Shut Up and Save

Budgets suck

2010-10-29T17:45:00.000-07:00

I hate budgets. I hate budgeting. I liken the idea of budgeting, to dieting; it sucks while your doing it and then you revert to your bad habits the minute you call it quits. For 99% of the population it doesn't work, so why do we even bother?

I suck at sticking to a budget and so does my wife. Being an accountant, I was able to quickly figure out that $1,000 in less $1,000 out; resulted in us living week to week. See I knew that what we were doing was bad for us, but we kept on doing it (sort of like junk food right?) People have a tendency to spend everything in their bank account (sometimes more), simply because the money was there. Then we'll usually suffer for about three days until that next pay cheque come in (see Wage Slave)

I knew something needed to change, but instead of trying to change our behaviour, I decided to change the system. I was going to tee it up so that it was actually illegal for us to pull our savings out of the bank and spend it on crap. I was also going to make sure it was going to happen without any conscious effort on my part. Because if it were up to my subconscious, that money would never make it into the bank account.

Then I read David Bach's: The Automatic Millionaire and it all made perfect sense.

So here's what we did:

Set up two First Home Saver Accounts because:

We were going to get 6% interest
We'd get the government co-contribution
Income was flat taxed at 15%
Money could not be withdrawn unless its for the purchase of a home

Then I decided to salary sacrifice 21% of our gross salary because:

Superannuation generally performs well in the long run
Salary sacrifice is flat taxed at 15%
As opposed to the individual marginal rates
Could not be withdrawn until retirement
By choosing a percentage contributions go up with our salary increases

All it took was an email to the payroll officer with a request to salary sacrifice 21% of our wage, then have the first $200 be directed into the home saver accounts. Most companies will be happy to help you out with this kind of request.

The end result is that I don't have to think about saving (even though I write about it all the time). The system I built does it for me. Yes, it took a bit of stuffing around, but it will be worth it in the long run.

Chris Hooper
Shut Up and Save

Take the emotion out of your investments

2010-10-26T01:35:00.000-07:00

Financial markets are not comprised of financial instruments, instead they are comprised of people dealing in said instruments. People are driven by emotions, emotions are at the best of time irrational. So if markets are people and people are irrational, it can be concluded that financial markets are irrational.

As such there are three cycles that every market goes through:

The Upside - Greed:

Optimism: The investor returns to the market with renewed confidence and high expectations.
Enthusiasm: The investor is excited as the market continues to rise and more investors enter the market.
Exhilaration: The investor is thrilled with the performance and high expectations continue.
Euphoria: The investor is absolutely stoked, but the market has reached a peak. The asset is now over-valued due to high demand created by a greed driven buying frenzy.

The Downside - Fear

Unease: A dip in the market leaves investor with a sense of anxiety.
Denial: The investor go into a state of denial, ignoring key indicators of poor performance.
Panic: The herd mentality kicks in, and the market goes into a fear induced selling frenzy.
Capitulation: The investor has surrendered, giving up anything thought of recovering their initial investment and will either sell at a loss or hold out until the next cycle.

The Recovery - Hope

Depression: The investor is depressed, wallowing in past mistakes, or blaming it on scapegoats like the government or the banks. There are no more sellers in the market place, and the intelligent opportunists start entering the market
Hope: The investor is hopeful as the market continues to strengthen as the opportunists continue to buoy prices.
Relief: The investor is relieved as the market has confirmed an uptrend, technical investors begin to enter the market looking for opportunities.
Optimism: The investor returns to the market with renewed confidence and high expectations and so the cycle continues.

This cycle is depicted below:

http://marketblog.wordpress.com/

If you can get this concept in your head and control your own emotions, you'll be able to identify and capitalise on opportunities within the market.

Until then,
Shut Up and Save (for the next opportunity)
Chris Hooper

Mission Statements: Not Just Corporate Hogwash!

2010-10-15T03:19:00.000-07:00

The idea of mission statements used to really piss me off! It was made even worse when I discovered the Dilbert Random Mission Statement Generator (no longer available online guys, sorry). It would spit out things like;
"We have committed to synergistically fashion high-quality products so that we may collaboratively provide access to inexpensive leadership skills in order to solve business problems"
This sounds like the kind of corporate BS I would expect to see plastered on the staff room wall of a Wal Mart.

But how do you expect your staff and customers to buy into that crap, when you don't even buy into it?

Now there's a reason why the mission statement is the first part of the business plan. It's because it is the most important part. Problem is it gets gleaned over so the entrepreneur can get to the juicy bits like marketing, or operations. Like building a house; when building a business, you need a strong foundation. Without a good foundation; your business is stuffed, no two ways about it.

I am now going to introduce a term I just made up five seconds ago; A Foundation Plan. A foundation plan is the first part of your business plan and it forms the basis from which all future planning and decisions should be made.

In his book, Strategy and the Fat Smoker, David Maister discusses four key aspects for developing a business strategy, or in this context a foundation plan. I have elaborated on these a little from my own research, and included a subheading under each of the four aspects. They are as follows:

Purpose: The Mission - Why does this business exist?

Stakeholders - The People - Who does the company work for?

Vision: The Direction - What are we trying to achieve?

Rationale: The Reason - Why are we trying to achieve this?

Values: The Principles - What values are driving this vision?

Ideologies: The Philosophy - What do we believe in?

Culture: The Way of Life - What can I, as an employee do to contribute to the mission?

Strategy: The Game Plan - What is the business going to do to achieve the mission?

I am going to leave it at that for now before I give away too much away. Suffice to say, if you answer those questions you're heading in the right direction.

Until then,

Shut Up and Save!
Chris Hooper

Business Plan. Do you have one?

2010-09-27T01:19:00.000-07:00

If you don't have a map, how do you know if you're going in the right direction? The same can be said for business plans. If you don't have a business plan, you could find yourself on the road to Nowhere, or worse the road to Bustville.
Many entrepreneurs that I have met have this misconception that business plans are only for those seeking venture capital or bank finance. Although they are correct to some extent; those seeking VC or loans need business plans, that's still no excuse for not having one for your business.

