November 2007

That which is at rest is easy to grasp.
That which has not yet come about is easy to plan for.
That which is fragile is easily broken.
That which is minute is easily scattered.
Handle things before they arise.Manage affairs before they are in a mess.
A thick tree grows from a tiny seed.
A tall building arises from a mound of earth.
A journey of a thousand miles starts with one step.
Contriving, you are defeated;
Grasping, you lose.
Laozi, (Taoist philosopher, China, 4th Century B.C.)

My family would sooner discuss genital warts than my income or my investments.

And to be honest, like most Brits I find something admirable in this.

Talking about money all day gets dull and weaselly. Tossing exciting start-up ideas around or debating undervalued stocks back and forth over a few beers is my idea of fun, but even I don’t ask my friend whether he can really afford the next round of drinks.

Tell people you’ve a dream to own a Ferrari dealership in every city and you’re the next Richard Branson. Tell them you want to be able to buy a Ferrari out of your pocket change, and you’re an evil, money-grabbing maniac, who’s no better than an… American!

(Important note to my US readers: some of my best friends are American! I’m merely discussing a national caricature. Don’t blame me, blame Monty Python.)

Yet in truth there’s a huge price we all pay for our national reticence about money – whether you’re at the bottom of the ladder struggling with debt, or further up and ready to take your wealth to the next level.

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Cash is the safest place for your money in the short-term.

Sounds obvious, but cash is money. Shares, property, bonds, gold and pension funds are all assets whose value constantly fluctuates according to the whims of their markets. You can only be certain what such assets are worth when you come to sell them.

In sharp contrast, while the real value of a £20 note will go down due to inflation over the long-term, short-term it’s the safest store of value there is. You know it’s worth exactly… £20.

The price for this safety is you can expect lower returns from cash compared to investing in shares, over periods of five years or more.

Note that I’m talking here about keeping the interest you receive in the savings account, to benefit from compound interest over time.

If instead you spend the interest you receive, the real value of your savings will go down with inflation. Right now that would mean your cash would lose 3-4% of its spending power every year.

Despite the low returns, everyone needs some cash stashed away for a rainy day – or more specifically for when the roof leaks and you need to get it repaired.

You’ll also want cash savings for near-term known expenditure, such as school fees or a house deposit. You don’t want to lose your dream home because the stock market happens to be having a bad month when you come to buy, for example.

You might also keep some proportion of your long-term investment money in cash, depending on your views on the stock market, and increase the proportion in cash savings if you’re feeling very gloomy.

Just remember, over time you risk losing out to inflation, so you really want your long-term money in assets like shares or property.

Cash savings are the simplest of investments, but there’s still plenty to cover. Let’s get going.

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The first step to financial freedom starts with how you think about money. You must resolve, now, to get your financial affairs in order. Stop fantasizing that a lottery win or an inheritance is going to make you rich overnight, and instead resolve to do it for yourself. Commit to setting long-term financial goals, and to learning and doing everything you need to achieve them.

The good news is there’s not much required to get started – a few basic habits you need to pick up about living below your means and avoiding debt, and a few things to learn about the stock market and efficient investing.

The bad news is it’s harder to change how you think than to learn what to think. In other words, becoming good with money is easier said then done. It doesn’t take time or expenditure on Get Rich Quick schemes – it takes commitment and courage.

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Whoever you are and wherever you come from, there are 10 steps you can follow that, given time, will secure you a wealthy future.

You’ll need to cut you cloth to suit your own position, sure, but don’t fool yourself – these steps have applied throughout the ages, across civilisations, and they certainly apply to you.

There are no excuses. Got a well-paid job? You still need to know where your money is going or it will trickle through your fingers. Three hungry kids to feed? That’s treble the reason why you should stay out of debt, not an reason to give up.

You can cure your money woes, and turn your financial fears into dreams.

Excited? Let’s go!

1. From now on, you’re good with money

No ifs and buts, no saying “I’m terrible, I don’t know where it goes…” Take responsibility for your finances and you’ll be happier, more determined, and, in time, richer. By reading Monevator.com you’ve already shown you’re ready to change. It starts now! (More)

2. Take stock of You, Yourself Ltd

You need to work out what you’re worth in financial terms, where your money is coming from and where it’s going. Then you need to work out where you’ll be in a year, five years, 10 years, and 30 years. Finally, the fun bit – deciding where you want to be. (Note: ‘deciding’. It’s up to you). (Click to learn how).

