Thursday, April 30, 2009

The Path to Financial Success: Step# 4

Protect you greatest income-generating asset, YOURSELF

This should be your first priority in your path to financial Success. Why? Well, because YOU are your GREATEST INCOME GENERATOR and YOU should be protected to the fullest. How?

Your family depends on your ability to generate income to help pay the bills or for the education of your children. Now, imagine what would happen to them if you are not able to generate income. Surely they will experience a serious financial loss. Therefore, it is important to cover yourself with insurance. Insurance is needed only when there is a possibility of unbearable financial loss.

But how much insurance should you buy? Well, the amount you need depends on who would suffer financially in case you died. It is also dependent on how much income you provide for your family. If you live alone then it is probably wise not to buy any insurance at all. If you live with your spouse and have no children, and if you are the sole source of funding for you and your spouse then it is probably better to get insurance enough to cover all the bills until your spouse can find a job of his own. Just think of how much time he would recover from losing you. Would it be five or ten years? It all depends on you and how much you need to live comfortably. The longer the time, the more amount of insurance is needed.

If your spouse needs about $50,000/year to and he gets over you after 5 years, then you need $250,000 of insurance to cover all his living expenses.

What kind of insurance?

For protection purposes here are the best types of insurance you should buy:
  • Term life- These are life policies that you pay premium for year to year. There are no cash values for this type of insurance. The benefits of the policy are only paid out to the recipients if ever you pass away.
  • Accident- This is similar to term insurance because the benefits are only paid out if you die or when you are injured due to an accident
  • Medical Insurance- Here, you buy specific amounts of benefits for every day you get to be hospitalized. Normally, the benefits are given as a fixed amount per day for one month per year.
  • Educational Insurance- This is important if ever you have children. This will ensure their education in the future in case something unexpected happens.
These are very economical types of insurance and the best thing is that THEY ARE CHEAP considering their benefits. These protection measures are so affordable that you must make sure you are covered by these. Most people buy more insurance because of interest built with the insurance policy. Forget about it, if you want to earn money then invest it in mutual or equity funds because this type of policy costs you more that what you truly need.

Stay Healthy
Honestly, you must take care of yourself as much as you can. You must eat a balanced diet and reduce junk food, softdrinks, and alcohol intake. Also, have at least 8 hours of sleep daily to ensure that you are truly physically fit. I suggest that you exercise or have gym sessions about 2-3 times a week. However, if you truly don't have time then I suggest you WALK and WALK instead of the luxury of using cars, elevators and the like. This is what I call improvised exercise.

Be Spiritually Healthy
Why do you need to be spiritually healthy? Well, studies show that those who believe in God are able to endure trials and hardships better. Despite all the setbacks in life, learn to trust in God always and he will make the way right for you. Remember, GOD HELPS THOSE THAT HELP THEMSELVES.

Mental Health
It is important that you keep in touch with friends and family members. Talk with them, eat with them and hang out with them. This way, you can experience the joys of life and you will always have a smile on your face. Smiling is said to help improve our health a lot. So don't be gloomy and share a smile!

You should improve your knowledge on a lot of things you are interested in. Reading this blog means that you are hungry to learn how to succeed online, VERY GOOD. If you need to take courses to improve your skills then please do so. In fact, it is always good to have formal classes because it will better your credentials. Also, a passion for education exercises the mind and this helps with your overall health!

Some tips? Attend free seminars or talks and listen to the speaker. Please, do not sleep when the speaker is talking to show some respect. If you come to the seminar only to sleep, then it is better to not come at all.

Whew, this has been a tiring article. Hope you read a lot more topics about this series on the steps to financial success here on Compound Savings Interest!

The Path to Financial Success: Step# 3

Stop spending on things that decline in value

When you start analyzing the difference between your assets and liabilities, chances are you will realize you have spent a large amount of money on a lot of things that lose value over time. It is common for a lot of people to buy appliances, furniture and gadgets that we can actually live without. We thing these things are assets, but actually they are not. This is why it is very important to stop buying on impulse when something you want is for sale. Before buying, ask yourself if you really need it or not. Remember, every penny spend is another penny lost that would otherwise go to your savings.