But where do you start? It's the first objection I hear. It's a valid question; it's not like they taught us Business Planning 101 in highschool (perhaps they should have). A business plan is a daunting task, and it is not one to be taken lightly. A business plan should serve as a vehicle to get your ideas out of your head and onto paper. Not only that, it should serve an operations manual for running your business. It should be reviewed and updated annually in light of changed circumstances; this is what I call a living business plan.

There are so many different formats for a business plan and I am yet to find a definitive standard. From my experience in business plans I can boil a business plan into five core components:

Business Background: What is your business about? What are your goals?
Operational Plan: How are going to run it? Who's going to be involved?
Strategic Plan: How are you going to achieve your goals?
Marketing Strategy: Who's your customer? How will you communicate with them?
Financial Statements: How will it be financed? What kind of profit are you expecting?

I won't go into too much more depth now (I'll save that later), I just wanted to plant the seed in your head so you can start thinking about getting your business plan sorted.

Until next time,

Shut Up and Save!
Chris Hooper

Debt + Employment = Modern Wage Slave

2010-09-24T03:52:00.000-07:00

Below are some rather colourful illustrations to challenge the way you think about the volatile mix of employment and bad debt (also know as wage slavery).

The entire world wants you to become a wage slave and they want you stay a wage slave. This really puts you behind the eight ball as you fight an uphill battle toward financial freedom. Question is; do you have the guts to fight for it?
Below is a list of organisations who are quite happy for you to remain a wage slave:

The Tax Man: I remember reading in the Financial Review before I even became an accountant, that those who pay more for tax advice generally pay less tax. Typically people who need to pay heaps for tax advice are not the wage earners, but the self employed, the business owners and the investors. As a wage earner, the government collects its tax from you every month from your employer by way of “Pay as You Go” withholding. Business owners, the self employed and investors can defer their tax payment until the very last day it's due (usually 11 months after the end of financial year!)

As a wage earner your tax optimisation options are limited to basic strategies such as negative gearing and salary sacrifice. The self employed, business owners and investors however enjoy a myriad of tax planning options limited only to the imagination of their accountant (and the boundaries of the law, hopefully).

As such it’s in the tax office’s (and the government's) interest that you earn wages so you can keep the government coffers full.

The Bank: Banks love wages slaves. Why? Because wages slaves as defined in my previous rant spend beyond their means, which means they often use borrowed money from credit cards, car loans, holiday loans and personal loans. Because this is unsecured debts (bad debt as described in another previous article), the banks get to charge higher interest rates and cash in big time.

What's got me thinking; is that it's actually harder for the newly self employed, business owners and investors to borrow as much money as their employee counterparts. This is because their income is irregular and not guaranteed. So in this way they're actually prevented from borrowing beyond their means, which is a good thing.

The Salesman: Anyone flogging big ticket consumer discretionary goods (ie the fancy stuff you can live without; cars, televisions, jewellery, holidays etc) are more than happy to peddle interest free their interest free payment plans if it means they'll sell more product. And as long as you're employed full time you can go your hardest! Just don't miss a payment or else you'll get flogged with a 20%+ penalty interest rate. God forbid you lose your job.

So do you get the picture; bad debt + employment = trouble. You'll find yourself going to work just so you can pay off your debts, and that my friend is not conducive to a happy life.

So until then,

Shut Up and (Stay Out of Debt)

Chris Hooper

Are you a wage slave?

2010-09-16T02:17:00.000-07:00

A wage slave is someone whose immediate livelihood relies solely on wages from employment. In the third world wage slavery is with respect to wages to the equivalent of basic sustenance. However a new form of wage slavery has evolved in developed economies.

This modern wage slavery is where someone spends exactly what they earn each week (sometimes even more) on goods that they think that they need. You may recall people you know talking about how they need some new clothes or they need a bigger house. Given that these people are living week to week, this means they have no capacity for saving and thus no way of earning passive income. Consequently they are entirely dependent on wages as their only source of income.

Now what happens if an anvil falls on their head and they cannot work for six months? Why that's what income protection is for, right? Well yes, that's exactly right.

Now what happens if you absolutely hate your job and its making you miserable? You find a new one right? What if you can't find a new job? What if you just hate working altogether? Well then you're stuffed! And that's the point I am trying to get to. If you're miserable and you can't tell your boss to go stick it where the sun don't shine, whilst knowing that you can make three months rent; then I am afraid you're a wage slave.

Don't be too upset, I'm a wage slave and most of the people I know are wage slaves. It's just how society is geared. You go to school, so you can get a good job, so you can buy a nice house (and spend the next 40 years paying it off). Did anyone else notice we didn't get much choice in the matter?

There's a system that we were ushered into; get a crap job, buy a car, finish school/uni, get a better job, buy a house, have kids, buy another car, retire 45 years later. There was nothing in the handbook about the options of starting a business, saving 12 months worth of living expenses or investing some money.

On that note, I'm going to end this rant before I get to worked up on my financial literacy soap box. In subsequent rants I am going to talk how you can get out of the rat race of wage slavery and my conspiracy theory about how the entire world is hell bent on keeping you as a wage slave.

Until then,

Shut Up and Save!

Eliminate your Unproductive Debt

2010-09-10T15:18:00.000-07:00

There are two types of debt. Good debt and bad debt. Put simply good debt is borrowing money to purchase an investment which will go up in value. Bad debt is using money you don't have to buy shit you don't need to impress people you don't like.

Let me elaborate.

Good Debt
As I said before good debt is when you borrow money to purchase in investment that will go up in value and generate income. Another good thing about good debt, is because it was used to purchase an investment the banks have security, thus they're inclined to offer a lower interest rate because they know they'll get their money back (one way or another). Another bonus is that in some circumstances you can actually get a tax deduction for the interest you pay on a loan to purchase investments.

I would like to stipulate that good debt is even better when the debt-equity ratio is within your risk profile and you can manage repayments. Good debt goes bad when you borrow too much money and cannot afford repayments or when the value of your investment drops below the value of the loan. If you want any more evidence of this notion just take a look at the sub-prime issues in the US.

