One of the calculations that you’ll hear thrown around time and time again is the compound annual growth rate. It’s a more accurate measure of past investment performance than just a simple average of the different years investment returns. Knowing what the average return of some investment is doesn’t give you any insight into what you might actually expect to have as a result of some initial investment.

To illustrate this, consider the example of two consecutive years where you earn 50% the first year and then lose 33% the next. If you average these returns, you end up with a 8.5% return on your investment, which doesn’t sound that bad. But if you actually run the numbers on some initial investment, you can see that the actual two year return was 0%.

So here’s how you calculate the Compound Annual Growth Rate (CAGR):

CAGR = [Ending Balance/Beginning Balance]^(1/Time Period, i.e. number of years)

It’s a relatively simple calculation to make, and it’s important because you can then equally compare the returns from different investments. I will caution you though, that just because you know the CAGR of some investment in the past, it cannot accurately predict the future returns of the investment.

I was thinking the other day about some of the more simple things when it comes to our finances, so I thought I would talk about keeping a check book register and balancing it occasionally. I’ve talked to a lot of people who don’t do this, and they have various reasons for it.

Some of the more common reasons for not keeping a register for one’s bank account are laziness, managing everything online, or just not understanding how or why to keep one. None of these are good reasons, but they’re the excuses that people will give for not keeping good records. So let me give a few reasons why I think it’s important for you to keep an accurate register for bank accounts.

1. It’s one of the simplest ways for you to keep track of and always know what money is coming in and what is going out. We know that in order to get and keep your finances in order you need to know where your money is going, and this is a great way to to do it.

2. Even though it’s really easy to manage your account online these days, there is still a one or two day delay before things post to your account, and you also don’t want to forget any checks that you may have written that people haven’t cashed yet. I’ve talked to far too many people who just check their online balance before making a purchase, but they’ve forgotten about some check they’ve written. This is a great way to rack up the overdraft fees.

3. It’s a great way to train yourself to think more about your finances and keep them in order and organized. By keeping a record of your purchases and deposits, you’ll stay on top of what money you have and don’t have. Getting more organized in your financial life is something that you definitely won’t regret.

Over the past weekend I borrowed another one of Robert Kiyosaki’s books from a friend. I believe it’s his latest one now, but I’m not certain about this. At any rate, this one is called Rich Dad’s Increase Your Financial IQ: Get Smarter with Your Money.

What do I think of the book?

If you’ve read some of his other books in the past, you’ll probably recognize a lot of the information in the book. He talks about the importance of financial intelligence as well as many other topics that he’s gone over before. It isn’t a bad read, but he does mention the fact that Nixon took us off the gold standard back in 1971 too many times. Now, here are the chapters in the book for those of you who may be interested in it:

1. What is Financial Intelligence?
2. The Five Financial IQ’s
3. Financial IQ #1: Making More Money
4. Financial IQ #2: Protecting Your Money
5. Financial IQ #3: Budgeting Your Money
6. Financial IQ #4: Leveraging Your Money
7. Financial IQ #5: Improving Your Financial Information
8. The Integrity of Money
9. Developing Your Financial Genius
10. Developing Your Financial IQ: Some Practical Applications

If you’re just starting out trying to get your finances in order and trying to get ahead, then you’d probably benefit from reading this book. If on the other hand, like I’ve already mentioned, you’ve already read some of his other books, then you’ll most likely find little value added.

I read an interesting article the other day about Jose Canseco having his home foreclosed. He walked away from his $2.5 million dollar home which is 7,300 square feet because it didn’t make sense to continue making payments.

This is just another instance that reminds us that it doesn’t matter how much you make. Whether you earn millions of dollars per year like Jose Canseco, or you just seem to be scraping by, you need to learn how to manage your money and the resources you have.

Quite a while back I talked about the importance of having and being able to increase your free cash flow. As a reminder, your free cash flow is the portion of your income that is left over after you’ve paid all of your necessary living expenses. Many people also refer to it as their discretionary income, but instead of just spending it at your discretion on whatever you feel like, you need to start putting it to work for you.

Since it is your “free cash flow”, you can choose what you’d like to do with it, and there are a lot of different options available. You also need to realize that many of the available options can be considered good but not necessarily the best. Only you can decide for your situation how to best allocate your free cash flow, but it will require some thought on your part. So here are a few of my thoughts on the subject, and in my opinion, there are two main things that should be done with any free cash flow that you have:

1. Save up X number of months worth of living expenses as a security blanket, emergency fund, or whatever else you’d like to call it. I personally have the goal of a one year emergency fund, but again, you decide what’s right for you.

2. Buy investments that in turn produce more cash flow. By doing this, you’ll continually be increasing the amount of available income that you have with which to pay your living expenses and eventually become financially free. Investing for cash flow is in contrast to investing for capital appreciation which excludes most mutual funds and other traditional investments.

