A young persons discovery

Yesterday I wrote about my son and today a story about my daughter.
She is 16 years old and works part time while she goes to school.
Two days ago she was having a look at her pay slip and realised that she has earned just over $9,000 this financial year. With another 3 months to go to the end of the financial year this is already nearly double what she earned for the previous year.
When she saw the amount her words were: Where's it all gone?
Like most people she was unable to account for all the little bits and pieces that have come up during the year and now she is left wondering.
I am glad that this has hit her at an early age. She is now becoming much more aware of the fact that if she isn't careful she will be just like the famous proverb which says: "Your money can be gone in a flash, as if it had grown wings and flown away like an eagle."

http://www.wheresthemoneygone.com/home.html

What's the world coming too!!

Yesterday I wrote a piece about Good Debt and Bad Debt
Today, I'm going to relate an experience of my 20 year old son who is working his way through becoming financially responsible.
He is employed on a salary of just over $40,000.
He has a student loan of just over $17,000 and for some time has wanted a credit card.
He applied to one of Australia's major banks and declared in the application that he already had a loan of $17,000. I suspected this would go against him and they would give him a small limit such as I had received with my first credit card. I thought he would receive an offer for between $500 and $1,000. He rang me this morning to say the bank had approved a credit card for him and the limit was $10,000. This means that right now he has been granted credit for over half of his salary. BUT this credit can be used on consumer spending or spending where there is NO capital to back it up.
From the banks point of view he could become a captive customer, paying a set amount of interest every month, which is good for them but not necessarily good for my son.
Why is it that banks can hand out this sort of credit without ensuring that the customer has the education and knowledge to make sure they don't get into trouble?
It's like handing a set of matches and a pack of little lucifer fire starters to a child and telling them to light a fire in the middle of a forest so they don't freeze to death in the middle of the night. Whilst this is an admirable objective, it can run the risk of starting a bush fire which not only destroys the child but also affects a whole lot of people around them.
We need to educate our children as fast as we can because the opportunities to get 'burnt' with debt are all over the place and will continue to be offered to them.

http://www.wheresthemoneygone.com/home.html

Good Debt - Bad Debt

There is no doubt that debt is around us to stay. Some of the best sales and marketing people are working for the major banks and as their primary product is debt, and they have budgets to meet, we as consumers will be asked to buy more and more debt.

But how do you determine whether it's good debt or bad debt?

When I was brought up, my parents told me that all debt was bad. Why then do wealthy people have a level of debt? Why do they use the banks money to get ahead rather than saving up all the time? Surely they can't be wrong.

Well, there are three simple rules of thumb for helping you work out if debt is good or bad.
Rule 1 : Is the debt being used to acquire capital which will produce income?
Rule 2 : Is the debt being used to acquire capital that will appreciate in value or depreciate in value?
Rule 3 : Is the interest payable on the debt a tax deductible expense when calculating my income?

Let's take an example.
1. Credit card debt used to buy some new clothes to wear.
The clothes will not produce income, neither will they appreciate in value and it is unlikely you will get a tax deduction for the interest on a personal credit card. This all means that the debt here is BAD
2. Loan taken out to purchase a rental property
The property will produce rental income, is likely to increase in value, and the interest on the loan is likely to be tax deductible. This all means that the debt here is GOOD

These are only examples and you should consult you own professional advice before making a decision.

