief introduction to the stock market.  In future posts, I'm going to be discussing other matters such as the price to earnings ratio, dividends, capital gains and losses mutual funds, and all sorts of things that sound much more boring and complicated than they really are.

      

One of the television shows that I sometimes get roped into watching is Till Debt Do Us Part. I think that as reality tv goes, it is pretty good. I enjoyed the first few episodes that I saw, but I find that its not as entertaining as it was because most episodes are pretty similar. The same strategies are implemented, the numbers and people change.

When I do watch that show, it often strikes me how much money people spend on bank fees. Often it will be highlighted that the feature couple spends a few hundred dollars a month in bank fees. I can think of many things that I would rather spend my money on than paying the bank $100-$200+ per month just for the priviledge of accessing my own money.  $200 is more than my girlfriend and I spend on groceries in a month.  With $200, I could get an 8GB iPod, a low end digital camera, 6 Blu ray DVD's, 2 pairs of Nike shoes, I could put enough gas in my car to drive from Toronto to Halifax and back, almost twice.  Its a lot of money to throw away. 

How long does it take you to earn that kind of money? Often all it would take to save that extra expense is to drive an extra block or two to withdraw your money.  When I need to withdraw money, I always go to my branch, or at least a bank machine that is maintained by my bank. If I withdraw $20 or $40 at a time, the approximate $3 fee (yes, it can be that much - $1.75 to the owner of the bank machine and $1.25 to your bank for using someone elses machine.) Just to have access to your own money. That's highway robbery!  I cannot figure out how people are letting the banks get away with ridiculous fees like that.  The only thing that I can come up with is that people aren't paying attention and haven't noticed.  The funny thing is that I've heard people complain about the stores that have little signs that say if you pay debit for a transaction under $5, there's a fee.  The idea of ATM fees is really the same thing. 

Thanks to my Quicken software, I have a rough idea of what my expenditures are, and I am able to withdraw enough money for a week or two. in addition to saving bank charges, making one trip to the bank instead of four or five saves time as well.

People are willing to pay for convenience, and occasionally I am too. I just don't make a habit of it.  The banks already make way too much money, and bank charges are one expense that you really have nothing to show for your money at the end of the day.

How do you avoid spending money on bank fees?  Do you try to avoid them?  Do you have any other examples of outrageous and easily avoidable fees that merchants charge?