Monday, September 28, 2009

BASIC PRINCIPLES TO EARN MONEY

BASIC PRINCIPLES TO EARN MONEY
First and most important point to remember:
A poor man is not the one, who doesn't have a penny in his pocket...But the one with out a dream.
Being rich is every ones dream. But only few dreams everyday about it. But only few have the determination toachieve their goal.I remember once(1998) my parents were scolding me for my expenditures being beyond my earnings. Those daysmy earnings were only 2000$ a month, but my expenditures were crossing 2200$. So, every month my debts wereincreasing 200$. My parents were forcing me to reduce my expenditures so that I should save at least 200$ a month.But my idea is always different. If I adjust with my expenditures & start saving from my earnings, I will never becomerich.I instead started thinking to earn more than my expenditures. That time my aim was 6000$ a month. And finally I haveachieved it in 2 months of time.Here you can notice two things..
1) If you listen to your parents and compromise with your expenditures, then probably today also your earnings wouldhave been 2000$.
2) Just because I my thoughts were, to earn more than my earnings, today I am earning 10000$ a month.So, try to think differently..Try to earn more to save money. But never try toreduce your expenditures to save money.
Money can make many things and also it can make monkey things. It all depends how well you will utilize it.Old or young, male or female, regardless of education, talent or qualifications. There are just few steps to take you from zero to well overa million dollars and each step is to be discussed in this section every week. Money is volatile.
1. Save 10 cents from every R1 you earn. If you put away at least 10 percent of your income as part of a long-term savings plan, there is agood chance that you will have a financially secure future and be able to attain your financial goals.
2. Put 10 percent of every pay increase towards savings, particularly long-term savings such as a retirement plan. If you are employedand belong to a retirement fund, your contributions will increase automatically in proportion to your pay rises. This will help ensure thatyou stay well ahead of inflation.
3. Use the “Can I sleep?” judgment when making investments. An investment is too risky if you are going to lie awake at night worryingabout it.
4. Diversify your investments. Never invest more than five percent of your assets in a narrow investment (for example, a specialist unittrust fund such as an emerging company one) or in an unregulated investment. Diversifying your investments will ensure you don’t loseeverything if one investment bombs out. Many people who invested all their assets in major scams such as Masterbond lost everything,and the same thing can happen in the regulated market if you put all your money into one sector ... just consider how the informationtechnology bubble burst in 2000.
5. Be extremely cautious if the returns promised on an investment exceed what is generally available. If they sound too good to be true,they probably are. It usually means the investment is too ambitious in its claims, too risky, or simply a scam.
6. Know the difference between effective and nominal interest rates. Normally, banks will quote you a nominal interest rate when lendingyou money, but a higher, effective interest rate when you invest money. The nominal interest rate is the simple rate. The effective rate iscalculated by compounding the interest earned or charged.
7. Check whether the interest you are being paid is credited monthly, quarterly or annually. Say you invest R10 000 for 10 years. If youreceive interest at 10 percent credited annually, you will get a total return of R25 937. If it is credited monthly, you will receive R27 070.
8. How do you decide whether you should invest directly in shares? Simple. If you haven’t got the time to learn about stock markets, tofollow the progress of companies or to track your portfolio, rather invest in unit trust funds and/or life assurance endowment policies thathave shares as their underlying investments.
9. If you do invest directly in shares, your two most important considerations should be ensuring that you have a properly diversifiedselection of shares across the stock market sectors to reduce risk, and regularly rebalancing your portfolio. When a share rises in price,you should consider selling some, but not all, of these shares, so that you make a profit, but your overall portfolio remains proportionallythe same as it was when you started. By doing this, you’ll be able to reap further profits if the share price continues to rise.
10. If an investment product is too complicated to understand, avoid it. It does not mean you are stupid. It simply means that the productprovider and/or financial adviser are trying to baffle you.
11. Always check the costs of any investment product. Some products are prohibitively expensive. You should be given a breakdown ofthe costs in three ways: as a percentage of your investment; as a fixed amount; and as the amount by which the costs will reduce yourinvestment at maturity date. Be very careful if the costs are more than six percent at entry and more than two percent a year thereafter.
12. Always check how much commission is being paid to your financial adviser. Some financial products – particularly those offered byso-called linked investment product providers – come with particularly high costs and commissions. High commissions can be aperverse incentive for advisers to mis-sell.
13. A product offering a range of underlying investment product choices, such as a wide collection of unit trust funds, is often not in yourbest interests and may come at additional cost. Be very cautious if anyone recommends that you invest in a linked investment productwith a wide selection of underlying investment choices. Remember that linked investment products come in many forms and are alsooffered by life assurance companies. The simpler and cheaper solution may be to invest in a properly diversified unit trust fund, such asan asset allocation fund that offers underlying investments in all the main asset classes, such as cash, bonds and shares.
14. Don’t be afraid to negotiate commissions/fees for financial advice. Most financial products allow you to do this. After all, it is yourmoney.
15. If you have a choice, should you pay a fee or commission for financial advice? As a general rule, a fee is better for large amounts ofmoney and a commission for smaller amounts.