http://www.wheresthemoneygone.com/home.html

What's 2005 look like for consumers

The Melbourne Age has reported the following today as an idication of what we can look forward to in 2005
"Consumers will continue to tighten their belts this year, as rising interest rates and high petrol prices force households to get their finances in order.
After several years of unrestrained spending, Australian households began to cut back on expenditure halfway through last year, a trend that is expected to continue in 2005.
The Reserve Bank of Australia (RBA) said last week that while households were generally reporting their finances were in good shape, they appeared to have taken a slightly more cautious approach to their finances over 2004.
It said the national accounts suggested that in the second half of the year, real consumption spending grew at an annualised rate of three per cent, well down on the seven per cent pace recorded over the same period in 2003.
Commonwealth Securities senior analyst Craig James said people had been spending quite freely over recent years, and that at some point in time they had to pause for breath.
"Consumers have been hit by a whole range of negative factors in the last couple of months - higher interest rates, higher health fund premiums, higher petrol prices - so that has taken its toll," he said.
AdvertisementAdvertisement
"And it's therefore quite reasonable that consumers are now choosing to get their finances in order, pay down their credit cards debts, refinance loans, as well as consolidate existing debts."
However the fundamental supports for spending - wages, employment and wealth levels - remained very solid, Mr James said.
"So while we may see some below-trend growth over the next few months, the longer term outlook is more encouraging."
Challengernomics head of investment market strategy Ron Woods said things had been relatively dire on the spending front for a while.
"If you've been used to a period where your house price ever goes up at spectacular rates and you feel very wealthy as a consequence... when that's suddenly deprived, you think you're headed for the poorhouse," he said.
"And the first reaction is to cut back on lots of things."
However many people were addicted to their spending habits and would be reluctant to do this, he said.
Dr Woods said this concern about declining wealth levels explained the recent slump in consumer sentiment figures.
This month the Westpac/Melbourne Institute index of consumer sentiment recorded its largest percentage fall in the history of the survey, following the RBA's decision to raise interest rates by a quarter percentage point to 5.50 per cent.
Dr Woods expected consumers to remain cautious in their spending this year amid a downturn in employment, as job losses escalated in the slowing housing market.
However analysts said the downturn in consumption was not likely to be a large one.
UBS retail analyst Michael Peet said there was more likely to be a soft landing than a major slowdown.
"We think clearly the staple categories like food and basic apparel will get through that relatively unscathed," he said.
"The areas that might get hit a bit harder are things like households goods, homewares and bigger ticket purchases which are going to be the ones people delay or do without over the next six to nine months."
He said general retail sales were likely to slow from around five to six per cent back to around three per cent, at an annualised rate."

Now is the best time to work out what your finances look like and how they work. As a famous saying goes: If you don't know where you're going , any road will get you there!"

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 7

Think like a banker , not an accountant
Have you ever had a conversation with an accountant about your finances? Chances are that you came away from that conversation a little confused and in some cases not knowing what he or she was talking about. The reason for this is that accountants are taught to think in pluses and minuses. These are called debits and credits and are used to drive the whole process of double entry book keeping. Accountants work out your finances and end up putting all the numbers into a balance sheet which is what you’ve got left. This is based on the following equation:
Owners Equity = Assets – Liabilities
So at the end of the day, your wealth is made up of pluses and minuses and as long as the pluses are greater than the minuses then you’re OK.
A banker on the other hand is always looking to see how the accumulation of wealth can be funded. They know that these days it is impossible to save up for everything. Think about buying a family home. If you were trying to save for one, you would likely never get there because the prices would be going up faster than you can save. You have to pay rent and try and save at the same time!
So the banker thinks like this. The house you want to buy is Capital. To buy it you will need to find the funds to buy it. You may have saved a deposit (your equity) and the bank will then lend you the difference(your debt). Bankers have an equation that looks like this:
Capital = Debt + Equity
So let’s look at an example.
House value $200,000 (Capital)
Deposit saved $20,000 (Equity)
Bank Borrowings $180,000 (Debt)
So this equation is $200,000 = $180,000 + $20,000
Most people find it easier to think like a banker because they can relate to it more easily and when you think about it, you probably have transactions more often with your bank than your accountant and can gain more value by thinking like the banker.
Bankers are always looking to sell you more debt, so that you can accumulate capital more quickly. If you can get a good return off that capital, you are moving to better wealth creation and a chance to move toward financial freedom.

