"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Tuesday, 27 November 2012

Goal Setting

Do you have something you really want to have in your life?

Is there an ultimate thing that would make you the happiest person in the world?

I think we all have at least one thing we badly want to get.

It could be popularity, power, friends, love, money, lasting marriage, children, or health.

But unfortunately, not all of us successfully obtain even just that one thing though we may live up to 85 years.


Well, it is simply because most people do not set goals.

However, even if we do, it does not guarantee achievement and success. You have to do things the right way.

You need to pay the price. Anything great necessitates hard work.
Setting goals that are too big. Goals bigger than you may just leave you exhausted but not victorious. Goals that are too big are those beyond your skills, knowledge, and capabilities, or even beyond your control and influence. You need to assess yourself, the things you know, the things you are good at and base your goals from them. Measure your capabilities. Do not set goals that seem impossible to achieve.
Setting goals that are too small. Setting goals that are too small does not challenge you enough which consequently makes you think those goals are not worth pursuing. Make sure your goals are not too easy otherwise you will not feel a sense of fulfillment and not be proud of reaching them.
Setting goals that are vague. Describe your goals. Be specific. Do not settle with goals that are too general. Detailed goals make you half-way there since they create a map for your subconscious mind; and you just need follow that map. This also helps you achieve your goals significantly easier and faster.
Not having a good action plan. 
Great things come from equally great planning. A mansion will not come out as grand and as breathtaking as it is unless there’s a good plan behind its construction. Same goes with the great and amazing things you want to obtain in your life. Plan, and plan well. Make sure your plan is feasible, doable, and effective. Also, it pays to think and plot an alternative plan or a plan B, in case your initial plan does not work.
Not taking good and enough actions. Even if you have a good plan, if you do not take action, do not expect to get what you want. Step up and act. Perform daily activities that will bring you a step closer to the realization of your goals. And when it’s daily, it means daily. Taking daily actions is not enough, though. You must make sure your actions are right, appropriate, effective, and enough to get you there.
Not taking time to develop and gain new skills. Skills are necessary to achieve your goals. List down the skills you need to accomplish a certain goal, identify the skills you are confident about and spot those that need improvement. Think of ways you can enhance those that require honing. Also, think of other skills you need but presently do not have and find ways to gain those skills.
Not identifying the consequences of not reaching your goals. Sometimes, the bad things that may happen when we fail to do something can motivate us. We do not want our family to starve, which is why we work hard to earn money. We do not want to fail in our exams, get scolded, and not graduate, so we study hard. We do not want to acquire cancer and die early, which is why we strive to live a healthy life. Identify the not-so good consequences if you fail in achieving your goals. List as many as you can. The longer your list, the more motivated you will be. Remember to be specific as possible.
Not identifying the rewards you can get from reaching your goals. 
It also pays to identify and list all the good things you can have the moment you reach your goals. This list is also a good source of inspiration and motivation. Write down as many as you can.
Refusing help from other people. I cannot think of a single person who has successfully reached his goals and done it all by himself. You need other people’s help, however small it is and in whatever form. Without the love, support, inspiration, motivation, encouragement, guidance, or assistance from the people around you, especially your family and friends, you may never accomplish your goals. Learn to seek and accept help, especially when things get rough.
Not having the ability to brush off discouragement and criticisms. A single discouraging statement or an ugly and harsh criticism is capable of tearing your entire heart and determination down. When this happens, you would not be able to have the emotional strength to move on. You can “die” emotionally if you succumb. Learn how to be emotionally strong because people who tend to criticize and discourage can be anywhere. You cannot completely avoid them. Learn to see criticism as constructive. Learn to convert discouraging words to stepping stones, or learn how to be “deaf” when you hear words that do not uplift your spirit.
Not identifying all possible obstacles. Knowing the road you are taking allows you to avoid an ugly and fatal crash because you know where the possible obstacles are. If you are not prepared the moment you encounter a roadblock, you can get stuck. You need to pin point and understand all possible challenges that may arise. This will prepare you and either help you avoid the problem or give you time to think of how to solve the problem. It can also give you time to gain or improve skills and gain more knowledge needed to get rid of the obstacles you will meet on the way.
Not willing to give up something in order to achieve your goals. Sacrifice and compromise are important ingredients for success. Be willing to give up something, especially if it is something “bad.” It can get tougher because sometimes you will be required to give up something “good” for something “better.”
These 12 ways to fail should help you spot where you may be going wrong with your goal-setting.