Bad Debt
Bad debt is personal loans, car loans, credit cards, those "interest free" finance contracts and any other form of interest incurring finance. Bad debt is bad because the asset that you purchased with borrowed money loses its value the second it leaves the shop, but your still stuck with the debt. Because the banks have no security over the debt, they're inclined to charge you a punitive interest rate to cover the risk of you defaulting. You'll notice that the higher the risk of default the higher the rate of interest; a car loan will attract a lower rate than a credit card, because the bank can always take the car and get some of their money back.

So we want to eliminate our bad debts because they have no productive asset behind them and because we're paying a higher rate of interest on the debt. You'll notice that if you're paying 20% interest on credit card debt, there's very little point in saving money in a savings account that collects 6% (or worse trying to play the stock market). Keep it simple stupid; if faced with the decision of saving at 6% or paying off debt at 20% you always choose the debt. Why? Because the paying of the debt is like getting a 20% return on you're investment! Why wouldn't you choose it?

So before you shut up and save, perhaps you should shut up and pay off your debts. Then once your free from debt stop buying useless crap and start saving for your future.

Chris Hooper
(Shut Up and Save)

What you need to know about your business' cashflow (Part 2)

2010-08-29T00:37:00.000-07:00

In my previous article, I talked about what can happen to your cashflow if your customers take to long to pay you, or if it takes too long to sell you your goods or provide your service. Now I will offer come insight into what you can do to free up this cash flow.

But first, I would like to chunk down the idea of working capital for you. Working capital is comprised of three key elements:

Accounts Receivable / Debtors (People that owe you money)
Accounts Payable / Creditors (People that you own money)
Inventor / Work in Progress (The goods or services you sell to make money)

Now that we've got that out of the way, the following offers some tips for each of these key areas.

Accounts Receivable:

Ensure you issue your invoice promptly: This is probably the easiest thing to control and a prime contributor to lock-down.You've got to get in while its still in your customer's mind how good the product or service was.
Send invoices by email as well as post: This will save you a day of postage and will make doubly sure that the invoice hits its target.
Make sure your invoice is clear, concise and accurately spells out the terms of payment: This will ensure that there is no ambiguity to the terms of the contract.
Make paying the invoice easy, provide different payment options: Now I'm not saying that you need to rush out and sign up for BPay or credit card merchant facilities. It however make sense to offer a cheque and an electronic funds transfer option to allow them to deposit straight into your bank. Most people have internet banking and this will save you visiting the bank to deposit cheques.
Follow up immediately with invoices that exceed terms: Most of the time your invoice has been mixed up in a pile of paperwork, or simply forgotten about. A gentle reminder to your customer can go a long way to getting you paid sooner.
Don't offer credit to everyone: Business credit is basically like a loan, would you lend money to anyone off the street? Then you probably shouldn't give credit to anyone off the street. Credit should be earned through a good working relationship or a good reputation.
Ask for credit references: Many big businesses will provide you with a form that needs to be completed in order to obtain credit terms. This form will ask you to provide the details of suppliers you currently have credit terms with; the company will then follow up with these companies and assess your credit worthiness.
Ask for deposits: If you ask for proportion of the payment upfront before the delivery of the goods or service, you'll have at least covered some of your costs while you're waiting for the invoice to be paid.
Ask for the money up front or cash on delivery: It's a bold thing to say I know, but you don't walk out of the grocery store with a trolley full of food and pay 30 days later, so why should you business be any different. I know business to business credit is almost expected these days, but it is at least worth investigating this option. It will essentially resolve all your cash flow problems.

Accounts Payable

Get organised: keep all the bills in one place, get them onto your accounting software as soon as they come in.
Creditor scheduling: It pays to know who you have to pay and when you have to pay them by. It will help you plan and manage your cashflow better.
Strategic release of creditors: Find out what the due date is and pay on the absolute last day. This cash can be used for working capital in the meantime.
Tell the supplier if you're having trouble paying: If you believe that you're not going to be able to pay your creditors in time, call them before they call you. Explain the situation, they will understand because all businesses have been there. It will go a long way to preserving your relationship with your suppliers.
Prioritise your creditors: If you have to juggle your bills; figure out which bills are a higher priority and pay them first. There's no point paying your stationery company first if your electricity is about to get cut off.

Inventory

Don't order too much (or too little): Inventory management is a delicate balancing act. Order too much and you've forked out good money for stock that's going to be hanging around for a long time. Order too little and you're stuck with stock-outs that are going to cost you business and cause you administrative headaches. The trick is finding just the right amount to order to keep things ticking over. If you're concerned ask your accountant about economic order qunatities and inventory management.
Plan ahead: Spend a little more time considering your inventory needs for the month, this can go along way for getting your inventory levels right.
First in, first out: Stock that came in first should be going out the door before more recent additions are sold. Don't promote new stock, if you can move the old stock first.
Get it done quicker: For all those in the service sector, you need to understand that the sooner the job is done, the sooner you get paid. So get it done quicker. If it means you get paid quicker; try and look for "quick wins" the smaller profitable jobs and prioritise them over your slower projects.

Well I hope these tips help you out with your cashflow management.

Chris Hooper
(Shut Up and Save)

What you need to know about your business' cashflow

2010-08-06T01:30:00.000-07:00

For all those in business, and even those of you thinking about going into business; listen up. I am going to explain what cashflow is, how it works and how it is the number one killers of businesses.

When a business fails it has run out of cash, not profit. Therefore cashflow which is the cornerstone of is working capital. Management of both cashflow and working capital is absolutely imperative to survival.

So what is working capital?

Working capital is the transient funds used to support a business' day to day operations. So it is the money used to purchase of inventory, pay wages and bills. The money used to pay these things comes from one source; sales.

