By Amanda Morrall
As proof positive Auckland is not the centre of the Kiwi universe, I decided to put myself to work today. Fortunately for me, personal finance bloggers are cranking it out 24/7 so I'm able to share the link love. Some fabulous reading here today, from the practical to the psychological and philosophical.
1) Bad brain
I like to consider myself a rational being but I'm not. Not because I'm female because I'm human. When it comes to money, humans are no less irrational than they are in love. We make stupid, self-sabotaging decisions all the time. The advent of behavioural economics acknowledged our propensity to made illogical, reckless and damaging financial decisions.
Globe and Mail writer Dave Morris explores why in an interview with Barry Ritholtz, an equities researcher who is cultivating a rather large following for his blogs on investing and behavioural economics.
2) Reverse budgeting
In recognition of the fact that traditional budgeting and savings methods just aren't working for the masses (as per bad brain wiring) many financial planners and PF bloggers including Money Crush, suggest saving first is the best strategy by far to manage your personal finances. Rather than saving what's left over at the end of the month, you take it off the pay pack when it's deposited into your account, forcing an auto-ajusting spending pattern. Obviously you need to do some budgeting in advance of that so you have enough to pay the rent etc.
3) The delusional of wealth
Another psychological trick to avoid unnecessary spending and over-runs, is the divvying up system; having multiple bank accounts with a dedicated purpose for each one. Moneytalkscoaching.com in this piece argues that having a big bank balance is an invitation to spend because we think we can afford it. Having small account balances, the blogger, argues, will make us think twice about spending because we are not lulled into a false sense of wealth.
4) Passive versus active income
If you're like most people, work is your livelihood. If you stopped working, the money would dry up and you'd be broke once you'd burned through your savings. Breaking free of this existence requires the establishment of a passive income, money that is self-generating and not dependent on your labours. This is a stage most of us would like to reach particularly if you hate your job. There's not many who get to the point of creating a passive income because ironically, it requires a lot of hard work to make it happen. It also requires a lot of financial knowledge, awareness and self-discipline. For this reason, I believe you should find a job you love to do or at least get a lot of satisfaction from.
Here's an friendly explainer on the difference between passive and active income.
5) Rich Dad Poor Dad
Robert Kiyosaki's Rich Dad Poor Dad is an iconic personal finance book. I read it awhile back and found it engaging. As this PF blogger aptly points out, you either love or loath Kiyosaki. I think he's a shrewd self-promoter who is worth adding your book collection. Most of his titles are available through the library so you don't need to shell out thousands on his courses, although I know many do and they don't regret it.
Anyway, investorjunkie.com here decided to revisit the book 10 years on to see if it passes the test of time. It's a fair and honest review. He summarises Kiyosaki's main tenets as follows:
- The rich don’t work for money
- The importance of financial literacy
- Minding your own business
- Taxes and corporations
- The rich invent money
- The need to work to learn and not to work for money
And here's an interview I did with Kiyosaki and his sister awhile back on their joint book Rich Brother, Rich Sister. Actually his sister is poor, she decided to become a Buddhist nun taking the opposite path as her money hungry brother but the arguement he makes in the book is that she's actually a rich woman, just not financially. Yin and Yang.
To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter @amandamorrall
20 Comments
Yah, gotta do that preliminary budgeting exercise first to avoid the claw back.
Here's a cool calculator I found that shows the accumulated savings over time when you try that pay yourself first approach. I'm gonna try for 8% off my pay, that'll cure my coffee addiction and fine wine passion pronto. But not super impressed with my KiwiSaver provider at the mo so a tad nervous.
http://www.theglobeandmail.com/globe-investor/personal-finance/investin…
Nice one! Great story for inclusion in my book. Would you mind elaborating on your experience, the turning point, and inspiration for me in an email? Will use anonymously or with alias.
Amanda.Morrall@interest.co.nz
Re: reverse budgeting, it's just pure common sense right?