Thursday, 22 November 2012

The benefit of paying that little extra into your homeloan

Why you should be spending your 13th cheque to pay it off.

It’s been a long, tough year and as the festive season approaches, one might be tempted to think that loosening your purse strings over this period may be the best way to reward yourself for surviving the challenges of 2012.
A different approach however, would be far more rewarding and is the best gift you could give yourself.
South African homeowners have been under financial strain over the past few years, as is evident in the sticky high debt to income ratio.
In this context, the December period is a good time to start putting in place a financial plan for 2013, rather than spending money now for short-term feel-good moments, which can place you under pressure in the New Year.
For those receiving bonuses or 13th cheques in December, some of the extra money should be used to reduce your debt, particularly large commitments such as home loans. This principle is particularly important when it comes to home loans as a mortgage is probably the single biggest debt the average person will incur, and it stretches over decades.
Even a few hundred rand a month extra paid into your home loan can bring down the interest burden and the term of the loan significantly, and save you hundreds of rands in the long term. You end up with less of a financial burden at the end of every month.
“Payment holidays” that some see as an option for extra cash at this time of the year is not a good financial decision. Remember that a monthly payment is required on your home loan. Taking a holiday from your payment will not benefit you in the long run, as it will cost you more over the long term.
But what about having some fun during the holidays?
Fun with a plan is the best option as this keeps you responsible and ensures that the fun is not short-lived with negative long-term effects. The challenge of the summer holidays is that most people get paid earlier than usual in December and this makes managing your money until the end of January a challenge. Most of us are used to managing through about four weeks, not six or seven.
In addition, a bonus or 13th cheque provides a false sense of increased earnings which makes us feel that we can spend a bit more without necessarily watching the budget.
The problem, of course, is that your month-end payment commitments for December are still there. And January has more expenses than most other months, because of school fees, stationary and uniforms, and too often, we also have a financial hangover to cope with from spending more than we should have in December.
Planning ahead can help avoid spending the rest of 2013 trying to recover from a few moments of madness in December.
What does paying a little extra into your home loan get you?
Paying a little extra into your home loan on a monthly basis or one off, can save you hundreds of thousands of rands in interest and will reduce your bond term. Below is a table demonstrating the benefits of paying extra into your home loan using an example.
Graph: Prepayment loan curve vs Normal loan curve
The difference between paying R1.1M for a R700 000 loan or R1.5M (Interest cost + capital)
The above graph shows the benefit of paying extra money into a home loan. The example used is a loan taken in April 2008 for R700 000 at an interest rate of 15% per annum, over 240 months (20 years).
The blue line represents the customer who chooses to keep payment at the same instalment level of R9217.53 each month, despite reductions in the interest rate over this period. The bond term reduces by 10.5 years (assuming that the lending rate remains at 8.5% from July 2012 until October 2018).
The red line represents a customer who paid the minimum monthly instalment only over the 20-year term (assumes that the rate remains at 8.5% from July 2012 until April 2028).

Monday, 12 November 2012

Breaking Free From Financial Bondage

Most of us work hard for our money, forty hours or more a week, and once we are set free from work we like to spend our hard earned cash by going shopping. We buy food, clothes and all sorts of goodies and then are left wondering where our money went.

Many people owe much more than we are worth (in savings and investments). It's not how much we earn that counts, but rather how much you are worth that matters. Dealing with our finances is all about our attitudes and beleifs about money. If you want to gain control of your finances, you need to make some behaviour adjustments.

Getting into debt was a process, getting out of debt is also going to be a process and a process takes time. If things are going to change then you have to take charge. You can't carry on in the same old way and expect things to get better, you have to take charge.

One cannot carry on living in denial by not opening your bills and expecting them to go away etc. And no, denial is not a river in Egypt. You cant carry on burning plastic at the mall and expect to get out of debt. You need to take control of your financial life and embark on a process of change.

These are simple steps to follow to breaking free from debt:

1. Pay yourself first - 10% and invest it
2. Get rid of your debt by making a list
3. Spend less than you earn through a budget

If you want to break free from debt, then it’s going take action. Getting into debt was a process and getting out of debt is also going to be a process. A process takes time and it takes courage, you can’t carry on behaving in the same old way and expect different results.

You can’t carry on living in denial, thinking that you will face your problems another day. To break free we need to embark on a process of change. Today, I will be discussing the first of 3 steps to financial freedom.

Number one is to pay your self first, 10% of your income and invest it. This is the secret to creating wealth. Wealth is not created in a week, a month or a year. It is built by making small continuous investments over a long period of time. Warren Buffet starting making investments at 10 years of age. Today Warren Buffet is one of the richest men in the world.