16. If you are a true investor, you invest for the long term and you don’t panic when markets fall. If you want to invest for the short term, youshould use a bank term deposit or a money market account rather than an investment in the equity markets.
17. It is time in the market and not timing the market that counts. Don’t try to time markets or sectors of markets. Few people have gotrich from doing this and most have lost money. The best way to get rich is to take time to select an investment product that has properlydiversified underlying investments, and then to stick with it for the long term. Most people make the fundamental error of buying into aninvestment when it is at the peak of its performance and then selling out when its value has dropped.
18. Always check that an investment product and/or company is registered with the Financial Services Board (FSB) before investing. If itis not registered and things go wrong, you will have little recourse, so be extremely wary. You can telephone the FSB on 0800 110 443 or0800 202 087 to check.
19. Charges on life assurance investments (endowments) are proportionally higher on lower amounts. Check the structure of costs inrelation to premiums. You might find that paying just a few rand more every month costs you proportionally less. This will give you abetter return.
20. Investing on a regular basis is a good strategy in volatile markets. If markets rise, your investment improves in value. If markets fall,you get more for your money, and you’ll benefit when markets go up again. This is known as rand-cost averaging.
21. If you are investing a large lump sum, put the money in a money market account to start with and phase it into pre-selectedinvestments over a period of time. This is particularly important with equity markets: don’t invest all your money when prices are high andlose out later, when they come down.
22. Don’t be taken in by labels. Some investment products style themselves as fulfilling certain needs (for example, “a savings plan foryour child”). Banks often offer need-branded products. Always check the underlying investment proposal. There might well be a moresuitable generic product with a better-performing underlying investment, such as a life assurance managed portfolio or a unit trust assetallocation fund, which has a low-risk structure but the potential for much better returns.
23. Don’t become emotionally attached to shares. If a particular share bombs out for good reason, such as bad management or failureto adapt to new markets, get out. But if the share value is falling as part of a general sector downgrade, there is little reason to sell.
24. If you are trading shares for short-term gain, you are not an investor, you’re a gambler. Don’t be surprised when you make a loss.
25. Avoid investing in unlisted companies. These companies are not properly regulated and are the favourite vehicle of scam artists. Ifyou decide to invest in an unlisted company, make sure you do your homework first and understand all the risks.
26. Never invest in anything where the underlying investments are shrouded in secrecy. Your money is likely to be secreted away too,never to be seen again. A good example was Jack Milne’s PSC Guaranteed Growth investment scam. Milne refused to divulge theunderlying investments, claiming it would show his competitors how he was getting exceptional returns.
27. Being a contrary investor can make all the difference. As investment market guru Sir John Templeton says: “The time of maximumpessimism in the stock market is the time to buy; the time of maximum optimism is the time to sell.”
28. Never invest on an ad hoc basis. You should have an overall financial plan designed to meet all your financial needs, taking intoaccount your investment goals and life assurance needs. Investing in something simply because someone (and that includes yourneighbour or hairdresser) recommends it, is unlikely to help you achieve your financial targets.
29. When you are advised to invest in something, always do a bit of research of your own. Get a second opinion and use the internet.
30. Use comparatively safe investments – such as life assurance smoothed-bonus policies and unit trust prudential or flexible assetallocation funds – as core investments. They may not give you spectacular performance, but they will provide you with a measure ofsecurity.
31. Investing in a low-cost index fund may not give you top performance, but at least it will not give you bottom performance. Local andinternational research has repeatedly shown that very few active fund managers consistently out-perform the markets. With an indexfund, you are likely to do better than the average fund manager – and at lower cost. Index investments come in many different forms, fromunit trusts to exchange-traded funds, which are listed on stock exchanges. You need to understand them before you invest.
32. As a general rule, only invest when you have no debt. The tax-free return you receive from paying off debt is likely to be greater thanany returns (which are likely to be taxed) you receive from an investment. There are exceptions, such as paying into a retirement fundwhile you have a home loan.
33. Be prepared to pay for good advice, as you would for any expertise. But make sure you deal with an adequately qualified adviser –preferably one who is a Certified Financial Planner accredited by the Financial Planning Institute. Good advice is worth its weight in gold.You would not go to a barber to have your teeth checked, so why go to someone for financial advice if that person is not properlyqualified?
34. Always have an emergency cash fund. Ideally, the fund should be equal to three months’ income. This way you will not have to cashin investments at an inopportune time or take out a high-interest loan if you are suddenly landed with a major expense.
35. An investment in a unit trust fund that is always in the top 25 percent of performers, even if it has never come first, is preferable to onethat has been ranked first once and languishes in the lower realms of the tables for the rest of the time. Check the consistency ofperformance tables published every three months in Personal Finance to help you find funds that perform well consistently.
36. If you are a member of a defined benefit or defined contribution retirement fund, or you contribute to a retirement annuity, you candeduct your contributions (limited to pre-determined levels) from your taxable income and defer tax until your retirement years. This wayyou get to earn investment returns on money that would otherwise have gone to the Receiver of Revenue.
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