Chapter 7: Investing PDF

**Chapter 7: Investing** Once you start saving your money, after some time, you will have a substantial sum available with you. You can choose to invest this sum, and help to increase its value. But, you must invest it in all the right places, so as to avoid facing any loss. Investing is the p...

**Chapter 7: Investing** Once you start saving your money, after some time, you will have a substantial sum available with you. You can choose to invest this sum, and help to increase its value. But, you must invest it in all the right places, so as to avoid facing any loss. Investing is the process of placing money or capital to a venture with the expectation that after a certain period of time, income or profit will be earned. These ventures included dealing with businesses, partnerships and corporations, shares of stock, real estate properties, and foreign currency. Investing is widely known to be the best method of acquiring wealth because here, the money is the one working for the person, and all that he has to do is to use his time and effort in making sure that the investment is on its right place. People invest for different reasons. There are those that will invest in order to increase their personal freedom. If you are not investing, you might have to work for long hours every day in order to make a large amount of but if you are investing, you might have some free time to yourself and for the people that matter in your life. Investing helps you afford more of what you want. There are so many people who only cater for their needs and that's that. You will have to work harder in order to afford something extra. Investing can help you earn more in order to afford more at the end of the month. Investing is a necessity in today's world. Things are not as easy as they were a few years back. You have to maximize your income in order to enjoy a good retirement and investing is a sure way to make some money for the future. **Investment Mistakes You Should Avoid** Making mistakes is common when one is investing but it always helps when you know some of the common mistakes so that you will be able to avoid them. **Investing with no plan** An investment plan will never fail you. You need to plan for your money and the goals that you want to achieve with the investment in order to give the investment some meaning. A plan will help you avoid losing money. **Do not invest when in debt** It is a rule of investors to clear off all their debts first before they can start setting some money aside for investment. It is always good to start at a clear slate, where you are in zero debts. **Having high expectations on returns on any investment is a** **mistake** Many people do not sit back to think of how the returns will come by and they end up investing money and immediately expecting so much more. When the returns are not as expected, you end up becoming frustrated. First of all avoid investment ideas that seem too good to be true. Take time to study an investment avenue and always have realistic expectations. **Investing following market conditions as these will keep** **changing all the time.** There is not a single time that the market conditions will be the same for a long time. If you want to invest, the current market condition should never be a determining factor as it will mislead you and you might come to regret your decision later. **How to invest** Investing can be a promising opportunity if done wisely and objectively. A person must research and dedicate his time and effort to make his investment fruitful and successful. Before placing his money into any of the investment options, he must take note of the following: **Set aside money for investing.** The first thing that a person must do before investing in anything is to set aside some money. He must not place all his money into investments because he may need some of it for emergency expenses. One mistake that most people do is to place all of their money into investments without setting aside a small amount for necessities. Whenever they need to spend for something, they borrow money from others. Because investing does not take one night to work, they will keep on borrowing until their money grows. They may enjoy the gains for a while because they will end up paying these gains to their lenders. **Pay any outstanding debts** Another thing that must be done before investing is to pay any outstanding debts, especially those bearing high interest rates. This is important to prevent the gains earned from being paid to lenders. People might think that what they are going to earn from investing will be enough to settle any and all debts that they have. This is not the case, however, because as soon as interest charges start to accumulate, the money invested may not be enough to settle it. To avoid this scenario from happening, it is a must that before investing, he must pay any existing debt. **Choose where to invest** The next step is for him to choose where to invest. After setting aside some money for investing, he must look at the different options and invest where his money allows him to do so. For instance, if he has some money, he may choose to place it in stocks or invest in a small business. On the other hand, if he has a large amount of money, he may choose to consider real estate investing. Knowing where to invest is important because there are cases where people will borrow money to meet the required amount to place. For instance, a person has set aside \$3500 for investing. Enticed by his friend's offer, he chooses to invest it in real estate that requires at least \$6000. Because he does not have sufficient money, he borrows \$2500 from another person. When he finally invests \$6000, his problem now is how to pay the money he borrowed. While his money grows, the gains he earns goes not in his pocket, but to his lender. This method defeats the very purpose of investing-to make someone's money grow. **Determine the risks of every venture** In choosing a venture where to invest a person's money, he must first assess the risks associated with each of them. This is important to know because the risks that each venture carries will affect his decisions. One must remember that in investing (and even in businesses), higher risks taken means higher returns from the venture. On the other hand, lower risks taken means lower returns to be expected from the venture. Another thing that must be remembered is that every person can be classified according to how he takes or evades risks. A risk-taking person is someone who is not afraid of taking risks, no matter how big the losses will be in the run. An average person is someone who may or may not take risks, depending on the nature of the venture and some