Many people delay saving, thinking they will start when they are out of debt, or when the car is paid off etc. There are a million reasons why one can put off saving.

If one is going to break free from financial bondage then drastic action is required. The first thing on your personal budget is to pay your self first 10% of your nett income. The 90% can be used for everything else that needs to be paid.

Out of every 100 people reaching retirement age in SA:

• 31% will be forced to continue working
• 47% will be dependent on family
• 16% will depend on a meagre state pension

And only 6% will be able to retire financially independent!

(Based on life assurance forecasts)

Now, what about you? Are you going to keep on delaying taking action? Are you going to be like the majority of South African’s living in denial spending all their earnings on things they don’t need?

Or, are you going to have the courage to take action and embark on a journey of breaking free from financial bondage and take the steps into financial freedom?

Get Rid Of Debt Using The Snowball Effect
This is a very effective and simple solution to getting out of debt and can be fun once you start to see the results. All it involves is writing a list of all your debt on a spreadsheet:

Start with the largest debt first going down to the smallest one. Then, once the smallest debt is paid off take that instalment and add it to the next debt. Carry on until you have paid off all your debt, this in record time.

Here is an example of Joe Soap, who is in a lot of debt:

- - - - - - - - - - - - - - Amount Due / Instalments / Months Left

Home Loan:- - - - - - R800 000 / R 8000 p/m / 300 (25 years)
Car HP: - - - - - - - - -R 90 000 / R 3500 p/m / 54 months
Personal Loan:- - - - R 50 000 / R 4500 p/m / 45 months
Credit Card: - - - - - R 40 000 / R 4000 p/m / 18 months
Clothing Account "A": R 5 000 / R 500 p/m / 12 months
Clothing Account "B": R 2 500 / R 350 p/m / 12 months

Joe Soap spends on luxuries:

DSTV - R500 p/m
Entertainment - R800 p/m

To get out of debt Joe needs to take massive action. This means he should make some sacrifices now, for longer term rewards. Joe decides to sacrifice the DSTV and he halves the amount he spends on entertainment. This gives Joe an extra R900,00 per month to use to pay off his debt.

Immediately he takes this R900 and adds it to the R350 instalment of his Clothing Account "B".

R1250 p/m is paid into that clothing account, it only takes two months to settle this account instead of 12!

In month 3, Joe uses the R1250 p/m adds it to the R500 instalment against Clothing Account "A" and he makes payments of R1750 p/m towards the remaining R4000 balance. Joe, has now settled this account in just 5 months, 7 months ahead of schedule!

Joe repeats the same plan of action and he takes the R1750 p/m adds it to the R4000 instalment of his credit card and makes R5750 p/m instalments against the remaining balance at this stage of R34 400 p/m. It only takes Joe 6 months to settle his credit card.

Only, 11 months into the plan Joe has managed to fully settle 3 major accounts that seemed overwhelming in the begining.

From here Joe added the R5750 plus the R4500 monthly instalment on his personal loan amounting to R10 250 p/m and paid off the balance of his personal loan, at that stage R18 500 in less than two months.

Just over a year, in a record breaking 13 months Joe has now paid off the majority of his debt and is way ahead of schedule. He then decides to repeat the plan and starts to use the extra R10 250 p/m adding it to the regular R3500 installment on his Car's HP. At the time the settlement balance was R67 000. By making monthly instalments of R13 750 p/m Joe managed to settle the HP withing 5 months! Unbelievable, Joe's Car is now fully paid for 18 months after he started the break free from debt snowball effect!

In only 18 months Joe managed to get out of a mountain of debt. The only debt Joe has left is his home loan. If he wanted to from here he could continue to use the snowball effect and use the extra R13750 p/m he would normally have spent on his debt and put this into his home loan.

That would contribute an extra R165 000 p/a into Joe's home loan and would make it entirely possible to pay his home loan in only 5 years.

Through a bit of sacrafice and some action you can like Joe get out of debt and break free from financial bondage for life!

Friday, 9 November 2012

Wouldn’t We All Be Wealthier If We Printed More Money?

If we print more money, prices will rise such that we’re no better off than we were before. To see why, we’ll suppose this isn’t true, and that prices will not increase much when we drastically increase the money supply. Consider the case of the United States. Let’s suppose the United States decides to increase the money supply by mailing every man, woman, and child an envelope full of money. What would people do with that money? Some of that money will be saved, some might go toward paying off debt like mortgages and credit cards, but most of it will be spent. Suppose I use my envelope of money to purchase a new Xbox.

