Monday, March 23, 2015

Is your DEBT Compounding FASTER than your INVESTMENTS?

I'm sure most of you already know what "compounding" interest means right?

Basically, just in case you need a bit of a reminder, it's the way in which, if a chunk of money that earns a certain percentage of interest is left alone for several years to compound.....it will gain great value over a lengthy period of time. Every year the interest is not only earned on the original principal amount but also on the interest paid out for the previous year(s). So let's say you invest $500 at 5% interest and leave it alone for 5 years, you won't just have $25 in interest earned at the end of the five year term. You will have much more than than because each year you will have earned "interest on your interest".

So the miracle of compounding is pretty awesome in the world of investing, especially if you have the fiscal discipline to leave your investment money alone before trying to withdraw any of it to spend.
Those who love the stock market and utilize dividend re-investment plans also use a similar concept of compounding in order to build up the value of their portfolios by simply "not touching" the dividends that their equities produce and allowing the plan to use the cash dividends to purchase even more stocks.

The scary part of compounding is that it can also seriously apply to instruments of DEBT. Therefore, if you have a debt owing of $500 dollars and you are paying 12% in interest yearly to the creditor....and you allow that debt to remain unpaid for five years, then after the FIVE years of compounding you won't just owe the company the original $500 plus a simple 12% interest payment....but you'll ALSO owe the creditor
"interest on the interest". That's why and how consumer debt gets way out of control so quickly. Many folks forget that DEBT also compounds when it is not quickly paid off in full. A small debt of only a couple thousand dollars can quickly balloon into hundreds of thousands of dollars in debt obligations if the debt is never paid off in full.

Remember that interest rates REALLY MATTER. One credit card might charge you 12% yearly in interest. Another credit card might charge you 28% in yearly interest. That is a HUGE difference and it will make a HUGE difference in the amount of money you are paying in interest to your creditor.

Today I just wanted to mention that when you are trying to get a healthy perspective on your financial situation you may want to dumb it down to this simple question..."
"Is my debt increasing FASTER than my investments?"
Is my debt costing me a higher interest rate than my the rate at which my investments are growing? It is a simple but very powerful tool to use to get us all to think about our finances in new and empowering ways.


For example, a simple equity portfolio might earn an average of 5% compounded annually. But what is your consumer debt costing you to carry it? 28% on a credit card is not uncommon for many department store credit cards. Therefore, if your investments are only GROWING at 5% and the consumer debt that you are carrying is ballooning in size at 28%.....something is not good. Ideally, we all want our investments to grow FASTER than our consumer debt. Then we will all stay ahead of the game and have something to retire on in the long run.

Think about it.

Peaceful productivity,
Carla

DISCLAIMER: Note the above blog post is not intended as professional financial advice and the owner/publisher of this blog does not accept any liability for the ideas discussed in this post. Professional financial advice should be obtained from a licensed professional.

Thursday, March 19, 2015

Canadian and American Finance Authors

I don't know about you...but I latched onto that catch phrase "Readers are Leaders" and so it has become a habit to inhale books just as often as I can.

Therefore, in case your reading list, particularly in the realm of finance and investing, has become a little stale, permit me to share with you some of the finance authors that I have dabbled with in reading their books or speeches over the past decade. If any of them have also piqued your curiosity and provided meaty motivation, please go for it and share your feisty opinions in the comments section.
 Peacefully productive,

Carla.

Derek Foster "Aka, the Lazy Investor" has published several investing books written for the common folk. 
    to see his titles, go to his website www.stopworking.ca

The Millionaire Mind by Thomas J. Stanley

The Millionaire Next Door by Thomas J. Stanley and William D. Danko

The Richest Man in Babylon by George S. Clason

The Wealthy Barber by David Chilton

Robert Kiyosaki ----a large number of books....too many to list...check out his websites by googling him....or start with his breakout book  entitled "Rich Dad Poor Dad".

Donald Trump and Robert Kiyosaki wrote a book together called 
"Why We Want You to be Rich: Two Men One Message"

Napoleon Hill's "Think and Grow Rich"

Tony Robbins new book "Money, Master the Game"

Tim Ferriss---lifestyle hacker/author of the breakout book "The Four Hour Work Week"

Gail Vaz Oxlade--personal/family finance coach from TV seminars (Canada centric eh)
all major book sellers will carry her books.

David Bach--check out his website --www.Finishrich.com






Small Gains are Better than NO Gains

I recall listening to yet another of Tony Robbin's videos online and I appreciated what he was talking about in terms of "gradual gains".

Sometimes when/if one gets caught up in the "self help" motivation world, that folks just start making WILD long range goals that are really really large. Now, I'm not against making LARGE goals....however, I believe in taking SMALL steps towards LARGE goal.

For instance.....if someone is trying to lose a HUGE amount of weight, it may actually be broken down into measureable gains of losing just one wee pound at a time. We humans usually don't lose huge chunks of weight at a time, unless we are having some kind of surgical procedure. There we have to learn how to celebrate small steps accomplished. Lost one Pound? Celebrate that small step. No matter how many long term pounds you want to lose....it's important to focus on losing just one small pound at a time.

Same thing goes for financial gains. 99.9% of folks who make it rich, don't gain their wealth overnight in one huge big win. The financial gains come in smaller more bite size bits and spurts. Maybe you are trying to get out from under hundreds of thousands of dollars of consumer debt. But maybe the answer is not in the BIG chunks of debt, but rather in many small hundred dollar gains. Slowly but surely paying off debt, is not as sexy as paying it off in one showy extravaganza, but it may be more realistic for most of us.

So, in a nutshell, just permit yourself the small wins FIRST before demanding to win the BIG fish.
Before you figure out how to save many thousands of dollars, ya might need to celebrate the saving of just one dollar at a time.

Peaceful productivity.
Carla