research that he has done. On the other hand, a risk-averse person is someone who is afraid to take risks and is not willing to lose a lot, even if the venture promises large gains. To make the most of his investment, a person must know if he is a risk-taker, an average person, or a risk-averse person. By learning this, he will have an idea on what investments to take. **Learn to diversify** It is a principle in investing that a person should not put all his eggs in one basket. He must learn to diversify his investment because if it turns out that the venture is a failure, all of the money he invested will be lost. If he gets it reimbursed, he may not get the full amount he placed **Invest in fully-understood ventures** A person knows where he invests his money. While he has the freedom to choose where to invest, another step to follow is that he must actually understand how that venture works. This is important so that he will know the proper actions to take in making his money work. For instance, in the case of stock trading, before someone engages in it, he must first learn how stock trading works. He must know that stock trading involves buying stocks at a low price and selling them at a high price. He must also know that predicting prices is not as simple as looking at the numbers, and that he must know how to research and analyze data. Missing any of these important matters will bring his investment to a failure. Investing can either be a promising opportunity or a frightening experience, depending on how a person handles his money and on how he does his research and efforts. **Investment principles** **Adopt an investing** **strategy** It is crucial to be aware of the type of investor you are and stick to the principles of your investing strategy. If you decide to become a value investor, you are in the right place to learn. Your investment decisions have to be valuation-based. No matter your investing strategy, make sure you adopt a consistent strategy. This means, as a value investor, you should not involve yourself in momentum investing. **Invest with a specific interval of safety** If you purchase an asset for lower than its actual value, you will have a margin of safety. One of the most exciting things that you should remember is that price matters. The right plan to reduce risk is to purchase investments at a price that is lower than the intrinsic value. A low price means a high value of appreciation if the situation is favorable. Similarly, a low cost will create a margin of safety if the circumstances are okay. **Maintain your expenses low** Many investors don't understand the difference which a high cost causes to their portfolio. For instance, in 30 years, a rise in the expense of 1% will cost your portfolio more than the original principal. **Diversification is important** Investment diversification in small figures offers vast benefits. If you have five investments, you will earn more than two investments. **Control your destiny** Nobody cares more about your money than you do. Technology and the internet have reduced transaction costs and offered ways to acquire information and guidance at a very lower cost. **Understand yourself** Everyone has different goals of investing and different time frames to achieve the said goals. Some are short term, others long term. Although risks may look like things that you can avoid, greater risk can provide the chance for greater rewards in the long term. To understand yourself as the investor, you need to focus on your investment knowledge, gross annual income, estimated net worth, gross yearly income, and investment time interval. **Basic Types of Investing** **Invest in stocks** You must understand the stock market thoroughly before you decide to invest in it. The rewards that you gain here can be quite high but at the same time, there is also the danger of losing out on your investment, if you choose the wrong stocks. You must spend some time and read on everything that there is to know about the stock market. You must then work out your goals and also calculate your risk tolerance. It will help you to have someone guide you, like an experienced investor. **Treasury notes** This is the next best place to invest your money. It is one of the safest forms as well, as you will have a government backing for your investment. A Treasury note bill is like a stock that is issued at a value, which is below par. This will allow you to buy many notes, as you will be paying less. After the note matures, the bill will be paid at face value and so, you will be able to make a profit out of it. The note can be issued with a maturity period of three months, six months or 1 year. **Invest in start ups** The next idea is to invest your money in an upcoming business. If you have faith in the business and think that it has a lot of potential, then you can invest in it. You will be able to reap the benefits within a short amount of time and it will only encourage you to invest in other such ventures. But remember to invest only a small amount and then add to it if you feel that you are making a substantial amount of profit from it. You can choose a line of business that is the same as your field of expertise as it will allow you to supervise the progress of the company. **Real estate** Investing your money in real estate is a great idea. The real estate business is quite booming and if you buy a nice condo or villa now, it will only grow in value over time. But you need not buy a fancy big house and just an apartment will do. Just make sure the apartment is in a good locality, where there are many facilities available. Once you invest in a house, you will have both long term and short term gains as you will be able to avail a rent by renting or leasing the place out and also be able to sell it later, for a big sum. **Start a business** One good place to invest your money is in your own business. This is unlike investing in another business and will allow you to have far more control over your money. You will be able to know how and where it is being used and can also control the amount that is being spent. You can pretty much start any kind of business and does not have to be related to your work. This will make for a great opportunity to pursue your childhood ambitions. You can avail the help of your family members or friends and also get them to invest so that the risk is evenly spread out. **Buying jewelry** Buying gold, silver, precious stones, diamonds etc. is a good idea. These will increase in value over time and you will be able to make a profit by selling them at a later date. You must understand that there is a risk involved, as the bullion market is quite volatile. The value will increase, no doubt, but it might not be a substantial