December 3rd, 2008 — Debt, Income Streams, Investing, Personal Finance, bad debt, good debt
While most of us get the general principle that we need to go into debt if we want to build up our credit, it’s tough to know exactly how far you should go. When you’re first starting out, it’s all too easy to get buried in bad debts that run into tens of thousands of dollars and it can take years to undo the damage that has been done. However, there are some simple rules of thumb that you can follow to help you determine how much debt you can safely use and what you’ll need to avoid in order to stay on top.
First, it’s important to understand the difference between bad debt and good debt. Yes, there actually is “good” debt, but you’ll need to be smart about your choices. Good debt is debt that can be leveraged to create income for you. Bad debt is the kind of debt that happens when you overspend on frivolous things that won’t make any sort of return. It’s perfectly fine to go into good debt, and in fact, most of the world’s millionaires have used this very technique to get where they are today.
Why is there such a disparity between these millionaires and the average American that’s trying to figure out how to make ends meet? The key is in how they use their debts. While there are exceptions to the rule, most business people don’t run out and blow a loan on the latest this or that. They use that loan to make an investment to create another stream of steady income. Over time, you can build up multiple income streams using this technique and you can end up making more money with these than you can with your old job.
The average American however may not know this. They’ve been trained to overspend, to run out and blow their paychecks on the latest clothes or electronics. All the time they’re spending, the interest rate charges are piling up and they’re getting deeper and deeper into debt. At the end of the day, a shirt may look nice, but it’s certainly not going to secure your future.
So, how do you know how much debt you can comfortably go into? If you’ve already established that your going to use that money wisely on new opportunities to create more income, you’ve got a little more wiggle room. It’s a good rule of thumb to use your salary as a guide as to how much debt you can comfortably handle. At first, try not to exceed three months of your current salary. This will help you learn the ropes and you won’t have the risks of getting in over your head.
As you start to make money from your multiple streams of income, you can invest this back into making more money or you can just pay off the old loan and get a new one to keep the process going. Never go into debt for the wrong reasons – and never let your debt get out of control.
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August 8th, 2008 — Book Review, Personal Finance
Wiley Publishing has put out a series of “Little Books” but this one may be the most important. If you are looking for ways to logically increase your wealth and secure your financial future, this is definitely a great starting point that will get you going in the right direction and help you avoid some common pitfalls along the way. We appreciated the no-nonsense style of writing and found that unlike many personal finance books, this one actually contained information that anyone can use, regardless of their current financial status or their knowledge of finance in general.
If the process of finding out which companies are the best to invest is somewhere between Greek and Sanskrit for you, this book offers a true guide to figuring out on your own what you need to do. From breaking down complex investing theories, to providing you with the tools to know when a deal is a good buy and when to walk away, this book has it all. Rarely have we seen a book that worked so hard to make it easy for anyone, and we really mean anyone, to invest.
You’ll learn how to spot economic moats as well as what may appear to be a moat, but is in actuality something else. The book uses real world examples to illustrate their points, such as the failure of Pets.com, to national clothing makers that investors thought were solid, only to have their clothes end up in discount stores within a few years. This is the kind of information that you need, especially if you are not working with a broker, or if you want to try figuring out the markets on your own.
The best section was the tools for valuation, which provides investors with easy ways of figuring out whether or not a stock is a good buy. This section alone is worth the cost of the book and we walked away with information that we could put to use right away. Another must read several times is the section on knowing when to sell. Many first time investors make the mistake of bolting when they need to hold on, or holding on too long. This chapter will help them find the right balance.
Overall, we loved the book and found it to be a resource that you can turn to again and again. It was very well written and engaging, which can be difficult for a book that is about facts and figures. We also fell in love with the fact that the book did not focus on get rich quick schemes, investing in insurance policies or investing in the housing market using shady deals. Unlike many books, the advice in here is proven and it really works. When it comes to making more money, this book can definitely get you started and you’ll have the benefit of working with the same techniques that Warren Buffett has used. You really can’t get any better than that.
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