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 6

Equity is not the same as cash
Many people think that equity is the same as money. It’s some kind of accumulated bank account that they can draw on when they need to. I have personally met people who build up the equity in their family home and then find that if they stopped working they would have no money to spend. They still have plenty of equity but no money to spend. Imagine going down to the bank and saying, “I need to withdraw 10 % of the equity in my home.” I’m sure the bank teller would look very blankly at you. Of course the lending part of the bank would support the thinking that equity is money and they can give you the illusion that it is true. Because when you draw on your equity by borrowing from the bank, you end up with money to spend. But remember, the money you get to spend is BORROWED money on which you are going to pay INTEREST and when you have spent the money you still have to pay it back or go on paying the interest for the rest of your life.

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 5.

Understand the detail of your finances.
Many people tell me that they are BIG picture people. They keep an overall idea of what’s happening in their finances but then have no idea of the detail of their finances. I love to ask these people what their income is. Normally they know this exactly. Then I ask them what their expenses are for the same period and they don’t know. Often they give me a figure and when I subtract it from the income figure they’ve given me it becomes obvious that they have left out quite a few expenses. If you have ever been on a diet or worked with someone in this area they will ask you to fill out a food diary for a period of time. This is because we are often not aware of what it is we are eating and when. Filling out a food diary gives you an opportunity to make sure you are honest about what you eat and without a correct record it is impossible to make any headway with a sensible diet that can control your weight. Getting an idea of your expenses is exactly the same. Until you honestly record them for a period you will have no idea where your money is going. Like the proverb says, ”Your money can be gone in a flash. As though it had grown wings and flown away like an eagle.”
Some people are happy if they have a little money left in their bank before each payday. They think that this is going to one day make them wealthy. But think about this. If you were unable to account for $10 each week, in a year this would $520 and over a working lifetime of say, 40 years, would equate to $20,800. That is the value of a small car just frittered away over a lifetime.
Let’s say you are trying to lose weight which is why you decided to fill out a food diary. The weight would come off gradually kilo by kilo. You wouldn’t wake up one day and suddenly have lost 10kg overnight. Also, you would make measurable changes to your diet which would make sure you didn’t starve but at the same time you lost weight.
So it is with controlling your expenses. You need to know what they are IN DETAIL. Near enough is just not good enough! Because it is the gradual small changes that you make which allow you to have an enjoyable life as well as getting ahead financially. No one wants to go on a crash diet with their expenses. Thinking that to get ahead you have to stop spending totally! So understanding the detail and planning sensibly will allow you to get ahead and have a life as well!

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 4

Money in the bank doesn’t mean available to spend
Do your income and expenses arrive at exactly the same time each week or month? Or do they have a habit of arriving at the most awkward time? Like a few days before you get paid. For many people, understanding this principle allows them to plan their income and expenses separate to their bank account. Remember there are two aspects to your finances. What you are doing and what you have left. The money that you have in your bank is what you have left after your previous income and expenses. So using your bank account as the basis for deciding whether to spend or not would be fine if everything stopped at the same time. If ALL your expenses had been paid for, then what was in your bank account would be available to spend on whatever you wanted. HOWEVER expenses are quite likely to arrive BEFORE you next pay and therefore the money that is in your bank account is not available to spend frivolously. Your bank account balance is at a point in time and does not take into account what is coming up before your next pay. So just because there is money today doesn’t mean it is not needed for an expense which needs to be paid before your next pay packet. You need to have a method of planning your income and expenses which is separate to your bank account because, as stated previously, your bank account is only a point in time and does not take into account what is coming up in the future. Keep a separate sheet of paper and on it write down all you income and expenses. Use this as the basis on whether you can spend or not because it can cater for future activity. If you have additional income or you can minimize an expense on the sheet of paper, this will give you additional spending power. If not, the money in your bank is only there for a short time and will be swallowed up with expenses you have already planned for.

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 3.