increase. You must understand all the risks that are involved and only then proceed with the investment. **Investing in a hobby** Investing in collector items is a good idea. If you have a hobby like collecting antiques or wines, then your hobby can be converted into an investment avenue. You can buy more and more by assessing their value and then sell them when the value increases. It need not be big fancy things like antique busts or paintings and can also be regular stuff like watches and stamps. But remember, if you pay more now, you will make more from it later. So decide on a budget and then invest in the collectibles. **Investing in yourself/ a mentor** Some people like to invest on themselves. This means that they will study further so that they can get a better job or hone a skill to take up side projects. This is also a good idea as you will put your money to good use and by investing in yourself, you will be able to make back the money along with some profits. Some people also invest in hiring a mentor or expert to take care of their investments and this will also pay in a big way. **Bonds** Bonds are like stocks that are held for a long time. There is a difference between stocks and bonds. When a company needs money for a project, they will need more than just a few thousand dollars. They will need money that runs into the millions so that they can start on the project and increase their business. Now, no bank or credit institution will be willing to pay that much money to one company and even if the company does approach several banks together, it will have to repay a lot of interest. **Day Trading** Day trading is a form of trading that is now quite popular owing to its high yielding results. Back in the day, it would take traders almost a week to buy and sell people's stocks. They would have to wait for a buyer after a stock was sold and then personally hand deliver the certificates. But these days, everything is done within the click of a button. If you wish to be a day trader, then you need a lot of experience. You cannot simply jump into it without conducting any research. If you think you will make a million just by buying and selling within a day, then you are wrong. You need to spend some time understanding all the different elements of day trading and then start with your business. Day trading is for those that look for many small profits in a day and build up to have a cumulative profit by the end of the day. They are not interested in any dividends and bonus that they will receive from the companies and only interested in the face value of the share. **Chapter 8: Risk management** What comes into your mind when you hear the word \'risk\'? Do you automatically feel threatened - \'at risk\' of something nasty happening? Or do you feel fired up to go and take a risk? Well hold your horses, because I didn\'t quantify that risk. \'Risk\' might mean the currently very slow erosion of the value of a cash holding by inflation - if you don\'t find a better investment than cash within ten years, you could lose 10% of the spending power of your capital. Or it might mean buying a stock that will triple in price if the company doesn\'t go bust, but you might lose all your money - a very high and immediate risk. So first of all, we need to think about how to quantify risk. That has a big benefit in taking the emotion out of the word, and it allows us to compare different courses of action as being more or less risky, rather than having a little siren go off that blares \'risk!\' at some courses of action but doesn\'t, perhaps, consider the less obvious risks behind others. We also need to think about human behavior. Human beings are not, in a state of nature, perfect risk managers. They tend to exhibit irrational behavior. For instance, they tend to prefer loss avoidance to profit maximization even though, in the long run, this delivers them very poor returns. They double up on losing bets and cut their winning positions, instead of the other way round. And their mathematical ability is frequently a long way short of what they need to evaluate risks properly. Organizational behavior can also be problematic - it\'s not unknown for senior management to \'shoot the messenger\' rather than listening to what their risk manager is telling them. We also need to think about risk and reward. Generally, the two correlate pretty well - the higher the risk you take, the higher the reward you\'ll get for taking it. When that\'s not the case, there\'s something wrong. Obviously, if the market is willing to give you a high reward despite the fact you\'re not running much risk, that\'s a bet you should take (after looking very hard to see whether there\'s a catch). On the other hand, if a high risk doesn\'t seem to have a good upside, you\'d turn it down immediately. Remember, many investors think that property is \'safe\', bonds are \'safe\', and stocks are \'risky\'. Yet when you quantify risk you can see that bonds and bond-proxies like utilities currently have relatively high risk and low reward, while growth stocks appear to offer a higher upside and slightly lower risk. Lazy thinking about \'safe\' and \'risky\' has often led professional as well as individual investors into horrible situations like the sub-prime mortgage crash or the Bernie Madoff scam. Do the numbers and think about the real level of risk, and you can protect yourself against many disasters that are waiting to happen. In a business, risk and reward also play out within corporate strategies. For instance, many software businesses refused to transition to Software as a Service, because it would have cannibalized their existing earnings from license sales. They looked only at the risk to their existing business - not at the reward from the new strategy. In fact, although businesses which moved to a subscription model had a few choppy years, they increased their market share at the expense of other software vendors - a risk not considered by the businesses that got left behind. You might also apply risk management techniques to assessing your sales strategy. If you sell for cash, you run no risk at all of not being paid - but you might be missing out on sales that you could gain if you allowed customers 30 days' credit. As so often, to get the right answer, you\'ll need to do the numbers, but you also need to think about your risk appetite - what level of risk is acceptable? Are you prepared to lose ten percent of your profits, in the worst case? You might apply RM techniques to your insurance. You might decide to cut your costs by choosing a higher excess, because you know you can afford to lose \$500 on a single event, and that will save you \$70 a year on insurance. On the other hand, if you don\'t have much