Coping with Low Income and High Expenses

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Worried about your income being suffocated by rising expenses? Do you find your stash drying up long before the next pay day? It can be saddening when you realize you don't earn enough to cover your monthly expenses.

Well, it’s very common these days to find your income being suppressed by an upsurge in expenses. The bad news is that rising expenses are here to stay, and the good news is that you can manage to strike a balance even when your income isn’t growing in the same proportion. Here are ways to go about this.

Live within your means

Don’t waste your time trying to speculate or predict the direction of the markets. You have no control over inflation rates, interest rates or tax rates. However, you can have solid control over how much you save, spend and in some cases (for the lucky ones), how much you earn. That’s your jurisdiction, so focus on it.

Pegging your expenses to a budget is a great way of guarding against living above your means.

Manage your debt

Debt; Be sure to at least trim it to your size, and If you can't eliminate it completely, then try managing it.

However, If you must borrow, borrow only for long-term investments, like real estate, funding your own business, and so on. Never borrow to purchase anything that depreciates in value, like furniture, cars or borrow to fund a vacation. The secret here is being able to convert debt into something of good value.

Borrowing to spend is a sure way of doubling your debt but when you borrow to invest in things that are likely to grow in value, you are better equipped to manage your debt. However, be watchful of what and where you invest, making bad investment decisions with borrowed money is like tightening a noose around your neck.

Try growing your income

Logically, one way to offset inflated expenses is by growing your income. When was the last time you asked for a raise? Yes, that's one thing employees find hard to request for. Since your boss doesn’t live on mars, he most likely should be aware of the rising consumer prices...So guess what? He just might be waiting for you to ask and if you don’t, he certainly won't initiate that conversation.

Getting a part-time job or running a small business (one you can manage within your means) can pave the way for increasing your income.

So Don't give up yet.  With some planning and focus on the goal, you can actually achieve getting by on a low income.

Annuity

3 savings goals you should prioritize

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“A Penny saved is a penny earned”, Said Benjamin Franklin.

It’s common for people to have some major goals to achieve in life, like getting a car, a mortgage, financing education and so on. And in almost all these circumstances, some level of funding, whether big or small is imperative.

If You don’t yet have a priority list for your savings goals, here are some common financial goals you may consider working towards.

#1. Retirement

“All days are not same. Save for a rainy day. When you don't work, savings will work for you.”- M.K. Soni

 

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Retirement is inevitable for everyone, both employees and business owners. Don’t wait till you start misplacing your glasses / bag / key etc. or finding you have no idea what young people are talking about before you realize that retirement has come knocking at the door. Therefore, now is the best time to worry about your retirement, and your retirement savings. Paul Clitheroe said, “Personally, I tend to worry about what I save, not what I spend...”. You should also do the same.

The most part of retirement income comes from what you managed to put aside and accumulate during your active working years. “It is like the seed put in the soil - the more one sows, the greater the harvest”. - Orison Swett Marden

#2. Investing in Your kids

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With the kids, it's almost like garbage in garbage out. Remember that you may one day in the future depend on them. Therefore investing in your kids will always turn out to be beneficial for you and them. One of such investments however, is education. You may want to get your children a college education and that is no small financial project. This takes a lot of long term saving and planning.

#3. Being your own boss

In a recent Mercer survey of 30,000 workers Worldwide, it was shown that between 28% and 56% of employees in 17 places around the globe wanted to quit their jobs. So of every 30,000 employees Worldwide, at least 10,000 are sick of their jobs. Unfortunately, this rate is likely to remain the same, if not rise, at least for some time.

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With these alarming statistics, it's not surprising to find employees who dream of days when they rule their own destiny, be the boss, call the shots and run their own show. For most people however, these lofty dreams never go beyond just being dreams, as they lack the needed funds to take the leap and grow from seed to start-up.

Since startups are not likely to generate piles of cash from the opening day, reduction in your income in the early stage won't be out of place. At this stage, the business will rely on cash from your savings.

Now you have 3 savings goals you should consider placing at the top of your priority list. Remember that in accomplishing these goals, saving money is crucial and as John Poole said, "you must learn to save first and spend afterwards".

Assets

Difference between renting and leasing

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Most people think the terms, rent and lease are synonyms and make the mistake of using them interchangeably.

While they both require the use of someone’s property in exchange for a promise to make a series of payments, the difference is primarily in the terms of the arrangement.

A lease is a contract for a fixed term to be paid over a fixed duration. The property owner cannot raise the rent until the duration lapses. Therefore leases provide some kind of Lock-in-effect.

Rents however are arrangements that may be for a shorter time period and have no Lock-in-effect. The property owner may not have an obligation to leave the rent at the same amount over the period.

The benefits of renting over leasing lie in the Lock-in-effect. You can decide to rent another property if the rent is raised. In a lease contract however, once you agree to the terms, you can’t just break the lease and decide to lease another property because it’s cheaper (you are locked in).

