The days of getting 3% interest on your savings account is not coming back anytime soon but that doesn't mean you should sit back with your money and be happy with the 0.05% they may be giving now.
To grow your money you have several options (even more than I will mention here):
For long term investing go with a Mutual Fund or Exchange Traded Fund. Over the long haul (5+ years) these will allow for 6% to 12% rates of return. However, for money that you may need soon these investments are too volatile.
For short term investing you have a couple of options. The one with the most risk would be a peer-2-peer lending site such as Lending Club or Prosper. This type of site evaluates borrowers and then (if the site accepts them for the loan), they look for lenders. That is where you would come in. You become a lender and lend your money to several different loan accounts and whenever they make a payment you get some of the money back. Unfortunately these loans are unsecured, so if a borrower goes bankrupt, your money invested in that loan is gone. Usually though if you have a lot of different accounts the rate of return on our money will be about 8% over a three year period. (I have not actually tried this myself but I have heard good things).
The next highest rate of return would be in a Certificate of Deposit (CD). These have several downsides, the most daunting is the locked-in term. When you by a CD you do so for a set term, say 2 years. This means that if you need the money before two years is up, you will have to pay a penalty on the interest that you accumulated. Depending on the term length, a current CD can produce a 0.5% to 1.5% APY. (These are FDIC insured so there is no risk of losing money.)
There is also a special type of CD that allows you to make a one-time withdraw without penalty. These are probably your best bet when it comes to CDs. The one I like is offered by Ally Bank and yields a 0.91% APY.
Then the final option is a money market account. This is just a glorified savings account with slightly higher rates of return. Money markets nowadays can range from 0.25% to 0.85% depending on where you bank and how much you keep in the account. These are also FDIC insured.
The main objective here is not the interest rate or how you invest, it is the fact that you are paying attention to your money! Paying attention to your money will lead to wealth. You can easily wander into debt but it is very hard to get out of debt and become wealthy. It starts with paying attention.
--A Future Millionaire
Tuesday, February 21, 2012
Saturday, February 4, 2012
The Flywheel
In Jim Collins book Good to Great he introduces the idea of the flywheel:
"Picture a huge heavy flywheel, a massive metal disc mounted horizontally on an axel, about thirty feet in diameter, two feet thick and weighing about 5000 pounds. Now imagine that your task is to get the flywheel rotating on the axel as fast and long as possible. Pushing with great effort you get the flywheel to inch forward moving almost imperceptibly at first, you keep pushing and after two or three hours of persistent effort you get the flywheel to complete one entire turn. But you don't stop, you keep pushing and the flywheel begins to move a bit faster and with continued effort you move it around a second rotation. You keep pushing, in an intelligent, consistent direction. Three turns, four, five, six, the flywheel builds up speed, seven, eight, you keep pushing, nine, ten, it builds momentum, 11, 12, moving faster and faster with each turn, 20, 30, 50, 100! Then at some point breakthrough. The momentum of the thing kicks in your favor, hurling the flywheel forward turn, after turn. Whoooosh! It's own heavy weight working for you. You're pushing no harder then during the first rotation but the flywheel goes faster and faster and faster still. Each turn of the flywheel builds upon the work done earlier, compounding your investment of effort 1,000 times faster, then 10,000 then 100,000 the huge heavy disc flies forward with almost unstoppable momentum."
This is a powerful statement of how our finances actually work. Unfortunately for some of us, we have been pushing the flywheel in the exact wrong direction we want it to go. By building up debt and wasting money, the flywheel may be spinning so fast in the wrong direction it's hard to picture it stopping, much less spinning the other way.
So what can we do to get it turning the right way?
1. Stop borrowing money! You can't make much progress if you continue to push in the wrong direction.
2. Get help. Sometimes you can't reverse the flywheel by yourself. Reach out to someone you trust and ask them to help you get your finances under control. Also read all the material you can about how to handle money.
