August 22, 2008

Seven ways to get and keep wealth

When it comes to personal finance and weight loss, you'll pretty much always score by telling people things that they already know: Don't spend more than you earn. Put some money aside for a rainy day. Eat lots of vegetables and drink plenty of water. Exercise regularly.

Re-packaging these most basic principles of common sense is a huge - and lucrative -enterprise. Of course we all know what we should do, but we're willing to pay a remarkable amount of money to people who remind us or hold our feet to the fire - from personal trainers to financial advisors.

Give that the Canadian economy is going through a particularly wobbly patch at the moment, it's a particularly good time to be in the business of the blindingly obvious. All the more when you consider the latest figures on the level of consumer debt, the continued erosion of net worth as a share of disposable income and the fact that personal borrowing is continuing at a healthy clip.

Numbers pulled together by CIBC World Markets indicate that in the first three months of this year, household debt in this country rose by close to three per cent while personal disposable income climbed by just two per cent. In a nutshell, that means the debt-to-income-ratio is running at about 130 per cent, up from 122 per cent just a year earlier.

* Check out 5 people who went from 'zero' to 'hero'

Economists tend to concur that consumer spending - and borrowing in particular - will adjust within the next few quarters. With softer housing prices and a turbulent stock market, the psychology of restraint isn't too far clicking in.

All of which means, it's an excellent time for a little back-to-the-future financial counsel.

The year after the great stock market crash of October 1929 and on the cusp of the decade long Great Depression, an American pamphleteer, George Clason, wrote a little book called "The Richest Man in Babylon".

The idea seems to be that by casting his simple message of prudence into an ancient setting, it would give it a little more weight and a feeling of timelessness. What it actually does, however, is give it an annoying, mannered tone with lots of "thees," "thous" and so on.

But if you can get past that, it's an excellent and easy read - as well as a relevant reminder of the most fundamental elements of personal financial common sense during a time when it's not a bad idea to refresh your ABCs on this file.

So what are some of the key points of this Babylonian wisdom?

Always set aside at least 10 per cent of your earnings and "pay yourself" first. Once you have established that habit, you will soon find that you don't miss that amount and it has little overall impact on your budget.
When it comes to spending, learn to delineate between need and want and remember that no matter how much you spend, there will always be more that you want.

The book suggests that you write down all the things you think you want to spend money on and then prioritize them.

* Talk back: What's your best financial advise?
Make a realistic budget and stick to it. Or in the words of Mr. Clason: "Budget thy expenses that thou mayest have coins for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings." 'Nuff said.
Look for ways to make the money you set aside work for you. Opportunity is only available for those with the means to take advantage of it.
Invest cautiously and don't be lured into seeking out the highest possible of return because of the inherent risk that you may lose thy entire nest egg. Be sensible about whose advice you follow and check out their experience and reputation before listening to their plan for your money.
Own your own home.
Increase your earning power by improving your skills, gaining new experience and thinking strategically in terms of creating opportunities for yourself.
It may not be revolutionary insight - but it is a straightforward and emphatic reminder of the basics. And, as Mr. Clason himself might note, common sense isn't really that common.
Furthermore, for $9.99, it's probably the most cost-effective self-discipline you're going to find on the market.