Stop Over-Thinking Your Money! - The Five Simple Rules of Financial Success by Preet Banerjee
This was a good book. It gives readers easy to understand steps on how to achieve financial success. The most important thing is to (as Nike says) Just do it!
Here's a summary of the book.
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Five simple steps to personal financial success:
1. Disaster-proof your life - Make sure you’re insured for unexpected events (illness/incapacitation/death)
2. Spend less than you earn - Simple advice that’s lost on many people
3. Aggressively pay down high-interest debt - Self explanatory
4. Read the fine print - This applies to when signing any sort of contract
5. Delay consumption - Don’t buy things you don’t have money to pay for right now
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All these rules make sense. The concepts aren’t difficult to grasp. Yet many people find themselves struggling to keep afloat financially-speaking. I suggest it has to do with self-discipline or lack thereof. People want things… I want things, you want things. We want things now (not when we actually have enough saved up to buy them).
I believe the problem comes down to the availability of credit (which many people seem to think is free money). Well it isn’t. And the penalty for abusing it is hefty interest payments and the stress of wallowing in the deep well of debt.
If you notice, the author, Preet Banerjee, doesn’t even talk about investing as one of the rules to financial success. Yes, it’s important. But, if you don’t have money to invest it’s a moot point, right?
Sadly, not only do most people not have any money to invest, but they are in debt. One of the latest statistics I heard (at the end of 2014) was that the average Canadian was in debt to the tune of $21,000 (not including mortgage debt). We, as Canadians, currently have one of the highest debt-to-income ratios in the world (162.6 per cent of disposable income as of December, 2014 according to Statistics Canada).
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“In the beginning, building up lots of money depends more on putting money away than making money grow because of smart investing decisions.”
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1. You need insurance
According to insurance company Great-West Life, one in three people become disabled for 90 days or more before age 65, and of those people, their average length of disability is 2.9 years. That’s a scary statistic that I’d suggest many people aren’t prepared for. Could you last that long without income?
You need:
• Disability insurance in case you become disabled and can’t work (either caused by injury or illness);
• Life insurance (term vs. permanent), which protects your family’s lifestyle in the event of your death. Insurance is most important if you have dependants and you are young and haven’t built up your assets much;
• An emergency fund for loss of employment or unexpected emergencies. 3-month’s expenses recommended, but only if you don’t have outstanding debt. Pay that off first, especially if it’s high-interest debt. You should keep a smaller fund in that case;
• Wills and powers of attorney to help communicate your wishes to others if you can’t do so yourself. A power of attorney is a document that gives someone else the ability to act on your behalf in case you become incapacitated and unable to make decision for yourself. There are two main types of powers of attorney: power of attorney for finances (or property) and power of attorney for health care.
A simple will and power of attorneys can run from as low as $400 to a few thousand dollars.
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2. Spend less than you earn
It’s pretty basic. If you spend more than you earn you’ll be a lifetime in debt. The problem is most people don’t even think about it. The see something they want and, irresponsibly, plop down their plastic. In a few years they’re drowning in debt. It’s so common it’s not even funny.
Steps to recovery:
• Figure out your old budget. Calculate ALL your monthly expenses;
• Figure out a new budget. See where you can cut back from your previous budget;
• Start tracking your spending more diligently. Keep ALL your receipts and put them in a jar by the door. Do the same with all your monthly bills. Add them up and the end of the month and compare them with the previous month. Are your expenses going down?;
• Save the savings. If you’ve saved $100 on clothing one month, don’t turn around and spend it on eating out the next month;
• Plan for non-monthly expenses such as holiday or birthday gifts. If you forecast these expenditures on your calendar you can set aside cash to pay for them when the time comes. For example, if you’ve forecasted you spend $1000 a year on gifts, you need to set aside 1/12th of $1000 ($83.33) per month into your short-term savings fund.
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3. Aggressively pay down high interest debt
Thou shalt not carry a credit card balance! Debt can cripple people’s finances. Preet recently met a family with more than $50,000 in credit card debt. At an average 28% interest rate they are paying $14,000 per year just to carry the debt. After 10 years they will have paid $140,000 in interest without putting a dent in the debt itself.
• Transfer high-interest balances to low-interest balances. If you have room on a line of credit, start by transferring the credit card balances there. A credit card with a $5,000 balance at 28% interest is costing you more than $115 in interest per month. Transfer that to a line of credit that charges 5% and you’ve saved yourself almost $100 per month.
• Develop a plan of attack for paying down your debt. Create a list of all your debts not including your mortgage. If you have three credit cards, all with a balance, list them. Preet suggests paying them off one at a time. You may want to start with the one with the highest interest rate first.
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4. Read the fine print
This is the part of the contract that contain the clauses that come back to bite you later. Never sign anything at your front door the first time you meet someone, and never sign anything you don’t understand. If necessary, take the contract, read it and, if it’s satisfactory, sign it later. Don’t feel pressured to sign it right away.
Preet gave the example of a friend of a friend who had both private insurance and mortgage life insurance. He died over the holiday season in a snowmobiling accident. He had a trace of alcohol in his system. The private insurance delivered a cheque in two weeks. The mortgage insurance claim was denied because one of the exclusions listed in the policy was that coverage would be denied if the insurer died in a motorized accident with alcohol present in the bloodstream. How many people would buy life insurance from a provider that didn’t even determine if you qualified for coverage until after you died?
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5. Delayed consumption
I’ll give only one example from the book, but it’s a good one. Suppose you want to buy a $30,000 car. But you don’t have $30,000 sitting around so you decide to finance it over 7-years at 4%. You’ll end up paying $410.06 per month for a total of $34,445.04. Now say you put $410.06 in the bank at a measly 1.5% before purchasing. It would grow to $30,000 in less than six years (70 months) and you would only have to put away $28,724.19 (because of the interest you earned). You've saved nearly $6,000 and over a year of payments!
That’s the advantage of saving ahead of time for purchases instead of financing them. You wind up saving money in the long run and it takes less time to pay for things. This applies to any big ticket item. Save first, buy later! (Or buy something less expensive).
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I’m going to skip Part 2 of the book. It just talks a bit about investing (Investing Basics and Financial Advisors); and goes into more detail about insurance (Insurance 101). The important stuff is in Part 1. Put it into practice and you’ll be well on your way to financial success.
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