So by that logic cash flow is the analysis of how the cash from sales goes to paying your bills. On the face of it, you may just think that cashflow is as simple as money in & money out. Unfortunately it’s never that simple and here’s a demonstration:

Say you’re in a commercial office furniture business. First you need to fill your showroom with stock so you approach your supplier and order $10,000 worth of stock. The stock arrives and with it comes an invoice for 30 days terms. You put the stock up for sale, and hope that you’ve sold them all before that invoice is due. The 30 days comes due and you haven’t moved much stock, but you have got some cash in the bank so you pay your invoice on the due date like a good customer. The 30 days it takes you to pay your suppliers (creditors) are known as creditor days. The average time it takes you to pay these creditors is an important measure of cash flow performance.

The important measure is inventory turnover. How long does it take you to sell all of that stock that you just bought? Let's say in this example it’s 50 days until you get turnover all your stock. So when a customer buys this product the product gets delivered and you issue an invoice with 30 day terms. Unfortunately your customers aren’t as courteous as you are and it takes them 60 days for them to pay the invoice. This is known as your debtor days, and represents the last critical measure of working capital management.

So let’s put it all together in some sort of timeline. So you ordered stock, it arrived, you were issued an invoice for the order, in 30 days you pay that invoice, 20 days after that you sell the stock and issue an invoice, 60 days after that you actually get paid.

You can see there that we’re going to have some problems if we continue to do business this way.

Stay tuned to my next post to see what we can do to address some of these problems.

Until then enjoy your weekend.

Chris Hooper
(Shut Up and Save)

Who's Going to get your Super if You Die?

2010-07-22T01:37:00.000-07:00

As some of you may know I recently got married to my lovely wife Katie. Well she’s been running around the city this week changing her name at the bank, Medicare, DTED, Electoral Office and what not. She’s also had to change her name with her superannuation fund. This prompted me into the realisation that we’d have to look at our beneficiary nominations. Being newly weds it is only natural that’d we’d now elect each other as beneficiaries in case the worst were to happen. Would it surprise you if I told you I have come across clients with ex girlfriends, ex husbands, deceased siblings and estranged high school friends as their beneficiaries?

My question to you today is; who’s going to get your super if you die?
For members of big superannuation funds (Self Managed Super Funds are a whole other ball game) there are three main types of beneficiary elections you can make:

Binding
These nominations can be binding on the trustee and thus provide the member with some level of certainty that this nomination adhered to. Such nominations also provide for expeditious payment of benefits. Unfortunately these nominations must be renewed every three years to remain valid and can still be challenged in court

Non-Binding
These nominations do not oblige the trustee to follow the nomination; they are merely recommendations as to the member’s wishes. Such nominations are easily contested and may create delays in the payment of benefits. One advantage is that unlike binding nominations, there is no obligation to renew these nominations regularly.

Legal Personal Representative
The previously mentioned nominations are dealt with exclusive of the will, however a fund member can elect to have their superannuation entitlement paid to their estate to be distributed in accordance with the will.

So when your 2010 superannuation statement comes in the post soon, instead of filing it in the bin; why don’t you actually open it. Take a peak at the balance and have a look at who you nominated as your beneficiary all those years ago. If it’s not who you want it to be, it may be worthwhile updating your nomination.

Chris Hooper
(Shutup and Save)

Superannuation Revisited

2010-07-21T01:45:00.000-07:00

In the past couple of months I have been met with much criticism and confusion about my zealous love for superannuation. To explain: First of all, I work in the superannuation industry and know the laws and strategies inside and out. Second, I have done some in depth analysis and made some startling realisations which have swayed my own investment decisions.

To clarify on my previous article. Let’s assume you’re in the 30% tax bracket (between $37,000 and $80,000) this means that for every dollar after $37,000 that you earn, the tax man will take 30% tax as well as an addition 1.5% in Medicare Levy, as such you’re effectively paying 31.5% in tax. If you were to “sacrifice” this income into superannuation it would only be tax at 15%. So already by electing to save for your retirement over saving money in your own name you’ve saved 16.5% in tax, which is effectively the save as making a 16.5% return on your investment.

To illustrate, imagine you want to save $1,000 of your gross before tax salary; you can either invest it in superannuation or invest it in your own personal name. If you were to save this $1,000 in your own name, the tax man would want his cut and would take $315, leaving you with only $685 to invest. If you instead chose to put this money into superannuation, the tax man would cut you some slack and he would only take $150, leaving you with a much more attractive $850 to invest.

What compounds this paradox is that the tax man also wants to get his hands on the money that these two investments earn. So assuming a very conservative 6% return, the tax man would want 31.5% of this money if it’s in your own name. If its in superannuation its only going to get taxed at 15%. What this does (as discussed yesterday) is reduce your effective interest rate down to 4.11% in your own name and 5.10% in superannuation. Now 0.99% doesn’t seem like much on the face of it, but over a 45 year working lifetime that gross $1,000 that we invested each year at 6% results in a difference between $85,429.36 in our own name or $139,637.65 in superannuation; that’s a 63.45% difference. What frightens me is that if you increase the investment return to 10% the difference between the two over 45 years is whopping 104.59%.

Now this isn’t to say that superannuation doesn’t have its risks; just like every other investment. As my mother cautions the biggest risk is legislative risk; where those mugs in Canberra might decide to change the superannuation rules (again). As it stands however, salary sacrifice looks pretty good at the moment. But I’d contact an account or financial advisor before implementing a strategy because there are plenty of other considerations that need to be taken into account.

Chris Hooper
(Shutup and Save)

Why cash might not be king after all

2010-07-20T04:10:00.000-07:00

Personally, I have a problem with cash at the bank as an investment. Don’t get me wrong, cash is important, it stops you reaching for the credit card when an emergency (or impulse buy) pops up. Most experts suggest you have three to six months cash saved up in a high interest savings account, just in case the worst happens. I totally agree with this idea, try to imagine if you lost your job and you didn’t have savings to fall back on? You’d be living off a credit card until you get a new job, it’s not fun, trust me I was there when I left a full time job to go to university.

But I digress, let’s say you found a high interest savings account that was paying 6% interest per annum (which many are at the time of writing). Some may think, “Wicked, a 6% return guaranteed. That’s way better than the negative forty-something percent the stock market had last year. My money will be safe there.”