in savings and you\'re paying a big mortgage, you might decide to pay a higher insurance bill to ensure you\'ll never be out of pocket. Again, you are choosing your level of risk by quantifying the risks and making a comparison. Risk management will help you to **manage uncertainty,** and to transfer or mitigate the risks that you run, via insurance, hedging and other techniques. Obviously, your business proposition or your investment selection will be key to your returns - and we all hope to get that 100% right. But in the real world, we\'re never going to be right 100% of the time - there are always uncertainties and unknowable out there - so risk management aims to let you manage those risks rather than just worry about them. Remember that you can be correct, and still lose. John Maynard Keynes famously said that stock markets can stay irrational longer than you can remain solvent; risk management is there to stop you going bust while you\'re waiting for the market to return to normality (and it should also help keep you solvent if you just happen to be wrong). Sometimes investors are absolutely right that a crash is coming - but they lose for some other reason. For instance, covered warrants gave investors a chance either to bet against the London housing market, or to use the instrument as a hedge against loss of value in their principal residences if the market fell - but many who bought covered warrants lost out because the timing of the eventual fall was later than expected, and the warrants expired before they showed a profit. Running a business without risk management is like going to sea without a life-belt. Even if your risk management is pretty basic and back-of-envelope, and your risk management officer is the finance director, it\'s better than nothing - and once you\'ve started looking at things from a risk perspective, you\'ll never see them the same way again. Just make sure the risk tail doesn\'t wag the management dog. Risk management isn\'t about avoiding risk, it\'s about controlling it. If you find \'risk management\' is getting used as a reason for not innovating, not entering new markets, or not considering new asset classes for an investment portfolio, chances are it\'s being done wrong. Risk management doesn\'t set your strategy \- it simply looks at the risks of pursuing that strategy, quantifies that risk, and then looks at how that risk can be transferred or controlled if it\'s uncomfortable with it. Enabling controlled, strategic risk taking should benefit your business or investments - and that\'s what RM is all about. Most businesses probably worry more about the destruction of their premises and having to work out of temporary accommodation, perhaps with a skeleton staff; but actually, losing a staff member is much worse news if you look at the expected value, because it\'s more likely to happen. **Risk control** is about deciding what to do with risk. You can keep it, avoid it, transfer it, or mitigate it. Keeping risk - you may decide that you\'re willing to take on higher volatility investments, because you want a higher return. Or you might take on corporate customers who represent a high risk of non-payment because they\'re also fast-growing companies and you think that will help your business grow faster. Avoiding risk - you might decide to avoid longer-dated bonds entirely in view of the potential risk of capital loss if interest rates rise. You might decide that getting involved in a new market that is just opening up - for instance, a country where sanctions have just been lifted - represents too high a risk for your limited resources. Transferring risk can be done a number of ways. Insurance is one \- you insure your business premises; you might take on liability or malpractice insurance. You might use a subcontractor for some business processes; you might use derivatives or hedging to offset financial exposures. Mitigating risk means taking action to reduce the severity of its effects. As an investor, for instance, I can set a stop loss, and make sure no single position accounts for more than 10% of my total portfolio. A lender can mitigate credit risk by taking collateral - that\'s how mortgages work. Operationally, a bank might mitigate the risk of \'fat finger\' (traders pushing the wrong button by mistake and selling a million shares instead of just 100,000) by setting limits on the size of trades. **Chapter 9: Retirement Planning** If you search the internet about retirement, you actually get a surprising amount of conflicting information. On the one hand, you will find all the different types of retirement saving options available, and on the other hand, you'll find new ideas stating that saving for retirement may not actually be the most important idea anymore. Many have taken this to backup the rumors that millennials are lazy, but when actually asked about it, CNN reports that generally speaking, most millennials believe their money will be better off being put somewhere else. Such as their student loan payments, entrepreneurship, or they are focused on more immediate issues such as childcare. Not to mention, between the recessions, low paying jobs, student loans and life, many millennials find it difficult to put anything towards retirement. 94% of millennials who work for an employer that offers basic retirement benefits such as a 401k, and are eligible to participate do try and take advantage of the opportunity. 94% is the same participation rate of older generations. However, Forbes states 40% of millennials find they don't qualify for their employer's retirement package. Either because their employers require they work for a certain length of time to qualify or they don't work enough hours to qualify. Many millennials with an entrepreneurial mindset have given into the fear of an unrealized future and default into the safety and stability of a traditional 9 to 5 and 401k plan. But following this path may lead to sacrificing our passions because we are afraid we will fail financially when the reality is, if we invest in ourselves and our ideas it could lead to building a business that not only provides more wealth than our 9 to 5 but also a more fulfilling life along the way. If you work for yourself, you have many other options to choose from, some of which provide significant tax savings. These options vary based off personal financial situation and before choosing which option, or combination of options to go with, you may want to consult with your financial planner to discuss what makes the most sense for you. Some of these options may not seem like a retirement option at first glance, such as a Health Savings Account (HSA) which is usually coupled with high deductible insurance policies. You can use the money from