Text Link Ads

Wednesday, July 4, 2007

The Savvy Investor

You can't invest your money wisely-and become rich-without first understanding and then applying sound financial concepts.

When author Robert Kiyosaki discussed how ordinary people could achieve financial freedom by understanding how money works in his Rich Dad, Poor Dad book series, he quickly gained a following. Kiyosaki, a Japanese-American investor and businessman, is also the inventor of the board game Cashflow 101, which teaches the financial strategies that allowed him to get rich and retire at age 47.

'Most people don't invest because they don't understand financial concepts: they don't like to deal with figures.'

In Cashflow Quadrant, Kiyosaki describes seven levels of investors, beginning with the big spenders on level zero and climbing up to the savvy investors on level six. Each level characterizes an investor's attitude toward money and spending, with those on level zero having nothing to invest and the borrowers on level two having debt attached to everything they own: they're either slaves to their credit cards or use borrowed money to spend or invest. (On the other hand, the savers on level two often prefer low-risk and low-return investments, and believe in paying in cash for fear of being in debt.)

Investors in level three (divided into smart investors, cynics and gamblers) are intelligent people with solid education and resources to invest, but lack financial literacy to understand how investing could work for them.

Long-term investors fall under level four: they understand the fundamentals of finance and are actively involved in investment decisions. The sophisticated investors on level five have a track record of failures and successes, but pack enough wisdom and drive to keep investing. Capitalists on level six become excellent businessmen using other people's money, talent, and time to get rich.

What separates the rich from the poor is their ability to acquire assets that generate money for themselves. If you can't tell the difference between asset and liability, you may be setting yourself up for a life of financial trouble and ending up like half the adult population on level zero: people who have nothing to invest because they spend more money than they earn. Tan says you should work your way up to at least level four and gain a working knowledge of financial concepts (income statement, balance sheets and cash flows, etc.) in order to make the shift.

In his book, Kiyosaki also introduces a quadrant showing four types of people and how they make money. On the left quadrant is the employee who works hard for his or her salary, and the self-employed who works for himself or herself. On the right side are the business owner, who generates money from his or her ventures, and the investor, whose earnings come from the money he or she has invested. To amass wealth, it is necessary to shift from the left quadrant to the right by coming up with an investment plan that rivals that of the rich.

Going into business is a good way to start making money as it serves as training ground for applying the fundamentals of finance. (You may also seek advice from competent financial planners or attend seminars to bone up on financial concepts.) Once you've acquired enough financial knowledge and money, you may move on to higher levels of investment such as real estate and stocks. The risks may be high, but the returns could very well allow you to retire earlier than you expected.

Monday, June 18, 2007

7 Cures for a Lean Purse

1. "Start thy purse to fattening." - "For every ten coins thou placest within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul."

There is no Santa Clause, there are no tooth faeries, and a large pile of money is not going to fall in your lap. If you keep ten percent of everything you make for yourself, over time, your purse will begin to fatten. This is largely covered by the first Law of Gold, but is important enough to briefly emphasize again. The only way your purse will fatten is to set aside 10% of all money you make.

2. "Control thy expenditures." - "Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.

The amount of money a person makes is important, but it is secondary to the degree to which that person controls his expenses. Budget and plan your expenses earnestly. Demand value for the dollars you spend.

3. "Make thy gold multiply." - "Put each coin to laboring that it may reproduce its kind even as flocks of the field and help to bring to thee income, a stream of wealth that shall flow constantly into thy purse."

4. "Guard thy treasures from loss." - "Guard thy treasure from loss by investing only where thy principle is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom
protect thy treasure from unsafe investments."

If you're going to throw any money towards risky investments, do it with the money you have not set aside for debts or savings. If you have money beyond the 10% savings to throw away, and you have no debt to pay off, you should set up another savings account, and pop a percentage into it. Use that for your hot stock tips, or risky investments. Never jeopardize your true savings by loaning it to friends, family, gambling, or risky stocks.

5. "Make of thy dwelling a profitable investment." - "Own thy own home."

A house is arguably one of the best investments one can make. It certainly ranks in the top 3, and you'll still find people arguing to have it in first place. If you spend 10 years in a house, making regular payments on it, you own a good portion of that house. You can sell it, usually for a huge profit. If you live in an apartment for 10 years, you own no part of it. You can't sell it, you can't modify it, and you have gained nothing. A house is every bit as much of an investment as an IRA, stocks, and savings accounts.

6. "Insure a future income." - "Provide for in advance for the needs of thy growing age and the protection of thy family."

You won't have your health forever, and sometimes bad things will happen. Insurance, while sometimes costly, is not a scam. Get insurance. Get home insurance, get car insurance, get health insurance. The savings in health insurance alone are immeasurable later on down the road. aside enough that you can live comfortably off the interest alone. And when you die, your children will have a nest egg to start their own wealth off with. Thus brings us to another point in this: You must teach your kids these rules if the success of your riches is to pass from generation to generation.

7. "Increase thy ability to earn." - "Cultivate thy own powers, to study and become wiser, to become more skilful, to act as to respect thyself."

In time you will be able to look at everything in terms of how much money it can make for you, and since you will have very few money problems, you'll probably have a lot of free time on your hands. If you have a hobby, it can usually be turned into money. Got a passion for art? Start collecting works by talented painters who are old. Got a hankering for golf? Enter competitions. Got some great ideas? Start typing and write a book. You can enjoy life, and even manage to profit off that enjoyment. Our single greatest asset is time, and if you use yours wisely, you will have more money than you will know what to do with.