Oftentimes in the financial arena you’ll run into people who think they’ve really got things figured out. They have very strong opinions about how finances should be handled and they know the best way to tackle debt, build an emergency fund, and invest for the best gains. They can quote you the current interest rates and tell you the differences between the various retirement plans as well as many of the associated facts. But what makes someone an authority on the subject or at least worth listening to?

A Few Options

You could go talk to a Certified Financial Planner who will help you plan out your finances and structure some sort of investment routine. It’s interesting to note, however, that this financial planner is working a normal 9 to 5 job just like you albeit providing financial services instead of whatever it is you do. Is this the person that you want to rely on for sound financial advice? Possibly, but I’m not to say.

You could also read many of the blogs out there that discuss personal finance and the many related topics. Most of the time you don’t really know who these people are, and many of them openly display an average, or even negative, net worth. Most of these blogs are a way for someone to track their own financial progress and learn what they can along the way, and they’ll usually be the first to tell you that they aren’t there to provide official financial and investment advice.

You could also go to the library and check out any number of books on the subject. Just because someone has published a book, however, doesn’t necessarily make them an authority on the subject. You don’t need to look any further than Suze Orman, David Bach, and Robert Kiyosaki to not only see conflicting advice, but controversy among bloggers about what they have to say. Are these the people you want to look to for financial advice then?

My Thoughts and Concerns

I’m not trying to tear anyone down with this post, but many people have the question of where to go to get good advice about their finances. And I am mostly concerned with the people that think they have everything figured out and who say that their way is the best way to handle your finances. The reason I’m concerned about these type of people is because I have never met anyone who knows everything there is to know about personal finance, business, and investing. In fact, most of the highly successful people that I’ve heard of, met, or know personally are extremely aware of how much they still don’t know. The more they learn, the more they realize they need to learn. They are usually willing, however, to share their personal experiences and what has worked for them in an effort to guide someone in the right direction rather than showing/telling someone exactly how things should be done.

As for this blog, I try to share things that I’ve learned through my own experience as well as through the experience of others. For the time being I’ve chosen not to display a net worth or any other personal specifics mostly out of a concern/desire for privacy. I do hope that you find the information valuable, but it’s by no means the be all and end all since I’m continually learning as well. I also enjoy comments and counter viewpoints because I think there’s much to be learned that way.

Ultimately though, you are responsible for the state of your finances. As you’ve probably heard before, no one cares as much about your money as you do. Try to learn as much as you can yourself about how to handle your money. You might do this by talking with a financial planner or by reading various financial blogs and websites, hopefully this one at least. In the end, you have to decide who is worth listening to and who’s advice you’re going to take, I just caution you against those who think they’ve already got everything figured out.

This is the second post in the Why I Like Real Estate series. If you haven’t already, check out Part I.

The concept and power of leverage is a simple one, yet it’s often misunderstood or not thought of when people think about real estate. I find this interesting since leverage is one of the most powerful reasons to invest in real estate.

All too often I’ve heard people say how real estate consistently under-performs the stock market, and we should therefore just invest in the stock market for long term gains. This may be true if you look at total gains, but leverage changes things.

Leverage basically means that you’re able to combine someone else’s money with your own money to buy an asset or invest in something. While it’s true that you can do this in the stock market with a margin account, most people who think real estate is too risky definitely would think a margin account is too risky.

By leveraging your money you’re able to multiply your gains, and this is why real estate can be (notice I said can be) much more profitable than other investments like the stock market. I suppose it would be best explained with an example:

Say that you put $10K into the stock market and you average an annual gain of 20%. Most people would say that this is quite an extraordinary rate of return. So, after 3 years your $10K would have grown to $17,280 which is outstanding.

Now let’s say that you put that same $10K as a 10% down payment on a rental property and finance the other 90% (this is the leverage part). We’ll also assume a rather conservative gain of 3% annually, well below what the stock market earned in our example. After three years, the property would then be worth $109,272 meaning that your $10K is now worth $19,272.

So as you can see, you’re money will still grow faster with an investment property appreciating at 3% than in the stock market at 20%. I understand that there are many other considerations, but you can’t dispute the power of leverage. This is why leverage is another one of the reasons that I like real estate.

