Monday, May 25, 2009

The Path of Financial Success: Step # 7

Invest and Diversify

Wow, It has been a while since my last post here. I am quite busy with life at the moment and I have another blog to manage. So, sorry for all of you who has been waiting for the 7th step to financial success here at Compound Savings Interest.

Diversifying means that you are spreading the risk in an investment. Because there is always some risk involved in every business and investment opportunity, it would be wise to spread your money so that you don't lose it all once the market begins to crumble. Prudence demands that, whenever possible, you should actually spread the risks. Remember there is no such thing as a perfect business and so many things can go wrong! So, make sure that the investments you make are properly matched with controlled risks.

Always remember this when you are evaluating business or investment opportunities. Investing is not simply looking for opportunities. Investing must always match a specific purpose! When you invest, you must know what you are doing. Your expectation of investment returns should be very clear as to the amount and time of income.

But investment is not only about the amount of income. You must also try to understand what an investment return, or yield is. A yield is the percentage return that an investment delivers based on the amount of principal you put in. It is usually calculated per year.

In every investment, you must evaluate it in terms of:
  • Return/Yield - How much do I get from this investment? Is it enough for me? Does it beat inflation?
  • Safety of Capital - How safe is this investment and how large is the risk of losing my capital? Is it worth it to have an investment of higher returns but with higher risk? Can I afford to lose my capital/
  • Liquidity - How long will it have to be before I can take my money out if needed? Can I convert it to cash anytime I want?
Then ask yourself these next set of questions:
  • Why am I interested in this investment? What is the specific goal that this investment will achieve?
  • Will it bring me closer to my desired net worth and by how much closer?
  • How much of my investible funds or present net work am I putting at risk with this type of investment?
  • Do I have to decide now? Will this investment opportunity continue to be available tomorrow, next week, next month, next year?
  • Is the financial return or income I stand to gain commensurate the risk I am taking with my money?
These are the questions you need to ask yourself in order to help you choose the proper investments and to know when to diversify. If you are about 50 years old. It would not be wise to put a majority of your money in stocks, but you should put it in bonds for safety. If you are young, you should put most of your money in stocks and less in bonds.

The percentage of your investment capital all depends on you. However, it is not wise to put 100% of your cash in stocks or 100% in bonds. It would be very wise to diversify. For example, you should place 70% of your money in stocks and 30% in bonds if you have a long way to go until retirement. This involves a much higher risk that putting 70% in bonds while 30% in stocks. But when you are still young, stocks normally beat the market and have higher gains on the long run.

What you diversify all depends on what your need is. Just don't take out your money every time there is a little twitch in the stock market since there would be an ugly tax on your capital. Just leave it be and trust in the power of compound interest!

Ok, I'm done with Step # 7. I hope you continue reading the articles here at Compound Savings Interest. Comment are very well appreciated!

Tuesday, May 19, 2009

Let's discuss scams

Why do people get victimized by scams? Very often, people fall victim to scams simple because they are not really clear on what they want. They tend to have this general idea of earning a little more money than the usual returns when investing.

Here are two basic rules that would teach you IF you should take out money to buy a product or to invest.
  • The personal reason on why you want to invest.
  • Is the company making the offer legitimate and credit worthy? Generally, scams offer very attractive and unbelievably high returns. Most likely, when you encounter an offer like this you would raise your eyebrows and ask "Is this too good to be true?". If this is your impression on a certain offer, then it would probably be 99% correct. IT IS TOO GOOD TO BE TRUE.
But what are the personal reasons I am babbling about?
  1. What is my interest in joining this network?
  2. Will I buy the product because I need it?
  3. Will I buy it because it is only available in this network?
  4. Will I buy it because I am getting a spectacular discount?
  5. Does someone I know need it?
If you answered NO to all of the above or if it is clear that your interest is not to buy but rather to make extra income. Then here is another set of questions.