3. Don't give up! It is going to take consistently smart decisions with your money to get you out of the mess. As long as you keep pushing everyday things will start to move in your favor.
4. Invest in assets. Once you get everything under control and are out of debt, invest money so that you can make more without doing more work. (This is what really gets the flywheel going fast in the right direction).
5. Enjoy. Once the momentum of your smart decisions builds it will be easy to maintain, so you can sit back, relax and enjoy.
--A Future Millionaire
Friday, January 27, 2012
Mirror vs. Window
This title does not mean that I switch my blog to be about interior design, it's actually a business concept that is outlined in the book, Good to Great by Jim Collins. The whole book talks about how to turn a good business into a great business by studying companies that made and sustained a great amount of success. Although it talks about businesses we can relate this to our everyday lives... think of yourself as being the CEO of your life.
One of the principles that the research team noticed in the leaders of these companies was this mirror or window phenomenon. They noticed in the Good to Great companies that when things were going well, the leader would look to others in the company to give credit (window) but when things were going poorly they looked to themselves to solve the problem (mirror). With the comparison companies, it was the exact opposite!
So what do you do when things are going poorly in your life and with your finances? Do you look out the window for someone to blame or do you confront the person in the mirror?
Personal accountability is the most important concept you need to integrate into your life. Once you start shifting from "helpless victim" thinking to true personal accountability things start changing for the better. One book that talks about this idea is QBQ! Question behind the question by John Miller. The main point of the book is to start asking the right questions. For instance instead of asking, "Why do we have to go through all this change?" Ask, "How can I adapt to the changing world?" This change in perspective puts the initiative on you instead of someone else.
One of the most memorable lines in the book for me was the "Circle of Blame" that he laid out:
"The CEO blames the vice president, who blames the manager, who blames the employee, who blames the customer, who blames the government, who blames the people, who blames the politicians, who blames the schools, who blames the parents, who blames the teen, who blames the dad, who blames the mom, who blames her manager, who blames the vice president, who blames the CEO, and on and on it goes." p. 45
As can be seen from the silly yet true quote above, blaming accomplishes nothing! The take home point is to look into the mirror and take responsibility for where you are in your life and accept the responsibility to fix it. Once you take back control of your life, only good things will come.
--A Future Millionaire
One of the principles that the research team noticed in the leaders of these companies was this mirror or window phenomenon. They noticed in the Good to Great companies that when things were going well, the leader would look to others in the company to give credit (window) but when things were going poorly they looked to themselves to solve the problem (mirror). With the comparison companies, it was the exact opposite!
So what do you do when things are going poorly in your life and with your finances? Do you look out the window for someone to blame or do you confront the person in the mirror?
Personal accountability is the most important concept you need to integrate into your life. Once you start shifting from "helpless victim" thinking to true personal accountability things start changing for the better. One book that talks about this idea is QBQ! Question behind the question by John Miller. The main point of the book is to start asking the right questions. For instance instead of asking, "Why do we have to go through all this change?" Ask, "How can I adapt to the changing world?" This change in perspective puts the initiative on you instead of someone else.
One of the most memorable lines in the book for me was the "Circle of Blame" that he laid out:
"The CEO blames the vice president, who blames the manager, who blames the employee, who blames the customer, who blames the government, who blames the people, who blames the politicians, who blames the schools, who blames the parents, who blames the teen, who blames the dad, who blames the mom, who blames her manager, who blames the vice president, who blames the CEO, and on and on it goes." p. 45
As can be seen from the silly yet true quote above, blaming accomplishes nothing! The take home point is to look into the mirror and take responsibility for where you are in your life and accept the responsibility to fix it. Once you take back control of your life, only good things will come.