The BIG picture is what counts
The big picture brings context to a situation. Have you ever been caught by missing the context of something? Suppose I was to take you out and ask you to run 100 metres in competition to ten other people. You would likely run as fast as you could for that distance. If, at the end of the 100 metres I told you that this was the beginning of a marathon, then you would ask me why I hadn’t told you that BEFORE you began. You would probably have run the distance more slowly to conserve your energy for the whole distance. Another example of this is when an architect looks at the plans of a building. It is the overall picture which is important rather than any particular piece of the design. Whilst the individual pieces make up a design, it is not until they are all together that the building can be viewed as a whole. The same is true when you look at finances. It is not simply a matter of getting more income than expenses. What happens after that? What do you do with the excess? You need an overall BIG picture to see your finances from the correct perspective which will have two aspects to it. What have I been doing for the last period of time AND what have I got left to continue onto the next period. This is simply a NET INCOME STATEMENT (what I have been doing during the period) and a BALANCE SHEET (what I have left to take into the next period). Without this kind of perspective you can spend all your time trying to get more and more income and nevcer work out what’s left and what you are accumulating as wealth. The BIG picture has both aspects. What am I doing and what have I got left.

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 2.

Financial Statements are not made to be easily understood.
No one ever went to an accountant because they WANTED to. They normally go because they HAVE to. In the same way, no one ever asked an accountant onto the management team of a company because they WANTED to. They realised that the HAD to have someone to ‘look after the books.’ As a result of this, the accounting profession has been able to happily survive without having to truly explain what they are up to at any point. Think about the businessperson that goes to the accountant and asks “Did I have a good year?” This shows that they might have a great ‘gut feel’ for the business but could be held to ransom by their accountant because only he understands the ins and outs of the financial statements.
The same goes for financial planners who ‘look after the numbers’ for their clients and help them build a better future.
Financial Statements have often been presented in a way that the normal person can not really understand. They understand the income and expenses but beyond that, everything is a mystery. The key to financial statements is to understand the difference between a balance sheet and a net income statement. One statement shows a point in time (balance sheet) and the other shows activity for a period (net income statement). This fact is often not told to people and they look at both statements as if they were the same. When they don’t understand the balance sheet they ignore it. Remember that the balance sheet is what you’ve got left after taking into account you net income statement for a period of time. If you have nothing left, you have consumed all your income and you’ll end up working for money instead of having money work for you.

http://www.wheresthemoneygone.com/home.html

Seven Secrets to Money Success - Number 1.

Make money work for you, don’t work for money
Many people spend all of their life selling their time for money. This means they remain an employee and spend most, if not all, their money on supporting their lifestyle. As a consequence they do not invest their money into opportunities which will bring them passive income. They work hard, spend hard and never have anything to show for it. This is like the person who makes a little out of a lot. Contrast that to the person who makes a lot out of a little. This is the person who invests their money into income producing capital and over time their small amount turns into a lot. They truly have turned the tables. They start out in life working for money and end their life having money work for them.

http://www.wheresthemoneygone.com/home.html

Why can’t I understand the financial numbers?

Money and finance topics have often been presented in a boring and uninteresting way yet they affect almost every one in society. So if this topic is so important why have more people not found the answer to understanding how it all works?

One of the major reasons is that money and the stewardship of finance has been the domain of a profession which has a way of looking at things which is not easily understood and those who work in it have had no compelling incentive to communicate with those outside it.

Most people don’t go to an accountant because they want to. They go because they HAVE TOO! When it comes to choosing members for a management team most managers choose to have an accountant because they want someone to ‘look after the finances’ and the accountant is often more focused on making sure things are controlled rather than communicating with the rest of management how the numbers work with the strategic running of the business.

In the business community financial communication is often not clearly understood outside the finance function and I have found that there is a high level of frustration in understanding financial statements by non accounting executives. Financial numbers are often learned ‘by rote’ rather than having a feeling of how they ‘go together.’ The effect of this is that people can answer questions from their superiors but have very little ability to make use of the answers in the daily hustle and bustle of their working life.

Many executives have knowledge of the profit and loss account; fewer have knowledge of the cash flow statement and balance sheet. But how do they all work together? When I ask people this question I have on occasions been met with the question; Do they??
The prime reason for this is that in traditional reporting the statements are shown separately and no one has shown people how they work together.