these accounts to pay for doctor visits, prescriptions, and contact lenses not covered by insurance. Or you can pay for these items out of pocket and let your HSA grow. At a later date, you can get reimbursed if you find you need some money. Using this option will actually end up helping your retirement. IRA might be the best route for you since it was specifically designed for you. This plan was literally designed for small business owners that have fewer than 100 employees who earn more than \$5,000 but far less than six figures. You can set it up in less than 15 minutes, but it could prove to be kind of annoying later since you are required to match each employee's salary reduction contribution for up to a flat 2% pay or 3% of the employee's salary, no matter what is contributed by the employee. **Reasons to Plan for Your Retirement** Learning how to retire wealthy requires understanding first why it is crucial to plan for your retirement on your own. The following reasons will give you an idea why taking matters into your own hands in order to have a financially secure future is the way to go. **You cannot fully depend on retirement financing through the** **government or your employers.** **Social Security.** While the number of people who are retiring has increased, the number of individuals who still remit their social security contributions is on a decline. Moreover, a greater number of retired individuals have longer life spans as a result of improved health care. All of these realities place a big burden on the Social Security system. The end result could be the government being forced to resort to reduction or suspension of social security benefits. **Pension Plans.** Defined-benefit pension plans exist to provide a monthly pension at a specified amount to its participants; their aim is to support the pensioners during their retirement period. Pension plans, however, are not fail-safe. In order to maintain their operations, plan sponsors may be required to increase the amount they have to contribute, or the number of benefits offered may be reduced. In some instances, both options may have to be carried out. **You cannot fully prepare for unexpected medical expenses.** **Old Age Requirements.** Thanks to advances in medicine and health care services, today's generation of individuals have a better chance of living longer. This results in the need to ensure that one's finances are able to support the health requirements of old age. **More Medical Expense** When one has not prepared his own retirement fund, it will be difficult for him to live comfortably, especially if the time comes when his health starts deteriorating and medical bills start to mount. It is also important to prepare for additional medical expenses such as extensive dental work, prescription medicine for a chronic illness, or nursing home services. **You will be able to maintain your living standards.** **Uncompromised Living:** Having a retirement plan in place helps you have a financially secure future. Even when you are no longer supported by your professional income, you can continue living with dignity because your standard of living is not compromised. **Protection from Inflation:** Planning allows you to have sufficient funds to offset the effects of inflation on your income after you retire. Inflation will reduce your ability to purchase items, and this is something you want to effectively deal with in your later (and longer) years. **You will be able to organize your estate plans.** **Family Commitments** A portion of your retirement fund can be used to honor your commitment to help your family, especially your children or your grandkids. You could make it clearly outlined in your estate plans that you want them to inherit a specific amount from your savings. You could also decide to pay for their education. You might also want to keep a particular real estate property within the family. **Legacy.** You know you will need sufficient funds to sustain you in your retirement years. However, if you have not created a retirement plan, you might find yourself selling your properties to pay for your daily expenses. This will leave you with nothing to leave for your family as a financial legacy. **Your retirement years will be more enjoyable.** **Independent Lifestyle** Planning for your retirement lets you avoid becoming a source of financial burden to your family. You don't have to depend on family members to meet your daily needs and especially your health care expenses. **Time for Relaxation and Recreation** You can finally reward yourself after having done your share of responsibilities in life. You probably want to start a small business, take up a hobby, travel to different destinations, pursue a specialized educational course, or become a local hospital volunteer. **Financial Freedom and Retirement** Financial freedom offers a sense of stability that allows you to manage your present and your future simultaneously. What you will save today will help you lead a content life in the future. You can map out your present lifestyle by adapting to a new lifestyle that could actually add benefit to your life. Consider all the opportunities available, and see what you can do to create balance in your life by spending and saving the right amount of money at the same time. We are living in a digital age. There are thousands of options that one can choose from to lead a financially stable life. Imagine yourself working as a digital nomad where you could ditch your 9-5 job. Wouldn't that be great? You will also have the option to go on early retirement from your job and pursue a life with both money and satisfaction. There are other options as well, such as freelancing. You can always opt to work on freelance projects related to your field job. This can help you earn extra money that you can put into your savings account. You can earn financial freedom by making minute changes to your lifestyle. Start working towards building a financial freedom for yourself by investing workable money-saving strategies; by adapting to lenient work styles and by investing your time and efforts into something that could actually benefit you in the future. As discussed earlier, you can choose your preferred option to earn extra money; let it be freelance odd jobs, remote work or anything else. Consider yourself as an individual who becomes financially free, only because you are able to save money from such projects after setting aside a specified amount for your monthly expenditures. **Chapter 10: Major Purchases** **Frugal Spending** Frugal spending refers to a lifestyle wherein a person lives only according to what he needs. It is spending money only on important and essential things to save money in case of emergency. To