This is why it is important to know the difference between an asset and a liability. To know what an asset or liability is you must first make a summary of your total assets and liabilities. If you keep a list of your total assets (Cash, Property, Receivables, investments and insurance) minus liabilities (Loans and everything payable) you get your net worth. Here you will find out whether your expenditures are increasing your net worth or not. "Assest put money in your pocket. Liabilities take money out."- Robert Kiyosaki.

If your are a salesman will a car be an asset or a liability? Well, most of you would answer that it is an asset because a saleman would need a car to move around and sell his products or look for new costumers. In principle, this is correct. But it may not be so in personal finance.

You may be rich is assets however it might not increase your net worth. Most of your neighbors spend and spend for a "better lifestyle" but they are not actually increasing their net worth. If they placed their money on government securities rather than spending it all the time they would have accumulated a much higher cash value for their investments. Here their money would truly grow and so would their net worth!

Some people buy and sell gold or jewelry. Some keep them for investments because, according to them, the value of jewelry over time grows faster that other types of investments. This is not entirely true. What will make it right or wrong depends on the financial situation of the investor. It is a good business if you have a good market and know which items to sell. But, if you do not have sufficient resources, you might just end up being forced to sell your jewelry at a loss to cover your expenses. The value of any asset depends on what the owner can do with it. So, ultimately, the disposition of any asset has to result in an increase in personal net worth otherwise it is a liability.

This is just the third step and we still have a lot more steps to go to financial freedom here at Compound Savings Interest.

Tuesday, April 28, 2009

The Path to Financial Success: Step# 2

Set Up Your Financial Goals

Setting up you financial goals is like dreaming you dreams. It is like imagining your wants and describing them to yourself in terms of what, when and how much. To help you set up your financial goals, Here are a couple of questions you should answer.

  1. What kind of lifestyle do you want? Are you contented with your lifestyle today or do you wish for some improvement?
  2. How do you want your lifestyle to improve? By how much more do you need to save to have a better lifestyle?
  3. How much financial comfort in terms of passive income do you want to have in the next five, ten or fifteen years? Should you prioritize insurance, investments or business?
  4. How and by how much can you augment your current income? Think about sidelines and small businesses or investments.
  5. How much can you afford to save every month? Do not think about an actual price but think about percentages.
  6. Which of your current expenses can you live without? What things are optional and what are necessary?
Now you should be able to write down your goals. First, put all your answers into writing. This way you can internalize your goals and realize what you need or what you want to enjoy in the future. Second, State it positively. Do not say "I will save $200 per month because I will not go malling or go watch movies". Instead, state it as "I want to save $200 every month for a new car soon". And last, set up how soon you want to accomplish your goals. Things like soon, in a couple of months, or sometime in the future should do it. Monitor your progress and adjust depending on some unexpected occurances.

Here are some important financial targets you should aim for.
  1. A cash reserve in case something unexpected happens such as an injury, disease or if you lose your job. It should be good enough to cover all your expenses for six months when unemployed.
  2. Term life insurance
  3. Medical Hospital Insurance
  4. Long-Term savings plan for important things such as education, pension and housing.
The ideal savings per month should be 20% of your current income. Now I know this is a lot but your expenses should adjust to this and you should find out that you can certainly life without this amount. One way to do this is to NOT think about that 20% and treat the 80% as your full salary.

Now, one way to save efficiently is to give a certain percentage of your savings to each. If you haven't finished your cash reserve then make this your primary target. like give 10% of the 20% savings for cash reserves. Then distribute what is left to your other investment goals. I know this may be hard but trust me, those 4 invesments are really important.

For more, continue reading Compound Savings Interst!

Thursday, April 23, 2009

The Path to Financial Success: Step# 1

Pay Yourself First!

This is very important. You are your first source of capital to generate investment income. For most of us, our capital comes mostly from some form of active income such as our salary, allowances, bonuses and other sidelines. You need to set aside a portion of this amount to be dedicated to savings that will generate investment income.

However, we also have other sources of capital. Our intellectual abilities could serve as our capital and should not be ignored. Remember that intellectual capital is just as important as our savings. Bill Gates, for example, only started out with his brains and now, being the founder of Microsoft, he is constantly crowned by Forbes as the richest man today. You might even be using his “Windows” operating system while reading this article! There are a lot of entrepreneurs today that only started out with their brains and look at where it got them today. Entrepreneurs starting with simple ideas that end up as multi-billion dollar ventures.

