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Improve Your Personal Finances By Asking Yourself These 3 Questions

A Quick Way to Improve Your Family’s Financial Situation

A huge mistake that I see repeated constantly among new investors is the desire to setup a portfolio without any meaningful rationale behind the action besides a generic, “I thought I should do something to begin preparing for retirement,” or “I’m an adult now, so I should have a retirement plan because that is what you are supposed to do.”

While this attitude is certainly better than the alternative of not caring about your family’s income statement and balance sheet at all, it is not an optimal way to go about your mission of making money.

1. What Are You Trying to Achieve with Your Investment Portfolio?

The best place to start is often identifying your objectives:

  •          Why are you saving money?
  •          Why are you interested in making money from your investments?
  •          Put another way, what, specifically, are you trying to accomplish?

It is shocking how many investors never actually sit down and ask themselves that question. Instead, they hurl their cash at a random index fund or throw it in savings bonds, hoping that it amounts to something by the time they dip into their piggy bank.

Don’t just say, “I want to move somewhere warm in the future.” Be specific! Say something like, “Within 4 years and 2 months, I want to move to a home in the Miami area at least 2,500 square feet, paid for in cash so there is no mortgage.”

These are important considerations because money is nothing more, and nothing less, than a tool. By itself it has no intrinsic value. The sole purpose of it is to be there when you want to convert it into goods and services from society. It requires planning.

2. How Much Money Do You Need to Achieve Your Objectives?

Once you’ve figured out what it is you want your money to accomplish, you need to figure out how much it would take to do it comfortably. I’m a fan of using the monthly after-tax cash income model.

Under this technique, you figure out exactly how much liquid, cold, hard, cash you need sitting in the cheque account every month, after paying all expenses and taxes, to live the way you want to live.  Ambiguous platitudes such as, “I want to be comfortable” are next to useless. You need specifics because it is only when you have a clear benchmark that you can determine if you are succeeding or failing.

The figure at which you arrive is going to be different from everyone else. Some people can be as happy as a lark on $3,000 a month. Still others require $15,000 a month. For others, it would take $100,000 a month. That is because each of us has a unique psychological profile, passions, hobbies, and comfort level at which we thrive. For some folks, driving a brand new Lexus or BMW seems like a complete waste of resources. Another individual might feel as if it is one of the greatest joys in life; an experience that makes driving to the office or dropping the kids off at school far more enjoyable. There is no right or wrong answer here, but you do need to be completely honest with yourself.

3. What Is Your Strategy for Making Money?

It is amazing to those of us who work in finance and have enjoyed success how few people actually try to make money in any meaningful amount. Most people are so brainwashed by the post-Industrial Revolution socioeconomic structure that they think the only way to make a living is to sell their time for a pay cheque.

Yet, almost all of the truly successful in society did no such thing. I’ve said it before but it is worth repeating:

  •          Ray Kroc sold hamburgers through his McDonald’s chain.
  •          Bill Gates sold software through Microsoft.
  •          Walt Disney sold Mickey Mouse cartoons and theme park tickets through his entertainment companies.
  •          James Cash Penney sold everything from men’s dress shirts to toaster ovens through his retailer, J.C. Penney.

You can sell your time and do well, especially if you are a member of the upper management at a large corporation or a not-for-profit such as a regional hospital chain. It is not, however, the only way you can do it.

How are you going to make your money? When you buy an investment, you are really just acquiring an asset that is selling something for you other than your time. If you own shares of Colgate-Palmolive, the dividend cheques that get deposited into your brokerage account came from the sale of dish soap and toothpaste.

What is your strategy? Are you going to focus on oil and natural gas assets? Are you going to buy up businesses such as retail shops or hotels in your home town? Find a way to focus on your strengths so you can minimize your risk. Stick with it, let compounding work its magic, and you might just find, like so many before you, than “money begets money”, to paraphrase the self-made genius, Benjamin Franklin.

Source  :  http://beginnersinvest.about.com/od/planningforthefuture/a/Improve-Your-Personal-Finances-By-Asking-Yourself-These-3-Questions.htm?nl=1

 

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