To make sense of the financial statements it is important to understand how they work with one another and therefore it is easiest to view them all together on one page. This is why I invented The Financial Fence® as a way for people to see visually how simple it is to view everything in the right context.

So why use a fence??

People see fences every day and I felt that people needed an analogy which they would see around them on a daily basis. Combined with this a fence can also show a picture of all the financial statements working together because:-
1. Fences are made of two parts:
A. Posts that anchor the fence into the ground at a point AND
B. Rails that carry the fence over a distance.

2. Fences incorporate Milestones (Posts) and Activity (Rails) in the same analogy.

3. Financial statements also have these two parts :
A. “Milestones” - Balance Sheet.
B. “Activity” – Profit & Loss Account & Cash Flow Statement.

So by using this simple analogy people can see the BIG picture of a business which is often lost in the accounting detail.

Understanding the BIG picture helps executives keep the right perspective in reviewing the numbers of an organisation which means they can make better faster decisions.

http://www.wheresthemoneygone.com/home.html

Money – simply an enabler.

How many times have you heard the following statement: “The most important things in life you never learn while you are at school.” I whole heartedly agree with that statement because the two things I learnt very little about at school were people and money. As soon as I left school I quickly discovered there was very little I could do that did not directly or indirectly require input from people or money! And as I journeyed through life I wondered what the role of money really was. Many people seemed to desire it but often it was not the money itself but what it could do.
So I’ve come to a view that money is simply an enabler
We often think of money as the answer to our daily needs BUT it is simply a commodity that we use to trade with and it has very little intrinsic value. It is produced and fed into the monetary systems by government agencies and banks so that businesses and individuals can trade with one another.

Scrooge McDuck is the only person that I’m aware of that actually loved money. The comic strips show him having a swim in it. Most of us relate to what money can buy or allow us to do and we therefore look to money to enable things to happen in our lives.

A useful analogy to help understand the role of money is petrol in a motor car. Petrol to a car is very like money is to a family.
The primary purpose of a motor vehicle is to transport people or goods from place to place.
A motor car will not travel anywhere without petrol as the petrol gives the fuel to propel the car forward.
Without petrol, the car would not be able to fulfill its purpose and might look very nice but be useless as a means of transport.
Therefore the petrol is an enabler in the same way that money is an enabler to assist people to live their lives.

How we use things can determine the value that we gain from them and petrol must be put in the right place to get the desired result!
Imagine putting petrol in the boot of a car. It would not assist the car to move forward and might even destroy the car if ignited by mistake. Often this is the same with money. Used in the wrong way it is disastrous and yet we need it to get ahead in our lives.

It is interesting to note that the petrol has to be ignited to make the car move forward. A controlled explosion is required to get propulsion. Petrol ignited in the wrong way can cause immeasurable damage.

Money can be ignited to get a bigger affect. This is seen in the well known phrase ‘You have to spend money to make money.’ Igniting it in the spend phase can mean a whole lot more propulsion forward financially BUT if it is spent on the wrong items or in a frivolous manner then it can result in no propulsion at all.

So it is important HOW we use our money and WHAT we spend it on. Remember it can assist you greatly but also has the capacity to do great damage.

On a lighter note it is one of those things in your life which can almost appear illusionary. One minute it’s there and then you turn your back and it’s gone which is demonstrated in the well known proverb:
“Your money can be gone in a flash as if it had grown wings and flown away like an eagle.”

http://www.wheresthemoneygone.com/home.html

Equity mate

What is equity anyway and how do I put my hands on it?
The advertising campaign of the Commonwealth bank has led many Australians to think that the word equity can only be used in conjunction with the word mate! However behind this adverstising is a message that equity is there to spend. So how do you go about spending your equity. That's really easy. What you do is exchange it for debt!!
Banks are like any other business. they have something to sell to their customers which is credit or more precisely debt. You can buy it in all sorts of forms. Equity home loans ( a mortgage with a cheque book), personal loans, credit cards, car loans, investment loans and list goes on and on.
So if you have paid off the mortgage on your family home then you become a target customer for the banking sector because you have the capacity to borrow. They are always looking for customers for their main product which is debt and anyone who has a steady job ( the capacity to pay interest). Make sure that you have something strategic to buy with any additional borrowings or you may find that the additional borrowings are soaked up in lifestyle and you have simply traded your hard earned equity into a debt owing to your bank.

