Cashflow Blog

~ By Jason Zweig
(Money Magazine) — Slow and steady wins the race, but a bird in the hand is worth two in the bush. Those dueling proverbs sum up the investing mind.

When you imagine choosing between making a quick buck or growing rich later, you know the right answer: Be patient and hold out for the bigger gain. But as soon as you face a real rather than an imaginary choice, the fast money seems irresistible.

New discoveries in neuroscience labs are helping to explain why it’s so hard to resist the allure of instant gratification. It turns out that your brain is much more aroused by $1 today than by $1 tomorrow. And $1 six months from now barely registers.

Only the promise of a much bigger reward later can fire up your brain the way an immediate score does. No wonder it’s hard to save instead of spend and, when you do save, to think long term; the average holding period for a stock, among individual and professional investors alike, is just over 11 months.

And the temptation to buy dotcom stocks in 1999, energy stocks in 2005, real estate in 2006, emerging markets in 2007 or gold right now — what’s hot when it’s hot — is overpowering for many people, no matter how often they’ve been burned before.

A sip now or a slurp later?

Recent experiments conducted independently by three teams of researchers at leading universities have focused on the battle in the brain between now and later.

Tracking people’s choices and their brain activity, one group tested whether college kids would rather have a sip of fruit juice soon or a slurp later. They also tracked how folks decided between Amazon.com gift certificates redeemable the same day for a small amount and those redeemable up to four weeks later for a larger amount.

A second team offered people the choice between $20 immediately and an array of alternatives ranging from $20.25 six hours later to $110 six months later. And a third group measured how individuals responded to the choice between various dollar amounts today and an extra 5 percent to 30 percent up to six months later.

“When our emotions are charged, we have a hard time waiting for a reward,” says Carnegie Mellon University’s George Loewenstein, one of the first study’s authors. Even the chance of getting a slightly bigger reward tomorrow doesn’t have the same stimulating effect on your brain as a gain today does.

It’s all downhill from there. A gain the day after tomorrow carries even less of an emotional kick, and so on. In fact, to the typical person, $20 now is better than $23 three weeks from now, $40 three months from now or $47 six months from now, according to the second study, led by a pair of New York University researchers.

In short, for your brain to be willing to wait a mere three weeks for a higher payout, that $20 would have to grow at an annualized rate of roughly 4,800 percent.

Rational? Hardly. But evolutionwise, the response makes sense. In our hunter-gatherer days we often faced scarcity. And when we’re really hungry, a future feast has to be huge to justify choosing it over eating now.

So are we moderns doomed to save and invest like cavemen? Not necessarily. Knowing that you operate in what NYU’s Paul Glimcher calls “as soon as possible” mode is the first step to making better financial decisions. Willpower and good intentions, though, aren’t enough. You need help. Here’s what to do:

Lock in for later. Saving now is harder than planning to save later. So commit yourself to doing the right thing a year from today. Want to raise your 401(k) contribution? Use calendar software to mark the distant date when you’ll take action — and send an e-mail to a small group of friends now and on that day reminding them that you have committed.

Don’t take your lumps. When you change jobs, it’s tempting to take the money in your old 401(k) as a lump sum instead of rolling it into a new plan or an IRA, especially if you’re decades from retirement. So whenever you’re starting a job hunt, pledge in writing to a friend that you will roll over the retirement account.

Likewise, if you are older and are fortunate enough to have built up a sizable pension benefit, pledge that instead of taking a lump sum when you’re eligible, you will string your pension out over many years as an annuity. Have that commitment witnessed by friends or family members who are younger than you are so they will likely be around when you put away the work shoes.

Similarly, when you’re investing your savings, you need to resist the temptation to simply go for whatever looks as if it will provide a quick return. Take these steps:

Answer two big questions. Why — other than a rising stock price — should I invest in this business? Do I have any reason to think that I know more about this company than whoever sells me the stock?

Sleep on it. If putting money into a hot mutual fund is really a good idea, it’ll still be one tomorrow. Waiting until the next morning won’t cost you much profit, but letting your brain’s anticipation circuitry cool down overnight could save you from an ill-timed bet. And you’ll be richer for your patience.

Original post:
Can?t save? Blame your brain

MillionDollarJourney.com has this to say about Robert Kiyosaki’s latest book: 

For those of you who aren’t familiar with the Rich Dad series, it’s a financial education series which teaches you how to THINK like the rich, but it’s a little light on specific details on how to actually make extra money.

Rich Dad’s Increase Your Financial IQ is no different.  The premise behind the book is about financial IQ and how to be like the rich.  Robert Kiyosaki believes that the rich get richer while the poor get poorer because of the differences in their IQ.  No, not regular IQ, but financial IQ. 

Who is Robert Kiyosaki? 

