Tuesday, May 6, 2008

Top Financial Resolutions for 2008

Quote of the day:
"After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own" - Alan Greenspan (column in the Wall Street Journal).

Hmmm ... the former Fed Chairman thinks the Fed cannot do what it is meant to do. So why does the Fed have responsibility over Money Supply again?

Commentary for the Week:

"Top resolutions to help you get your financial house in order in '08"

Every year, many of us mark the passage of time by resolving to do one or more of three things - the merely inconvenient, the idealistic impractical and / or the downright impossible. This year, let us focus our energies on just the first - the merely inconvenient. While it is a bit sad that most of us think about our financial affairs as an inconvenience, if you promise to spend just 5 hours this month on your finances, I will try to show you how this time will be one of the better investments you can make in yourself.

Here are my top 3 suggestions for resolutions and the actions that each requires. It will not solve all your problems, but should solve at least some important ones. I ask you for 5 hours over the next month, whether you want to continue the process will depend on whether you had fun. To put that into perspective, 5 hrs / month is around 10 minutes a day - a mere sprinkle of grains in the sands of time. More relevantly perhaps, I am told that this is less time than many people spend pruning their eyebrows. Of course, better eyebrows may do wonders for one's social life, but some real wealth might help as well.

Suggested Top 3 Resolutions for 2008:

1. I will spend one hour of uninterrupted time figuring out how much I myself or my family receives and spends each month.
a. This can be done very simply by adding up all your income on one side and expenses on the other. Do this for more than just one month so you capture a more accurate picture of your income.
b. Ideally, the income column should exceed the expenses column by a margin that makes you smile. If not, analyze the expenses - which items are worth a second look?
c. If the expenses are all minimal, but you are still not smiling my friend - this is the year to do something towards getting a better job.

2. I will spend one hour of uninterrupted time figuring out what my net worth is and putting down on paper my 5 Year Net Worth and Income Goals.
a. Feel free to think about the Jones'es and involve family in this discussion about your Goals. Of course, the why of these particular goals and whether they are reasonable are both important considerations to discuss with family.
b. Once that is done, add up all your Assets (the Fair Value of the things you own) and minus all your Liabilities (your debt). This is your present Net Worth. If you are a young couple, this is a good time to sit down and take a deep breath. Try and relax, things will get better over time.
c. Look at the savings figure from Resolution 1 - On a monthly basis, is that going to be enough to fulfill Goals from Resolution 2 over the 5 years? If so, you saved yourself 3 hours. If not, then we may have a problem.

3. I will spend three hours of uninterrupted time analyzing my debt load and figuring out how to lower it quickly and efficiently while taking less risk.
a. Remember the itemized list of your liabilities? Look at each one in turn and put down the effective (not quoted) interest rate for each one. If you are having trouble with calculating effective interest rates, call your banker or Credit Card Company to get the information. Relax - you have at least an hour. Also, as you ask for this information, you can also ask them to look into how they can do better for you for each relevant item. Ask for a proposal to be sent to you so that you can analyze it without their 'help'.
b. You should now have identified at least two problems (three if you count the customer service from 3-a). The first is figuring out why you didn't smile under section 1-b. The second relates to why you are still reading past section 2-c. If section 3 is all still relevant, then it seems that you are perhaps not saving enough. If you can generate enough savings, you can satisfy your goals. Let me stress this crucial point a bit more - reread the previous sentence. Begin to think that Real Wealth = Savings + Effective Risk Management. Remember, there is NO OTHER RISK-NUETRAL WAY TO ACHIEVE YOUR GOALS. Re-read section 3-b again until you can sing its lessons in the shower and repeat it to yourself on your daily commute to work.
As you are almost done your five hours of what initially seemed like penance, this is a good time to reflect on what you have learnt from this process. You should know more about how your income is spent each month, what assets make up your present material wealth and what your definable goals are. All that remains is figuring out how you will achieve them. In fact, as you have been chanting section 3-b on your way to work for a month - you may have the first part of solution as well.

At this point, you should be smiling for a different reason. Not only do you really get 'it', you also have some tools and education to take things to the next step. The first is to invest in your own financial education by talking to friends, family and trusted colleagues to see how they solve their problems. If, however, you find yourself a bit ahead of them in knowledge and sophistication, you may be ready to go head to head with a professional. That will be an adventure as well, but at least you will be prepared.

In my experience, there has been a very simple difference between clients that have challenged me to outperform and those that I have dragged through the beginnings of financial discipline. It was not a substantial difference of wealth, education, sophistication or intelligence - it was almost always a few hours of work on their end. Some people expect to be babysat through even the important areas of their lives; some challenge themselves and their advisors to actually solve their problems. Let us resolve to be more of the latter in this New Year. One never knows; perhaps if we can keep this up for longer than a month, we might even get to the profoundly idealistic and the downright impossible before long. May you all have a Happy New Year - but keep away from them eyebrows ...

Finance News:

1. What the experts say about the state of the twin economies of the US and Canada for 2008 ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080101.wreconomistsintro01/BNStory/robNews/home/?pageRequested=all

2. As the housing crisis gathers steam in the US, the lawyers come out to play ... http://www.economist.com/finance/displaystory.cfm?story_id=10337884

3. Gold prices set a record again... past $850 this time ... http://www.ft.com/cms/s/0/89da5850-b929-11dc-bb66-0000779fd2ac.html ... & Oil hits $100 for the first time ever ... http://www.nytimes.com/2008/01/02/business/02cnd-oil.html?_r=1&8au&emc=au&oref=slogin ... what is common between the two is that the price of most traded commodities is quoted in US currency ... so is it a rise in Oil Prices, or a fall in the worth of the US$?

Economic News:

1. Some intensely pessimistic views on the global economy ... the factors identified are interesting enough for a look ... http://www.theglobeandmail.com/servlet/story/RTGAM.20080102.wcomment0102/BNStory/specialComment/home?cid=al_gam_mostemail

2. Prospects for the CDN Loonie in 2008 ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080101.wyrcurrencies01/BNStory/SpecialEvents2/?cid=al_gam_nletter_maropen

3. Column on growth (and emerging issues) for Asian economies ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071231.wasianmarkets1231/BNStory/SpecialEvents2/?cid=al_gam_nletter_maropen

4. Some very good analysis on Global 'Financialitis' ... http://www.atimes.com/atimes/Global_Economy/IL22Dj01.html

5. Lessons from Japan about what we can expect in the US this year ... http://www.economist.com/research/articlesbysubject/displaystory.cfm?subjectid=2764524&story_id=10286992

Islamic / Middle East Finance:

1. How much does using the US$ as their currency peg cost the Middle East economies? ... http://www.economist.com/finance/displaystory.cfm?story_id=10191717

2. How is it a bargain if you buy something that nobody else wants to buy right now and that you probably would not be able to sell again? ... perhaps they know something I don't ... http://www.ft.com/cms/s/0/ac734c28-b89d-11dc-893b-0000779fd2ac.html


1. Very informative article on graphical presentation of data ... the graphs are a definite learning opportunity ... http://www.economist.com/world/europe/displaystory.cfm?story_id=10278643

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