Wrong.

You’re money is only safe there if you plan on using it for something in five years time (such as a house deposit or car purchase). As a long term investment, cash sucks!

Here’s why:

It is unfairly taxed in Australia: Unlike shares and real estate, there is no Capital Gains Tax discount or dividend imputation here. The interest on cash is taxed at the full marginal tax rate. This means if you’re in the 30% tax bracket then 30% of your interest is going straight to the government.

Your earnings are eroded by inflation: If I were to pick a random year in the past, say 2005 inflation was 2.8%, the cash rate was 5.7% so a good term high interest account would collect 7.7% (about 2% over the RBA cash rate). Now once we donate 30% to the tax man we’re left with 5.39% in our pocket, then once we let inflation chew up the rest, we’re left with a measly 2.59% net return on our money. Good luck getting to a million dollars at 2.59%!

I think the only time cash makes an appropriate investment is when you cannot afford to lose your money in the stock market or real estate market. Such times would be; when you’re nearing retirement and when you’re saving for a house.

Why wasn't I taught this at School?

2010-06-25T03:16:00.000-07:00

I will blame someone for our collective financial stupidity: The education system.

While we were busy learning about chemistry, physics and history we seemed to have missed out on important lifeskills; fundamental things from how to fill out a tax return to how to iron our shirts. We are missing some real fundamental lifeskills from our curriculum.

These were the skills that our parents were expected to teach us, but chances are both parents were working all through our childhood an adolescence. This means we were simply left to fend for ourselves an learn from our own mistakes. That means that a few shirts will get burnt, and a few credit cards will get maxed in the process.

Now there's nothing wrong with this learning this way, it's character building and great for building independence. But wouldn't it be nice if we walked out of high school fully equipped to with everyday lifestyle skills.

What concerns me is that the big four banks are running their financial literacy workshops. Clearly they are pushing an agenda and raising the next generation of credit card junkies.

Have a good weekend.

Chris Hooper
(Shut Up and Save)

It's not my fault...

2010-06-23T01:44:00.000-07:00

The second cause of our financial misfortune is our externalisation of our financial problems. Everyone else is to blame for our problems. If you’re broke, it certainly isn’t your fault...

It’s the governments fault for making taxes so high, property prices so high and welfare so low.
It’s the petrol companies fault for making petrol so high.
It’s America’s fault for the drop in the stock market.
It’s your bosses fault for not paying you enough.
It’s your kids fault for needing new clothes all the time.
It’s your parents fault for not leaving you a fat inheritance.
It’s your schools fault for not teaching your financial literacy in the first place.

That’s right, it certainly couldn’t be your fault that you haven’t achieved your financial goals. And all those rich people out there just got lucky.

Grow up!

We blame everyone else for our problems so we don’t have to take responsibility for our own shortcomings. The problem with this approach is that by doing this, you are externalising the problem and fooling yourself into thinking that it cannot be fixed. The second you stop blaming everyone else for your problems; financial or otherwise, the sooner you can be in control of your own destiny.

You can either live be the effect of your financial future or you can be the cause of it.

Decide right now, which it will be.

Chris Hooper
(Shut Up and Save)

Stop Making Excuses

2010-06-22T01:56:00.000-07:00

Everyone has an excuse for not saving!

Mine was, "I'll be earning twice as much as I'm on in a few years, so what's the point?" Well guess what, a few years came and I still wasn't saving, In fact I was still using the same excuse.

So what's your excuse for not saving?

I don't earn enough... Newsflash, you'll never earn enough! You'll always keep "living into your pay rises." Humans are engineered to spend everything they make.

I'll save money later... No you won't! You'll keep procrastinating until you hit 55, realise that you have to retire soon, and start panic saving.
I'd rather enjoy my youth... Go ahead! Then you can enjoy working the rest of your life to pay off the debt you've racked up "enjoying yourself."
I've got this hot business idea/investment that will make me rich... That's great but what happens if (when) it all blows up in your face? Shouldn't you hedge your bets by getting rich the old fashion way?
I'm going to win lotto/marry rich... *shakes head and refuses to dignify with a response*

Honestly I don't care what your excuse is, I've heard it all before. They are nothing but rationalisations for behaviour that we consciously know is counter-productive. They are the little lies we tell ourselves to help us get to sleep at night.

Well enough excuses: It's time to Shut Up! And Save!

Start studying money; get your hands on as many resources as you can

2010-06-18T03:14:00.000-07:00

I think this one step changed my financial destiny forever.

I got my hands on some audio books on mp3. Dropped them on my phone and started listening to while I went on my lunch time walks; I had gained one hour of financial education each day. Then I got some CDs to listen to in the car, I had then gained another hour of financial education. I now have two hours of every day dedicated to learning more about my personal finance, and the best part is I simply added it to things I was already doing, so I didn’t lose any time.

I encourage you to figure out what your down time is; be it in the car, on the train or at the gym. Get some of these audio books and start learning. Check out the resources tab for some suggestions on where to start. I found that once you get started the process of learning becomes habitual and almost subconscious.

The best part of this is that it will totally change the way you think about money. It’ll also help you set some goals too.

Chris Hooper
(Shut Up and Save)

Start thinking about your money, where it goes and where you want it to go

2010-06-17T00:34:00.000-07:00

Do you find yourself at the end of a pay period wondering where all your money went? Don’t sweat it, you’re not alone. Now I am not here to force a budget down your throat, if budgeting worked and was so easy; everyone would be doing it. Instead I want you to spend some time thinking about where your money goes, and have a think about what habits could be changed.
Have a think about an ordinary week for you, and think about where your money goes. Try and pick the easiest to measure outflow first. Rent or mortgage payments are probably the biggest, most important and the easiest to measure; it’s the same amount every time, we absolutely must pay it and if you’re smart you have an automatic transfer setup. So scribble down your rent or mortgage repayments and the frequency you pay them ie:
Rent: $560 per fortnight

The next one on the list is non discretionary debt payments. Things like your car repayments, store finance contracts and personal loan repayments. These are usually fixed amounts and you absolutely must pay them, lest the bank repos your precious consumer goods. So take a minute and list your debt repayments and their frequency. Before I go any further I need to explain that these are bad debts; they generate no wealth, they clog up cash flow and you’re paying exorbitant interest to the bank. The idea here is to pay these suckers off and then we can focus more on saving and investing.