If you want financial freedom then you should start saving NOW! This is very critical because time is very important in the journey to financial success. Let me give you a tip, set aside a portion of your salary as savings instead of saving what’s left of you money. This way you can start building up your capital.

Income – Expenses = Savings (IS A BIG MISTAKE)

Income – Savings = Expenses (IS WHAT IT SHOULD BE)

Never forget that savings in itself is an expense however it is an expense that pays for your future! Most of us look at our salary as ours to spend for whatever we want. However we should actually put aside a part of our salary for our future.

It is very important that you pay yourself first and this should be a priority. Paying yourself in this instance means compensating yourself for the “use” of an income-generating asset, which is yourself.

Thus your income must first be reduced by your savings needs and what is left after is then available for living expenses and wants.

If you really look at your expenses, you will find out that most of your expenses are actually optional. If you immediately set aside 20% of your income for savings you will find out that you really can live with a budget of 80% your total income! This is because a tiny portion of our brain adapts to the circumstances once the money is actually put away. I know, it might be hard at first so start small! Save 5% of you salary this year, 10% on the next year until you reach your 20% mark!

Remember pay yourself first and start saving now and you're on your way to financial success! Stay tune here at Compound Savings Interest for more Finance Tips!

Thursday, April 16, 2009

Our Allies to Financial Success

I have mentioned the obstacles in the path to financial success. but, don't worry, you not only have enemies in your journey but you also have allies! What you need to do is to learn to use your allies to your advantage because they are just there, waiting to back you up.
  • Time
Time would be your first ally. Time, is honestly by your side because all people, whether rich or poor, have the same amount of time. Sixty seconds per minute, 24 hours per day, 30 days per month and 12 months per year. It is your ally to financial success if you use it properly. It is a great ally because it will be used in planning your path to financial success. Also, timing is of utmost importance and you should know when is the proper time to invest or divest your money to your advantage.

But, if you look around you, time seems to be taken for granted. People don't seem to understand that "one hour lost" means you can never get it back. Take for example you have an appointment and you were 10 minutes late. You not only wasted 10 minutes of your own time but you also wasted 10 minutes from another person's life! 10 minutes that could have been productive but instead was wasted waiting. Making other people wait is honestly stealing time from them, time that they can never have back!

So, next time you are about to attend a party or an appointment, be fair and be on time. Being on time is one major success attribute found everywhere around the globe. My advice for you is, be on time for appointments, always meet your deadlines, and invest your time wisely. Ask yourself if you really need to use up your time and think of the opportunity cost of your decision. Also, never forget to spend time for yourself, for those you care about, and for God. It will keep you healthy and motivate you to succeed financially. Everyone needs a break from work.
  • Compound Interest
Another powerful ally would be compound interest which, according to Einstein, "is man's greatest invention". Wealth and financial success can be achieved if we allow the power of compound interest work for us. Also, investments allowed to compound can help beat inflation and, when partnered with time, is your most powerful ally.
  • Leverage
Finally, another very powerful ally is also within our reach. It is what we call leverage. This is also sometimes referred to as "Good Debt". Dept, when used for productive investments, increases your financial return even with very little capital. Leverage in itself does not only refer to money, but to people too. When you pool resources, your gains increase while risk is lowered. Other forms of leverage are multi-level marketing and business systems. These allow you to earn on your "down lines" even without being active in selling.

These are your allies to financial success and they are always there waiting for you. Using these will ensure your success.

Next, I will be posting step-by-step guides on how to achieve financial success. With a little patience, I know anybody can do it. Compound Savings Interest believes that anyone who wants to succeed and is serious about it will get what they are looking for. Thank you for reading the blog and I hope you stay with me in the succeeding chapters here at Compound Savings Interest!

Wednesday, April 15, 2009

Why is it Important to be Financially Literate?

Financial literacy is important in the path to financial success. A lot of people who are smart, intelligent and hard-working tend to lose their money because they invest on something that they believe could help them succeed financially but end up losing it. Simply said, they lack the understanding of money, assets, and liabilities. We need to know the difference of assets and liabilities because this is one of the most common mistakes people make. They would spend on what they believe are assets when in fact they are really liabilities. Compound Savings Interest blog has seen two losses when people make this mistake.

