Hello again and great to have you back for the second day of the 31 Days Challenge to Financial Excellence! Today we are going to calculate our net worth to see how healthy (or unhealthy) our current financial situation is.
Your net worth is a sum of all your possessions (also called assets) minus the total of all your debts. You can either have a positive net worth, which means that you have more possessions than debt, or you can have a negative net worth, indicating the exact opposite: you owe more than that you own.
Examples of assets include: real estate, any money in savings or checking accounts, investments and valuables such as antique (don’t bother including your electronics or small jewelry though as these are unlikely to add that much value). Continue reading “Day 2 / 31 – Calculate your Net Worth”→
Hello and Welcome to Day 1 of the 31 Day Challenge to Financial Excellence! We are going to dive straight in and start with the first Challenge of this month: Track your Expenses.
When you start keeping track of everything that you spend, you gain valuable insight not just in where your money goes each month, but also where you might be able to save some money as well as taking steps to aligning your expenses with your long-term goals.
If one of your goals is to start your own business at some point in the next 3 years, and if you only have $500 of the $10,000 that you calculate you need as start-up capital saved up, then you clearly need to up your monthly savings. Continue reading “Day 1 / 31- Track your Expenses”→
In just 10 days from today, on October 1st we will be starting the 31 Day Challenge to Financial Excellence. During these 31 Days many different financial topics will be covered, including expenses, debt, savings, pensions, income, investing, financial security and many more! If you haven’t signed up yet, make sure to do so here.
Whilst you will be sent all the necessary information and challenges at the start of each day, I recommend you do the following before October 1st to be as prepared as you can be for when we start the 31 Day Challenge:
* Join the Facebook Group dedicated to this mission and connect with other people during the 31 Day Challenge to see how they are doing and to find motivation. This is also where you can go as soon as you finish your challenge and let us know you have completed it or put any specific details or questions regarding that day’s challenge.
* Follow 100 Steps Mission on Twitter for more tips and ideas every day. During the 31 Days, we will be using the hashtag #31DaysChallengetoFE so feel free to send out a tweet at the end of each challenge to let the rest of the world know about your progress!
* If you know of anybody else who could do with a financial make over, let them know about this challenge so they can join too. Or find a friend, colleague or family member willing to do this challenge with you so you have an accountability partner!
* I recommend you find an old notebook to take notes in every day, either regarding the challenge you are doing or to jot down important information or ideas. Alternatively you can of use a digital file for this depending on your preferences of course.
Are you looking to give your finances a quick make over? Do you want to learn about the 31 most important financial steps you can take right now to kick your money management skills into high gear? Would you like to become more financially organized but do you have no idea where to start? Could your current financial status do with a health check?
If so then join me for the 31 Day Challenge to Financial Excellence, starting October 1st 2017! During these 31 Days you will be given a challenge or task to complete each day that will bring you one step closing to Financial Excellence and Success.
During these 31 days we will cover a huge range of topics: expenses, debt, savings, pensions, income, investing, financial security and many more!
There is no need to read dull money books or spend hours learning about complicated financial concepts, each day’s challenge has all the information you need to get you started!
Sign up now and you will automatically receive each challenge delivered to your inbox on October 1st! Make sure to also join the Facebook group for daily tips, news, support and accountability!
Step 53 of the 100 Steps mission: To invest or not to invest?
The big question is of course whether you should or shouldn’t start investing. Ask anybody and you are likely to get very different answers, some saying they can recommend putting in some money monthly, others saying only the really wealthy or dumb invest in the market, whilst still others see it as their main way to (early) retirement.
The truth is, whether or not to invest depends entirely on you, your personal (and financial) situation, and the reasons you might want to invest in the first place. In this step I’ll try to give you some pointers to think about to help you determine whether or not you should invest, but the ultimate decision is yours and you have to feel comfortable and happy with that decision.
My boyfriend at the time (he’s my husband now), suggested we’d start investing in 2009 when the market was at a low. Now I wish we had, as we would have been able to buy lots of really cheap shares, but at the time I didn’t know anything about money and didn’t feel comfortable putting money into something that I didn’t understand. Of course I regret not having bought those cheap shares now, but I don’t regret not putting in money without knowing what I was doing and whether I really wanted to invest. Continue reading “Step 53: To invest or not to invest”→
Now that we’ve discussed the what of investing (stocks and bonds and what the differences between the two are), it is now time to learn more about the how of investing and in particular how one can enter the stock market and start investing. Hopefully by now you’ve at least become slightly curious about how this investing really works, whether or not you feel like this will be your thing to do.
