Easy Finance 4U

If you happen to have watched the news during the past year, chances are you may have seen a mention or two of something called the “Credit Crunch”. You will have seen stories of banks going bust, stock markets in a panic, and grave announcements from Important People to “not panic”. Of course, that’s exactly the kind of thing that makes people want to start digging a hole in the back garden to keep their new gold coins in, but now is not the time to stop buying shares.

Not so long ago, back before the Dot-Com bubble, wise men with many letters after their name would calmly argue, all the while keeping a straight face, for something called the “Efficient Market Theory”. The market, they said, knew EVERYTHING there was to know about a particular stock or bond, and therefore, the current price the market was paying was clearly the RIGHT price given all available information. In the future things might be different, events might make a stock seem worth more or less, and the price would go up or down accordingly, but trying to out-guess the market, with today’s available information, was nothing more than a 50-50 bet, and stock pickers would do as well to use a dartboard as a broker’s recommendation.

How times change. While many people will still take a dim view of the recommendations of brokers, the idea that the market is rational should have died the day the Nasdaq went above 5,000. The events of the past 12 months are just another nail in the coffin of idea that large groups of people, risking large amounts of money, behave in ways that are in any sense “rational” or “efficient”. The plain and simple truth is that we cannot say that today’s stock prices are any more “right” than the prices of 1 year ago, but we can quite definitely say they are cheaper.

This matters because, as most successful investors through the years would agree, the time when you really make your profit on a stock is when you buy, not when you sell. For investors who plan to take a truly long-term view of the stock market, today’s prices present a wonderful opportunity to make much more profit in the long run, by buying shares cheaply today. It’s true that a number of companies have been caught out by global events, particularly banks exposed to bad housing loans, but anyone investing into a properly diversified fund or tracker product need not be worried by individual company failures.

True, prices may go lower still, which is why investors are often advised to drip-feed their money into an investment over a period of months or years, but the important thing is that by most long-term valuation methods, the market at today’s prices is cheap, and history has shown that investors who can summon the courage to take advantage of periods of cheap prices, are always rewarded, so if you have a pension or regular investment, keep on making those payments, and don’t let the gloom and doom of today prevent you reaping the rewards of tomorrow.

Are your monthly bills getting you down? Do you struggle to budget for food and clothing? In today’s difficult financial climate, millions of people are facing spiralling credit card bills and soaring mortgage costs. It’s time to fight back, and take control of your finances by Living Below Your Means!

The key to staying afloat financially is simple, live on less than you earn, and always have money put aside for emergencies. In today’s world of low job security and frequent unexpected costs, it’s amazing how many families are living paycheck to paycheck, with less than one months expenses set aside in savings. This is very dangerous, ideally every household needs at least six months expenses set aside in an easy to access savings account, but how can ordinary people earning low wages save up enough money to be safe? The answer is to live below your means!

Let us be clear, living below your means does not mean a low quality of living. All to often people mistake high spending for a high quality of life, but quite often the opposite is true. To begin with you need to focus on the unavoidable costs of running a household, Food & Clothing and Housing & Transport. Start with your food bill. Track every item of food and drink that you buy, and then at the end of one week, look over the list and see where you can save. Perhaps buying cheaper brands, or buying an item in bulk. Perhaps by buying more food from the supermarket, and less from expensive stores or eating out. Pay attention to any wasted food, and see if you can cut down on costly ready-meals or trips to the local fast food place.

Once you’ve cut back on your food bills, pick another essential area, such as utilities. Again, track your costs for 1 week, or if the bills are monthly, divide them down to get a weekly cost, and see what you really need. Are you paying too much on heating or air-con, running it during the day when no-one is home? Do you regularly watch every channel in your TV subscription package, or could you miss off a few? Do the same with travel expenses, fuel costs, clothing and grocery purchases, and you will find yourself saving possibly hundreds of dollars every month on essentials.

Once the essential costs are out of the way, begin looking at non-essentials. Again, track every cost, and think about the value for money of each purchase. Did you buy a DVD that you will only end up watching once? Did you get a new phone when the old one did everything you need? Are you renting a second car that you barely use? It’s all about identifying value for money, so you can cut back on the costs of things you aren’t getting real benefits from.

Once you’ve cut back you need to allocate your free money. This is important, unallocated money ends up getting spent regardless of good intentions. Ideally take money you have decided you won’t need directly from your account as soon as your paycheck clears. You are looking to do two things; first you need to build up a savings account for emergencies, so look for an easy-access account with a decent rate of interest. Keep this separate, and never use it for paying day-to-day expenses. This is your safety fund, you are buying financial peace of mind with your money, and it’s worth every penny.

Lastly, use perhaps half your free money to pay down your debts. Start with the debt with the highest interest, usually any credit cards or car loans, and then move on to your mortgage. If you are lucky enough to be without such debts, if you rent for example, then consider investing in things like energy-efficient light bulbs to cut down on your utility bills. By paying down your debts you will be increasing the amount of free money you have at the end of each week and be able to build up your security fund even faster!