3. Get rid of debt. Really! Everything except the mortgage

Your debt makes other people rich. You’re not borrowing from anyone other than your future self, who will be poorer, less financially secure and/or live a less abundant life because you wanted something now, before you could afford it. You can’t save while you’re in debt, and it grows like a weed. Kill it! (More on debt)

4. Discover the secret all successful savers know

You believe it’s hard to save money? Some of us find it easy, simply because we have a few tricks that change how we view our outgoings. The key is to allocate a certain percentage of your salary every month to savings. It goes out the moment you’re paid. You won’t miss it – it was never yours to spend. It’s yours to save, and given time and determination that will make you rich.

5. Splash out on a rainy day fund

Before you put a penny into the stock market or any other kind of financial investment, get some cash savings. Then, when the boiler blows up or you need new glasses, your financial plans aren’t derailed and you don’t go into debt. Having cash in the bank feels great, and you’re even paid interest for the pleasure. Try to save three months’ salary so you can cope if you lose your job. Six months’ worth is even better.

6. Buy what you want – but cut out the crap

To remain financially motivated over the long haul, you need to know what you’re saving for – only misers love money for its own sake. So what’s it to be? A secure retirement? A holiday home? That classic sports car you buy without a penny of debt? Your daughter’s wedding? Personally meaningful goals will help you save, but you’ll need to sacrifice some of the small stuff to get that big prize. It’s time to stop the waste – the surplus shoes and doomed electronic gadgets that steal money away from what you really want.

7. Commit to long-term investment in the stock market

If you want your money to grow comfortably faster than inflation over the next 10, 20 or 30 years, you’ll need to invest in the stock market (possibly via a pension). Markets go up and down over shorter periods of a few years, but over the long-term shares have always risen. By drip feeding in your funds, you can smooth out the highs and lows. A low-cost index tracking fund that spreads your money across the main market is the best way to begin. Indeed, it may be the only stock market investment you ever need.

8. Own your own home (when you’re ready to)

Why does your landlady rent a home to you? Because she believes she’ll make a profit out of it, either because your rent at least covers her mortgage and maintenance costs, or because she thinks property prices will grow faster than the difference. If you buy your own house, you can pocket this profit yourself, tax free. One downside is property currently looks an expensive, risky investment. But it won’t forever, and most generations have done very well from property over the past 100 years.

9. Work hard and smart to create multiple income streams

Ideally, you’ll run your own business to really reap the rewards of your labour. However full-time entrepreneurship isn’t for everyone. The second best way to enjoy the benefits is to set-up extra revenue streams that supplement rather than replace your salaried job – anything from a hobby that makes money or an investment property you rent out, to the royalties you get from a book you wrote about local celebrities. Get a second income stream, then try to get another.

10. “Never, never, never give up”

Money is daunting. Here in the UK we don’t like to talk about it, despite being one of the richest countries in the world, and with some of the world’s most insatiable (and heavily indebted) consumers. Perhaps that’s you, or someone you know. Whatever your circumstances, you’re setting off on a road to somewhere better. Some readers will start in debt and end up in a comfortable retirement. Some will start with modest savings and finish their days rich. And let’s be honest, a few who take this road and stick to it could still find the future difficult, and maybe wonder why they bothered; unlike James Stewart in It’s A Wonderful Life, they’ll never see the even worse outcome that would have awaited them if they’d condemned their old age to true poverty.

Fact: tragedies aside, we’ll all get old and need someone to look after us. But we can start by looking after ourselves. Sure it will take guts to stay on course, with all the temptations and challenges life throws at us. So let’s remember the words of Winston Churchill, the greatest British Prime Minister of all time: “Never, never, never give up”. (And he got the cigar, after all).

I’ll expand over each of these points in the coming days. Subscribe to Monevator.com to make sure you don’t miss a step!

“Do as I do, not as I say” is a useful maxim in life. It’s one instinctively understood by children (”But daddy, you ate three packets of crisps and YOU never clean YOUR room – it’s unfair!”) and politicians (”But you, Snouty and Fatcat already have knighthoods – it’s unfair!”).

But can mimicking the wealthy really make you rich?

Richard Templar thinks so. In his The Rules of Wealth: A Personal Code for Prosperity, a neatly packaged book that will doubtless make him millions, the best-selling author says:

“The simple truth is that wealthy people tend to understand and do things the rest of us don’t. From mindsets to actual actions, they follow behavioural rules when it comes to their wealth and these rules are what separate them from everybody else.”

Everybody else except, potentially, purchasers of The Rules of Wealth, because within its pages Templar sets out what he claims are 100 behaviours you can copy to make yourself wealthy, too.

It’s seductive: steal from the rich and you’ll become rich yourself. And it’s laudable in that Templar’s 100 Rules are often so common sensical and all-encompassing that it’s hard to argue with them. Work hard, save your money, shun debt – hear, hear, we say.

The only tricky bit is working out what’s an enriching action, and what’s a byproduct of previous money-making behaviour.

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