  1. Will I earn extra income selling the products?
  2. Is the product worth the time and effort I must exert to earn extra income?
  3. Will I have the time and talent to spend for this product?
If you answered NO again, you should definitely walk away and save yourself some time and money.

It is very important to be clear and sure about your personal purpose in putting you money in a certain offer. You definitely should not put out money unless you are clear on what PERSONAL OBJECTIVES OR BENEFITS you stand to make out of the transaction. You have to be very clear about what you can expect to recieve and, more importantly, what you have to personally invest in terms on money, time and talent.

However, if your answers are YES and you want to earn extra income because the offer is very attractive, study the system a little bit further. Pursue the specific objective of finding out whether the offering is, in fact, based on sound business operations, whether or not it is legal and whether, in fact, the compacy and the agent making the offer are duly licensed.

Why be absolutely sure? Well, it is only to protect yourself from becoming a victim of unscrupulous individuals and companies. They set up businesses for the sole purpose of deceiving investors usually with a promise of high returns. Many people have fallen into the trap of investing their hard-earned money in pyramiding schemes disguised as legitimate multi-level networking marketing firms. Here are a couple of questions you need to ask before finally making the judgement call to invest you hard-earned money.

  1. Is the product something that will benefit a person and is legitimately priced?
  2. Is there a transaction? Is there a document or contract outlining details of the transaction that you can understand?
  3. Is there an actual cash outlay? Do you have to pay a certain amount before you can be a party to the transaction?
  4. Is the money being "pooled"? When the money goes into the business, is it kept in the business for the business?
  5. Is a third party managing the pool of money?
  6. Is there a reward or profit?
If you answered all of the above questions as yes, then the product in an investment product or a security. These fall under the jurisdiction of the Securities and Exchange Commission (SEC).

Do not be content with the Articles of Incorporation issued by the SEC, which most investment proponents present proof of their legitimacy. These are just like the birth certificate of a person and is not valid proof.

A legitimate company should also:
  1. Register its investment products with the SEC.
  2. Secure a specific license from the SEC to sell them.
  3. Secure a specific license from the SEC for each of their agents to sell them.
Ask for a copy of their product registration as well as the company's license to sell them to the public. I will be listing down the scams here later on. Hope you continue reading Compound Savings Interest for more articles!

Saturday, May 16, 2009

Understanding a Loan

What is a Loan and What is an investment?

This is very important that you ask yourself "Am I lending my money or am I investing it?". A lender typically requires the payment of interest and the return of the principle amount he lent out.

What is a Loan?
Usually, a borrower must give a collateral to the lender to secure the loan. Banks would normally ask for cash real estate collateral equal to 170% of the loan amount. Understand that a responsible bank does not give out loans just because there is adequate collateral.

The only correct basis for the grantingof loans is the ability of the borrower to prove that he will use the proceeds of the loan in an activity that will produce sufficient income to repay the loan.

To make sure the lender gets his money back, he only gives out when:
  1. The borrower has more than enough sustainable income to pay the load plus the interest.
  2. The lender really does not mind foreclosing on or taking over collateral.
If you want to be a successful lender in the future, you should follow this practice. Never lend money just because there is good collateral, unless you want that collateral at the price of the loan you gave. Just make sure you know that the price of collateral depreciates in value over time.

How about an Investment?
Investing in a company effectively makes you a partner in the business. The money that you put in as investment or capital is called equity (yeah you learned this word). This equity, whatever the amount, will be at full risk. Simple. You make money when the business makes money and you lose money when the business loses money. In investing, usually the institution/s offering such investment products do not guarantee earnings and return of the principal. They make best estimates based on extensive financial and operational studies conducted by reputable professionals.

Usually, the value of your investments rises or falls, depending on the profitability of the business you invested in. However, there is an added risk in the stock market. The values of the best stocks in the market fluctuate. These could go up or down, sometimes based on rumors, sometimes based on facts. So, you can never be 100% sure that you will earn money. The selling price (real value) of a stock is ultimately dependent on the investing public. Later I will tell you what stocks to invest in to earn money!

