Personal development

The six fundamentals of finances

I wanted to write something about money because there is just seems to be so much garbage in the media about it. What sparked me off was that a couple of weeks ago a national newspaper headlined that the average debt per person was on the way down-fair enough. In the very same paper a few days later it was reported that more families than ever are drowning in debt! Who really knows the exact truth, but it does seem a lot of people walk on a tightrope with their finances.

I don’t know what your relationship with money is like but I do know, after spending over 20 years in the financial sector, that when people have problems in this area it spills over into other parts of their lives. So surely it’s an area we need to get right to experience the best of what life has to offer?

Finances may seem like a complex area to some people but they don’t have to be. Whether it’s a huge business or one individual there are only six fundamental areas to finances…

1. Income

Income is what creates cash flow. It’s what drives the engine. But most people put themselves last in the money queue. Everyone else gets paid first and then there’s none left to invest to create financial freedom.

When people earn more money they often correspondingly up their expenditure. But if they kept the same lifestyle and started buying assets then they would reach financial independence far quicker. What will you do next time you increase your income?

2. Expenditure

There is a simple formula to attain wealth. Spend less than you earn and invest the difference. Most people over spend and consequently are not on a realistic path to financial freedom. In the classic book ‘The Richest Man in Babylon’ by George Clason, the first of the five laws of gold is save not less than one tenth of your earnings.

It’s amazing how much most people can save by paying close attention to their spending for a week or two. If you don’t get maximum value then don’t spend the money.

3. Cash

Having readily available cash is what provides a sense of security. I have always been amazed at how many people have virtually zero savings. What happens in an emergency? What happens if a fantastic opportunity comes along but money is required? If you’ve got no cash how do you focus beyond mere survival?

Each of us should aim to have three months, preferably six months, living expenditure, available instantly and as a bare minimum.

4. Borrowing

Long term, hard core borrowing means you are living or have lived beyond your means. By debt I mean loans, credit cards, store cards, overdrafts and any other form of borrowing. It sucks the life out of your ability to save and achieve financial independence as well as being a reason to worry. Do not tell yourself that just because it is acceptable to the majority it is alright for you too.

Some people have a tendency to repeatedly spend money on credit, which is often a symptom of a bigger issue. They are spending the money to make themselves feel good to cover up something else.

5. Protection

Two weeks ago I received a very sad email advising me that Corey Rudl, a genius internet entrepreneur, had tragically been killed in a car accident. He was 34 years old. His wife Tracy sent an email to say that he had put the structure in place to ensure his legacy will live on. (there’s a tribute to Cory at www.marketingtips.com)

None of us know when we are going to die, become ill or have an accident. What we do know it that any one of these situations is potentially catastrophic in financial terms.

When building up your assets and making great progress towards your goals an unforeseen event could completely destroy all your hard work and ruin your plans, not to mention those close to you who may also be affected. Therefore, the intelligent thing to do is make provision for the unforeseen. Rather than bearing the entire risk yourself, transfer it to someone else-insurance companies do have some uses!

6. Growth

Currently, I believe, only about 4% of people retire financially secure and fully able to fully support themselves. Only 1% of employees ever receive their full potential pension. Economic studies have indicated that of the soon-to-retire, more than 40% will not even have half of their pre-retirement income and nearly 20% will have incomes below the poverty level. Isn’t this incredible considering we are amongst the most prosperous nations on earth?

With careful planning, goals and focus anyone can become wealthy. For most people it’s not done by getting rich quick but by saving a reasonable proportion of income and taking advantage of the power of compounding.

When’s the best time to start investing? NOW, because despite what you read in the papers there’s always opportunity in any market conditions.

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