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Top Ten Practical Tips To Manage Your Finances

Many people like top ten lists. They're pithy, and a great road map for the uninitiated. And they're even better when they're proven.

So let's start with that. The first rule in managing your finances is to systematically save your money. Hang on to what you have, or as they say in Latin, Retine Quod Habis.

If you dig into the numbers and the magic of compounding, you see it is not so much about the return but systemically adding to an existing growing pool of wealth, and not touching it for say 30 years.

Once a week is times 52. Once or twice a month is 12 or 24. Times $10 it is $520 when saved weekly, or $120 to @240 if saved monthly or bi-monthly.

Now instead of $10 say it is $100, so that you accumulate $5,200, $1,200 or $2,400 depending on your accumulation pattern.  How about $500 or $1000? Putting that away every week is a stretch for most of us, but done monthly or bi-monthly could work.

Let's assume the savings range is $10,000, $20,000 and $30,000 per year, and you invest in a plan once per year. 

For the following calculations, I used the Savings Calculator at Check it out because it has lots of good financial tools specially created for Canadian interest calculation conventions. This is important because US calculations are different in compounding methodologies.

If you multiply it by 30 years, you would accumulate $300,000, $600,000 or $900,000 in original payments, but at a 10 percent yield that grows to about $1,985,000, $3,970,000 and $5,950,000 respectively. At half that, 5%, it's still about $740,000, $1,480,000 and $2,222,000.

Now a lot of the increase is interest yes, but it is really about the investment earnings in any COMING year, which is based on savings in the current year being added to the pool of prior savings plus all that it has earned so far.

It looks like this. In year one you save $10,000 to earn 5%. In year two you add $10,000 to the $10,500 prior year pool. In year three it becomes  $10,000 plus $11,125 from year one plus $10,500  from last year's $10,000. This will go on for 30 years, then adding that final $10,000 to whatever the prior 29 payments have earned to date.

To drive this point home, investing that first $10,000 at 5% for 30 years grows it to just under $45,000, earning you about $35,000, while saving  $10,000 per year at 5% grows to about $740,000 in 30 years, earning you about $440,000.

You can readily see that systemic saving is the key to wealth accumulation so you must have oversight over your finances and the discipline to save the annual amount you put away first.

It also means don't worry about keeping up with the Jones or others with big houses, fancy cars, exotic trips, etc, that they want right now. Especially if the lifestyle is financed because incurring debt costs money, and financing anything means you'll pay far more over time than if you pay cash today. It's the flip side where the magic of compounding works for the lender and against the borrower.

Given the math of save systematically works, and the discipline required to not spend it for 30 years does not come easy, let me advance some guidelines and tips on how you can get there.

Here's what I think can work:

1. Live below your means. Way below if you can.

2. Save your money according to your planned schedule . This follows naturally from #1, but it is so crucial that it needs to be emphasized. Invest it conservatively and always consider after tax returns. In this day and age, capital gains and eligible dividends are treated most favourably for tax. Canadians should have Tax Free Savings Accounts, RRSPs, and RESPs if you are saving for a child's education. And NEVER automatically believe what banks and other financial institutions say about what you need. They ONLY care about getting their hands on your money, and if they can, they'll convince you to invest it in something that works best for them.

3. Focus on building your personal capabilities and reputation so that you can earn more. This makes points 1 and 2 much easier.

4. Make sure you marry someone with the same frugal attitude as yourself. This results in easy decisions, builds trust, avoids stress, and this may seem counter intuitive, but allows each to spend freely without looking over each other's shoulder to see where the money is going. Set a limit to what you and your spouse can spend, and on what, without consulting the other.

5. Avoid all debt except debt that builds wealth. So a mortgage to buy a home, or debt to finance some other safe investment is fine, but do pay it off as quickly as possible. They key is to avoid, minimize, and if you have them, eliminate fixed monthly obligations.

6. Don't become house poor by buying more house than you really need. This follows from point 1, and makes point 2 easier, because it means lower mortgage payments, property taxes, maintenance, insurance, utilities etc.  Do not be misled by agents and brokers into buying bigger because home gains are tax free, real estate is a 'can't miss investment", or because interest rates are so low you can afford the mortgage. The most important "number" is easy affordability with lots of room available to meet all your other goals.

7. Never think that anyone who provides you with any good or service is in it for your benefit, especially when they approach you. EVERY business wants your money, and as much of it as they can have, so when a business comes to you with an unsolicited offer, they'll likely say whatever they think it takes to get it. Mostly, they prey on your fear, greed, or guilt, but they twist it in terms of why you are better off than before, and why you should deal with them. The reality is, no matter what they say, in the end they only care about themselves. So rely on points 1 and 2 and say no to all unsolicited offers, and when you do spend your hard earned money, do it on your terms and look for reputable businesses who provide you with true value.

8. Which takes us to point 8. When you do spend, make sure you know why, and how it all fits in to your overall life and family plan. If it's about acquisitions, it's about how can you best get good value for your money. Be careful not to fall prey to your vanities and superficial wants. For larger purchases, always look at at least three alternatives. And it is often better to spend a bit more on quality and reputation, so that it lasts longer, costs less to maintain, and is well supported by manufacturers and retailers. And avoid fads. Think about how attractive something may be in say 5 to 10 years.

9.Point 7 also leads to buying a car when you don't have to so that you can shop without pressure. while point 8 provides some guidance as to when in time you do. Unless there is some compelling reason, buy used, from a reputable dealer or intermediary, and get the best quality small car you can without any fancy features. You'll save on initial cost, gas, insurance, and maintenance. Save even more by only using it when you have to. Instead, walk, cycle, use public transit,  or share a ride. A car is only transportation.

10.Free financial planning or advice that is advertised is never ever free. Only deal with objective, independent, knowledgeable, reputable advisors who are experienced in the areas you use them for. They will cost you money, but you'll know exactly what you are paying and what for. And don't focus as much on the hourly rate as the total bill and what you get for it. When you do pay, make sure you learn as much as you can from it.

So there you have it. In a nutshell, increase your capabilities and earning power, and Retine Quod Habis. 

© 2015 John B Voorpostel

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