When you invest in shares of stocks that aren't listed on the stock market, the ability to take out your money is somewhat limited. There is no established way to withraw your investment when you need it (another reason to keep an emergency fund). Generally, you become dependent on the controlling shareholder and/or the management if you want to sell your investment.

Each private investment transaction is unique. Each one is different from the other. If you invest in a private offering, you must make sure you understant:

  1. How income is generated
  2. Who else is investing on this business
  3. How can you get back your investment when you need your money back.
Just remember these and your money will be safe. Later, I will talk about index mutual funds that generate good returns. So stay tune here in Compound Savings interest for more investment tips.

Wednesday, May 13, 2009

The Path to Financial Success: Step# 6

Assess risks and options: The higher return, the higher the risk

As an investor, you should know that all investments come with risks. However, you can help reduce risk by knowing how to use both time and compound interest at your advantage. You need not put your well-earned money in jeopardy, so read on the rest of the chapter.

Keep in mind the risks involved every time we enter into any transaction. Always remember that there is NO SURE INVESTMENT and that all investments carry risks. When you are offered the opportunity to invest in something, you are practically being asked to lend them you money.

It is important to assess risks as carefully as we can. All investment opportunities come with corresponding risks. So, before engaging in an investment, ask yourself first whether or not you can really afford to lose the money you are investing, just in case an investment turns sour. A perfect example of a high-risk investment would be stocks. Stocks give the most returns but are also the most risky investment. This is because the stock market constantly shifts so returns are unbalanced.

Apart from understanding the risks in a given investment, you must also have a very own risk profile. Risk profiles differ with age, health condition and financial obligations. The extent and timing of the risks you take must be consistent with your financial goals. For example, a man in his fifties in not recommended to invest in high-risk investments such as stocks but should rather invest their money in government bonds in order to protect retirement money. A person in their twenties should not be conservative with their money but rather be aggressive in their investments and put money primarily in stocks, say 80% in stocks and 20% in bonds. This enables maximum growth given he would not remove his money with every little twitch in the stock market.

Successful investing requires that the investor's risk profile matches the type and extent of the attendant risks in a given investment. So, asses the risks involved every time you make choices in your path to financial success. Be Smart!

Here is a couple of risks you would probably encounter:

  • Risk of inflation - This would probably be the most popular type of risk. We know that money is an ever declining value so we must invest money on investments that grow beyond the inflation rate
  • Risk of non-payment - This has to do with the financial credibility of the company or of the person you making the investment offer. You should look at their history for proofs of payment or look into their company profile to see how the company fares.
  • Risk of liquidity - When you invest, you should be absolutely sure you won't need the money until retirement. Liquidity typically means how fast you can take out the money in case you need it. Some investments require a certain period of time before the investment matures so check the liquidity of the investment so make sure you can do without the money until it matures. In case of emergencies, you should stash money on a savings bank account as previously recommended.
  • Risk of new taxes - Taxes are your worst enemy when investing. Over time, the government may decide to impose a new tax. So, ask yourself what would happen to your investment if ever a change in taxation would occur.
  • Business risks - This has something to do with the market, production and finance risks relevant to how the business produces the product or service and how it is financed and delivered to the consumers. How stable is the business you are investing in? Always ask yourself if the company has a sufficient history of profitable operations. Start-up businesses often end up as scams so you need to find out if the business has sufficient sources of financing for equity and working capital.
  • Fraud or Scam risks - This has something to do with the integrity of the business process and how it is documented. As yourself If the investment documentation is complete and legally binding. Find out whether the margins of its products provide for all the overhead and marketing expenses.
  • Foreign exchange risks - This has to do with the devaluation or revaluation of your currency. You need to understand this factor as it relates to the long-term valuation of your investment.
Be careful in choosing the right types of investments. One technique to reduce risk is by diversifying you investments which will later be discussed. I will also discuss later the best types of investments you can have. So stay tune here in Compound Savings Interest for more tips. If you are interested in what is being written here, kindly subscribe to our feed. Thank you and happy investing!