--A Future Millionaire
Monday, January 23, 2012
Net Worth
One of my goals for the new year is too continually track my net worth monthly to see how I am making it grow. I am excited to track it and see how much it is growing by saving and investing while spending less. I eventually want to be what Thomas Stanley calls a Prodigious Accumulator of Wealth (PAW) as opposed to an Under Accumulator of Wealth (UAW). The formula for figuring out which one you are is quite simple and involves your age and salary.
According to the formula your average net worth should be = 0.1*age*pre-tax income from last year (this can be taken from your W-2).
The formula is slightly skewed for those of us who are younger and those who have just achieved a stable salary. However, if you want to know how much you should be worth this is a good approximation. If your actual net worth is higher you would be a PAW and if it's lower you would be classified as an UAW.
I just graduated from college last year and have obviously not had much time to accumulate wealth. The power of compound interest is also not on my side but I am feverishly saving and want to get to the $1 million net worth. I am very far off right now as you may be too but if we keep saving and investing the flywheel will turn faster and faster and our goal will be attainable.
--A Future Millionaire
According to the formula your average net worth should be = 0.1*age*pre-tax income from last year (this can be taken from your W-2).
The formula is slightly skewed for those of us who are younger and those who have just achieved a stable salary. However, if you want to know how much you should be worth this is a good approximation. If your actual net worth is higher you would be a PAW and if it's lower you would be classified as an UAW.
I just graduated from college last year and have obviously not had much time to accumulate wealth. The power of compound interest is also not on my side but I am feverishly saving and want to get to the $1 million net worth. I am very far off right now as you may be too but if we keep saving and investing the flywheel will turn faster and faster and our goal will be attainable.
--A Future Millionaire
Wednesday, January 11, 2012
Happiness
Money can buy us a lot of things but happiness is not one of them. We try to find the next thing to buy that will make us happy but it always falls short. We always want more, thinking that will finally fill the void. We say, "If I only had that new house or car then I would be happy." Dr. Henry Cloud in The Law of Happiness investigates what we really need to be happy by trying to answer the question, "Where does happiness come from?"
First, he breaks down a mathematical makeup of happiness (derived from psychological research):
- Circumstances account for only about 10 percent of our happiness. (This is why the new house, car, boat, job or even spouse will make you happy at first, but it will surely fade if you don't address the other sources of happiness.)
- Our internal makeup (probably composed of genetic, temperament, and constitutional factors) seems to account for 50 percent of our happiness.
- The next 40 percent comes from things that we CAN control such as our behaviors, thoughts and intentional practices in our lives.
Dr. Cloud further breaks down these things we can control into thirteen chapters each corresponding with the thirteen ways of happiness where God and science agree:
1) Happy people are givers - Giving is important not only for others but also for the person who gives. That good feeling we get inside when we give some of our time or money can bring us true happiness.
2) Happy people are not lazy - In order to be happy we must willing to invest our time into things such as building relationships, attending a small group, pursuing goals, serving others and staying healthy.
3) Happy people don't wait for "someday" - If we are always looking for happiness in the future, we will never find it in the present. Find happiness in the now.
4) Happy people pursue goals - Setting worthwhile goals and reaching them gives a sense of accomplishment that is important for attaining happiness. I recently wrote about achieving goals and how to ensure you reach your goals. In the book, Dr. Cloud introduces something similar called SMART goals, meaning you must make them Specific, Measurable, Attainable, Realistic and Timely.
5) Happy people fully engage - Those who really love what they do become fully engaged and "time flies." If we are fully engaged to what we do then we become a happier person.
6) Happy people fully connect - We can't do this alone. We need support systems from friends and family built into our life to make us happy.
7) Happy people don't compare themselves - We are all unique and have different situations. You can't compare yourself to what others are doing especially when you don't know their whole story.
8) Happy people think well - Everyday, happy people are thinking thoughts that help them to be happy, while unhappy people do the opposite. Always think good thoughts and find the silver lining in everything.
9) Happy people are grateful - Be thankful for everything that we have, instead of wallowing over the things that we don't have. If someone is not yet in their dream job they should just be thankful they have a job that can put food on the table. Thank God everyday for everything.
