The Eight Rules Of Investing
Correspondent | Monday September 28, 2015 15:44
How to Spend, Save and Invest Your Money Wisely
Here are some personal finance “rules of thumb” to get you started:
Rule 1: Save for the Future First – as soon as you get paid.
This is called “paying yourself first”. Save first, spend later. Set up a savings account or a money market fund, and move some money into it as soon as you get paid.
If you wait, and spend first before saving whatever is left, you will often run out of either money or run out of motivation by the end of the month.
Rule 2: Bad Debt: Never borrow to buy anything that depreciates in value.
Spending more on debt and interest while losing on the capital value is what keeps most people poor.
Buying goods now - on credit - will make the “Future-You” poorer. If you buy with cash what you can afford today, “Future-You” gets the benefit, but not the costs.
The cause of bad debts is the failure to differentiate between your needs and your wants. Controlling your expenses is a big challenge, but remember: buying something only gives you temporary pleasure. Always ask yourself whether you really need the stuff, or whether you’d get more pleasure from experiences.
Rule 3: Vehicle: Pay cash for the car you drive.
Don’t buy a car on credit, and never drive a vehicle that costs more than 6 months net income. If you consider your vehicle an asset, consider that it depreciates by 10% each year. If you buy a new car, it loses 12% in value before you’ve even driven it – because of the VAT that you’ve paid. Then it will depreciate by an additional 20% in the first year.
By definition, an asset is an item that increases in value over time. Cars always fall in value. Don’t consider a vehicle to be an asset!
Rule 4: Emergency fund: You need to save up at least 3 months of your income.
Your emergency fund must be safe and secure, but available to use at short notice. An option is to put it into a money market fund that pays good interest but is secure and accessible.
Accessing our short term emergency fund when needed for any shortfalls prevents us getting into debt and incurring interest costs.
Rule 5: Own the House that you live in a soon as possible.
This mortgage to buy your own house is your only really ‘good debt’. This is because the bond repayments take the place of your rent.
However, don’t take out a loan with a repayment term of more than 20 years! The difference in monthly payments between a 20 year and a 25 year loan are very small, and the extra five years is just extra interest going to the bank.
Make sure your mortgage repayments are affordable. If they cost more than the rent you are used to paying for each month, how will you afford the extra expense?
Rule 6: TAKE CARE of Your Money
Don’t Lend Out Money!
Don’t get Scammed through Greed!
Live Within A Budget that you can afford!
Plan how you will spend your money, if you don’t have a plan, how will you ever be in control? How will you know if you are over spending, or where all your money has gone?
Rule 7: Beware of Non-Qualified Advice
Beware of financial advice from friends and colleagues, they will only tell you of success stories, never their financial disasters.
Anyone who tells you to buy an asset just because it has grown in value in the past is endangering you to buy at the peak of the market. Understand how much risk you can take and remember that there is no such thing as free money.
If you are going to use a Financial Adviser, remember to ask: What’s in it for them? What commission are they being paid?
Rule 8: Retirement Saving: Start when you are young, and invest on a monthly basis a percentage of your income equal to ½ your age. Therefore, if you are 20 years old, start to save and invest 10% of you salary. When you’re 30, that needs to be 15%, and when you reach 40, you need to save 20% for the future.
Think about the Future
When you’re making financial decisions, it can be helpful to think of yourself now, and then envisage a ‘Future-You’ which is still you, but in 10 or 20 years time. Then, think about what life will be like then, and plan a budget for that lifestyle. By knowing how much money you will need to retire, you will be able to keep this goal as a priority in your life.
Review:Rules to Live By
Priority 1: Pay Your Debts
Priority 2: Pay Your Bills
Priority 3: Buy Essentials – groceries, etc
Priority 4: Pay Your Future Self – SAVINGS
Priority 5:Treat Yourself
“We believe that true value of money is not how much you start with, but what you do with it”
Author: Somolekae Modikwa – Business Development Executive with S.C.I. Training (Pty) Ltd. © S.C.I. Training is a BQA accredited training institution specialising in Financial Education. We also offer Ethical Collection services for companies with debtors and Debt Counselling services for those in financial distress. For help and information contact 3180111 or 75114375 or money@wellness.co.bw