The reason for the focus on cash flow is because that’s what we live on. Even with a traditional retirement plan, people hope to accumulate enough over their working life which will produce enough income to live off in retirement. So it’s imperative to mind your free cash flow and find ways to increase it. And as always, I’d love to hear any comments that you have on the subject.

Getting ahead financially in the most basic sense is actually fairly simple. It typically seems complicated to many people because of the many varying opinions about the specifics of something that in general terms is quite easy to understand. For example, choosing the best account for an emergency fund and exactly how much to keep in it is something about which many people have differing opinions. But it’s only one part of the basics of personal finance.

What I’m talking about here are the two main parts of everyone’s finances, our earnings and our expenses. It’s important to focus on both of these instead of neglecting one in the name of the other. As The Digerati Life mentions, we should spend less than we earn, and earn more than we spend. These two phrases may seem redundant, but the subtle difference is important.

Focus on Your Earnings

I believe it’s safe to say that you don’t have a financial life without earning any money (or at least having some sort of income). Too many people though, go through life having resigned themselves to earning whatever income it is that comes fairly readily to them. If you’re serious about attaining some level of financial freedom, there needs to be a focus on growing your earnings. You can’t save what you don’t have, and you can’t invest what you haven’t earned. Be sure to make this a priority in your financial life.

Focus on Your Expenses

As you’ve probably experienced yourself, or at least seen with others, it doesn’t do any good to earn a great deal of money if you end up spending it all. And for those that have already taken a keen interest in their finances, this is usually the area of most focus. I’m not going to go into a long explanation of why one needs to focus on expenses (it just makes sense), but I do want to make one point. You can always spend more than you earn. So make sure to keep tabs on your spending.

If you take a step back and look at your financial life, you can probably see which if these two goals you tend to favor. That’s what it should be though, a tendency. You need to consciously focus on both of these areas, regardless of where you naturally focus.

There are many more than just eight reasons why people fail to get ahead financially. This is not meant to be an exhaustive list, yet these are some of my thoughts about why so many people continue to struggle financially.

1. Failure to Plan

You’ve all probably heard the saying that goes something like this, failure to plan is planning to fail. While this does cause one to stop and think, I don’t actually think anyone reading this site is deliberately planning to fail. The concern though, is not having a workable plan for improving your financial situation and thereby staying content with the status quo. Very few people wake up one day and are suddenly financially free and successful. If you haven’t already, take the time to develop a financial plan and start moving forward.

2. Focusing only on Yourself

If you look at charitable giving as money you could otherwise put to better use, you’re missing the point. By reaching out a helping hand and giving to others of your time and means you’re shifting your focus away from yourself. You will realize that it’s not the new flat panel TV and the hottest car that ultimately makes you happy. It’s much easier to control your spending in order to get ahead when the focus isn’t always on you.

3. Not Making Savings a Priority

How often have we all heard that we should start and maintain some sort of emergency fund. For one reason or another things just happen that we weren’t expecting. Your savings, or emergency fund, is one way to plan for the essentially unplannable. Make your savings regular or even automatic, and you’ll find that getting ahead is within reach.

4. Impatience

It’s no secret that we live in an On Demand society, but financial freedom and stability don’t play by these rules. You can’t be impatient and expect unreasonable results. Learn the virtue of patience and you’ll actually be surprised by the results.

5. Lack of Follow Through

This goes hand in hand with impatience. Once you’ve created a plan and set things in motion it’s imperative that you execute and follow through. Opening a savings or investment account and then failing to contribute after six months is a recipe for the same. Little adjustments here and there will be necessary along the way, but getting ahead is going to take some doing.

6. Underestimating the Little Things

How often have you heard others or even yourself say, “it’s only $x.xx”? I hate to break it to you, but all of those little things add up over time. Just $5 for lunch every day at work adds up to over $100 per month or over $1200 for the year. That just happens to be about the amount of the coming tax rebate. Just think, by saving just about $23 per week you could give yourself the equivalent of this tax rebate every year. The small things add up.

7. Have Now, Pay Later

It’s a depressing feeling when the bulk of your paycheck goes to pay for things that you don’t even remember buying. Because you have to have the latest gadget, you end up mortgaging your future earnings. How do you expect to get ahead and plan for the future when you’re constantly paying for the past?

8. Lack of Financial Knowledge

How can one contribute to a 401(k) if he doesn’t know what it is or how it works? Having a goal of a million dollars or so seems impossible if you don’t understand the principle of compounding. It’s also difficult to grow any semblance of a nest egg without at least a basic understanding of investing. Getting ahead will require some effort on your part, and that includes learning at least the basic tenets of financial management.