Personal Investment Management

Use an investment management system based on the Big 3 Personal Finance Tools

You have used the Thinkyourmoney model to build a budget where you spend less than you earn. You have learned to save. The savings go on your balance sheet as an asset. After doing this for a while you have progressed beyond just saving to investing as one of your goals in your personal life plan. You come to the question “what strategy do I use for investing?”

Ask yourself “What got me here?” to this point that you have savings. The answer is you used the Thinkyourmoney model of managing your money. To move forward just use this model smore. The first step is to put your savings to work in accounts and then use the principal of compound interest. The sweet thing about compound interest is its simplicity. You put your money into a compound interest product and leave it and it works hands off. It will grow with no costs to you. It starts slowly and then the rewards escalate. It is the ultimate passive income. It adds cash flow to your budget and grows your net worth. You really need to do nothing more than make compound interest work for you and not get bored and mess it up.

However folks always try other investments. Private companies do not have to report financials but you can still ask simple questions about the big 3 before you invest. Do they make money and are they building equity? This is called due diligence. Publicly traded companies have to publish quarterly and annual reports to show what is happening in their budget and balance sheet. These are monitored closely by investment professionals but can be sorted out with a little effort by the self directed investor who knows what to look for. Once again ask...Do they make money and are they building equity?

Like with your own finances, you look at a target investment’s budget and cash flow to find out where the money comes from and where it goes to. The cash flow and income publications show you exactly that and it is not rocket science to figure out if they are spending more than they earn. Red ink or red font colour clearly indicates if a company is spending more than it earns whether it is on a particular aspect of the business or at the bottom line. Like your own finances they must spend less than they earn. What is left over is called earnings. The relationship between earnings and the price of a stock is very important. The closer the price earnings ratio (P/E) is to single digits (< 10) the more attractive the investment target company is on the budget side.

One of the most important documents that a business produces each quarter is its balance sheet. Here again, like you, the net worth of the company should be positive and should increase steadily. Once again it is not rocket science at the self directed investor level but it can get very sophisticated at the professional level. In particular this is where companies will use strategies to lie about what they own and owe. Stock pricing is supposed to be the net worth of the company divided by the number of shares issued. The closer the price of the stock is to this calculation, the more secure your investment should be. If the price is less than this number you are looking at a bargain. If the number is more than this the market is betting not investing. This is dangerous to your investment. Tech stocks are famous for being grossly overvalued to their net worth and their P/Es and people have lost a lot of money over the years through the bursting of “tech bubbles”.

The perspective that a personal life plan gives to you is incredibly valuable if you want to Thinkyourmoney. Money works best over time. If you are making plans in a the time frame that is your lifetime, you need to guage your plans to how much time you have left. If you plan early in life you do not have to work nearly as hard as someone who does not Think and Plan early in life. When you are young you need to spend less than you earn, save money and invest in compound interest bearing products. The most powerful of these is to buy your house and pay off the mortgage over time. You are young and have lots of time for both of these concepts to work for you. If you save as well and invest in compound interest investment instruments, after 25 years you will have a house to live in, assets in savings to live off of in your retirement and you will have the interest off of those savings to live off of in retirement. The average Joe or Jane do not have to get involved with mutual funds or ETFs or hedge funds or pie in the sky ideas to get rich. In most cases the folks pitching these retirement plans at you are making you part of their retirement plan. Just stick to basics. Spend less than you make. Own more than you owe and then keep your life plan simple. To do that you need to have one and start ASAP.

However if you feel inclined to get involved with business there are several ways to go about making money through investing. However, the one I find most in tune with the Thinkyourmoney philosophy is the one that has made Warren Buffet one of the richest men in the world. He is a disciple of a man named Benjamin Graham who wrote a book based on his investment experiences from the 1890s through the depression and into the 50s. There is another book about the richest man in Babylon. The message here is that the message is timeless and genderless. Money does not change and it is not discriminatory based on race or gender. If you apply the rules set out by the 3 angels of money management, you will have financial success with investing. For further reading I suggest that you read the following books. The one on the right is the bible for professional investors.