10) Happy people have boundaries - They don't let people walk over them and they remove themselves from negative situations. "When you change yourself, the world around you usually changes as well."
11) Happy people forgive - "The evidence confirms that when you forgive others, you are the biggest beneficiary." Forgiveness allows you to move on with your life and forget about the past hurtful event.
12) Happy people have a calling - When we realize the daily activities that we do are in alignment with what God wants for us, everything has a higher meaning and purpose.
13) Happy people have faith - Having a relationship with God built on trust is important. Knowing that He has a purpose for us will give us a great sense of calm and allow us to get through a lot of hardship.
My goal is to become a millionaire... duh. But if I achieve it at the cost of my happiness and health then the journey was for naught. All the money in the world can't buy happiness and health, so it's important we keep everything in balance on this journey and stay truly happy and healthy while building wealth.
--A Future Millionaire
First, he breaks down a mathematical makeup of happiness (derived from psychological research):
- Circumstances account for only about 10 percent of our happiness. (This is why the new house, car, boat, job or even spouse will make you happy at first, but it will surely fade if you don't address the other sources of happiness.)
- Our internal makeup (probably composed of genetic, temperament, and constitutional factors) seems to account for 50 percent of our happiness.
- The next 40 percent comes from things that we CAN control such as our behaviors, thoughts and intentional practices in our lives.
Dr. Cloud further breaks down these things we can control into thirteen chapters each corresponding with the thirteen ways of happiness where God and science agree:
1) Happy people are givers - Giving is important not only for others but also for the person who gives. That good feeling we get inside when we give some of our time or money can bring us true happiness.
2) Happy people are not lazy - In order to be happy we must willing to invest our time into things such as building relationships, attending a small group, pursuing goals, serving others and staying healthy.
3) Happy people don't wait for "someday" - If we are always looking for happiness in the future, we will never find it in the present. Find happiness in the now.
4) Happy people pursue goals - Setting worthwhile goals and reaching them gives a sense of accomplishment that is important for attaining happiness. I recently wrote about achieving goals and how to ensure you reach your goals. In the book, Dr. Cloud introduces something similar called SMART goals, meaning you must make them Specific, Measurable, Attainable, Realistic and Timely.
5) Happy people fully engage - Those who really love what they do become fully engaged and "time flies." If we are fully engaged to what we do then we become a happier person.
6) Happy people fully connect - We can't do this alone. We need support systems from friends and family built into our life to make us happy.
7) Happy people don't compare themselves - We are all unique and have different situations. You can't compare yourself to what others are doing especially when you don't know their whole story.
8) Happy people think well - Everyday, happy people are thinking thoughts that help them to be happy, while unhappy people do the opposite. Always think good thoughts and find the silver lining in everything.
9) Happy people are grateful - Be thankful for everything that we have, instead of wallowing over the things that we don't have. If someone is not yet in their dream job they should just be thankful they have a job that can put food on the table. Thank God everyday for everything.
10) Happy people have boundaries - They don't let people walk over them and they remove themselves from negative situations. "When you change yourself, the world around you usually changes as well."
11) Happy people forgive - "The evidence confirms that when you forgive others, you are the biggest beneficiary." Forgiveness allows you to move on with your life and forget about the past hurtful event.
12) Happy people have a calling - When we realize the daily activities that we do are in alignment with what God wants for us, everything has a higher meaning and purpose.
13) Happy people have faith - Having a relationship with God built on trust is important. Knowing that He has a purpose for us will give us a great sense of calm and allow us to get through a lot of hardship.
My goal is to become a millionaire... duh. But if I achieve it at the cost of my happiness and health then the journey was for naught. All the money in the world can't buy happiness and health, so it's important we keep everything in balance on this journey and stay truly happy and healthy while building wealth.
--A Future Millionaire
Subscribe to:
Posts (Atom)