I think the biggest claim to fame for Mr. Kiyosaki is that he is the author and creator of the Rich Dad franchise.  Along with being a successful author, he is also a real estate mogul owning millions of dollars in real estate assets.

The Topics Covered?

• Financial IQ #1: Make More Money (the more the better)
• Financial IQ #2: Protecting your money (pay less taxes)
• Financial IQ #3: Budgeting your money (budget for surplus)
• Financial IQ #4: Leveraging your money (the higher you returns, the better)
• Financial IQ #5: Improving your financial information (problem solving is the key to wealth)

What I liked about the book?

• In Financial IQ #1, the author explains why the rich are rich and why the middle class and poor stay that way.  Kiyosaki explains that the rich use their money to build assets which creates an ever building passive income stream (unlimited potential).  The middle class, on the other hand, use their limited TIME to bring home income.  

• In Financial IQ #3, Kiyosaki explains to budget for a surplus.  Basically, this means to put your savings as a FIRST priority before everything else.  What he believes that if you are short on money to pay the bills after savings, you’ll need to go out and make more money.

• In Financial IQ #4, Kiyosaki explains that if you have control of your leveraged asset, then there is no risk involved.  That’s why he invests most of his money in real estate and very little in the stock market. Maybe there is a lot of truth in the old saying “invest in what you know”.

• I enjoyed the Financial IQ #5 chapter which explained the different parts of the brain and how each part affects decision making.  Kiyosaki emphasizes that the best way to learn is through “doing” and “making mistakes”.  I agree with this point as I have the tendency to get “analysis paralysis”. 

What I didn’t like?

Throughout the book, Kiyosaki has the message of NOT living below your means but to INCREASE your means.  I’m not sure if that is the best philosophy for most as I believe that controlling frivolous spending is key to financial health. My belief is to do both!  Why not live within your means AND aim to increase income at the same time? 

Go here to see the original:
Review of Robert Kiyosaki?s latest book

The first step to taking control of and improving our finances is education.

For many people, this involves suddenly paying attention to a subject which they perceive as boring, foreign and possibly intimidating. Most people begin by trying to wade through the financial section of the daily paper and/or going to the library and taking out books on finances.

While this ‘plunge in’ approach to learning can be a great way to start, because it is so intense it can often be daunting, and cause people to feel overwhelmed and give up.

Fear not, as these feelings are normal, and things actually WILL get better and more clear. In fact, the more you learn about the financial world, the more FUN you will have dealing with your finances. As with anything you feel you are good at, what now seems like a chore will become a pleasure, especially as you begin to see the results of your efforts.

Below are some of the more common feelings which accompany a woman/person starting out on the journey to financial knowledge and empowerment. Read them and take heart knowing that you are not alone; far from it. Many women have blazed this path before you, and many more are travelling it along with you, feeling the same frustrations and overcoming similar challenges.

• Embarassment/intimidation:

  ‘I don’t know much about finances, but I don’t want anyone else to know.’ We pretend we know and we don’t ask questions. After all, it’s easier to be ignorant with no one knowing (maybe they’ll think we know) than to admit we don’t have the answers. We may not even have the brightest of questions.

  SO WHAT? Asking questions is how we learn, and life is short. If we always take the long way in our learning - struggling through books and articles full of terms we don’t understand - then it will take us far longer than necessary.

  A few questions asked can make a huge difference in your understanding. Swallow your pride and remember that you’re doing this for YOURSELF. Your financial freedom awaits, and the fastest way to get there is to learn faster and put your money to work sooner. No other person’s opinion is more important than that.

• Frustration/demotivation:

  You are extremely motivated to improve your financial future and you dive right in. You read the financials every day and they begin to seem somewhat familiar. Somewhere along the line, you begin to care less, to let things slide. You skip a day or two, and you begin to ask yourself why you’re really bothering anyway - can this really make that much of a difference?…

  This is frustration, masquerading as demotivation. Take heart: this too shall pass. Just as when beginning a new diet or exercise regime, there comes a time when we hit a wall. What’s actually happening is that our inner beliefs - in this case about money - are sabotaging our efforts to change. Because we are unaware of this, we rationalise our slips by telling ourselves it was all no use anyway.

  Now is the time to do some work in uncovering your internal beliefs about money. How you behave in any given situation is as much a function of your beliefs as your intentions. They are in there and they’re holding you back, and can be found by exploring your reactions to what you are doing. For instance, if you are thinking things like ‘I’ll never learn enough to make a difference’ or ‘I’m not smart enough for this,’ you are coming up against your internal beliefs. You can counter this in many ways, including:

  a) carrying on anyway and pushing through the wall,

  b) examining the beliefs and refuting them with postive affirmations, such as repeatedly telling yourself you are smart, capable and powerful,

  c) searching out some role models and having conversations which renew your fire for learning and improving your finances,

  d) purposely remembering times when you felt empowered and strong, no matter the situation. For example, if you once ran a marathon and felt a fantastic sense of accomplishment afterwards , close your eyes and conjure up that feeling. Strengthen it and hold on to it…then carry on with your reading and learning in the financial arena. Everything is connected - when you feel great in one area, it flows over to others and gives you the strength and motivation to carry on.

