Thursday, March 19, 2009

Advanced Frugality

When people reading this, they probably think that credit in general is bad. I digress I at this note because credit is not "bad" per se. In actuality credit can provide you with the opportunities to make investments thus being able to increase how much money you make. The technical term for this is residual income. If you have mastered everything in the previous posts, you will be able to take this essential step to financial freedom: using your money that you saved so earnestly to go in on investments.

I alluded to this in the last post intentionally to drive home the idea that saving money is only one attribute to frugality. Anyone can save money as I have shown you. And also it does not depend on how many kids you have either (albeit it will be harder to do so if you have a lot of children). There was a family that lived on $35,000/ year with a working family of two. Typically nuclear family. And guess what they did with their savings? They reinvested the money in publishing a book. And now they live the American dream and do not worry about bills. Now how did they do this? They saved their money and reinvested it. Like saving money, investing is not rocket science nor does it have to be hard.

Saving Money Will Only Get You So Far

I say this mainly because there are people who are afraid of investing. Investing does not have to be risky. But you need to acquire knowledge about how to invest. And never invest to the point where you are in a fiscal deficit. Last year I made a conscious choice to become an investor. First I started out with a public retirement fund at my old job. I did not like the returns in the fund so I closed it an took the money and saved it.

Now, I am investing in precious metals and blue chip stocks due to market trends and I have already seen a return on my investments. When I say trend, I mainly mean going against the trends or counter-trend investing. If the investment is trendy, the investment could be over valued. As a frugal investor, over investing is a big no-no. Here let me explain why.

I also have collected old war relics and trading cards. I even lost big.At one point I bought the Alpha Edition Black Lotus card from the game Magic the Gathering. I was pressured by the owner to give up the card and forgo it for three whole boxes of MTG trading cards. I bought the card for $220 and sold it for $270 in value. However, if I had held on to it, I would have made $2,000 from the transaction. Mind you I was only 13, but even then I was thinking about investing. However, it is probably best to say "I wish I hadn't" than, "that I wish I had". While my instict here told me not to sell the card. It was nonetheless risky because the card could have been worth $5, just like a lot of the Pokemon trading cards.

But I move on. There is no such thing as the perfect investor. However there is such thing as a prudent one. There are going to be failures along the line. Even Buffett is having difficulties with his current businesses. With the economy Berkshire Hatheway reported record losses, but does that mean Buffett lost money? No his investments did. While yes in a sense he did lose, he did win by "watching the basket full of eggs". While I do not have as much money as Buffett, I am not afriad to lose because I follow a strategy that emphasizes not losing money. (By the way that is one of Warren Buffett's golden rules.)

How To Take Budget And Set Aside Money For Investments

There is only one thing that holds people back from achieving financial success: themselves. When I mention furgality being a science, I mainly mean being able to apply its application properly. Saving money is one part. In fact, those of you that understood the property of successfully setting up a budget will understand this concept. Your going to want to save up at least $2,000 to get this off the ground. Once you saved up this amount of money, you will want to not spend this and fractionalize whatever earnings you have towards this goal.

There is another way to go about investing and that is just save up a lump sum and go in on an investment outright. I prefer to do the aforementioned, earning small victories along the road and gain momentum for the "big deal". There will be plenty in a span of 70 years. There are really no "once in a lifetimes". For me L-U-C-K, is often mispelled W-O-R-K, meaning that you will have to have the self motivated mindset that drives people to succeed. I will discuss the advantages and disadvantages of both, but first I would like to discuss why I said not to spend that $2,000.

The $2,000 is really a buffer that protects you from failure (and homelessness). You need money to fall back on. And this amount should be $2,000 if your single. (This number should really be around $5,000 if you're married) For one, there is no assurence that things that you invest in will not go awry. When you start out, things can and often will go awry. As a side note, the amount should be significantly higher if you live in a high cost city like New York or Hollywood. For regular cities like Reno, or Cleveland, or Highland this is a good amount.

When you obtain the set amount, you should fraction about $200 for every $1,000 you earn. Obviously you will probably invest in either collectibles, stocks, precious metals, or yourself. However, that is $2,400/year/per $1,000 that you can use toward either having a small business or investing. Either one will lead to profit, although the returns from investing in a small business will be more profitable at first. But once, you find something that succeeds, replicate the results until you are ready to go in on a big deal.

Option 2 is you set aside 20-30% of your annual income and just buy a business. Most people cannot do this right away. The figures for regular 9-5ers are around 17-20K. With just Sam's Club, I only make about 18K. However, let's say I wanted a small time burger francaise, we will call it Burger Barn for the purposes for keeping the topic fresh. Burger Barn wants 16K to start out. I will have to set aside roughly 5.5K in order to franciase with them. Plus I will have to probably go in on a lease. It will be a lot harder on my meager "salary". But lets say I wanted to look for a better job and I landed a 5K/month ideal college gig. That would be 12-16K for the range so ideally, I could do this within 2 years no problem, but I now have to take a huge blow to my account.

Getting small investment strategies along the road would build up residual income for the purposes of having the "big deal" in a quicker amount of time. While I do sit on things, I believe that only a fraction of your money should be spent towards making more money. It is never safe to assume risk. But when you get to the point where you find your niche and decide to reinvest. The best way to go about doing this is to reinvest your profits plus the amount you obtain from your job until and replicate the results. Successful investors invest in the same thing over and over again. They hardly ever deviate unless they understands a investment.

Budgeted Investments Is What Motivates Frugal People Into Being Frugal

I have to say the best investments I ever did were not in the bank, but on paper. You need to invest in yourself first whether it is in knowledge, time, or money. If you need something that you know will give you more money. (i.e. a class on tax preparation that will give you a comissioned return) To be able to take what you have read and turn it into profit is an ideal application. But do not expect to be able to buy stuff and get a return. One you have to find the market first and, two, you need to able to turn your market into revenue. I have to say, when you invest in yourself the returns are tremendous. You make yourself a more rounded person along with becoming saavy at investing. Budgeting and being able to save huge amounts of money is only one facet of being frugal. The art of frugality is being able to take all that you have saved and live a fruitful, meaningful lifestyle, of financial independence. The science of frugality is to do this, calculate your assets-liabilites and divide that by a certain percentage and take the difference made and RE-INVEST, save more, replicate and repeat.