Generally speaking there are three different ways you can invest in a stock market:
Handpicking shares (and bonds) of individual companies
Getting a collection of shares and bonds through collective or mutual funds
Passive investing through Index tracking or Exchange Traded Fund
We’ll look at each option in turn to find out more about each way of investing in detail. In this step we’ll start by looking at handpicking shares of individual companies. Remember that these steps are only an introduction to the complexity of investing, so don’t just take my word for it, but read up if you’d like to find out more. There are many good books, articles and websites around that will explain this all in greater detail.
To make things easier on me as well as on you when reading, I have decided to talk about “handpicking shares” where in reality I am talking about both shares and bonds (yes, you can call me lazy if you want..!) Continue reading “Step 50: Investing through Handpicking shares”→
Stock markets have a vast selection of stocks and bonds that can be invested in and before deciding what to invest in, understanding the main differences between stocks and bonds well is absolutely key if you consider getting in the stock market. Investors can decide whether they want to invest in just shares, just bonds or whether to create their own mix of stocks and bonds. With time, many furthermore decide to slowly reallocate their investments, so even if you start with a certain percentage shares and bonds, this needn’t stay as such for the rest of your investment life.
Here we’ll look at the main differences between shares and bonds from an investor’s point of view and how they both offer different advantages and disadvantages.
Volatility
Share prices vary more day-to-day but also over long periods of time: their value can increase or decrease fast.
Bonds are generally more price solid and fluctuate less over time and at a much slower pace than shares.
In step 47 we looked at an introduction of what shares are, but they are only part of the stock market, there is another major player to be found on the stock exchange, which are of course bonds. In this step we’ll look at bonds in greater detail and find out why they might be interesting to invest in.
What is a bond
A bond is in essence nothing more than an IOU that a government or company issues when they borrow money. In the case of a bond, the debtor (i.e the government or company that issued a bond and therefore borrows money) agrees to pay back the full amount of the original loan, along with interest.
A bond is traditionally an official paper to confirm the loan and when bonds are issued, they usually have the following information:
Value of the original loan, i.e. how much money the bond was for.
Interest rate that the company or government will pay back yearly.
Redemption date: this is the date when the issuer of the bond will pay back the original loan. This is usually anything between 5 and 30 years.
Like with stocks, companies and governments often issue many bonds at the time in order to raise a total amount of money they need for a new investment or expansion.
Why do bonds exist
So why do companies issues bonds and not just borrow money from the bank? The main reason to choose for bonds is that companies can often agree lower interest rates with investors than they can with banks. It also means that they don’t need to adhere to the restrictions that many banks impose on entities when they borrow money. By issuing bonds it guarantees that companies have more flexibility and freedom when it comes to chosing between reinvesting or loan repayments.
So why not issue shares then? A drawback of shares is that a company cannot just continue issuing more and more stocks without annoying their investors as the more shares are out, the more owners of the company there are, the more reduced the Earnings Per Share (EPS) are: the same profit has to be divided amongst more investors. With bonds, companies don’t have this problem as they can issue more so long they can find new investors willing to lend them money. Of course the disadvantage of bonds over stocks is that the full amount needs to pay back, which as we saw in step 47 is not the case when a company issues shares.
What do bonds give
Bonds give investors the possibility of making money in the following two ways:
Interest payment – as with any loan, a debtor agrees to pay interest on an outstanding loan, so if you lend somebody $100 at an interest rate of 5%, you can expect to get $5 every year until the redemption date, when the bond will be paid back in full.
Capital gains – similar to shares an investor can decide to sell their bond to somebody else, meaning the new investor takes over the loan. Since bonds are traded on the market, their prices can go up (or down). Bonds can be sold for more or less money than was originally lent to the company or than what the original investor paid, so as with shares, one can make and lose money on the buying and selling bonds.
What affects the price of bonds
The fluctuation of bonds prices is usually a result of the following three main factors:
1. Interest rates of the national and global economy
Investing in anything on the stock market always brings a risk as well as a cost with it. You pay fees somewhere along the line, be that to a stock broker or your brokerage account.. at some point you’ll pay. Added to that, bonds might cease to exist if the company or government goes bankrupt. So if you get 5% interest on a savings account with you bank, you’d be silly to buy bonds at 4%, as not only will you get less money on it, you will also run a higher risk of losing your money and you haven’t even paid for any costs at this stage. When interest rates of the economy go up, bonds have to offer more interest, otherwise people will invest their money in their own savings accounts. Add in inflation rates being high or low and you can imagine that it might be more interesting to put your money in stocks instead of in a low-interest bond.