Car Loan: $200 per fortnight
Lease Contract: $25 per week
You’ll note that credit card repayments are not listed above, that is because they are discretionary payments. The minimum payment on credit card is so small it’s not worth mentioning. Moreover, the idea behind a credit card is that it is supposed to be paid off every month. If you are carrying credit card debt, you are probably paying an absolute rip off interest rate, and you need to pay this one off before you can even think about saving. We’ll talk about this some more later.
Moving on, the next on the list are those pesky direct debits. These are usually non discretionary, but occasionally variable finance contracts that such as: car insurance, house insurance, health insurance, gym memberships, phone bills, internet bills. Make a list of the amount of these direct debits, their frequency and what day they fall due.

Car Insurance: $80 per month
Health Insurance: $60 per fortnight
Phone Bill: $50 per month
Internet: $70 per month
Gym Membership: $40 per fortnight

Now multiply the amounts you’ve got to they all equal a year and then add them all up eg:

Rent: $560 per fortnight x 26 = $14,560
Car Loan: $200 per fortnight x 26 = $5,200
Lease Contract: $25 per week x 52 = $1,300
Health Insurance: $60 per fortnight x 26 = $1,560
Phone Bill: $50 per month x 12 = $600
Internet: $70 per month x 12 = $840
Gym Membership: $40 per fortnight x 26 = $1,040

TOTAL: $25,100 per annum

So at this point you may find your self a little overwhelmed by how much money is flying everywhere and you haven’t even bought food, clothes, petrol, bus tickets, electricity and entertainment and so on. These are what I call everything else expenses. They are variable, in that the can be varied if you change your habits. Some of them are discretionary in that you don’t even need them.

Now I want you to take your net that annual amount of cash outflow that you’ve calculated and divide that by the frequency of your pay; weekly, fortnightly or monthly (obviously this is going to be a little harder for contractors, self employed and commissioned staff). Now take this amount from whatever your net take home pay is;

Cash Outflows: $25,100 ÷ 52 = $483 per week
Cash Inflow: $600 per week
Balance: $117 per week

This is how much money you have left for food, clothes, petrol, electricity and everything else. And hell we’re expected to save money after this as well! No wonder that credit card’s taken a beating.

No the objective of this exercise is to find out what our “savings capacity” is: how much can we afford to save without crippling your lifestyle. The second objective is to establish our: “Burn Rate” our basic living expenses.

Your base savings capacity is the sum of your debt payments, mortgage payments and believe it or not rent (because this money can be used to pay a mortgage if you want to buy a house).

Rent: $14,560
Debts: $5,200
Primary Savings Capacity: $19,760

Your secondary saving capacity comes from any money that you can afford to save from your expenses (but we’ll figure this one out later).
Now your burn rate is the sum of all your expenses excluding debt repayments, mortgage repayments and rent. Now if you aren’t saving any money what so ever, then it will be your net pay less rent, debts and mortgage (ie less your savings capacity).

Net Pay: $31,200
Less Saving: ($19,760)

Burn Rate: $11,440

If you are spending more than you make; take your outstanding balance divide by the number of years since you first accumulated the debt. For example a $4,000 debt that has accumulated over six months which is half a year so: $4,000 ÷ 0.5 = $8,000. Now add that amount to your net pay and subtract your capacity:

Net Pay: $31,200
Credit Card: $8,000
Less Saving: ($19,760)

Burn Rate: $19,440

You are burning more than you’re earning, and some things got to give; lucky you’re reading this then.

That’s all for now, we’ll revisit these figures later on. In the mean time ask your self how you can increase you savings capacity and decrease your burn rate. And here’s a tip you’re not allowed to just earn more money; get resourceful.

Chris Hooper
(Shut Up and Save)

If you think good advice costs lots of money, consider the price of bad advice.

2010-06-16T01:07:00.000-07:00

In discussions with business acquaintances and my own personal experience; I have noticed that most clients are so fickle and they would rather see 4.5% of their investment go toward fees, even if it accumulates to tens of thousands of dollars, than pay $5,000 upfront for the actual advice. That said, a study by the Financial Planning Association revealed that even those that opted for commission based fees, were still better off than those who never speak to an advisor.
Many people pinch pennies when it comes to what they pay for financial services be it accountants, tax agents, financial planners, brokers and everyone else.

Now I am not telling you not to shop around, in fact some of the best business people I know interview several firms and ask very in depth questions before settling on one. Keep in mind though, fees should not be your number one concern; quality, service, rapport and outcomes are infinitely more important.
Financial services is one expense where you should not be cutting corners. The cost of going to Dodgy Bob’s Discount Financial Services may be much more in the long run, even if he is 80% cheaper than everyone else. Think about it, isn’t there a reason he’s charging 80% less? The cost could be in money lost on bad investments, a tax audit or the extra fees you need to pay a real professional to clean up the mess. Think about it, finance professionals have a high motivation to help you make more money. Why? Because the more money you make, or the more your business grows the more they get to charge you. you should be happy you’re being charged more, because it means you’re making more money! See everyone wins.

What’s worse than Dodgy Bob’s is taking free advice from friends, colleagues and family. If they’re not getting paid, they have no real incentive to give you good quality advice. More often than not they don’t expect you to take any action on their advice, they are merely shooting the breeze and regurgitating what they heard in the latest current affairs program. What’s worse, is if they are not a finance professional, then they have absolutely no qualification for that advice what so ever. Be cautious of friends that approach you with a sure thing; be even more cautious if they seem persistent.

In conclusion, not only should you make the best endeavors in becoming a master of your own personal financial literacy. You should also know when to delegate the hard stuff to a financial professional and pay fee for advice only.

