Top 3 Personal Finance Books - Setting the Foundation

Happy New Year!

So I bet you've made a bunch of New Year's resolutions and this year you're going to get all your financial ducks in a row, right? There's a myriad of personal finance advice out there, so it can be difficult to sift through he garbage. Fortunately by reading just a few personal finance books you can be way ahead of the pack.

You might be asking yourself, what is personal finance anyways? Personal finance is the very practical subject about how to handle money in your life. There's no escaping it, we all deal with money everyday. We work hard for our money, so wouldn't it be nice to learn how to get your money working harder for you. Personal finance is about enriching your life by doing such that, it's about learning how to handle your money in such a way to become financially free.

 Financial freedom can mean many different things to many different people. There's no one size fits all plan, which is why it's important to tailor your finances to reach your own personal goals. Money should never be an end in itself, but a means to an end, which is why it's so important to set financial goals in the first place.

By understanding the purpose of money in our life we can live a much more meaningful one and truly build wealth. Personal finance isn't about amassing a fortune only to be a miser. It's about having security in knowing that you have enough to weather life's inevitable ups and downs, providing for loved ones, and the freedom of enjoying what life has offer.

The topics covered in these books include:
     - The role of debt (particularly how bad credit card debt is)
     - Setting financial goals
     - Paying yourself first
     - Mortgages
     - Insurance
     - Saving for retirement (RRSP for Canadians, 401K for Americans)
     - Investing

By reading these three books you'll be setting a strong personal financial knowledge base. There will be some repeating themes in these books, but they're each taught in a slightly different way. One author may explain a certain theme that will really get through to you, while another may bore you. So my recommendation is to read them all, eventually something is going to sink in. By doing so you'll gain a clearer picture of what to do with your money so that you can eventually become financially free:

1) The Wealth Barber by David Chilton

 For more information visit:
http://reynold-savemoney.blogspot.ca/2010/06/one-of-best-personal-finance-reads.html


2) The Millionaire Teacher by Andrew Hallam

3) The Automatic Millionaire by David Bach

For more information visit:
http://reynold-savemoney.blogspot.ca/2010/09/whats-your-latte-factor-automatic.html

Here's a short video clip about Andrew Hallam's story and some of his solid financial advice:

Rules of Retirement Have Changed!

We all occasionally daydream of the day when we don't have to work anymore. Images of feet in the sand and a cold beer in hand come to mind. For most of us retirement is far from reality and it may seem to far away to think about. Now with the recent changes to company and government pension funds retirement may seem more like fantasy than reality.

First of all it's important to note that the rules of retirement has changed. In the past people would work at one company for 30 years or so and get a pension where 70% of there annual salary would be paid to them for the remainder of their life. This type of retirement plan is known as a defined benefit plan. Most companies have found that a defined benefit plan is too costly to their bottom line since they have to ensure they can pay for employees that are no longer working. Therefore, companies are moving towards a new type of pension plan known as a defined contribution plan. The way this pension plan works is the employee contributes a certain portion of their pay cheque (usually 5-10%) into a registered retirement savings plan (RRSP) and the company matches the contribution.

There is a dramatic difference between these two types of pension plans. The pro to a defined benefit is that the company will ensure that you get a steady pay cheque after you retire (unless the company goes bankrupt). The con is that you have to stay with the same company for 30 years, which is happening less and less these days. The pro to a defined contribution plan is that it is usually portable, which means it travels with you if switch to a different company sometime down the line. The con is that now the employee is responsible for the management of their own retirement fund (to a certain extent, more on this in future articles), so if the markets perform horribly just as you are retiring you are up the creek without a paddle.

So now that we know the rules have changed and that our retirement is now our own responsibility, what can we do to ensure that we can retire? The simple answer is to set a goal, calculate your current cost of living, and to save and invest wisely so that your savings and passive income can support your cost of living. This is one article that can lead to endless topics, but the most important step is to realize that the retirement rules have changed and we need to change our financial planning accordingly.

For more on passive income check out the following articles.

Top 4 Forms of Passive Income
http://reynold-savemoney.blogspot.com/2010/08/top-4-forms-of-passive-income.html

Rich Dad Lesson: 3 Types of Income
http://reynold-savemoney.blogspot.com/2010/07/rich-dad-lesson-3-types-of-income.html


Here is a clip from http://www.howdini.com/ of David Bach the author of Start Late, Finish Rich on saving for retirement:


For information on "The Automatic Millionaire" by David Bach check out: http://reynold-savemoney.blogspot.com/2010/09/whats-your-latte-factor-automatic.html

Pay Off Debt or Invest?

This is a simple question which can lead to complex answers. The short answer would be to pay off all your bad debt before attempting to invest your savings. As discussed in an earlier article there are two different kinds of debt and it is important to distinguish between the two: http://reynold-savemoney.blogspot.com/2010/08/know-your-debt.html . But in most cases it's best just to pay off any money that you owe, because it would be terrible to waste your hard earned cash on interest.

So before we delve into the world of investing, it is best to first talk about debt. Now that you know the difference between good debt and bad debt it would be wise to tackle all of your bad debt. This would be your credit cards, vehicle payments, and the mortgage on your own home. Also included in this category should be any student loans. While you were going to school there probably wasn't any interest accruing, however a month or two after you finish school the interest clock starts. So it's best to get that debt off your back as soon as the interest starts accruing or better yet before the interest clock starts.

There's an excellent book by David Bach entitled the Automatic Millionaire. He explains a very simple method of paying off consumer debt (which is the worst bad debt) known as the DOLP system, which stands for Dead On Last Payment. Basically the best way to pay off consumer debt is to pay off your credit card with the lowest balance first, not the card with the highest interest rate. There is an interesting formula to rank which debt to pay off first. I've included a link that allows you to calculate and rank the credit cards you should pay off first http://finishrich.com/dolp/ .

It's important to note that it can be very difficult to invest your money for growth when you still have outstanding debt. An investment can be measured by what is called a return on investment (ROI). This is an annual rate of return that you get on your investment which is measured as a percentage. For instance, if you invested $100 in Company A and at the end of the year you receive $110 on your investment you have just received an ROI of 10%. You just made an excellent investment! However, if your credit card debt of a $100 is charging your 19% interest you're really losing 9% to the credit card companies, not to mention penalty fees for not making payments. So it's important to understand the debt that you're in and seriously consider paying it off before investigating your investment options.

I've included a video by David Bach about his DOLP system. The first minute is him trying to sell his book so I would skip to the 1 minute mark and listen to it to about the 2:20 mark. Let's get that debt off our backs and move on with our lives to a better financial future!