I mean who will save anything if you just have a great wad of money burning a hole in your bank account each month, just about impossible I would have thought. Much better to syphon some off and then just live on what is left. And of course you can spend all of that !
I like Kiyosaki, he is definatly a self promoting salesman, doesn't mean he's selling snake oil though. I've never been to course, but have read many of his books, and I found the cashflow game to be an overpriced waste of money but I'd say it would be a great way for people to learn about it. The books are a great place to start. Or for free you can check out some of his videos on youtube etc. Common sense, plain english, and the fact that your home is not an assets may come as a revelation to a lot of people.
After reading those books, I became serious about passive income, it makes working hard, more satisfying when you know it's for a limited time. Active income, and passive income, aren't mutually exclusive though, and if you have a job you enjoy, why not use that and also work toward passive income at the same time.
I know what you mean, he has built up a massive empire, for no reason other then he can, and has gone to bed with the govt, and in many ways become a parasite on the system. It took me a while to get past that, and see that doing nothing was dumb, and ensuring that I would get steamrolled by the system. The economy isn't fair, there has to be far far more have nots, then have's, thats reality. Education is the key to deciding whether you are going to be a have, or a have not.
Fuller was a genius but was a little off course, I mean who would want to do a thing like this.
"In 1927 Fuller resolved to think independently which included a commitment to "the search for the principles governing the universe and help advance the evolution of humanity in accordance with them"
Inconceivable, he should have been investing in property instead.
Talking of brains...the irish peasants have started to think...!
"The Irish government faces intense pressure to hold a referendum on the eurozone fiscal treaty after a poll that showed almost three quarters of the public want a vote on the agreement."
http://globaleconomicanalysis.blogspot.com/2012/01/72-of-irish-want-referendum-on-fiscal.html
Come on Amanda, FaceBook is going for it's IPO next week. Whack up an article on how to open a broking account, with the ability to long or short. There is gonna be a frenzy, either way.
Be nimble on your trades with this stock, and you will do O.K.
But either way, it beats paying some FaceLess suit to administer your money in KiwiSaver, because as thier track record indicates, KiwiSaver will always be a losing trade.
You should have listened Amanda, SEC website crashed today under the load of interest about the FaceBook IPO. Just imagine all the ad revenue!
http://techcrunch.com/2012/02/01/facebook-ipo-crashes-sec-website/
Or then again, perhaps The Daily Mash has the correct take on the frenzy.
Warning: NSFW
http://www.thedailymash.co.uk/news/business/facebook-ipo-fails-because-…
I know Amanda's brief is personal finance, but maybe she could comment on the following macro economic thoughts,
http://en.wikipedia.org/wiki/Rational_expectations
Some macro economics theory (more than you would think) is based on the expectation that economic agents are 'rational', which in the context of economics theory means the agents know the statistical chance of all possible future events and act accordingly, at least on aggregate. To me this seems un-realistic in the extreme, even for the most sophistocated investors, with access to a lot of information.
So what are we talking about with regard to "illogical, reckless or damaging financial decision making?" I would assume this is basically the borrowing of money which has since become un-repayable. Clearly we are not implying that most loans were taken out fraudulently and so we can assume in general when people mortgaged a house purchase (or other kind of borrowing and investment) their income was reviewed and there was a reasonable expectation that they could pay it back, over a period. So in fact for many the only change investors from 'logical' to 'illogical, reckless or damaging' is the loss of some income stream. Since nearly nobody anticipated the financial crisis in 2008, I doubt myself that it would be resonable to assume that general delusion is responsible.
So the question would be, who is the more foolish, the general public (for sharing in a apparant 'collective delusion' that the wealth they see around them is real, e.g that it was extremely unlikely for their income to fall) or macro economic planners who assume that the general public knows roughly how much real wealth is around them, and sets policy based on these assumptions.