Friday, May 8, 2009

Some Investment terms you just need to know

Hi to everybody! Well, I just got back from a couple of days vacation. For those who are waiting for step #6 in our series, I am so sorry because I will first tackle on important words you need to know when investing or when talking to financial advisers. I promise to make it a very short list so just stay with me for a couple of minutes. Smart and sensible investment choices can be fully explained using these words.

  • I'll start the topic with stocks, the investment you hear about the most. Stocks represent a tiny bit of ownership in a corporation. If you own 100 shares of Apple, for example, you own 100 bits of its profits, dividends, and its underlying value. When a company excels in the market, the market price of its stock goes up. If the company is not doing well at all, the price of its stock goes down. You won't know how a particular company's stock will perform in the long run. But, stocks tend to build more wealth than other investments do and because of this most investors put a large sum of money there.
  • The general word for ownership interest is equity. When you say "I have invested in an equity mutual fund" or "I have invested in equities", this means you have invested in stocks or have bought stocks.
  • A dividend is a small piece of profits that companies pay out to investors.
  • Bonds represents debts. When you buy a bond, you are lending money to the entity that issued it may it be a government body or a corporation. You earn interest which is usually paid out twice a year.
  • Bonds are scheduled for a fixed period of time. At the end of the period, the bond then matures. This means that you will get your money back. When the issuer repays before the bond matures, this is known as a call.
  • There are a lot of different kinds of bonds. Treasury bonds are bonds issued by the federal government. Municipal bonds are issued by cities, states, or various public authorities. Corporate bonds are issued by corporations.
  • A mutual fund is a big pool of money, contributed by thousands of people who invested in it. The manager of that money invests it in stocks, bonds, or even both. Your share in the fund gives you a tiny ownership in all the fund's investments so you are actually spreading your money around. As a mutual fund shareholder, you receive a piece of the dividends that the fund's investments earn.
  • A security is a term used for a "paper" investment, such as stocks or bonds as opposed with "hard" investments such as golds or real estate.
  • An asset is anything you own that has monetary value. All your investments and bank accounts are considered assets. So are your home, cars, jewelries and any other real estate investments.
  • Asset allocation is a term used to describe how you have split your money among various types of investments.
  • Diversification means spreading your money over many different kinds of investments. Doing this reduces risk because when one market value goes down, another will probably go up.
  • Your portfolio refers to all the investments you own. It is a word that means "everything".
  • The market refers to the activity of buying and selling products or services.
  • A trade happens when you sell a certain stock or bond and buy another. The buyer believes that the price of the stock is going up while the seller thinks otherwise.
  • The economy refers to general business conditions and everything that affect our spending and our standard of living.
Well, there you have it. Throw in a couple of these words out when talking about investments and you'll probably get through without being cheated at. This is to help you out with advisers who guide you to investments with FAT, Hidden fees.

Well, I'm going to write Step #6 next so please stay with me here at Compound Savings Interest!

Sunday, May 3, 2009

Tips on staying healthy

Ok, let's take a little break from this long series about financial success. If you have been reading the blog, I mentioned in Step #4 that you MUST, no you SHOULD keep yourself healthy. This is to protect your greatest income-generating asset, YOURSELF!

Now let me present to you a couple of practical ways to stay healthy and save at the same time!

Here is the list:

1. Cut costs on softdrinks, juice, and other treats- I know for sure that it would be difficult for you to stop drinking your daily dose of coke or juice everyday but this certainly is a must. If you are attentive with what you drink, you will notice that one CAN of coke is about 140 calories. One can has about 39g of carbohydrates, but observe the nutrition sheet well because the 39g of carbohydrates is actually 39 of SUGAR. No wonder a lot of people are obese today! They pay to drink sugar!