2. Risks associated with the bonds
Every bond issuer is different and is either more or less likely to actually pay back the loan. If the entity goes bust, you simply won’t get any money back. Safer bond issuers might be more interesting as they are less likely to go bankrupt, although returns (i.e. interest rates) are generally lower than on bonds from more risky entities. To indicate how safe a bond is, there is a credit quality rating or bond rating, which ranges from AAA (highest level of safety) to AA, then A, BBB, BB and B and continues with CCC, CC and finally C, which indicates a low quality bond. During different economic times, people are willing to take more or less risk.
3. The remaining life span of the bond
Bonds that have a long life span have a higher risk of a payment default (the issuer not being able to pay) or a change in their credit rating. A company might be very healthy at the moment, but what will they look like in 30 years’ time? Because of the associated risk, longterm bonds usually have a higher interest rate to correct for the increased risk or insecurity. Bonds getting closer to their redemption date can go up in prices as they become more interesting to have as the chance of payment default or bankruptcy of the company goes down.
Two last warnings
Remember that if you bought a bond of $100 for $110 (thinking you’d either get enough interest on it to counter for the $10 difference, or would be able to re-sell at an even higher price), since the bond was originally issued for $100 at the end of the its date, you will only be given $100 by the issuer! If on the other hand you purchased it for $90, you will make $10 on the bond by its expiry date.
If a company has issued both bonds and stocks, then their bondholders must be paid interest before any profit can be given to the share holders. At the same time when you buy a bond, you won’t be given any part of the profit.
Step 48 – Understanding bonds – in detail
Like in the previous step, we are for now just finding out about bonds and how they behave on the market.
Type in bond prices + a company to find out more about the characteristics of bonds, such as their interest rates, maturity date / redemption date, and current prices. See how this evolves over time. Don’t worry about the actual details or number, just try to get an idea of how bonds trade on the market.
It’s harder to find information on bonds in the news, as news items tend to focus more on shares since they sound more exciting due to their prices fluctuating more. Try and see if you can find some information on bond prices, defaults and other information on bonds.
And that ladies and gentlemen is the introduction to bonds. Does the whole stocks-and-bonds-story still sound little confusing? Good, as the next step is completely focussed on comparing the two in greater detail.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.
We’ve mentioned inflation in several earlier steps, so it’s time to have a closer look at this economical phenomenon, how it works and what effect it has on the economy and your personal finances specifically.
Inflation
Inflation is an increase in the prices of goods and services over a period of time, leading to a loss of the relative value of our money. If you have $1,000, you can buy 10 items that cost $100 each today, but when the item price goes up to $110, the $1,000 will only buy you 9 items in the future. Inflation leads to us being able to buy less for the same amount of money.
Deflation
The opposite of inflation is deflation, with prices dropping and therefore our money increasing in value. Although this might initially sound like a fantastic situation, a period of deflation is normally a sign of economic recession. When customers know that prices will go down with time and that their money will be worth more tomorrow than today, they hold off making new purchases or investments. Often times this is a vicious circle, as interest rates on loans drop (see further down as to why) so holding off bigger purchasing such as a house means not only that it will be cheaper if one waits a little, but also that the interest on a mortgage will be lower. The more people do this, the more prices drop further, the more interesting it becomes to wait even longer. Less money is spent, the government needs to make cuts as less taxes are coming in, more businesses struggle to survive, people lose their jobs and money is no longer flowing, meaning the economy is becoming unhealthy and in no time the economy is affected negatively tremendously. So in reality a situation of deflation is not generally a desirable one. Continue reading “Step 46: On Inflation and Interest Rates”→
Although it is nearly impossible to predict how your pension will develop over time and how much pension schemes will change, especially if you are still many years, if not decades, away from your retirement, calculating your pension regularly and setting pension goals is a key habit to develop and establish if you don’t want to be taken by surprise when you finally get to retirement age and start needing to rely on your pension.
It’s easy to think that our pensions will work their way out for us and that we will be able to retire comfortably after 40 or 45 or even 50 years of working. Yet with fewer and fewer young people carrying the burden of paying for an ever-increasing aging population, not just in numbers but also in years living after retirement as saw in step 42, we don’t know exactly how the pensions will develop. Already many countries are increasing retirement age and this might happen again in a decade a two. Continue reading “Step 45: Calculate your Desired Pension”→
100 Steps Mission 