Ever since I got out of school at the age of 22, I had always been fascinated with the subject of personal finance, which is simply the business of making, keeping and managing one’s money. To be out on my own and independent was a formidable thought for me, so I took it upon myself to learn about it as much as I could as a post-graduate exercise since my discipline was not in finance, but rather in software engineering.
What I found quite utterly interesting about personal finance was how so much of it was rooted in human psychology — how you control and manage your own affairs as well as how your actions interplay with the rest of society, as evidenced through the economic markets.
My family would tease me horrendously about how I probably would turn out to be the miserly old relative who lived in the creepy old house up a hill, who upon expiring would bequeath a grand estate that would stun heirs far and wide for its unexpected discovery and magnitude. Hetty Green, they said I was.
Well fast forward to today and I am no longer anything like Hetty Green though perhaps in my earlier years I may have conducted myself rather similarly. I learned a lot about finance since and the more I learned, the less compelled I felt to scrimp so hard given that my growing confidence in the subject alleviated what I felt were the pressures of handling it.
To this day, I look to the following recognizable tenets (aka cliches of the century) as a guide to navigating my fiscal life, a work still in progress:
- Knowledge is power.
The more you know, the less chance you will be scammed, and the more capable you will be of managing your own money. In the world of money, there’s nobody else whom you can trust more than your own self; after all nobody cares more about counting your copper pennies more than you do. Seek out free investment software and tools online that you may be able to peruse. Read a bunch of books or periodicals on personal finance, or visit the wonderful world of personal finance weblogs and other online resources! I’d avoid attending free financial seminars though, unless you can stave off hungry agents who are highly proficient at the hard sell or trained to go for the jugular.Tip: Online brokerages like Scottrade, TradeKing and Zecco have a lot of free investment resources you can review. - Pay yourself first.
Again, if you have many expenses and are promising to pay your creditors your first born child, treat yourself as the most important creditor there is. Find out what the best savings account is for you, then set up a regular savings schedule for this account. Earmark a certain amount for this Me, Myself and I Fund, and you may be surprised to find out how simple it is to build a rainy day fund or something even beyond that. I did this conscientiously and invested the amounts in mutual funds using dollar cost averaging and it turned out to be quite painless and extremely successful.Tip: For your short term savings, there are high interest savings accounts that may offer you rates that are higher than the national average. Check out my EverBank review and HSBC Direct review for more information. -
Buy low, sell high.
Never am I more thrilled than when something tanks. This may seem somewhat ghoulish, but I’ve actually always been a big contrarian so whenever any market or single issue takes a dive, I get rather giddy as it represents an opportunity to cherrypick value in the surrounding distress. This goes for any form of investment, whether it be in real estate, or in the equity or bond market. -
“Concentrate” to grow your wealth and “diversify” to preserve it.
That is, if you concentrate your positions, you can potentially generate wealth faster assuming you are in the right end of a play. Conversely, you diversify your holdings in order to protect what you have. Whoever came up with this statement, I can’t remember for the life of me but I believe it to be great advice. Peter Lynch (the authority on “N-baggers”) preaches concentrated positions, while John Bogle (the master of indexing) preaches diversification. If you’d like to take a chance, go for it, as long as you think you can afford to lose your position with an aggressive trade. Simply going for broke on well concentrated portfolios is somewhat foolish unless of course you’re a true market wizard; I personally employ both strategies though on weaker economic periods, have preferred to diversify completely using indexed securities or funds. - Things revert to the mean.
Markets tend to revert to the mean. That is the case when considering the long term. So if you are holding an investment long enough and are enjoying a massive gain, realize that it won’t be that way for too long so you better know when to pull the plug. If you are the average joe (read: not a market whiz as in previous point above) trying to make a buck out of playing the market, you can get lucky and be just like the dart throwing monkeys who have beaten professional stock pickers at their game. Or you can try this for the long term and suffer a fruitless quest akin to the search for Atlantis, so you are taking a chance by trying to beat the market. - Don’t be penny-wise and pound foolish.
Take a hard look at your larger expenses and figure out how to control those. That’s where you’ll make a big difference in your finances, much more so than saving a few bucks here and there on discount soap bars or chewing gum, although I agree that small things add up. However, you can’t deny that by NOT overpaying to buy a house at the height of a housing bubble, you will save yourself an enormous amount of money for years to come which translates to several lifetime supplies of soap bars, dog food and chewing gum.
By following such prudent principles, perhaps before long you will have enough amassed to leave a legacy that will amaze your heirs…. and you wouldn’t have had to live like Hetty Green either.