• Sense of isolation:

  It’s normal to have times when you feel alone during this journey. This is especially true if you have no support within your circle of family and friends. There are many ways to remedy this, and you are never alone.

  Try going online and finding blogs, forums and articles about and by women who are struggling with the same issues you are. Believe me, there are millions. Try joining a local group or two - an investement group, a women’s finance group or even a Cash Flow game in your area.

  If all of these ideas are new to you, a good place to start would be to go on google.com and type in something like ‘finance meeting my city’ (replace ‘my city’ with your city), or ‘women’s finance advice’ and follow some of the links that come up. There are more resources available to you than you may now believe!

• ‘Huge mountain’ sydrome:

  Closely related to the demotivation of point number one, this feeling comes when the learning (or doing) challenge seems so huge that we feel we’ll never get a grasp.
  Try bringing to mind the last time you learned something difficult, even if it was a long time ago…driving a stick shift, learning a new job, etc.. Recall that with every new thing we learn, there is a period when we feel overwhelmed by all the information, and feel we’ll never get it.

  Also recall that things usually seem most cloudy just before they become clear. As with every skill you now take for granted, this too will become second nature. Keep at it and the rewards will be well worth the effort.

• Procrastination on action: You’re feeling like you’ll never know enough. You’ve learned a lot, but somehow you never feel confident enough to put that knowledge into action. The translation of knowledge into action is not the big step you may be making it out to be.

An analogy I love is one I once heard from a mentor, Brian Tracy:

Once an aircraft takes off, it can adjust its’ trajectory any number of times in order to ensure it reaches its’ destination. Based on feedback about the wind, etc., the numbers can be adjusted accordingly…BUT without being in the air, none of those adjustments are possible. It takes the aircraft being in flight to enable it to receive feedback and make adjusments.

Your finances are no different. If you have to start small, then do that - but DO IT. The sense of accomplishment you’ll get from taking that first step will nudge you towards further action. Take that first step - every journey begins with one step.

~ source:http://femalefinance.blogspot.com ~

Read the rest here:
Financial Learning Curve: Overcoming Frustration

I am still reading Kim Kiyosaki’s Rich Woman and in the true Kiyosaki style she offers some incredible common sense “objection handling” to the common issues thrown up when it comes to why so few women have succeeded in obtaining financial independence either within a relationship or on their own.

1. I don’t have the time.

2. I am not smart enough.

3. I haven’t got the money.

Now as a mother myself, I can fully relate to the time factor involved with bringing up children, however I take on board Kim Kiyosaki’s viewpoint that if my life depended upon finding the time, I’d have found it somehow.

I concur with the viewpoint that men are not born smarter than women when it comes to finances, in fact biologically women are better equipped for investing than men. ( Kim goes on to show this .) I began studying investing over 12 years ago, when on regular trips to the USA & Canada I was amazed at the extent of personal finance books, business and self help books available everywhere compared to the extremely limited selection in the UK. ( So I bought several on every trip & changed my course.)

I have been guilty of waiting to hit the big deal, then start investing, and with money to invest too much too soon without first practising, I have set myself a small challenge this week of finding an asset ( something that pays me a positive cashflow ) this week for around £100. I am a massive believer in learn by doing, I have come through all the money management levels required in order to be free to invest in passive income so I will research what is available and do my due diligence.

If you ever come across the chance to play the Cashflow 101 game by Robert Kiyosaki then jump at the chance, you play the part of a Rat, trying to get out of the Rat Race. You collect your “Monthly Cashflow” payment and decide which small deals provide you with a positive Cashflow, when to convert those samll deals to capital gains to clear liabilities and when to purchase a big deal.

The object of the game ( and is highlighted throughout Kim Kiyosaki’s book ) is Financial Freedom is achieved when your Passive Income pays for your Total Expenses.

Source: http://witoo.wordpress.com/2008/04/05/financial-freedom-is-achieved-through-passive-income/

View original post here:
Financial Freedom is Achieved Through Passive Income

Mis-selling and poor advice continue to plague the domain of investment and insurance products. To make matters worse, a section of advisors/agents vociferously claims that the aforementioned don’t exist; others choose to justify the same by shifting the onus onto investors. Such trivialities notwithstanding, the ground reality is that mis-selling and poor advice are ‘clear and present’ menaces that investors routinely encounter.