Before I can really talk about managing your free cash flow, you’ve got to know what it is and how you can acquire some. Wikipedia defines free cash flow as:

cash flow available for distribution among all the security holders of a company.

As I’ve talked about before, if you view your personal finances as a business, you’re the sole shareholder of your “company”. Therefore all of the free cash flow belongs to you.

Essentially, it is the money that is available to you from your income after you’ve paid all necessary expenses. If you’re budget is constantly tight, you’re not going to have much cash flow to manage and you’ll need to come up with ways to increase your free cash flow. This can be accomplished in one of two ways: by increasing your income or reducing your expenses. It sounds simple enough, but coming up with specific action plans for this can sometimes be difficult.

I’d also like to mention that I’ve seen far too many people concentrate solely on reducing their expenses. While this is good to do, it leaves out the other side of the equation which would help speed you on your way to your ultimate financial goals. Don’t forget to also spend some time trying to increase your income as you also focus on reducing your expenses.

Once you have managed to free up some cash flow, you’re going to need to know what you ought to do with it. This is where so many people get in trouble because their are so many choices and everyone is vying for a piece of what you’ve got. I break down all of these choices into four basic categories to simplify things:

• Pay down debt
• Save
• Invest
• Spend

These aren’t in any particular order, but I wouldn’t put Spend near the top of the list, although that’s what most people do with it. You’ll have to decide what is best for your personal situation to do with the money that’s available to you. Establishing an emergency fund may be high on the priority list for some, while others may look to invest because they’ve already got an emergency fund. You may choose to allocate your funds equally among all of the categories so that you’re making headway on all fronts. Whatever you do though, make sure that it’s a conscious decision with your goals in mind.

If it helps you, try to think of your finances like a business (like I mentioned earlier). By doing this you’ll want to increase and manage your free cash flow so that it provides the most growth and benefit to your overall finances. So take some time to figure out what your current cash flow looks like and how you can increase it so you can allocate it how you best see fit.

A couple of days ago I talked about starting the new year off right. And one of the possible goals that I mentioned was to learn about investing. This goal could be expanded into learning anything new concerning your finances. You can obviously choose to learn about whatever you’d like, but here are a few topics that you might be interested in learning more about:

• Retirement plans and options (401Ks, IRAs, etc.)
• Debt management and reduction
• Investing in the stock market
• Time management and your personal effectiveness
• Real estate investing
• How to start a new business, or
• Choose your own topic…

Whatever it is that you’ve now chosen to learn more about, it’s not going to just happen. You’re going to have to put a little effort into it and make something happen. Because everyone learns a little differently, I’m going to make a few different suggestions of how you can accomplish this goal without taking too much more of your already precious time.

One suggestion that I wrote about quite a while ago is to establish Your Mobile University. If you’re like most people, you probably spend quite a bit of time in your car whether it’s driving to and from work or running the many errands you need to get done. So, instead of just listening to the radio, try putting in an audiobook about the subject you want to learn about. Most libraries carry all sorts of audiobooks, and if they’re usually checked out you can most likely reserve them through an online system. I highly recommend this option and have done this myself and really enjoyed it.

Another option for those of you can’t stand the thought of silencing the music in your car is to do the same thing while you’re doing things around the house. You may as well learn something new while you’re vacuuming, doing the dishes, or just organizing and straightening up the house. Either put it on your home stereo or use headphones with your iPod or other such device.

A more boring version of the above would be to check out the actual books and just read them. This won’t really save you any time, but you may find that you can concentrate better by focusing only on the one thing. I personally like reading the occasional book but wouldn’t only do this option. It may work for you though.

You also don’t want to forget about all of the information that is available online. There are so many great resources and personal finance blogs out there, not to mention this one. And over this next year Fiscal Musings will be filled with a lot of great information. Also, if there’s something specific you’d like to read about here or learn more about, let me know via email at fiscalmusings@gmail.com or in the comments below.

I stumbled across an interesting website the other day that I thought I would make you aware of. Apparently the government cares about our personal finances at least at some level. I know it’s hard to believe, but they’ve at least put up a website.