Chris Hooper
(Shut Up and Save)

Should you really hand over your money to an “expert” before asking a few questions?

2010-06-15T04:43:00.000-07:00

Now don’t get me wrong, I am not slamming all accountants, financial planners and stock brokers. Hell, if I did that, I’d be putting myself out of business.

What I am saying is that you should do your due diligence, not only in choosing the people that will be managing your money but in choosing what you ultimately invest in. The right financial professionals can make you a fortune, the wrong money people could lose you money, or even get you in trouble with the law.
The New York Times cites a University of Pennsylvania study that shows in 1990 14.4% of fund managers actually beat the stock market. In 2006 this number had shrunk to 0.6%! There are three reasons for this fall;

management fees eroding performance
good fund managers being poached by sophisticated investment funds (that only the rich can invest in)
the market has become more efficient thanks to the internet

With this in mind, a fund manager is going to manage money better than a total amature. So you have to make a decision; you either need to learn as much as you can about finance or engage the services of a professional. It’s important to note here that you should be looking for a fee for service professional not one that is paid in commissions. An advisor paid in commissions will steer you in the direction of the investment that pays the highest commission, not the one that’s best for you.

It also will pay to get a second opinion from a trusted advisor, that has no interest in the future transaction. For example, if you had just met with your financial advisor to talk about a new investment, pick up the phone soon after the meeting and talk to your accountant about what was said, they’ll be able to provide you with unbiased honest opinion. These same advisors are good for referrals, all you have to do is ask.

Now the second thing note is whether you hire a professional or decide to do it yourself; if you cannot explain what you’re investing in to your spouse, parents or your cat, then you should not be investing in it. Even if they have been recommended to you by an advisor, you owe it to yourself to do the research.

I have had many people come up to me in the past asking about sophisticated derivatives such as options, warrants, futures and contracts for difference. Before I even bother getting into a conversation with them, I politely ask them to explain how that investment product works. I’d say about 90% cannot give me a proper answer. Remember if you can’t explain how it works, you can’t invest in it!

Chris Hooper
(Shutup and Save)

Become a Student of Financial Literacy: If you spend your whole life earning money, shouldn't you spend your whole life learning money?

2010-06-14T05:37:00.000-07:00

Contemplate this for a minute; most people spend more then half their life working, about forty five years of our life are dedicated to earning money to support ourselves and the ones we love.

We spend our time daydreaming about retirement, or maybe being lucky enough to win lotto, or picking the next Microsoft stock, or starting the next Google.

Dream on.

If we spend half of our working life earning money for retirement, doesn’t it make sense that we should understand the fundamentals of how that money works? The good news is you’ve already started. By reading this, you have become a student of financial literacy.

By reading this blog and other blogs, you will slowly master your finances. There are also many books and audio books (see the resources tab) on personal finance. Some of these books have changed my life and set me on the course I am today.

You see, I have been interested in money since I started my first paper route when I was 13. After I left school I found myself wanting nothing more than to learn how money worked. I went to university to study accounting and applied finance. In addition to my tertiary education I have been studying the greats; Clithroe, Pape, Kiyosaki, Robbins, Hill, Graham and Buffet.

My financial education will won’t stop until I am financially independent, and yours shouldn’t either. Always be learning, always be improving.

Chris Hooper
(Shutup and Save)

The Difference Between Owning a Business and Being Self Employed

2010-06-12T07:10:00.000-07:00

I have been contemplating the business of some of our Startup Club members and I thought it was high time that we drew a line in the sand and defined who is self employed and who is a business owner; and obviously figure out the difference between the two.

A self employed person is exactly that; they are employed by themselves. Typically they earn the same as an employee, but often work more hours. They probably work more hours because in addition to their job they are also the administrator, bookkeeper, receptionist, marketer and salesperson. The self employed usually charge by the hour similar to employees.

Self employed charge more than the employed are paid, but they have overheads to manage. Self employed people usually don't make losses because their overheads are usually fairly low. The self employed seldom have staff, either because they don't need them or they are such perfectionists that no one else can do it as good as they can. When the self employed retire, they don't sell their business, they simply tell their customers they are no longer working.

A business owner; owns a business and like owning shares in the market they are subject to the highs and lows of any business. Business owners can either lose all their money on a venture, or they can realise massive growth quickly. Business owners don't necessarily have to work in the business, they may have worked in the business initially but the business owner has build a system that allows the business to survive without the business owner. This is the key differentiator, to be considered as owning a business, you must be able to walk away from it or sell it to someone else. If the business cannot survive without you, then you are self employed (or egotisical).

I hope this clarifies things a little for you. I am not here to tell you which one is better than the other. Like all things in life, there are pros and cons to each. It's up to you to figure out which hat you want to wear based on your personality and your goals.

Have a good long weekend gang,

Chris Hooper
(Innovate or Die)

Diversify Your Income Sources

2010-06-10T01:31:00.000-07:00

I remember when I first started my career as an accountant (to clarify I was an entrepreneur first and accountant second) I always wanted to be rich. So here I am as a 19 year old junior accountant doing tax returns for multi-millionaires. This got me thinking; what are they doing that I’m not? The answer, well first they’re like 40 years older than me, but seriously the difference is they have more complicated tax returns. Their tax returns are complicated because they have income coming in from a variety of different sources. Where as mine had salary and wages, and some interest if I was lucky. You’ll find that anyone with just salary and wages in their tax return is probably not wealthy (even if they make $1,000,000 a year), this is because they do not have any investments generating income for them.

Now before the tax-nerds chime in and start saying things like, “What if they’re channelling money through a discretionary trust to their children or spouse?” or “What if they’re salary sacrificing to reduce their taxable income?” I will say, there are several strategies your can implement to “optimise” your tax position. You need to thinking about tax when you're earning; say over $37,000 and it’s time start thinking about tax and $80,000 it is definitely time to do something! If you need advice get in touch with me and we can develop a plan. In the meantime, let’s keep this blog it simple for illustrative purposes.

