And the truth shall set you free. Knowledge is power. George Orwell's central premise in Animal Farm and 1984 was that the ability to remember the recent and distant past is crucial to a society’s freedom. It is the only restraint on government ambitions or other plots. Such amnesia is rampant today in North America and beyond. So this blog is here to add some historical perspective and remind people of forgotten truths.
GAIA
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Your Money
"Live long and prosper." (Vulan greeting, Star Trek series)
This is a great goal but how do you do the "prosper" part in today's volatile golbal economic rollercaster?
Answer: By following certain fundamentals that have always worked. My personal addition in #5 as I am a very conservative investor.
1. BUDGET, BUDGET, BUDGET and live within your means:
a. budget your income into 3 piles if you work for a company that collects income taxes, etc. at source:
maximum 1/3 for shelter costs: rent, mortgage, heat, light,
water, property insurance,
landscaping, etc.
(If you spend more than 33% of you income for this category, you are
in danger of severe debt, bankruptcy and forclosure.)
1/3 for food, clothing and transportation
1/3 savings for fun/entertainment/vacations, rainy day emergencies (health related; furnace replacement, new roof, etc.; job layoff), kids' college funds and your own retirement. (Savings can be bank accounts, stocks and bonds or property.)
*** Experts recommend you keep aside at least 3 month's salary for rainy day emergencies.
b. If you are self-employed or do not have income taxes, etc. collected by your employer, the rule of 1/4 applies to your salary/income.
1/4 mimmum for your annual tax return
1/4 maximum for shelter costs: rent, mortgage, heat, light,
water, property insurance,
landscaping, etc.
(If you spend more than 25% of you income for this category, you are
in danger of severe debt, bankruptcy and forclosure.)
1/4 for food, clothing and transportation
1/4 savings for fun/entertainment/vacations, rainy day emergencies (health related; furnace replacement, new roof, etc.; job layoff), kids' college funds and your own retirement. (Savings can be bank accounts, stocks and bonds or property.)
*** Experts recommend you keep aside at least 3 month's salary for rainy day emergencies.
2. Find banks ot credit unions that give you accounts for free.
Many on-line banks do so though funds can take up to 3 business days before they show up in your mail or at an affiliated brick and mortar bank account.
If your older than 59, check for senior discounts. Often banks will only give the the posted specials if you formally tell them you want to be recognized as a senior. (Yes, their computer systems know how old you are, but if you don't speak up, you don't get the deals.)
If you are under 20 or still attending school, you should be eligible for discounts. And, again, it is up to you to ask.
3. Credit cards are good to build up your credit rating -- so you can get loans, etc., but don't use the cards recklessly and watch what the interest rate and rules are. Gas station cards and store cards often have much higher interest charges -- up to 28% interest, which is up to 50% higher than many bank credit cards!!! (You can easily check current rates at http://money.canoe.ca/rates/credit.html)
If a card promises to give you 1% -2% -5% cash back or reward points,etc. that's great -- so long as you pay off your full monthly statement EACH MONTH. To get these 'bonuses' they jack up the interest rates due on the card! Also, they usually charge an annual 'member fee' of about $50.00 or so to be paid by you UP FRONT!
So, you think your making 'bonus money' while it actually may cost you far, far more!
In a nutshell, if your income is limited or you're just starting out on your own, get the lowest interest card you can -- and never sign up until you have checked with at least 5 different institutions and on-line banks for the best rate.
4. take advantage of every legal way to avoid taxes. In Canada, the main options to shelter money are the RRSP (retirement), RESP (kid's education) amd TFSA(new; never pay taxes on the interest)
5. Don't play the stock market or rely on mutual funds -- yes, you read this correctly.
Billionaire George Soros when told by a friend that the stock market is now like betting at a casion reputedly responded: Never compare the stock market to a casino; casinos have rule!
Money in the stock market/mutual funds is only worth what you get the day you cash it in. Stocks worth $1,000 a share today may be worth $1.00 the day you need to cash them out. If your Canadaian, the names Nortel and Bre-X come to mind.
And don't forget your broker gets paid a fee whenever you buy and sell - so you have to deduct that commision from your 'profits', and I know at least one person who tried to close out his decade old mutual fund on retirement, only to find that the stocks had tanked and, by the way, he owed $4000.00 to the financial investment company in deferred management fees (a common practice).
If you must 'gamble', only choose well established firms with regular dividends. Dividends or quarterly/semi-annual investor payouts keep management from taking wild risks and from paying themselves excessive salaries.
If you remember and follow nothing else, at least listen to the Wealthy Barber, David Chilton: start saving as young as possible, put savings first on your list of 'expenses' and if you can put aside 10 per cent of all that you earn and invest it for the long-term, you will live long and prosper.
{P.s. - He does recommend the stock market/mutual funds - but that advice was last updated in 2002.}