If the lessee is to break the lease however, he is obliged to make all the remaining future payments according to the terms of the contract.

Best time to save

Buffett the great and powerful: 4 ways to invest like Warren Buffett

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A great man once said, “The first rule is not to lose. The second rule is not to forget the first rule.” That man’s name is Warren Buffett.

Does the name sound familiar? I’m sure it does for some, but if you haven’t heard that name, Warren Buffett is a man well known for many reasons.

He is known for his acts of philanthropy, having pledged to give away 99% of his fortune to philanthropic causes. Did you hear that? 99% of his fortune? This is a man with a whopping net worth of $53.5 Billion and the fourth richest man in the world. That makes you say wow, right? Yeah, even my jaw dropped when I heard that for the first time.

Buffett was listed among Time’s 100 Most Influential People in the world in 2007 and was named the most influential global thinker along with Bill Gates in the Foreign Policy’s 2010 report.

The list can go on and on, but besides all of this, Warren Buffett is widely regarded as one of the most successful investors in the whole world. He is famous for the successful Berkshire Hathaway Company where he is the primary shareholder, chairman and CEO.

His noteworthy savvy in stock market investments can be viewed as his trademark which has doubtlessly earned him the nickname, “Wizard of Omaha”.

Almost everyone wants to invest like the legendary Warren Buffett, but only a few know how to. So here are 4 simple tips you can adopt to get you investing like Warren.

#1: Invest in Value

Buffett said, “Stop trying to predict the direction of the stock market, the economy, interest rates , or elections.”

This is where most people make a mistake. Everyone wants to get rich NOW. PRONTO! This is a method that can only lead to heartbreak as it is based on speculation and the false hope that share prices will rise irrespective of their real value.

On the opposite side of the wall are value investors, the grand-knights of the stock market, who, unlike “the get rich quick” speculators, demonstrate their aversion to risk by striving hard to avoid loss.

Summary: Forget about market direction, look at VALUE!

#2: When it comes to stocks, buy low and sell high

Buffett said, “Be fearful when others are greedy. Be greedy when others are fearful.”

A value investor is always looking for stocks that the market has undervalued. An undervalued stock is just a stock that is selling at a price below what is assumed to be its real value. The idea here for making money is to buy low and sell high.

The average person, on the other hand, buys high and sells low and never becomes very wealthy.

Summary: Buy low and Sell high.

#3: Be Patient

Buffett said, “The stock market is designed to transfer money from the active to the patient.”

Investing, like any other endeavour in life, requires a huge deal of patience. It isn't unusual to find cases where an investment which lagged for many many years abruptly turned around and became a top performer.

To be a successful investor, you need to invest carefully and sensibly and then have the patience to let your investment grow. Investors with the ‘get rich quick’ mentality are generally not successful.

Summary: Patience is what gets you the big bucks.

#4: If it’s too complex, then run away

Buffett said, “Never invest in a business you can’t understand.” 

Warren Buffett will only part with his money when he is convinced he understands the rules of the game, to ensure that his chances of losing are almost zero. So understanding a business really well can help you detect warning signs quite early, enabling you to make sound investment decisions.

Summary: Only put your money in a business you understand.

Investors who consistently adhere to these tips can be sure to record good returns sooner or later. Who knows, you may sometime in the future be called ‘The Wizard of  Investment.’

To buy or to lease: Why you should lease when you can afford to buy a home

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If you had a million bucks to spend on property, will you choose to buy or lease?

I'm sure you will agree with me that making that choice between buying or leasing a property can sometimes get you thrown off balance.  Even when you've got the money to buy, some voice deep down within you keeps asking “why don’t you just lease? it’s a lot cheaper ...”.

Advocates of the idea of owning a home will argue that owning a home gives you more security, coupled with the fact that when it’s yours, you can do whatever you please with your home, like painting it your favourite colour, attaching a garden, or giving it a revamp when you get tired of the old look. And if it’s yours, you also have something to pass on to your kids for inheritance.

But just before you jump at the idea of buying, you may be interested to know that leasing also has certain benefits attached to it and here are some;

#1: Cheaper financing

Since leasing typically requires no initial down payment (as a lump sum), you are likely to save a great deal leasing. Also, if you invest what you have been able to save, you can almost be sure of generating your next rent with great ease.

#2: Reduced risk of Obsolescence

At the end of the lease, the asset is returned to the owner and you can choose to lease a newer, bigger or cosier home. You may not even need to wait till the end of the lease to do this. You can up and move whenever you please. Buying doesn't allow such flexibility plus you are left to do all the maintenance on your home, including renovations, and believe me, this isn't cheap.

#3: Reduced loss in times of disaster

In the event of a disaster, your loss, no matter how huge, won't be as much as that of a home owner.

I have now laid out before you the good, the bad and the ugly of owning a home, and now I'm sure you can at least feel less frustrated when deciding if buying or leasing is better for you.