- Stock trades: Free stock trades from Zecco, Cheap stock trades from TradeKing, Stock news and Investment info at INO TV Free, No cost Trend Analysis for stocks
- Earn top returns: FNBO Direct [1.90%], HSBC Direct [1.65%], WTDirect [1.76%], E*Trade Bank [0.95%], ING Direct [.25% to 1.65%]
- Cash bonus: Discover More [$50], American Express [$25], Lending Club [$25]
If you enjoyed this post, you can get free regular updates through our RSS Feed, or you can have our latest posts delivered to your email inbox by supplying your address here. Your address will only be used for this purpose, and you can unsubscribe anytime.
{ 6 trackbacks }
{ 8 comments… read them below or add one }
At the risk of presenting myself as a Hetty-Green-in-the-making, I am inclined to slightly disagree with the statement that one should not be “Don’t be penny-wise and pound foolish.”
As you said, small expenses do add up – and, in my experience, they can sometimes add up to more than one would expect. I’m currently going through a rather difficult financial period, and I noticed that by carefully monitoring my small expenses and asking myself whether a particular purchase is actually necessary or worth it, I managed to save a lot. I suppose just how much you really want to concentrate on minutae, day-to-day small expenses depends on your exact financial situation – however, for serious, “hardcore” fiscal controls, I’d be more inclined to go with being “penny-wise and pound-wise”.
Apart from that, I agree with the rest of the article, especially with the notion that things tend to revert to the mean, which is something that a lot of investors/casino players seem to forget. I also agree that diversification is crucial for wealth preservation – in my time on the Net, I’ve met a lot of people who were relying solely on their AdSense revenue for the majority of their online income, only to find themselves banned by the programme for whatever reason.
Hi George,
you are absolutely spot on with being penny-wise and pound-wise. It always amazes me how there are people who can live on $6000 a year in the USA. If only I could manage! Given that I have tried so long to maximize frugality and found that in the end I paid for it more — such as when I deferred house maintenance to save on contractor fees only to pay more when dry rot took over a garage wall — I opted to fixate on saving on the big things and became more proactive with maintenance even if it meant forking out money now rather than later. Who knows what kind of disaster I had staved off by paying for something today…? Thank you for your insights and comments, they are refreshing!
I would really like some advice from all you smart bloggers and readers . . .
I’m finally ready to put at least $35k into funds as a longish term investment. I was saving this for a home, but I no longer plan (or need) to buy anytime soon. I max out my roth and 401k, but I don’t hold any other investments.
Sooooo, the market is really high now. If I buy now, aren’t I buying high? There’s so much pessimism out there, too, regarding the economy and all that. Are we really due for a correction of some sort?
Part of me is thinking about waiting until January just to avoid having to deal with the tax implications of these taxable funds until 2008. Yeah, I don’t have an accountant, and I’m lazy & cheap like that.
And, part of me is thinking that I should just buy today.
What do you think?
Michelle,
If you are very concerned about the market being high — as I am, then do what is called “dollar cost averaging”. Here is what I wrote about it:
Taking the Emotion out of Stock Investing
Also, if you wait till January to enter the stock market, you may be buying during strength, which is not what you want to do. You need to buy during weakness to get better prices. The strength traditionally seen in the market in January is called “The January Effect” which is a phenomenon due to the psychological mood the market experiences when everybody comes out of the holiday season (optimism and cheer and all that)…. Just dollar cost average over the span of 6 to 12 months and you should be in the market in a manner that controls your risk.
Regarding money magazines 7 shortcuts. On item number 4 you stated you’d work on the first and leave the rest to last. Please do get a will now even though you’re single and young. If you die without a will your loved ones will suffer needlessly. Several friends died in a car accident when they were in their 20s and not having wills prolonged the mourning for all their families. Having a will would have simplified things and made a horrible time a little less horrible. Find an attorney who’ll do a basic will for you or see what you’re states requirements are for a will you write yourself (may need several witnesses in front of a notrary). Yes your 401k and Roth has a beneficiaries designated but your clothes, car, computer equipment will need to be disposed of. Your family will most likeyly have to hire an attorney anyway to handle your estate intestate so you might as well get one now and save them the potential trouble. Good luck.
money fellow,
you’re absolutely right. One of these days I’ll talk about wills and trusts. Estate planning is very important and needs to be done especially once you have dependents and a family to support.
i dig it
It’s common sense but it’s surprising how common sense goes out the window when it comes to setting up and running your own business. And as you said, take care of the pennies and the pounds will take care of themselves.