put it in simple words, it means buying and using only what a person needs. There is no unit of measure to say that someone is frugally spending because it depends on the financial condition of a person. It is also subjective in nature because it depends on how that person spends. Someone who spends only ten dollars and another who spends more than a hundred dollars can both be said to be frugally spending. Frugal spending involves doing the following steps: **Track spending** Tracking a person's spending is one of the critical steps in frugal spending because he cannot plan how to spend less without knowing how much he actually spends. Also, without knowing the same, he won't have any idea on how much to reduce in his expenses. A person must start by spending as he would normally do. However, he must take note of how much he spends for every transaction, whether it is a big or a small transaction. He must choose an interval at which he would assess the amount of expenses that he will make. He may choose to know his daily, weekly, or even his monthly expenses. In this way, he can make a rough estimate of how much money he normally spends. **Classify expenses** After a day, week, or a month, the next step is for the person to classify the expenses into necessary, variable, and occasional expenses. Necessary expenses are those which are inherently important in a person's life, which, when reduced, will greatly affect his lifestyle. These expenses include food, rent, and monthly obligations such as insurance. Variable expenses are those that are also important, but they can be reduced without affecting a person's life. These expenses include electric and water bills, groceries, and transportation costs. Occasional costs, on the other hand, are those that can be greatly reduced or totally removed without affecting the lifestyle of a person. These expenses include almost all entertainment expenses. **Reduce spending** After classifying the different expenses, the next step is for a person to reduce his spending. However, he cannot simply reduce any expense that he chooses. He must follow certain guidelines in choosing what to reduce. **Save money** After reducing expenses, the last step is to save the money that he will get from frugal spending. He may not notice it at the beginning, but as time progresses, he will start to have more money. He must save this amount for future use. Frugal spending is very helpful, especially when a person wants to manage his money by maintaining the same amount of income but changing the amount of expenses he incurs. In this way, he will not have to worry on how to earn more, because by having the same amount of income, he can now enjoy a better, less expensive lifestyle. **Cutting Costs** The next step in identifying various ways for you to cut your discretionary spending especially if you are adamant on maintaining your lifestyle. One way you can cut spending is to first start with your grocery spending. If for example, you normally spend \$500 on groceries per month then you can utilize websites that offer coupons so that you can still get the items you need for less. To get coupons you can get them from the manufacturer website, newspaper circulars, coupon websites and you also get coupons from the cashier at your normal grocery store when you check out. Keep in mind, grocery stores still have a 6 week cycle where they will change their product prices to their desired lowest amounts. You will need to time your coupons for these days. There have been complaints at times where people have stated that they never offer coupons for products that they actually use or its never for stables like meat or vegetables and that's not entirely true. *With car fuel* , you will want to utilize apps for your cell phone that help you identify the closest station with the lowest fuel prices and also utilize GPS apps that can help you identify ways to get home faster (time and distance wise) so you can save on fuel costs that you waste getting stuck in stop-andgo traffic. Yes, you do waste gas in traffic more than roads and freeways where traffic flows at the same speed longer. With other discretionary items such as cellphones, you will want to look at your phone patterns and if you have a habit of using less minutes on a regular basis, then maybe its time to lower your phone plan UNLESS you will lose major customer benefits switching plans, then don't do it. When it comes to spending on eating out or spending on household items, especially if you do it on a regular basis, there are websites where you can get gift cards for major locations at a discount. If you search gift cards at a discount or similar keywords on any major search engine, you will come across websites where you can buy gift cards at a cheaper price. **Chapter 11: Behavioral Finance** **Making Frugality a Habit** If you want to attain financial freedom, you have to develop some very particular habits. Habits are learned through repetition and practice. Self-made millionaires rely on these habits to attain financial freedom. If you want to be like them, you can start saving money from now. Self-made millionaires are known to be frugal. They are wary about spending their hard-earned money. They know how to budget their funds and save for the rainy days. In general, a person must have between 3 to 6 months' worth of salary as emergency fund. However, most people find it difficult to save that much cash. Actually, it is understandable because saving is a choice and a byproduct of various habits which may come naturally to some individuals. You know, at the back of your mind, that you have to save money because you may suddenly lose your job and you don't have enough savings. However, you keep putting it off. You lack self-discipline. Your intentions are great but you really don't take the first step. Your economic stability may depend on various factors. You may even be experiencing financial strain right now. But, it is not an excuse not to start saving. In fact, it is during these trying times that you have to start saving. You have to have at least 3 months' worth of salary as emergency fund. It is actually doable. You may cut on expenses. Quit drinking that expensive Latte everyday. You can opt not to eat at restaurants. You can even rent out your garage. Whatever extra you save or earn must go to your emergency fund, which isn't linked to your checking account. In fact, the emergency fund mustn't even be accessible online or through the ATM. If you're having financial problems, you must be motivated to save. **Using The Law of Attraction to Attain Financial Freedom** You'll become happy and positive when you start saving money. It is because money has the power to attract more money into your