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

What’s Your Latte Factor? The Automatic Millionaire

The Automatic Millionaire is a great personal finance read by David Bach. Bach has written a wide assortment of personal finance books geared towards different audiences. The Automatic Millionaire is his most popular book and the one that applies to most people.

The book starts with a couple approaching Bach in their late 50’s worried about their finances. The couple approaches Bach for advice, trying to see if they are prepared for retirement. The couple has a dual income of approximately $60,000 a year, which is not a huge salary but provides them with a decent living. Bach takes a quick look over their finances and is surprised to see that the couple is well prepared for retirement. The rest of the story is about how this couple was able to become financially free on an average salary. Here are 3 valuable lessons you’ll find in this book.

1) Pay Yourself First – It is really disappointing whenever we get a pay cheque only to see how much gets taken off the top. The first person who usually gets paid on payday is not you but the government. Money is taken away in the form of Canada Pension Plan, income tax, and employment insurance. In addition you may have to pay a small fee for company benefits and insurance. All of these deductions can add up to as much as 30% depending on your tax bracket (it can be as high as 45-50% for people making over 100k). To bypass all of these deductions you can contribute to a Registered Retirement Savings Plan (RRSP), which can grow untaxed until it is withdrawn. When it is time to withdraw from your RRSP you should be retired, therefore your income is much lower (thus you'll be in a lower tax bracket) resulting in less income taxes. Another way to bypass tax deductions is to contribute to a Registered Education Savings Plan for your children. Either of these plans are great for paying yourself first and not the government.

Bach also suggests setting up an automatic withdrawal from your chequing account on payday into a savings account. It’s good to start with a small amount, like $5 or $10 each payday. Bach suggests that you can gradually increase this amount over time so that it doesn’t drastically change your lifestyle. Over time you’ll see a nice bundle of savings in your account. Another excellent personal finance read with the "Pay Yourself First" lesson is The Wealthy Barber. Check out: http://reynold-savemoney.blogspot.com/2010/06/one-of-best-personal-finance-reads.html for more information.

2) Latte Factor – Bach defines what he calls the Latte Factor, which are the dollars that escape our grasp on a daily basis. Often these small costs build up to large quantities of money. Bach gives an example of somebody who buys a Latte each day from Starbucks. Usually it’s only about $2, but while they are in Starbucks they decide to get a croissant and biscotti which adds up to $6. Do this for 5 weekdays and we’re already at $30.

With 52 weeks in the year and 3 weeks of vacation that’s 49 weeks of Starbuck Lattes and snacks. This adds up to a whopping $1,470! The thing about the Latte Factor is that usually we spend such small amounts on a daily basis we don’t even notice or give it a second thought. You don’t have to give up your latte all together, but when you are conscious about your spending you may be able to cut it down from 5 times a week to 2 times a week. Another important note is that when we’re in a position where we’re spending it’s easy to add in a couple extra treats. For instance in our Starbucks example, it’s not difficult for us to pick up a couple snacks when all we were planning to get was a latte. If we’re conscious of the extras we can also try to cut our expenses there.

3) DOLP – this stand for Dead On Last Payment. This is Bach’s system to prioritize paying down credit cards. This system could also work on other loans such as student loans, mortgages, car payments, etc... . Really this system can apply to all loans with the goal of minimizing interest costs. See this archived article for more details: http://reynold-savemoney.blogspot.com/2010/08/pay-off-debt-or-invest.html.

Check out this book at your local library. With these tips you can be on your way to becoming a Millionaire Automatically!

Here's an extra tip from David Bach to take 5 years off your mortgage!

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!