http://www.wheresthemoneygone.com/home.html

I have a dream

I have a dream that one day people around the world will truly understand their personal and business finances and that they can have sustainable financial freedom.
Many people are trapped with a lack of education when it comes to money and have very little idea of how it works.
A common definition of insanity is ‘doing the same thing and expecting different results’ so when it comes to money we are all a little insane. We do the same thing week in week out, month in month out, and for some people year in year out. Always hoping that one day things will change and we’ll find financial freedom. BUT it just won’t happen that way.
Find the answer to your frustration by using The Financial Fence®.

http://www.wheresthemoneygone.com/home.html

Wealth Creation takes time

In this world of quick fix and instant gratification it is easy to think that wealth creation can happen very quickly. However, every financial decision that I have made in a hurry has never turned out to be a good one.
Wealth creation takes time and the earlier you begin the easier life will become in the future.
We are becoming a nation of 'urban subsistence farmers' living from pay packet to pay packet, hoping that one day in an instant our whole financial world will change.
Well, you probably already know the definition of insanity. Doing the same thing and expecting different results.
Start today, do something different with your financial world. If what you've been doing up to date hasn't made you wealthy then why will it work in the future?

http://www.wheresthemoneygone.com/home.html

Financial Freedom-Is It a Pipe Dream?

I have a dream that one day people around the world will truly understand their personal and business finances and that they can have sustainable financial freedom.
Sustainable financial freedom won’t just happen to you one day in the future. It’s not going to leap out from behind a rock and ask you to embrace it like a dream. It requires a lot of work and energy to plan towards this position in your future.
Many people are trapped with a lack of education when it comes to money and consequently have very little idea of how it works. They run a mixture of hope and repeated experience to try and get ahead but often make only minimal progress.
Without knowing it, they are slightly insane as shown in the following definition of insanity: ‘doing the same thing and expecting different results’
But many people are like this. Often they are like urban subsistence farmers living from pay packet to pay packet. Doing the same thing with their money week in week out, month in month out, and in some cases year in year out. Always hoping that one day things will change and they’ll find financial freedom BUT it won’t just happen!!

So understanding your personal and business finances is a dynamic thing. It’s not something which you get right and it stays right. It’s almost like dancing with an eel! Just when you think you’ve got everything right its slips right out of your fingers! So doing the same thing all the time is never going to get you to the right answer.

But why bother to even understand. Why not just ignore what’s happening around you because when you die you can’t take anything with you. Right!!
Ignorance is a great strategy if you want to keep working until the day you die. You can continue to sell your time for money and have enough income to survive until the very next pay packet. However, most people look forward to some sort of retirement where more time can be spent on pleasure. The trend today is for people to retire earlier, if possible, and live longer! So how would you feed and clothe yourself if you were not working? How would you run a motor vehicle and go on holidays when you wanted to?

One definition of wealth is: How long can you survive without being paid for your time? For many people it’s hard to get to the next pay packet let alone beyond that but if you think about it, financial freedom means never having to worry about a pay packet again. Having the financial resources to do what you want to do when you want to do it.

Sustainable financial freedom means that you no longer need a pay packet to survive and you can live off your investments whatever they may be. But to get to that point requires understanding what you’re doing with your money and how it all works together.
Understanding the BIG picture of your finances is a relatively simple thing when you understand how all the pieces work together and you can plan with a degree of certainty. The Financial Fence® is a simple way of understanding how things work together. With this tool you can easily work out what you need to do to be sustainable and where you will need to put your effort.

There is an old proverb which says:
Your money can be gone in a flash. As if it had grown wings and flown away like an eagle!

Get some education today so that you can make sure your hard earned money doesn’t grow wings in front of you and fly away before your very eyes!

http://www.wheresthemoneygone.com/home.html