Category Archives: personal finance

Personal Finance: The Five Principles

I like to hear about success stories, and here is a good one

For the past five years, (a teaching group) has challenged their students to collectively squirrel away $100K over the course of a single semester—and most years, students surpass the challenge.

It sounds too good to be true and it may indeed be too good to be true. And yet, it is still inspirational. How to get started down this path? Here are the five principles the teachers believe in

  1. There is no one size fits all formula – we are all different
  2. Time is Your Biggest Ally – You need to save less is you start earlier
  3. Don’t Make Imitation purchases – Don’t try to keep up with the Jone’s. Buy what you need and can afford
  4. Talk money with your significant others – You don’t get rich alone. Instead, you do well when you collaborate
  5. Don’t worry about mistakes if you follow process – You will make mistakes. But you can get beyond them if you understand the bigger picture

These are rather general, but I think a nice foundation

Personal Finance: What Do You Need to Retire?

Before I write this, a brief caveat. I do not like the word “retire”. I do not think that people should aspire to “retire”. Why? Because the word retirement implies that you stop doing things.  That you just walk away from the things in life that sustained you for a long, long time. I think that it is healthier to think in post-career terms. You may stop doing brain surgery. But should not stop using the knowledge and skills that you built up during the time when you did that. Having said that, it is still a good idea to calculate how much money you would need if you stopped earning money altogether. How do you do that? Motley Fool offers a nice guide.

The conventional wisdom is that $1 million is the right goal.But you may be able to retire on less. Here is some advice on that topic.

Personal Finance: How to Become a Millionaire

In fact, becoming a millionaire these days is not that big a deal. It is doable. But how? Well, there are a few golden rules that can help you. They have to do with saving — or as you might say “paying yourself first.”  but the bottom line

If you really want to know how to become a millionaire, you need to find a way to provide value to other people. You must create a product or a service that others will pay for. Ideally, you should create a system where – once the value is created – you can continue to sell it over and over again. This is what is known as a passive income stream.

Personal Finance: Creating Passive Income

For most of my life, I have been working to produce active income. In other words, like most poor slobs on the planet, I worked for a living. I got paid for what I produced. In my case, this was mostly in services rendered: advisory services, management services, consulting and teaching.  I didn’t think much about creating passive income.

Passive income? Passive income is generated from assets that themselves provide a return. That might be in royalties, rentals, or just appreciation. So you might ask, just how does one develop strategies for producing passive income? If this interests you, here is a nice blog post on the subject.

When Dreams Get Out of Control

Thanks to my friend for sending me this link!

You have probably heard about “unicorns”. They are startups that race up to pre IPO billion dollar valuations.  Fred Wilson posted the other day that focusing on valuations this way is not a great idea.  He was a bit more direct

I hate the word unicorn. It’s using fantasy to describe something very much reality. But I don’t want to digress from the larger point I’m making to go down the unicorn rat hole. Just please don’t use that word around me. I will likely throw up and that won’t be pleasant.

Heidi Roizen lays out a fictional scenario that gets into how this all can go very wrong.  You may not be in the VC business. And you may not be nurturing dreams of becoming a unicorn. But if you are building value and have hopes to scale, it is worth spending a few minutes to get straight how to measure tha success.

Personal Finance: Measuring Your Position

Peter Drucker said it a long time ago – you cannot improve what you do not measure. In thinking about personal finance, our goal is to improve our position. Right. So what are we measuring?

Motley Fool offers 3 measuring tools that are worth knowing. They  should not be used to impose hard and fast rules. But they are useful guides to  assess whether your overall position is improving. The tools are

  1. Your liquidity ratio (divide the overall amount of your liquid assets by your monthly carrying costs)
  2. Your debt service ratio (the amount you must pay per month divided by your income before taxes). You can look at this as a percentage (and banks would recommend that you keep this below 40%) or in raw dollar terms
  3. Your assets to equity ratio — or leverage ratio — (dividing total assets by net worth). In the best of all worlds, you want this to be under 4.5 and declining over the course of your working life.

In a perfect world, you are liquid enough to cope with emergencies, with a manageable debt service ratio and are not highly leveraged. You can get into trouble  any of these if you are not prudent.

Personal finance: Financial Services for Millennials

This is a rather startling quote from a Forbes article

Given that Millennials are projected to inherit at least $41 trillion through mid-century, their financial behaviors have the potential to redefine financial services and transform how financial services companies interact with their customers,

this might not matter if millennials will act like their parents. But according to a recent report, they may not. The key difference appears to be a demand to take more control rather than sit back and let a financial manager make all the decisions.

This may or may not be a great approach to financial management. For example, if you have a sufficient asset base, plopping your nest egg into an index fund like Vanguard and letting it ride is not a bad option. But for better or worse, my guess is that a significant portion of millennials will reserve at least a portion of their nest egg for personal investing – whether in startups, buying assets, or just kickstarter campaigns. So social networks geared to helping these folks out are probably in a growth market.

Which ones are best?  I know of one off the top of my head – Motley Fool. I will be tracking this and other platforms here. Stay tuned!

Personal Finance: How much do you save?

BI offers some sensible advice on how much to save: there is no one single answer. We are all different. Having said that, there are a few things that we all have in common.

  1. We all need “investable funds” – In other words, we need a certain amount of liquid or semi-liquid funds that we can use when we spot the right opportunity. How much? Well, that depends on what types of opportunities you are looking for
  2. We all need appreciating assets – We are not likely to experience rapid deflation in our life times. This means that cash and cash equivalents lose value the longer you hold them. But not all assets are like that.  We all need to make reasonable bets by acquiring and protecting our appreciating assets.
  3. We all need social as well as financial resources – Amassing a big pot of money for retirement is not going to give you a great life if your retirement means being isolated. Investing in connections that will enhance the quality of your life is not optional.

Personal Finance: The Great Mortgage Payoff Debate

There are nice aspects to having a mortgage. I am thinking primarily of the ability to buy something when you don’t have the cash as well as the tax deduction for the interest payments. And there is something nice about owning a place as opposed to throwing money away on rent.

But as the years go by, you may find yourself in a position where you might be able to pay off the mortgage early. Should you go to the effort? Some have argued that you would be better off using the cash to invest. Here is the counter argument.

I do agree with one part of this argument. It is great to have financial goals. They transform your thinking from “can I?” to “How can i?” And it would be nice to live with a reduced monthly cost basis.  You would be less tied to higher paying jobs that you may not like.

Will I pay off my mortgage early? I could. But so far, I have not done so. I am more interested in investing. But that might change.

Personal Finance: A Crisis Over Women Saving?

From BI, on the average: (1) Women ear less than men.  but (2) Women live longer than men. See the problem? One solution is to close the pay gap.  But

… even without women’s lower retirement savings there would still be a large gap between what people need to retire on and what they’ve saved/what is funded by entitlement programs

Thus, everyone needs to save more and/or develop multiple income streams that last longer into retirement.