savings account and into your life. You'll have opportunities to earn more money. You begin to sell your old stuff which you no longer use. Your savings account begins to grow and you develop the positive energy to attract more money. In most cases, people don't attain financial freedom even if they work really hard because they always feel the need to earn more money. They always feel that they don't have enough. There's nothing left after each payday because they have to pay the mortgage and the bills. They also have to spend on food and other daily needs. Thus, they struggle financially every month. They are also very aware of other people who don't seem to struggle financially. They see themselves as forever slaves to their work without gaining anything from it. They count the long hours and effort they put in their careers. However, they see people who don't work as much as they do but get praised and promoted. If you're like these people, you have to realize that there are things that you can do to change your perspective about financial prosperity. First, you have to know that attitude can spell the difference. If you're one of those who have to work real hard to gain some financial rewards, you'll surely see those who have money as people who don't need to push too hard to attain prosperity and abundance. You may be someone who is stressed on working really hard. Most of the time, you bring all your worries even at home. You fail to strike a balance between life at home and life at work. As such, your private life and career suffer. The negativity becomes more apparent such that it attracts more negativity. If you lack money, your lack of joy, success, and financial rewards become more pronounced. Successful individuals know how to work smart. They spend time appreciating other people. They project success instead of projecting failure. As such, they attract more financial prosperity. Furthermore, they enjoy meeting and talking to people. They develop an attitude which made them more likeable. You can be like them by understanding the Law of Attraction. You start your day by taking charge of your day. When you wake up in the morning, you have to visualize how you want your day to be. You don't have to think about possible problems or concerns you may encounter. You just have to focus on what you have to achieve for the day. You have to think of your day as a perfect day, without any disturbance or problem. By doing this, you develop the right attitude to attract financial prosperity. Next, you have to change your morning routine. You must start the day with a successful attitude in order for you to attract wealth. For example, you can set your alarm clock an hour before your usual wake-up time so that you don't have to hurry through your routines. You won't be pestered by other family members who want you to hurry taking a shower because they still have to shower also. You have time to eat breakfast in a calm manner. Furthermore, you may even have time to exercise or take a walk before you leave the house. You have to ensure that you get to your office early so that you can calmly plan your working day with a cup of coffee. Since you've eaten breakfast and are in a great frame of mind, you will be able to attract prosperity because you feel invigorated also. You can actually make your working day enjoyable. You may have felt overwhelmed with tons of work on your desk. However, with the new attitude, you can attract enthusiasm and begin to change even your work habits. This happens if you put the Law of Attraction into practice. Because, you now have the power to take charge of your morning, you will become productive and finish projects with much gusto. In fact, you'll feel joy once you're done with your tasks because you now enjoy working. In addition, the feeling of happiness is also brought home because you no longer feel stressed at work. You can also continue attracting success if you only say positive things about your job. The idea is whatever you think, it will happen. If you see life as an exciting journey, then it will be exciting. If you think that you can be financially free, you will gain financial rewards. You can choose your attitude in order to attract the right deal of success. **How to Rewire Your Mind in Order To Reach Your Financial** **Goal** If you're going to develop the right habits and perspectives with regards to your financial freedom, you must first rewire your thinking. You may have been thinking of pleasurable things in the past and associate saving with pain. First, you have to change your way of thinking so that you can develop habits to gain financial freedom. Your email inbox is full of special offers and sales announcements. You also get a lot of vacation options. You will really be tempted to spend more than you plan to. If you're having a hard time changing your spending habits, you have to know that it is possible to develop a positive attitude about creating wealth, living frugally, and saving more money. You will surely find it difficult to break a spending habit. However, you can change for the better if you know how rewiring works. You can resist the temptation of buying new clothes or gadgets because you want to save your money for retirement. The secret lies in consistency. If you continuously decide not to stop for coffee every time you see a coffee shop, your brain will recognize that avoiding the shop makes you feel good. As such, the dopamine surge will occur every time you don't stop at a coffee shop. When you continuously become aware that you have to save your money, you change your spending habits. If you want to develop good spending habits, you have to determine which bad habits you want to change. You can create a list of such bad habits. You can check your bank and credit card statements to determine which nonessential things you continue to buy. The list of things you want to avoid buying must be specific. After making the list, you must then try your best to avoid any circumstance which can make you spend your money foolishly. For example, you can try hanging out with a different group of friends if you discover that you've been spending a lot of money during weekends with some other friends. You have to choose to hang out with friends who have the same desire to live frugally like you. If you often pass by your favorite coffee shop every time you go to work, you can find another route. The goal is for you to develop new and good spending habits. It may need more willpower but it will surely be fruitful in the end. Furthermore, you can share your list with somebody whom you trust so that he can support your desire to stay away from your bad spending habits. That someone has to hold you accountable every time you