Monevation

Space operas are exciting, with droids, blasters and galaxies far, far, away. Financial advice is often dull, and focussed on doing without, dying, and matters down, down to Earth. Is it any wonder millions more of us watched the lamentable Episode 1: Phantom Menace than will ever read The Millionaire Next Door?

But what if Star Wars could teach us something about personal finance? Well, read on to discover what the classic trilogy’s major characters know about money.

(Note: I’ve ignored all the characters from the ‘Trilogy of Shame’, even the good one(s). If you know where Jah Jah Binks or Count Dooku would stash their cash, I’d love to read your thoughts in the comments below).

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Catching up with some of my favourite financial blogs (no, Monevator.com is not an island!), I’ve noticed a sour note on many of the personal finance blogs that follow the net worth of the author (e.g. My 1st Million at 33 and Accumulating Money).

Let me say firstly that I really admire these writers for putting their cojones on the line so publicly. My concerns certainly shouldn’t be construed as a criticism of their efforts.

However, there’s a reason why I don’t track my personal net worth on Monevator.com, and it’s being demonstrated by the depressed tone that many personal finance blogs are taking right now.

The trouble with tracking your net worth

When things are going well, as they have for the past few years, blogs tracking personal net worth seem heroic. Booming stock markets and rising property prices see an ambitious target drawing nearer month by month. £500,000 no longer seems a distant dream, and even £1million looks feasible.

However when markets or property prices fall, the goal suddenly falls back too. All things worth achieving suffer setbacks, but there’s a crucial problem when your goal is a net worth figure:

• You cannot control the price the market puts on your stocks or your home

This is crucial. The writers of these blogs are doing just what they did last month or last year – saving hard, earning well, and giving us a ringside seat – but suddenly the results don’t look so good.

My advice: focus on goals and targets you can control

Goals are crucial, but they have to be attainable for you to keep working towards them. Attainable means controllable. Have a target of a million in the back of your mind if you want (I do ocassionally add up the value of all my investments), but in the meantime focus on stuff that you can achieve.

Good controllable goals might include:

• Saving 15% of your salary
• Reducing your monthly shopping bill by 20%
• Doubling your income over the next five years

These are all financial goals you have some ability to control on a month to month basis. The price of groceries may rise or fall, or you may find it hard to squeeze your boss for a raise, but they’re nothing compared to the uncontrollable fluctuations of stock markets.

Good longer-term targets might be:

• Focus on achieving a monthly income figure from your investments. (I recently wrote on how replacing your salary with investment income was a perfect long-term goal). Income from blue chip shares is much steadier than the same share’s capital value
• Focus on maxing out your tax-saving investment plans each year. (For instance, in the UK anyone with sufficient earnings should be focusing on using their £7,000 ISA limit every year.)

Create your own targets that suit your own position in life, but concentrate on things you can do, not things that will be done to you. The benefits are that you focus on what’s doable now, not on how generous the stock market may be feeling from month to month.

Ironically, now is a much better time to buy shares for income than a year ago. Anyone wanting to retire early should be pretty happy they can get 10%-25% more dividend income from leading shares than at the peak of summer 2007. In the long-term, markets (shares and property) will always bounce back, and this bear market will be seen as a great buying opportunity rather than a time for hand-ringing.

Most of us get into investing because we want freedom, whether from office bores, traffic jams or the drudgery of a mortgage. We want to be free from having to work for a living.

Why then are most money-motivated books called things like The Millionaire Next Door or Secrets of the Millionaire Mind? A million isn’t what it used to be, but it’s still more than most of us need for financial freedom.

What we’re really looking for is a replacement for our salary. The number on your pay check is the number you need to beat to retire early. If your monthly wage turned up in your bank account no matter what you did, wouldn’t you feel pretty financially free? You could quit work the next day if you wanted, although there’s no reason to take to the golf course – you could get a fun job, work for charity, or do all sorts of other exciting things instead.

Why you should consider targeting income instead of capital

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Your debt makes other people rich. You’re only borrowing from your future self, who will be poorer, less financially secure, or lead a less abundant life because you had to have it now, before you could really afford it.

You can’t save while you’re in debt, and like a weed it grows and grows. Kill it!

The only exception is debt you take on for investment purposes. Unless you run your own business, such ‘acceptable investment debt’ nearly always begins and ends with an affordable mortgage to buy property.

Borrowing to invest in shares is too risky. The market goes up over the long-term, which might make it seem like a good idea. But shares are volatile, and the market could easily go down over the 3-5 year time period of a personal loan.

You don’t want to have to sell your shares when they’re down to repay your capital – like that you’ll end up poorer than when you began.

Very occasionally debt might be acceptable if you need to buy something to earn more money, and you really can’t save it up.

For instance, you may need specific training to upgrade your job, or perhaps you want to buy an ice cream van to whip up a fortune. (Don’t laugh, it worked for Duncan Bannatyne.)

You’ll have to use your judgement here. Buying a fancy car with debt to impress your boss certainly doesn’t count!

But let’s be honest, we all know the kind of debt I really mean – excess clothes piled up using store cards, overseas holidays put on the credit card, a dozen sundry items bought over a week on the ‘never never’ as our grandparents ironically called credit.

This kind of debt – the kind of non-mortgage debt that most people take on – will make you poor if you’re not doing very well already, and it will stop you becoming rich if you are.

Too extreme? Everyone has debt, you say – surely millions of people can’t be wrong?

I disagree. I think the popularity of debt is down to:

1. Relentless emotional marketing by retailers to persuade us that we must have things we never knew we needed and most probably don’t.
2. Relentless emotional marketing by financial firms, who tell us we can have those things – now.
3. People being too impatient nowadays to save for anything.

Perhaps I sound old-fashioned, but I believe we need to relearn some of these old ways of thinking.

Financially, debt makes no sense in my view, whatever economists tell you about balancing ‘consumption over a lifetime’ or similar wealth-sapping baloney.

In reality:

• Debt makes everything much more expensive
• While you’re paying off debts you’re not saving and investing
• Debt saps your efforts to make more money
• You’re not getting anything ‘free’ when you buy on credit, you’re only borrowing from your future self, who will be poorer as a result of your debts

Let’s look at each of these in more detail.

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To get the most from your money in the long-term, you need to know what you own, what you owe, how much you bring in every month from your earnings, savings and investments, how much goes out again, and thus whether you’re living beyond your means.

Completing this personal reckoning is step two of my rather dramatically entitled 10 eternally true steps to financial freedom.

If we don’t take stock, we’re liable to do silly things like:

• Saving into a bank account earning interest at 5% while simultaneously accruing interest on a storecard debt at 26%.
• Working overtime, then buying takeaway food and late night drinks as a reward and so, post-tax, negating the overtime we’ve earned.
• Devoting evenings and weekends to our investments, to the detriment of the job or second income stream that’s actually bringing in the loot.
• Spending hours looking for the cheapest books or CDs online, while paying thousands extra a year on an expensive mortgage that’s moved onto the lender’s standard variable rate.
• Talking celebrity gossip at parties, when we could be enthusing to a cute stranger about how we’ve reduced our grocery bill down to £30 a week.

Okay, maybe that last one is an acquired taste.

How to take stock of your finances

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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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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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