Investment and Opportunity Cost (Part II): Understanding the Balance Sheet

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Sequel to Part 1, financial statements basically serve as signposts guiding investors along the investment path. Information extracted from them may either give you the green light to invest, red light not to, or yellow light to wait and observe future outcomes.

Any investor who enters into a financial contract wants to cash in without disappointments. So you should focus your attention on what and where you invest in, rather than just investing.

Fight the temptation of leaving it all for the analyst to decide where your money goes. That sounds like getting on a plane without being able to decide your destination. Agreed, that’s what he might be trained to do, but it’s your money and you should be able to have a say.

So if you choose to lend at any time, here are quick deductions you can make from a borrower’s balance sheet to help you make a better judgement before investing.

For short-term investments;

Keep an eye on the borrower’s liquidity. From the borrower’s perspective, liquidity is the ability to meet short-term obligations.

Certain ratios calculated from balance sheet items can be used to determine a firm’s ability to pay its short-term liabilities. Such ratios are employed by investors for better decision making. Below are a few key ratios.

#1. Current Ratio

This is the best known measure of liquidity. A high current ratio just means you are likely to receive your returns in a timely manner because the firm will have no difficulties paying its short-term bills.

High Current Ratio = ü (Green Light)

Low Current Ratio = û (Red Light)

#2. Cash Ratio

From the name you can already tell what to look out for. Who wouldn’t agree that high levels of cash are a good sign? So the higher the cash ratio, the more likely it is that the borrower will be able to meet short-term obligations without hassles.

High Cash Ratio = ü (Green Light)

Low Cash Ratio = û (Red Light)

For Long-term investments;

If you choose to invest for a longer period, then you should look out for good solvency attributes. Solvency is the ability of a firm to meet long term obligations. So here are a few ratios that measure solvency.

#1. Debt-to-Assets Ratio

An increase in this ratio suggests a high reliance on debt as a source of financing. High reliance on debt means that the company has many short and long term obligations to meet and this may affect its solvency.

High Debt-to-Assets Ratio = û (Red Light)

Lower Debt-to-Assets Ratio =  ü (Green Light)

#2. Financial Leverage Ratio

High use of debt financing increases financial leverage and, typically, risk to investors.

High Financial Leverage Ratio = û (Red Light)

Lower Financial Leverage Ratio =  ü (Green Light)

Formulas

Current Ratio = current assets  ⁄ current liabilities

Cash Ratio = cash+marketable securities  ⁄ current liabilities

Debt-to-Asset Ratio = total debt ⁄ total assets

Financial Leverage Ratio = average total assets ⁄ average total equity

Investment and Opportunity Cost (Part I)

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Investing is fundamental to wealth growth and being able to invest wisely is very crucial. However, for every investment made, there most times exists an alternative forgone. This is referred to as the opportunity cost of making that investment choice.

The opportunity cost can be seen as the value that investors forgo by choosing a particular course of action.

The benefits you could have received by taking an alternative action becomes the opportunity cost of the action you choose to take.

For instance, the opportunity cost of taking a bus to work is the money you will save if you took a walk with an old time pal. On the one hand, you gain 20 minutes of catching up and acquainting plus the amount saved by walking; on the other hand, you lose an amount equal to the bus fare while getting to work faster (in 7 minutes).

Therefore, if you choose to take the bus, then you forgo the benefits of walking (saving money and chatting with your pal), which is the opportunity cost of taking the bus and if you choose to walk then you forgo having to get to work faster (by the 7 minute bus ride), which is the opportunity cost of walking.

If we apply this principle to investing; then for every investment made, there should be a compensation equal to the value of the benefits forgone (i.e. The benefits you could have received if you chose to invest in something else).

This is where the topic of receiving interest comes in. Interest payments are designed to compensate the investor for the opportunity cost of choosing which ever investment option he is receiving interest for.

For example, a dollar saved today grows into a dollar plus interest tomorrow. So the higher the interest rate, the greater is the opportunity cost of spending the dollar (not investing).

Your money is of significant importance and how you choose to use it matters. Whether you choose to save, spend or invest, the ultimate goal should be to maximize its value.

With the exception of making donations, when it comes to investing or lending, you should be concerned about not getting a value less than that which you choose to invest. Even Warren Buffett (widely considered the most successful investor of the 20th century and the fourth richest man in the world as of march 2013) is very cautious about how and where he invests.

The key thing here is that every investor or lender has a right (and I emphasize the word right) to be compensated for foregoing other alternatives.

Having pointed this out, it is smart to scrutinize the financial statements of companies you choose to lend to. Key financial statements to be considered include, but are not limited, to the following: the balance sheet, the income statement and the statement of cash flows.

In subsequent posts, we will discuss the minute but crucial details every investor should be able to extract from the financial statements (mentioned above) of the borrowers he chooses to lend money to. In other words, we will point out to you what you should be able to look out for before signing the cheque.