Typically, by the time an investor realises that he has become a victim of mis-selling/poor advice, the damage has already been done. We thought it would be interesting to come up with a checklist of warning signals that can caution an investor of an impending investment/insurance disaster.

Now, we aren’t claiming that this list is an exhaustive one. Perhaps, it wouldn’t be possible to create an exhaustive list, given the numerous instances of poor advice rendered and the innovative mis-selling techniques deployed. But this can serve as a starting point for sure.

So here goes. It’s time for you to be cautious if your advisor

1. Only peddles forms and fails to offer advice

If your advisor is the kind who only approaches you for getting you invested in various avenues and offering advice doesn’t feature in his scheme of things, then there is a cause for concern. An advisor’s primary responsibility is to offer advice.

He is the one who should help you translate your investment objectives into monetary terms, lay out plans to help you achieve the same and get you invested in line with those plans. The advisor is also required to periodically review your plans and incorporate changes therein, if required.

While offering prompt and reliable service is important, offering accurate and unbiased advice is certainly an advisor’s core responsibility. And dealing with an advisor who doesn’t make the grade on the latter, could spell trouble for you.

2. Frequently churns your portfolio

Churning the portfolio is a term that investors in the mutual funds segment should be able to easily identify with. It means frequently buying and selling funds, especially of the equity variety. You can be sure that you are at the receiving end if most of this buying and selling is in NFOs (new fund offers).

Equity investing is essentially about investing for the long-term and if the advisor’s recommendations were correct in the first place, there should be little need for a churn. So an advisor who frequently churns your portfolio is either incompetent or has an ulterior motive i.e. to make more money by getting you regularly invested in NFOs.

For the uninitiated, NFOs fetch higher commissions vis-a-vis investments in existing funds, thereby making them more popular among advisors. While you bear the burden of the churn in the form of entry and exit loads, the advisor makes a quick buck at your expense.

The good news for the investor is that SEBI (Securities and Exchange Board of India) has taken concrete steps to curb mis-selling in NFOs and indications are that we are likely to see fewer equity NFOs going forward.

3. Attempts to entice you by offering rebates/kickbacks

Offering rebates/kickbacks is a practice wherein an advisor ‘compensates’ you for investing through him. For this he offers you a part of his commission earnings. The rebate/kickback offered is linked to the sum of investments.

Incidentally, the practice of offering rebates is explicitly prohibited in both mutual fund and insurance offerings. Without a doubt, if offering rebates is your advisor’s forte, then something is amiss. He is doing so to cover up his incompetence and it is in your interest to steer clear of such advisors.

4. Only emphasises on returns and ignores risk

It is not uncommon to find advisors, whose arguments (to convince clients about the merits of any investment) revolve only around returns with the risk aspect being conveniently ignored. Any advisor worth his salt will vouch for the fact that while evaluating the worthiness of an investment avenue, the risk-return trade-off is of paramount importance i.e. both risk and return need to be accorded equal importance. Furthermore, the suitability of the investment avenue for the investor in question needs to be determined. This in turn entails understanding the investor’s risk profile, needs and investment objectives. Clearly, there is much more to making an accurate recommendation than just evaluating the returns aspect. And any advisor who fails to do so, deserves a thumbs down.

Incidentally, a similar view was recently echoed by SEBI in the context of mutual fund advertisements. The regulator was of the view that the rapid fire manner in which the standard warning is recited in advertisements makes it unintelligible. Apparently, the practice of side stepping risk is not restricted to advisors alone.

5. Offers ULIPs as a staple offering for all your needs

This one’s for insurance advisors. Don’t get us wrong, we have nothing against ULIPs (unit linked insurance plans) or even with advisors selling ULIPs for that matter, so long as proper disclosures are in place i.e. the client is made adequately aware of the costs involved and other implications of buying a ULIP. In other words, the advisor should enable his client to make an informed decision.

However, all is not in order, if the advisor recommends ULIPs as a standard offering for all your insurance needs. It’s a well chronicled fact that term plans are the cheapest form of insurance; a term plan should ideally be the first insurance product that you must add to your insurance portfolio.

More importantly, the latter can play an important role in helping you achieve a cover that is in line with your Human Life Value. Of course, offerings like ULIPs and endowment plans can be added at a later stage.

So why do insurance advisors display a penchant for ULIPs? Maybe it’s the higher commission earnings in ULIPs vis-a-vis term plans that are driving the insurance advisor i.e. mis-selling.

On the other hand, maybe the insurance advisor just doesn’t know better i.e. he lacks proper knowledge. Anyway, being associated with such an advisor is an unenviable proposition for you.

As always, while this article has been written for the benefit of investors, there is no reason for advisors who go about conducting their business in an ethical and righteous manner to feel annoyed. We can only admire them for their resolve in the face of intense competition and tempting commissions.

More:
5 tips on how not to be misled by your advisor