1. They incur a loss because when they sell the product, they would not recover the same amount for that product so there would be loss of money. Also, the product would depreciate over time so the product gets cheaper the longer you hold on to it.

2. They lose the opportunity to invest the money. If you lose $1,000 because of a bad transaction, then you lose the opportunity to grow this $1,000 to $2,594 in ten years if it was invested with 10% annual interest!

This is why it is so important that you realize that every time you spend, you must take note of the opportunity cost of that transaction. Ask "If I spend this amount of money on a certain product, will it get me closer to financial success?". This is only true if what you spend on is not at all necessary or something you could live without. Please don't cut meals in order to save.

A lot of people are just tired of learning and that is a particular reason why they don't want be financially literate. They believe that only people who are graduates of business and finance courses could be financially literate. Because of this, Most people ask friends and family on financial advice and end up on a bad deal.

However, EVERYONE CAN BE FINANCIALLY LITERATE! Yes, you are included! It is actually about common sense. It is knowing what money is for and how to spend your money. It is prudent to ask know what are assets and what are liabilities, how to handle money against inflation, what are dangerous investments and how to avoid them, and what is the path to financial success. Everyone should know that this does not require a college degree and anyone who is eager to learn will be rewarded. Books, seminars and even websites such as this can help you be financially literate. I hope this site, Compound Savings Interest, can help you in your path to financial literacy and in achieving financial success.

More to come here at Compound Savings Interest! have an abundant financial life!

Saturday, April 11, 2009

Things that hinder Financial Success

Do you think that after making that first deposit on some mutual fund will mean you are on your way to financial success? Well, think again! You may have started the journey but the difficult part is the things you encounter on the way. During your path, you may fall into the temptations of life that you would gradually let go of whatever it is you may have started! You might tell yourself "This is just for this month, I will not save so I can buy a new car" but once you stop a "habit" you might find yourself forgetting it one way or another. So, in order to avoid these hindrances, you must first understand what these hindrances are.

I will now jot down the obstacles to financial success other that inflation.

1. Procrastination and being lazy
This is a habit a lot of people seem to have. Procrastination is doing things tomorrow what we can do today. It is saying "Nah, I'll do it next time" or "Maybe it can wait until tomorrow" when there is something to be done. Sooner or later that one day becomes a week, and then it will turn into a month, and next thing you know its already been a year and you still haven't done anything about it. You would say "I can save/invest next time" but ONE YEAR of delayed savings of $3,000 at 10% annual interest would lose you $137,000 after 40 years of savings!

Delayed savings may also sacrifice high yield investments that may not be available in the future. Mutual or Equity funds that reach 15-20% annual interest may only be 7-10% in the future. So, you would lost the opportunity to EARN MORE! Everyday a lot of people are guilty of this habit. We lose the opportunity to buy cheaper homes and land, cheaper loans or stocks and a lot more because of this habit. Remember Procrastination would not only waste you time, but your money as well.

Laziness is also a big problem when it comes to financial success. Too much dependence on other people often lead to laziness. Not only do we lose the opportunity to earn cash in order to invest, we also make the person we are dependent to lost that opportunity as well! we should not rely on others. Not all the time would there be someone, somewhere for us to depend to. This path to fincancial success is all about you. It should be independent of others. Remember, this is YOUR money, YOUR path, so YOU should be responsible for it.

Since this is your path to financial success and you alone. So, because of this, negative values can hinder us from achieving our goal. However, if we are determined, decisive and if we really desire to achieve financially, we can overcome these obstacles to financial success. Remember always. Losers criticize, winners analyze!

One major negative value that we must overcome is the fear of failure. Everyone fears failure. We are all afraid of making mistakes. However, people only see how they are bound to fail but not how to succeed. What we need to understand is that life is certainly not fair. We experience the good times, but we also get a taste of the bad. We need to understand that failure is a key to success. Yes, you heard me right, whenever we fail we must learn from our mistakes. We must analyze the situation and look for a way to turn it all around to our advantage. We cannot succeed unless we fail. Also, failure is a very powerful tool to motivate us to act. Remember 20% of the 2008 world billionaires started from very poor families and never even finished college because of this. Look at where they are now, enjoying all the pleasantries of life. So, don't let failure put you down but look for a way to make it push you towards the path to success.