I put it to you that if there is a 'collective delusion' existing, believing that this behaviour can be modified by increasing personal financial literacy is probably also quite foolish. It would clearly be wrong to allocate blame to the real economy for not living up to invalid assumptions about its nature.
Rational markets is a stupid idea thats never been proved...in fact dis-proved by events.........the biggest is whats rational for the individual isnt necessarily rational for a group or a Nation, or a market.......the very fact we have short sellers and long holders shows there are different "rational" views....to me its chaos......herd mentality at best, greed and fear...nothing rational at all. Plus if the very best in economists cant make 100% clear decisison and predictions every time on time.....the many hundreds of thousands of investors never will IMHO.
Steven Keen and a handful of others predicted 2008 and they are predicting yet more......even before that I you read up on Peak oil and understood waht that means to debt (which is a future call on energy/work), and yet there will be less energy its pretty clear infinite expansion on a finite planet has to fail at some point....the only Q is when....
"collective delusion" yes I agree but on multiple levels.....I bailed out of shares 18 months ago....cleared debt.....most seem to be running into the market because they fear being left behind, or not making the absolute most return on their "investment"....they dont look at losses or the probable size of them........thats classic "this time its different"....so 1929 to my mind.
"It would clearly be wrong to allocate blame to the real economy for not living up to invalid assumptions about its nature."
voodoo economics at its finest IMHO.
regards
You're right, rational markets is stupid as is the idea that the optimum outcome for a nation is the aggregate sum of all its self interested individuals. Human emotion plays as important part in our actions as rationality, often more so when fear and greed are involved. We don't all sit round making calculations on the relative utility of our different financial and consumption options. Even John Stuart Mills eventually came to that realisation. That's why branding and advertising exists, to bypass our common sense and invoke emotive and impulsive decisions. You can't measure and aggregate utility anyway. We're all different.
The other absurd premise is that markets tend towards equilibrium, that speculative bubbles and collapses are impossible in a rational market
Well of course its an un-realistic and stupid idea, but its ubiquitous. It doesn't actually say that peoples aggregate interests is the best outcome (which would be equally ridiculus), basically it means a group of 'rational' investors are taking part in a game (the game is investing) where the odds of every outcome are effectively known.
The problem is this idea is basically rife and often religiously held. Notice that Amanda didn't mention the idea that the institutions responsible for investment could be taking part in collective foolishness. Effectively as I see it she is making the assumption that financiers are not the cause of the financial crisis (excluding the small sub-set who are actually acting illegally). In Amanda's case I think she has simply built it into her belief system rather than consiously ignoring this.
When you start to think about what a bank is doing when lending money (without some previous rhetoric), what they are actually doing is buying a contract, a contract where the mortgagee promises to pay them a certain income and offers security for this. The collective delusion of the financial industry underlying the crisis is that they could simply claim more and more of the surplus of the economy for themselves, without bankrupting everybody else. You know this is the underlying premise, because the response to their problems in Europe has been to increase their hold on surplus profits from the economy.
The underlying financial system and certain values of our society however are not going to be improved by implying that its all down to public collective stupidity (because its not), the general public have good reason to complain about their predicament and to mandate governments to act of their behalf.
Keeping buckets of money in separate bank accounts has worked for me. As has paying myself first by saving. And aligning bills to come out just after pay day. What is left i spend until there is no much left, then I go without.
Traditional budgeting advice always starts with "make a budget for everything you might spend money on". This is boring and most don't follow through on it. I'd be interested in research about the success of that approach.
I kind of follow a budget but then as you do with some cash set aside, have money get a coffee occasionally...(pay day treat, then dont buy for 2 weeds).....I used to follow a strict budget but money isnt as tight as it was 2 ~3 years ago....Ive paid down debt and earn a bit more, and yes its time consuming and boring to watch every penny......
I also think its sensible to have at least 2 bank acounts....internet banking is your friend when the bank runs start.....
regards
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