fail to avoid any of your bad spending habit. You also have to search for new constructive habits to replace the bad ones. For instance, if you continuously buy books, you can search a local public library. If you found constructive habits, you have to build a reward system which can help you reach your goals. For example, if you've reached a particular financial goal, you can treat yourself to dinner at a restaurant. Lastly, you have to have a visual reminder. Put a small picture which represents a financial goal in your wallet. When you see it, you are constantly reminded of it when you open your wallet. For example, if you're saving for a travel destination when you retire, you can have a picture of that place in your wallet or any place where you can always see it. **How to Get Over Compulsive Spending Habits** Compulsive buying disorder can be triggered by perfectionism, the desire of perceived acceptance by others, the need for control, or general impulsiveness. However, it can also be a manifestation of identity searching, social position-gaining hopes, or anxiety, low self-confidence or depression. These reasons do not apply to all cases. Not everybody who experiences CBD suffers from depression. For those who are wealthy, CBD might just seem like an everyday pastime. In many cases it is. For those who have a tight budget, this condition can ruin their lives. Those who need budgeting the most should consider reading more about CBD. The difference between CBD and regular shopping is the compulsive, overwhelming desire to buy and spend against the better judgment or known negative consequences. Non-addicted buyers buy for the sake of real need and utility, while compulsive buyers buy for mood-improvement and balancing emotions. Just like other addictions, buying disorder roots in aggrieved emotional needs. Since we know by now that ads primarily trigger emotions, it's not hard to imagine how it affects a person who craves satisfying that need. It feels like drugs -- it gives a bit of relief when the purchase satisfies the need, but soon the positive effects fade. A new, bigger dose of satisfaction will be needed. People suffering from CBD think just as intensely and as often about shopping as an alcoholic about the next drink. The easiest and quickest way to overcome compulsive buying is to raise better emotional awareness. The best way is to work with a licensed therapist. An objective, unbiased third party, can help you stay on track better than your friends and family. Also, a professional can help you with healthy emotion regulation strategies to understand where your compulsive buying tendencies come from and overcome the urge of mindless buying in the future. The therapist can help you identify the causes and negative consequences of your actions, and help you figure out replacement actions for the compulsive behavior. It is important to examine the positive and negative sides of the compulsive buying behavior to find an appropriate alternative lifestyle that satisfies needs while being less self-destructive. There are no specific therapies designed solely to overcome compulsive shopping habits, but there are many forms of therapy that can help people address this issue. Two therapies produce outstanding positive results: cognitive behavioral therapy, and therapies using different mindfulness techniques. The former proves to be the best when used in groups. If the patient receives the most appropriate therapy, it will decrease their compulsive buying tendencies after only ten weeks of participation. The latter, the mindfulness technique, therapies resulted in impulse improvement, better emotion management, and acceptance. People with compulsive buying tendencies might want to add financial counseling along with their psychotherapy. Anything can be useful, from selfhelp books to online finance and budgeting courses, to group counseling meetings. Raising financial awareness and budgeting improvement techniques can help a lot with facing the financial reality of a person with CBD. **The Money Mindset** This knowledge will be put into action as you look back into your history with money and see how these experiences have shaped your views and feelings towards personal finances. Whether you're a spender or a saver, the short discussion on disputing irrational money beliefs can help you adapt a better and healthier perception of money. If you think that being rich is associated with greed, then it is no surprise that you feel comfortable with just getting by. However, if you see money as a vehicle to help more people achieve their goals (in an honest and dignified way) then you'll be more inspired to achieve financial freedom. Having negative mindsets may limit you from achieving your aspirations and experiencing genuine satisfaction. The wonderful thing about perception is that it can be controlled. Daily circumstances may be beyond our sphere of influence, yet we can always determine how we can feel about it. Bankruptcy for instance, can either be a sign of defeat or an indication of a fresh start. While most people aspire to get rich, only a few become successful. What separates winners from the rest of the crowd? The answer is all in the mind. **Conclusion** Managing your finances is associated with responsibility. It takes an intelligent and determined person to work with a plan every time they are spending their income. Even though it is not an easy thing to do, the benefits are many therefore it is something that at least everyone should try in order to enjoy a life free of money worries. Struggling with money issues is a common phenomenon in many households even when both partners are earning a lot of money to sustain the household. You only need to start managing your finances today to achieve financial freedom sooner than later. When you are looking at your personal finances, it is just as important to manage a small income as it is to manage a big one. There is no excuse for waiting to save or grow your financial position. Always remember that every little cent that is spent without a plan is a great waste and it can mess up your plans of becoming wealthy in future. All the income you get should be accounted for so that you will have enough money to set aside for future plans. If you do not have enough income for your budget, look for a way to increase revenue. If you feel you have a better understanding of your finances and know how to create a budget that reflects your expenses, you have mastered the steps you need to do to pay off your debt. The time to start managing your finances is now. Procrastination is a major barrier to achieving financial success. It is good to start now as you focus on the benefits so that you can keep up with the habit for life.