Remember failure is not a person, you are not a failure. Failure is the key to success and to better ourselves!

3. Poor spending habits
This is one of the major habits that you must learn to control. It is very important that you discipline yourself when it comes to spending your money on wants. Look around, almost everything you see is actually optional, optional in the sense that we don't need it. Try to keep track of all your expenses for about a month or two.

You may be surprised when you look into the list that more than half of your expenses are actually unnecessary. Why is this so? Well, here are the reasons on why people spend on optional expenses.

  • Impulse Buying
People almost always end up buying more than what they intend to. This is the fault of sales and promotions for product and services in the malls. The usual "30-50% sale" in the malls never fails to attract customers. This is because customers seem think that they are saving money on spending on things that are "on sale". One important thing to learn is that we must not buy the price but the value of the product. Now, what if the product you would buy in a midnight sale is of no use to you in the moment. It would be OK if you would find a use for that product later on but what if it was never used and just lain around the house? Sooner or later these items bought on sale just end up being given away as a gift, given to charity, or left to accumulate dust in the closet. Imagine how much you would earn if you saved the money to invest in equity funds or government bonds!

  • Trend Spending
This is probably the real culprit to financial success. So many people spend their hard-earned money on items they can actually live without. I have a lot of friends that regularly update their cellphones, ipods, and laptops just because there is a new model. For women, jewelries and cosmetic products or services while men are more likely to spend money on a few gulps of beer and snacks while watching the sports channel. Let me point out that this is totally unnecessary because you can still live comfortably with what you have!

Remember that your spending habit determines your financial success. What counts is not the amount of money that goes into your pocket but the amount of money that actually stays there. You must control spending and even let go of some things in order to succeed financially. This is a value that you must practice daily. Always ask yourself whether buying a certain item puts you closer to your goal or not. Remember that this is your battle so you must control yourself and your spending habits. So go for it!

Stay tune here in Compound Savings Interest for more articles regarding the path to financial success!

Friday, April 10, 2009

Inflation: A very ugly thing

What are the things that hinder us in succeeding financially? How can we cope with these obstacles we face?

There are several obstacles on the path to financial success. But, as everything is with our financial life, the decision on what to do with these mistakes is up to us. What is important is that we learn to recognize these mistakes and accept it so that we can take action.

Inflation is the economic condition of sustained price increases. Money continually loses its value over time. As the prices of goods and services increases, the value of money decreases. So, in order to succeed financially, we should look for ways to beat inflation. We cannot run from inflation. Most of the basic goods in life are subject to inflation as it affects the basic commodities such as food, water, shelter, and in some cases fuel or energy. Inflation is a condition that will never leave us. It has been so that all the countries in the world experience inflation. It is like a disease in the world of finance.

So, how can we beat inflation?

If the inflation rate today is 6% then prices of certain key commodities increase by a rate of 6%. So, in order to combat inflation, we must make sure that our income, savings and investments should be above 6%. If we invest our money on a savings account with 4% annual interest, we lose. This is because we cannot buy the same amount of goods this year as we did last year therefore reducing our purchasing power. This is probably the main reason why savings accounts are not good investments and must only be used when you need to keep your money and use it after a short amount of time.

It is not enough just to save and invest in something with an annual return. We must have investments that are above the inflation rate so that we can beat inflation. This is important because we could not achieve financial success if our savings depreciate over time thus lowering purchasing power. The sad part is that most investments today simply just breaks even or sometimes lower than the inflation rate. This is due to the global financial crisis that the world is experiencing today. So remember, always keep your money where it could EARN.

There are a lot more hindrances to financial success which I will discuss in the following chapters. So, stay tune in Compound Savings Interest.

For Compound Interest to work, Time is Important!

Let us have another example of compound interest along with the power of time. We have two friends, Mike and Rey are two close friends of the same age. Mike, being taught the virtue of savings sooner, started saving $3000 every year with 10% annual interest at the age of 18. He stopped saving at the age of 26 but left his savings intact. Rey, however, started saving $3000 a year at the age of 26 and invested it with 10% annual interest until he retired at the age of 65. After retirement, it’s surprising to see who has more money.