At USA.gov they’ve got a section about Money and Taxes. It covers a variety of topics including:

• Currency and the Economy
• Federal and State Financial Agencies
• Financial Crimes and Scams
• Investing
• Personal Finance
• Sales and Auctions, and
• Taxes - Federal and State

The information in these different topics is pretty ordinary. There isn’t anything earth shattering or revelatory, but it’s an interesting resource to check out. It does however, provide reliable information on some of the most common personal finance topics. Where else would you get better information about government sponsored retirement plans than from the government themselves.

Overall I think the site is worth checking out. You may find a topic that you want to learn more about, and you wouldn’t have otherwise thought of it. How else would you learn about the Check 21 Law (I will be very surprised if you know what this is). You can also order a free CD-rom called the Individual Retirement Arrangement (IRA) Resource Guide for Small Business Owners and Individuals (I’ll let you try and find this for yourself). Who would have thought? So poke around the site and see what you think.

Anyone who has invested in anything is familiar with the trade-off between risk and return whether you’ve consciously weighed the options and thought about it or not. Before you’ve bought into an investment, you’ve decided that you’re able to stomach the risk is hopes of certain returns. And in order to make long term financial progress you need to decide what level of risk you can handle while at the same time remaining comfortable with your investments.

Investment risk can be defined as the chance that an investment’s actual return will be different than expected. Risk also means that there is the possibility of losing some, if not all, or your investment. Where there are low levels of uncertainty, there are low potential returns. The opposite is true for high levels of uncertainty.

It is important however, to remember that higher risk does not equal higher returns. Higher risk only gives us the possibility for higher returns. There are also greater potential losses.

While we’re on this subject, I think it’s also important to bring up the concept of the risk premium. Too many try to balance their risk against the wrong return. If they’re going to take a risk in the stock market, they’re looking for a return of about %11 percent or so. Now, would you be willing to take the same risk for only 6%? Because this is what you’re doing essentially.

Take a look at U.S. Government bonds and what they are paying. Let’s say that they’re offering a 5% return. Because these types of bonds are virtually risk free, they represent a risk free rate of return. Mutual funds may have losses of -6% one year and gains of 20% the next for an average of around 11%. The difference between the 11% and the 5% is called the risk premium. The risk you take by investing in mutual funds is for the additional 6% return.

Not everyone goes through this type of analysis when they’re investing, but the concept is important to understand. You don’t want to take on a large amount of risk if there isn’t a significant risk premium.

When you start to invest or begin looking at your different options of what to invest in, it is paramount that you understand what you’re investing in. This concept applies to many aspects of our lives, but here I’m focusing on investing. You’ve got to understand what you’re doing.

There are so many options available to us these days that it can be extremely tough to choose where to put your money. There are full service brokerages, self service brokerages, retirement accounts (both employer sponsored and not), mutual funds, individual stocks, real estate (residential, commercial, etc.) and so much more. If you understand how money is made in each of these investments you can do quite well for yourself. If, however, you’re not sure how they work, you can also lose a lot of money.

I’m sure most all of you have seen those late night infomercials telling you how easy it is to make money in something like real estate. And I’m sure there are all sorts of opinions on this subject as well. Well, the truth is that there is both money to be made in real estate and money to be lost. Donald Trump is a typical example of someone who knows how to make money in real estate and you probably know someone who has lost money in real estate. The difference, I submit, is that some understand the game and others don’t.

The stock market is another place where some people make money and others lose money. There are people like Warren Buffett and (once again) there are plenty of others who have lost a ton of money in the market. I don’t think anyone will dispute that Warren Buffett understands how the market works and how to profit from it. Those who continually lose money in the market probably don’t understand it like they should.

So what does all of this mean for us? What should we invest in and how? It may behoove us to step back and instead of wondering what to invest in, decide what we understand or what we want to understand better. If you’re interested in the stock market, begin by researching how one makes money in it. Just because you’ve heard that you can make a lot of money through options trading doesn’t mean that you know how to. Someone you know may have made some money by shorting a stock. Does this mean that you should all of a sudden start shorting stocks?

Now, instead of realizing all of the things that you don’t understand, take the time time to educate yourself in areas of investing that interest you. Perhaps you can find a mentor of sorts that knows how to do what you want to do. There are also a ton of books at the local library with a wealth of information on various investing topics. It may be time to invest a little time in yourself before you start investing your money.