I’m not going to be the only one who runs out to buy an Xbox. This presents a problem for stores like Walmart for example. Do they keep their prices the same and not have enough Xboxes to sell to everyone who wants one, or do they raise their prices? The obvious decision would be to raise their prices. If Walmart (along with everyone else) decides to raise their prices right away, we’d have massive inflation, and our money is now devalued. Since we’re trying to argue this won’t happen, we’ll suppose that Walmart and the other retailers don’t increase the price of Xboxes. For the price of Xboxes to hold steady, the supply of Xboxes will have to meet this added demand. If there are shortages, certainly the price will rise, as consumers who are denied an Xbox will offer to pay a price well in excess of what Walmart was formerly charging.

For the retail price of the Xbox not to rise, we will need the producer of the Xbox, Microsoft, to increase production to satisfy this increased demand. Certainly this will not be technically possible in some industries, as there are capacity constraints (machinery, factory space) that limit how much production can be increased in a short period of time. We also need Microsoft not to charge retailers more per system, as this would cause Walmart to increase the price they charged to consumers, as we’re trying to create a scenario where the price of the Xbox won’t rise. By this logic we also need the per-unit costs of producing the Xbox not to rise. This is going to be difficult as the companies that Microsoft buys parts from are going to have the same pressures and incentives to raise prices that Walmart and Microsoft do. If Microsoft is going to produce more Xboxes, they’re going to need more man hours of labor and obtaining these hours cannot add too much (if anything) to their per-unit costs, or else they will be forced to raise the price they charge retailers.

Wages are essentially prices; an hourly wage is the price a person charges for an hour of labor. It will be impossible for hourly wages to stay at their current levels. Some of the added labor may come through employees working overtime. This clearly has added costs, and workers are not likely to be as productive (per hour) if they’re working 12 hours a day than if they’re working 8. Many companies will need to hire extra labor. This demand for extra labor will cause wages to rise, as companies bid up wage rates in order to induce workers to work for their company. They’ll also have to induce their current workers not to retire. If you were given an envelope full of cash, do you think you’d put in more hours at work, or less? Labor market pressures require wages to increase, so product costs must increase as well.

In short prices will go up after a drastic increase in the money supply because:

   1. If people have more money, they’ll divert some of that money to spending. Retailers will be forced to raise prices, or run out of product.

   2. Retailers who run out of product will try to replenish it. Producers face the same dilemma of retailers that they will either have to raise prices, or face shortages because they do not have the capacity to create extra product and they cannot find labor at rates which are low enough to justify the extra production. 

In articles such as "Why Does Money Have Value?", "The Demand For Money", and "Prices and Recessions" we've seen that inflation is caused by a combination of four factors. Those factors are:

    * The supply of money goes up.
    * The supply of goods goes down.
    * Demand for money goes down.
    * Demand for goods goes up. 

We’ve seen why an increase in the supply of money causes prices to rise. If the supply of goods increased enough, factor 1 and 2 could balance each other out and we could avoid inflation. Suppliers would produce more goods if wage rates and the price of their inputs wouldn’t increase. However, we’ve seen they will increase. In fact, it’s likely that they’ll increase to such a level where it will be optimal for the firm to produce the amount they would have if the money supply had not increased.

This gets us to why drastically increasing the money supply on the surface seems like a good idea. When we say we’d like more money, what we’re really saying is we’d like more wealth. The problem is if we all have more money, collectively we’re not going to be any more wealthy. Increasing the amount of money does nothing to increasing the amount of wealth or more plainly the amount of stuff in the world. Since the same number of people are chasing the same amount of stuff, we cannot on average be wealthier than we were before.

Tuesday, 6 November 2012

A quick guide to financial ratios

Some key ratios to help you understand a company's financial health.

While the price to earnings ratio is often the first port of call when people are gauging a company's investment worthiness, there are many other ratios that can give investors a diagnosis of a firm's investment potential. 

Let's start with two ratios that reveal the profitability of a company. 

Gross (operating) profit margin - First calculate operating profit. That is sales less operating costs. That includes all costs - raw materials, cost of purchases, depreciation, cost of personnel, transport, etc but it does not include finance costs, investment income or tax. The operating margin is worked out by dividing net sales by the company's operating profit. The margin tells investors how profitable the company's sales are. If a company has an operating margin of 10%, you know that for every R10 of sales, there is a rand of profit. Some companies, such as Masonite, have margins of less than 10%, while PPC in the same industry boasts a margin of three times that.