It is actually the same for almost all drinks. Almost all drinks are made mostly of sugar for two reasons. Sugar is cheap and everyone likes it. Drinking sweet things often leads to the drinker looking for more. This is because our thirst is not fully satisfied.

The alternatives: Water and healthy fruit drinks with NO SUGAR ADDED. This is important because our body adapts well with artificial sugar. However I would advise you to drink water because water truly quenches thirst, and it's 100% NATURAL. Also, by drinking water you not only benefit yourself because of less sugar intake, but you also benefit your wallet because water is so CHEAP!

2. Exercise- You've heard this a million times so let's make it into a million and one. You should excercise your body to keep it in shape and also to work up your muscles. I would recommend gym sessions but it should not be entirely so. There are plenty of ways to exercise your body without going to the gym and having serious gym sessions!

Here are some tips:
  • Push up a few times daily
  • Sit-up a few times daily
  • Walk Briskly
  • Use the stairs instead of an elevator or an escalator
  • Stretch your body when you wake up
  • Strech your muscles throughout the day
  • Don't be a whimp! Walk short distances instead of riding a vehicle!
  • Jog on Saturday and Sunday mornings when your free
  • Be engaged in sports
Well, those are just some of my tips. Remember this not only keep you healthy so that you can continue to earn money but it also gives you a sexy shape. After reading this article, stretch a little bit or do about 5 push-ups. It won't hurt. Soon, It'll just come out of habit.

3. Quit Smoking and Drinking- To be honest with you I am not a smoker. I believe smoking is a serial killer and that smokers should stop. This is also one way to cut costs and keep your body as healthy as possible. It would also help you buy insurance because smokers pay more money for insurance JUST FOR THE FACT THAT THEY SMOKE! So, stop smoking and pay a little more attention to your health!

As for drinking, just do it moderately. Here is a tip, don't drink for fun or when you are on your own. Drink only on special occasions when you are with a couple of friends, family or in important corporate meetings. This is what I call social drinking. It keeps off the beer belly but it still gives others the impression that you aren't a whimp.

I may edit this post if I remember something important to share. But keep in touch with Compound Savings interest for more articles of financial freedom!

Friday, May 1, 2009

The Path to Financial Success: Step# 5

Grow with the economy and beat inflation

What you guys should really understand is that money is an ever-declining value. You must always remember that you are working against time and money.

Now, you must make sure that your investments earn more than the inflation rate. It is not enough to start saving. You must also consider where you are putting your money. If you leave you money on a savings account, or lying on you pockets, you lose the chance to earn income and your cash also loses it's value. Double trouble right? So, put your money in an investment that should always generate an income that is higher than the inflation rate. This is how you can maximize the effect of compound interest.

Estimate your desired Net Worth
One way to plan for your financial future, given the reality of inflation is to make projections of how much your net worth should be by the time you retire. Let us say you are about 20 years of age. You are earning $130,000 annually and you want to maintain this purchasing power when you retire at the age of 65.

To be able to retire with the same purchasing power, you should know the equivalent of your present income at age 65. This amount is what your net worth should be earning at the time. Therefore, you should aim to build your wealth to this amount before retirement.

At 5% inflation rate, the equivalent of your present annual earnings of $130,000 is $1,168,050 when you are 65 years of age. At an earning rate of 10% per year, your Earning Assest or investments should be $11,680,500! This means that by the time you retire, you should have $11,680,500 worth of investments to live as you are living now! And if you start at 20 years of age, you have 45 years to achieve it!

Here is a tip, if you start saving at 20 you only need to save 11% of your income annually to maintain how you live today. This amount increases to 15% when you reach 30 and 22% when you reach 40! Now how can you save 22% of your income if you have children and are educating them in high school or college? Well, I have some healthy advice for you. The earlier you start saving, the more peaceful your life would be without worrying about retirement. Remember that delaying savings or cheating it is like "planning" for a diminished standard of living when you retire!

Whew, done with the 5th article.. I'm gonna be writing the 6th one soon so keep in touch here at compound savings interest!