Archive | March, 2013

What’s The Answer?

22 Mar

Following the article ‘A Cautionary Tale’ there has been a wave of questions asking if people should withdraw their funds from banks.  There is both a short answer and a long one.

The short answer – No.  There are two reasons for this, in UK we still have the government guarantee for savers up to £85,000 and this was reconfirmed by the government this week.  Secondly, if you are unsure of whether to leave your money in the bank or not then you still need to improve your Financial Education. Until you do that the safest place for your money is in the bank.

The long answer – in my ‘Surviving’ books I talk about Fast Money.  What this means is as an investor the faster my money is invested and returned to me the more money I make.  For example when I buy property I use my money to buy and renovate the property.  Once the property is renovated it has higher value.  I then mortgage the property to the highest value I can.  This gives me back the whole of the money I put in so I have none of my own money in the property.  My money is then free to move into the next investment.  I still own the income producing asset (the property) but I don’t have any of my money in it.

I apply this principal to every investment I make.  I always ask the question how quickly will I get my money back?  I’m not looking to sell the asset because I still want the income and growth from owning the asset.  However, what I want to do is get my own money out of the asset as quickly as possible and invested into something else.

For this reason, I rarely keep money in the bank.  Banks don’t offer high enough interest for me and any money saved in the bank is devaluing with inflation.  It is only through Financial Education that I am able to make this decision.  Financial Education provides the tools to decide what is best for me as an investor up to the level of my financial knowledge.  As knowledge grows each person sees things in a different way.  What I invest in could be seen as risky by you.  However, what you invest in can be seen as risky by me.  Depending on our level of financial education we each see different investment as more suitable to our needs.

A Cautionary Tale points out that there are still a lot of unknowns that will affect you and your money.  The more financial education you achieve the better prepared you will be to face the challenges.  Financial Education can be achieved through books, dvd’s, seminars and experience.  Ultimately, it is your money and you are the best person to decide how much knowledge you have and the best way to invest for you up to your skill level.  Financial Education is a life long learning commitment .

My aim is that through my books, seminars and blogs you can improve your financial education.  In turn you can build your income producing assets which will make it easier to weather the ups and downs of the world economies. Then when the next Cyprus comes along you will know you have your money invested in the best place for you.

 

 

 

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A Cautionary Tale……

19 Mar

While most of us were tucked up in bed late Friday night early Saturday morning the ECB (European Central Bank) IMF (International Monetary Fund) and representatives from Cyprus’ Government put together a bailout deal for Cyprus Banks which are technically bankrupt.

Needing a bailout of 17BN Euros it was agreed that money would be lent to the Cypriot Government if they could come up with a way of reducing the amount needed to just 10BN Euros.  No problem says the Cypriot Government we can come up with 7BN Euros simply by taking the money from people’s savings in the banks.  We’ll call it a one-off tax.  So if savers have less than 100,000 Euros we’ll tax them 6.75% on what they do have in the bank. If they have over 100,000 euros we’ll tax them 9.90%.  Needless to say there has been panic all weekend with people trying to get their money out of the banks. In desperation the Cypriot Government have announced that banks will remain shut until Thursday.  The Banks can’t be kept shut forever and I wonder what will happen when they do reopen?

What is most worrying about this situation is the total lack of respect for people who have worked hard, saved their money and trusted the banks to look after it for them.  The repercussions of this decision will be felt worldwide.  Not only will 7BN euros disappear into the endless black hole of government debt but what is to stop every other European country doing the same.  How many overseas banks invested in Cyprus and how will that affect their balance sheets?  How many governments have invested money?  We know Russia is very upset as it has billions of euros in Cyprus.  Why would any sane person trust any of their hard earned savings to a bank where the money can be legally stolen?

As an investor I believe there are only four investment categories Business, Property, Paper and Cash.  By balancing your investments through these categories you will reduce your exposure to the financial crisis engulfing the world. (More information can be found in my book  ‘Surviving 2013’ A Financial Guide) 

A couple of years ago I wrote about the Financial Storm battering the world.  We are now in the eye of the storm.  For anyone who understands storms and hurricanes you will know that the second part of the storm is worse than the first part.  So as we look ahead we see Britain is heading towards a triple dip recession (actually we’ve been in a depression for 5 years).  World economies are slowing down.  Banking issues haven’t been resolved just brushed under the carpet in the hope we will forget about them.  The crisis in Cyprus reminds us all that there is a lot of trouble still ahead. 

Your financial know how is the only lifeboat you have to weather the storm.  Build it as wisely, strongly and as quickly as you can.

Be Your Own Bank

3 Mar

Since the credit crunch in 2008 Banks have become the most hated industry in the UK but we can learn a lot from banks because if there is one thing they do well it is making money.  You can also make money by becoming your own bank.

The principle of banking is simple.  Get people to lend you their money.  Reinvest the money to make more money.  Create money when an opportunity arises.  Successful investors understand these principles and learn the skills and knowledge necessary to do exactly the same.

So, let’s look at each of these principles from both a bank and the investor’s point of view.

Get people to lend you their money

Banks – get people to lend them their money through savings accounts and in exchange pay the saver interest. 

Investors – borrow money to fund an investment and in return pay interest for the use of the money.

Banks attract money into their accounts by offering what is considered a competitive interest rate at the time.  In today’s market banks are offering around 0.10% on the average savings account.  Investor’s will look to borrow money at the lowest possible interest rate which in some circumstances is around 1.99%.

Reinvest the money to make more money 

Banks – use savers money and lend it out at higher rates making a profit 

Investors – use borrowed money to buy income producing assets. 

Having attracted money at a low rate banks will lend the money out at a higher rate the difference being the profit they make.  In today’s market new loans can be obtained for around 1.99%.  The investor will borrow money at that rate to buy an asset producing a higher return.  Thus they can repay the money borrowed and still make a profit.

 Create Money

Banks –   as an example, every time someone obtains a credit card banks don’t have that money set aside they create a paper transaction which becomes real money when the card is used. The bank then creates a regular income in the form of interest paid on the credit card.

 Investors – do the same through leverage. That is, they put down a small amount of money to buy an income producing asset the lender puts up the remaining balance.  The investor however has full control of the asset and the income. For example – the investor pays £15,000 to buy a £100,000 rental property.  The investor has just created £85,000 in capital on their balance sheet (paper transaction) plus the investor gets income in the form of rent.

Understanding how to create money is one of the most important skills an investor can have.  Warren Buffett buys shares in companies.  He doesn’t own the whole company but he becomes the largest shareholder in the company giving him control of the company.  He creates an environment that allows him to be paid a greater return on his investment than ordinary shareholders would.  He doesn’t work in the business he invests in.  He uses the existing management and staff but he does have control of the business as the largest shareholder. The company becomes part of his balance sheet so he has just created capital growth and income.

All successful investors have discovered how to get people to lend them money; how to invest the money to make more money and how to create money.  They have learned how to become their own bank.