Some analysts prefer to take out depreciation, a non-cash item. They talk about earnings before interest, tax, depreciation and amortisation (Ebitda).

Net profit margin - the net profit is the company's bottom line . It is the profit after expenses such as finance costs, income on investments and after tax. Sometimes a company does not own 100% of the companies it controls. It therefore subtracts the minority share of profits of such subsidiaries before striking net profit attributable to shareholders. Net income can be related to sales and and to shareholders' funds.

Next up are two ratios dealing with the dividends paid by a business. 

Dividend yield - the dividend yield is calculated by taking the annual dividend paid by a company, dividing the figure by the company's share price, and multiplying the result by 100 to obtain a percentage. It is useful because it can be compared to interest on investment funds. The dividend yields of quality companies are often as low as 2%. That is because the dividend is expected to grow apace. If there is uncertainty about future dividends, the share price goes down and the yield rises. While a high dividend yield can indicate an uncertain outlook, it can also indicate a bargain or an under-valued shares.

Dividend cover  - This ratio is calculated by dividing the company's earnings (net profit) per share by the dividend. It is useful because it shows how well the dividend is covered by earnings. A company with a dividend cover of four is more likely to be able to maintain the dividend than one where the cover is just over one. The higher the cover, the safer the dividend. Media conglomerate Naspers has the highest dividend cover of all JSE-listed companies, sitting at 7,2 times. A dividend cover of two or more is considered safe, while anything below 1,5 times is generally risky, according to analysts. 

Finally, here's a look at two balance sheet ratios.

Return on assets - used by a company's management to determine whether it should go ahead with a project or not, this ratio is calculated by adding net profit and interest expenses and dividing the result by total assets (multiply by 100 to get the percentage). If the return is above the rate at which a business can borrow money from a bank, then a project is worth undertaking.

Return on equity - perhaps the most important ratio an investor should consider, the return on equity illustrates how much an investor receives in growth for every rand invested. The return on equity is calculated by dividing net profit by total shareholders' equity in the business (and multiplying by 100). If the answer is 10%, for example, then 10c is returned for every rand invested in the company. Of course, the higher the percentage, the better.

9 Everyday Habits That Will Make You Happier

Happiness is the only true measure of personal success. Making other people happy is the highest expression of success, but it's almost impossible to make others happy if you're not happy yourself.
With that in mind, here are nine small changes that you can make to your daily routine that, if you're like most people, will immediately increase the amount of happiness in your life:
1. Start each day with expectation.
If there's any big truth about life, it's that it usually lives up to (or down to) your expectations. Therefore, when you rise from bed, make your first thought: "something wonderful is going to happen today." Guess what? You're probably right.
2. Take time to plan and prioritize.
The most common source of stress is the perception that you've got too much work to do.  Rather than obsess about it, pick one thing that, if you get it done today, will move you closer to your highest goal and purpose in life. Then do that first.
3. Give a gift to everyone you meet.
I'm not talking about a formal, wrapped-up present. Your gift can be your smile, a word of thanks or encouragement, a gesture of politeness, even a friendly nod. And never pass beggars without leaving them something. Peace of mind is worth the spare change.
4. Deflect partisan conversations.
Arguments about politics and religion never have a "right" answer but they definitely get people all riled up over things they can't control. When such topics surface, bow out by saying something like: "Thinking about that stuff makes my head hurt."
5. Assume people have good intentions.
Since you can't read minds, you don't really know the "why" behind the "what" that people do. Imputing evil motives to other people's weird behaviors adds extra misery to life, while assuming good intentions leaves you open to reconciliation.
6. Eat high quality food slowly.
Sometimes we can't avoid scarfing something quick to keep us up and running. Even so, at least once a day try to eat something really delicious, like a small chunk of fine cheese or an imported chocolate. Focus on it; taste it; savor it.
7. Let go of your results.
The big enemy of happiness is worry, which comes from focusing on events that are outside your control. Once you've taken action, there's usually nothing more you can do. Focus on the job at hand rather than some weird fantasy of what might happen.
8. Turn off "background" TV.
Many households leave their TVs on as "background noise" while they're doing other things. The entire point of broadcast TV is to make you dissatisfied with your life so that you'll buy more stuff. Why subliminally program yourself to be a mindless consumer?
9. End each day with gratitude.
Just before you go to bed, write down at least one wonderful thing that happened. It might be something as small as a making a child laugh or something as huge as a million dollar deal. Whatever it is, be grateful for that day because it will never come again.

Warren Buffett Quotes

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