Mike, saving from 18-26 has invested only $24,000 by saving $3,000 yearly for 8 years. He allowed his money to grow for a total of about 48 years. Rey, on the other hand, invested a total of $120,000 saving from the age of 26 till retirement at 65. He also left his savings remain intact in all those years.

Upon retirement, Mike would actually have more money than Rey. He would have a total of $1,707,994 while Rey would only have a total of $1,460,555! But, didn’t Rey save about 5 TIMES MORE that Mike? Well, the key here is that Mike saved EARLIER. Time, it may seem, is a really important part of investing in compound interest. It is not about how much you save but when you save that matters! TIME is more important than the AMOUNT!

If you would like to learn more about Compound interest, stay in touch in Compound Savings Interest!

Thursday, April 9, 2009

The Power of Compound Interest

"man's greatest invention is compound interest" - Albert Einstein

Compound interest gives money the opportunity to grow all by itself. By using compound interest we "don't work for money but we let money work for us". You leave money in investments that give you good returns and it will grow all by itself. Just like a little plant, you leave it alone and come back after years only to find out that it just isn't a plant anymore but a large tree.

Let me give an example:
You have $10,000 right now but you don't know how to spend it. So, you placed the cash on an investment that earns 10% interest yearly. So, you will be receiving $1,000 a year and if you take that money and use it, you will be left with the same $10,000 you began with. Ok, lets say you decided to leave that $10,000 alone to grow. After 10 years that $10,000 would be $25,938! Even better, after 15 years it would be $41,772! So, if you took the yearly interest, you would benefit only $15,000 however if you leave it alone you benefit $41,722 after 15 years. That is more than DOUBLE the amount in which you would have received if you took the yearly interest.

This is the power of compound interest. It can make you earn a lot more than just saving the money!

Let's say you save $100 per month earning 5% yearly for 40 years. By the power of compound interest, it will grow to about $152,000 and if you double it to $200 it will simply be doubled to $304,000!

At 10% interest rate, saving $100 a month would earn $620,000! That is Quadruple the amount of the 5% interest rate! Ok, now can you see the power of compound interest?

And on top of all that, you are not taking high risks when you use the power of compound interest. You just need to know how to use compound interest at your advantage! Your key here is TIME and CAPITAL money. They more time you let the money grow and money you put, the larger the amount would be! Just make sure to look for investments that has above 10% interest rate in order put your savings into good use!

I will be adding more posts soon! To learn more, keep in touch here at Compound Savings interest!

Compound Savings Interest: Policies

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Wednesday, April 8, 2009

The Importance of Financial Planning

What is personal finance? How do you let money work for you even after you retire to live the life you want to live? How do you want to live your life 20 years from now? 30 years from now? When you retire at 65 and later?

I want to share with you the path to financial success through this blog. These are lessons taught to me by friends, wealthy relatives and more importantly, people who have earned success. Just stay with me and read a couple of my entries in Compound Savings Interest and I promise you would be on the way towards financial success.

A lot of people believe that in order to achieve our goals in life, we need to earn a lot of money. This is not entirely true since anyone, as long as they have the proper discipline, can achieve financially. The most important thing to consider is the need to plan your finances for the future. You would need to set your financial goals according to how you want to live your life when you retire. What people do not realize is, the more money you earn or the more cash you have the more problems they will face. This is because the more money we have in our pockets, the more confident we are that it will never run out. THIS IS THE WRONG WAY OF THINKING AND WILL ONLY LOSE YOU A LOT OF MONEY.

If your problem is your inability to manage your earnings, no amount of earnings will solve your problem. They key to financial success lies in knowing:
• What are your financial needs.
• How to manage your savings to produce passive income
• Knowing the power of Compound interest and using it to your advantage

What you need is to be financially literate and to commit yourself to plan and monitor your
financial progress.

A lot of people have gone into business and investments that generated a substantial amount of earnings for many years, later they end up losing more than all they have ever gained. These are people who may have been doing well but do not know how to manage their personal and business finances. Hard work and perseverance are not guarantees of financial success.
So, stay with me as I explain the path to financial success with you and explain the benefits of compound savings interest.