So let’s look at tax form and look at the types of taxable income we can get our hands on:

Salary & Wages
This is what you get paid for rocking up to work on time, and selling your labour.

Employer Superannuation Contributions
This is the 9% of your gross salary that the government makes your employer contribute to your superannuation fund. It still counts as income, even if you don't get to spend it!

Allowances, Earnings, Tips, Directors Fees:
• Allowances from your Employer (Car, Travel, Meal, Uniform etc)
• Directors Fees or Board Sitting Fees
• Commissions on product sales
• Bonuses on performance (or because you’ve got a great boss)
• Tips from customers

Fringe Benefits
This includes those perks that your boss gives you that aren’t paid in cash, but have cash value such as:
• Company car
• Free rent
• Free car parking
• Other free stuff of significant value

Interest
This money comes from the bank who pays you for keeping money with them.

Dividends
This money comes from companies pay you for owning shares in them.

Partnership Distributions
This will usually be from business activities or farming cooperatives

Trust Distributions
This money comes from listed trusts on the stock exchange, managed funds or your own private trust.

Business Income
This would be the net profit from product sales, service fees, hiring fees

Rent
This is money you are paid for owning real estate and renting it out to someone else.

Capital Gains
This is the profit you make on selling investments that have gone up in value such as shares or real estate.

Royalties
This is the money you get if you’re a rockstar or an author, but people have to buy your stuff first.

So there it is, I hope this gives you some ideas on how you can make some money in addition to what ever your earning now.

Stop Trying to Pick the Bottom of the Market

2010-06-09T03:05:00.000-07:00

Before you get too excited, this isn't financial advice, just an anecdote I have picked up

I was at a function for the Institute of Chartered Accountants tonight, and I was talking to a few other accountants, brokers and advisers. Everyone was sharing their post Global Financial Crisis war stories. I tell you, there were some shockers. Rule number one, don't mortgage your entire house to play the foreign exchange market (but you're not that silly are you!).

But in all seriousness, the one thing that did resonate with me, was the stories of people trying to pick the bottom of the market. For all those financial n00bs, picking the bottom refers to waiting until the market has hit the absolute lowest, then buying up big and riding the upswing. Conversely, picking the top is waiting till the market is at its absolute highest, then selling all your stock (or even going short) and lol-ling at all the suckers that are still in the market.

If you walk away with one thing from this blog, let it be this. You will never pick the top or bottom of the market. Sorry to burst your bubble, but the only time this will happen is purely random; and if that's your approach to building wealth, then you might as well take your life savings to the casino. Let me re-frame this for you; if I can't pick the top of the market and my friends earning six figures at Macquarie Bank, CommSec and Perpetual can't pick the top of the market, then I highly doubt you can.

Now that I have taken all the fun out of the stock market for you, I suppose I should leave you with something positive about the market.

Instead of picking the bottom, get into the market when:
I have surplus savings that I don't need for a very long time and that I would not miss if they lost half their value in a week.
To clarify, if I had $10,000 saved up and this represents 100% of my net worth, I would not be putting that money into the stock market. Or if I had $10,000 and this represented say 20% of my net wealth, but I wanted to buy a house next year and needed the money for a deposit, then I would not be putting my money into the stock market. Whereas if I $10,000 and this represented 10% of my net worth and I had not earmarked the money for anything else, then sure, why not put it into the market.

Instead of waiting for the top, get out of the market when:
I actually need the money for something productive, or when I have retired and I need the cash to live off of.
If I needed a house deposit or needed to buy a new car, then it might be time to cash in some stock. The important thing here is that I should never second guess my decision. If were to look back in ten years time and say, "I wish I never sold those shares," then I will spend the rest of my life, beating myself up about every financial decision I make. Shoulda, woulda, coulda; forget it. The second situation, is if I were heading toward or I was in retirement. The rationale here is that if the market dropped 50% and there goes half of my retirement saving, well yeah... I'm gonna be pissed. So I want to prevent this from happening by gradually moving into cash the closer I get to retirement.

Now we've covered some pretty heavy stuff today, so here's a disclaimer for you:

This article is intended to provide general information only and has been prepared without taking into account any particular person's objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. It is recommended investors obtain financial advice specific to their situation before making any financial investment or insurance decision.

“Luck is what happens when preparation meets opportunity”

2010-06-08T05:04:00.000-07:00

At the last Startup Club event, I asked Geoffrey Kwitko if he believed in luck and after much discussion Michael Kubler finally chimed in with a quote from Roman philosopher Seneca, “Luck is what happens when preparation meets opportunity.”

I couldn't agree more. It's funny that the second I got some more focus in my life, finances and business; my luck started to change. This was no coincidence. It was like, I was suddenly wearing a sign that said "looking for opportunities." Because I was preparing for success, everytime opportunity came a knocking, I was ready to capitalise.

So my thoughts on luck? Ditch the lotto tickets, ditch the pokies, ditch the TAB. The odds are stacked against you, the house always wins! Instead, make your own luck by looking for opportunities to make more money the old fashioned way, and be prepared to make the most of any opportunities that come your way.

Ditch the "Keeping up with the Joneses" Mentality

2010-06-07T03:52:00.000-07:00

I was talking to my mum (one of my financial role models) yesterday about my blog. She said that she liked the article "Set Goals and Get a Wealth Mindset" but she offered me an alternate hypothesis.

She said, "I agree that if you think poor, you'll be poor. But if you think rich, when you're not rich you will be poor. You get this when you spend like you earn more than you do. This is the key difference between income and wealth."

Queue brain explosion, as I am yet again blown away by the wisdom of my mother. She raises an interesting point. Some of you may know this notion as; "Keeping up with the Joneses." I cannot remember which author I can credit with this quote, but it has stuck with me for several years. Keeping up with the Joneses is;

"People buying stuff they can't afford, with money they don't have, to impress people they don't like."

Let's face it: We don't like the Joneses anyway, so let's stop trying to keep up with them! Instead we can let them drown in a pool of personal debt while we focus on accumulating wealth and saving for our retirement.