4 tips that will change the way you think about money

Personal finance is 80 per cent psychology. The maths behind it is simple and all you need is what you learned in primary school: Don't spend more than you earn, find the cheapest loan, etc. A child could understand it.

What's difficult is cultivating the willpower and motivation to follow through on common sense rules.

Here's how to do it:

1. Think of making money as a form of care

If you think of making money in materialistic terms (e.g. I want to own a mansion, I want to own a fleet of cars) you will often lack the willpower and discipline to save or invest. Surprisingly few people are motivated by these things.

Instead, think of making money as a form of caring and saving as a way of "paying yourself first". If you cannot earn enough money, will you be a burden on your friends and family? If you get sick or cannot work, who will bear the cost? Who pays your medical fees and your mortgage?

Do you have the wealth to deal with it? Or will your retired parents end up having to chip in, your friends having to give loans you know you can't pay back, and your children having to give up on a university education?

If you cannot make enough money to support yourself, someone you love will pay for it. Keep that in mind, and you will find the willpower to save and to invest.

4 money myths Singaporeans should get rid of in 2016

  • Most basic savings accounts only offer 0.05 per cent interest per year. If you're earning a salary of at least $2,000 a month, then it doesn't make sense to keep your cash in a savings account that offers such a low interest rate.
  • The OCBC 360 Account was introduced in 2014, offering significantly higher interest rates. It was so popular that other banks quickly introduced competing accounts - like the DBS Multiplier Account and the UOB One Account.
  • The way rewards points catalogues are these last few years, points are becoming like the Indonesian rupiah. Let's look at DBS for example - 3200 DBS points for a $50 Tung Lok dining voucher, which requires spending of $16,000!
  • Cashback credit cards are the way to go in 2016, and cards like the OCBC 365 Card, the American Express True Cashback Card and the ANZ Optimum World MasterCard offer 5 per cent - 6 per cent cashback for various categories.
  • 2015 may not have seemed like the best year for investors. But that's actually not true for those who dabble in regular savings plans and exchange-traded funds with long-term goals.
  • With regular savings plans like the POSB Invest-Saver and OCBC Blue Chip Investment Plan, you can start your investment journey with as little as $100 a month.
  • With the US Federal interest rate finally being raised last month, we can expect home loan rates to start rising in response.
  • However, if you're out of your lock-in period (usually 2-3 years after your loan began), you're probably eligible to get what is known as refinancing. Put simply, this means you can switch your home loan to another bank in order to enjoy a more competitive interest rate.

2. If your first response to everything is to "budget for it", you will probably never get rich

Saving is important, and you should never spend more than you can afford. But if something comes up and you need money, your first response should not be to budget. Your first response should be to think of ways to make that money.

If you unexpectedly need S$500 this month, where will the money come from? Do you downgrade the brand of tea that you drink, or cancel a cable subscription?

Those are many ways to make up the cost. But what will you do if one day you unexpectedly need $25,000 for surgery? There is only so much you can budget for.

It's better to respond to financial needs more proactively. If you require more cash, go out and look for ways to earn more before scrimping and budgeting. Look for side-income jobs, do projects that get you paid, or negotiate for a raise if it's necessary. Budgeting comes in when all of those attempts fail.

Taking this attitude will propel you to find opportunities to grow your income. Read the biographies of people like Richard Branson. Warren Buffet, or Jack Ma, and you will see this is the quality they all share.

3. Your financial situation will closely match that of the people you hang around with

Your friends affect your spending habits and mindset more than you realise. If you hang around people with poor financial attitudes, you will develop the same qualities.

Take a look at your "crowd": are they enterprising and able to brush off setbacks? Or are they mostly poor, and spend all day moaning that they will never get out of their situation? Do they spend money and mire themselves in debt, or are they prudent and make a habit of saving?

Whatever their attitude towards money, you will gradually adapt to match them. Being conscious of this helps to mitigate some of the effects - but you can be proactive too. Seek out acquaintances who understand money and how it works, and hang out with them more often. This doesn't just mean banker and stockbroker types (in fact, those types can be very bad with personal finance) - it could be a neighbour who is financially prudent.

20 tips from Warren Buffett

  • “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
  • “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.”
  • “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
  • "No advisor, economist, or TV commentator -- and definitely not Charlie nor I -- can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet."
  • “What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: “Most men would rather die than think. Many do.”
  • “After all, you only find out who is swimming naked when the tide goes out.“
  • “The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
  • Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
  • “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock."
  • You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. "
  • “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
  • “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.“
  • “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”
  • “The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’”
  • “Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it is going to be hurt by the Internet. That’s the kind of business I like.”
  • “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.“
  • “Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong (a challenge we periodically manage to overcome)."
  • “Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1″
  • “I am a better investor because I am a businessman, and a better businessman because I am no investor.”
  • “Time is the friend of the wonderful business, the enemy of the mediocre.”

4. Plan for the probable, not the potential

Potential is winning the lottery and becoming a millionaire next week. Potential is picking one stock among 5,000 that goes up 700 per cent in a quarter. Potential is finding one magic Forex trading course that changes your life forever.

Potential, in other words, is often fantasy. Focusing too much on potential is why people fall for get-rick-quick scams or play the lottery every week hoping to strike it rich.

When you must make a financial decision, focus on the probable and not the potential outcome.

So don't get excited at the potential returns on a stock investment - do your due diligence and calculate conservatively what is the probable return over your investment time horizon. Don't ask your property agent how much your condo's value could potentially go up. Look at the surrounding houses, and the 20-year transaction history of the neighbourhood. That's the probable appreciation.

When you start dealing in probability rather than potential, you will make better financial decisions. And you will do it faster, and with greater confidence.

16 money mistakes you are making

  • We've all learned from a young age that saving is good for you. Failing to save means you have nothing to fall back on when you need it. It also means you are more likely to borrow and increase your debt when you need funds for certain things like having a wedding, furthering your education and more.
  • Your budget is the key to achieving all your goals. Just as we have limited time, most of us have limited means. So, how you choose to spend your money can either help you take that dream trip to South Africa or can keep Cape Town in your dreams. Without a budget, you also run the risk of falling into debt, a huge hindrance to achieving goals.
  • Setting aside a bit of money every month for emergencies could save you big time when you least expect it. You never know what could happen, and having funds to turn to could help you get through bad times in life.
  • If you do not plan your expenditure, you could end up spending a lot of money on things you do not need. Just because something is on sale, does not mean you should buy it.
    Always think about how much you need the item. If you don't already have it, think carefully if you will actually use it if you did own it.
  • You could be paying a lot of unnecessary fees if you don't check your bills before paying. For example, credit card insurance that you never signed up for, or telco service subscriptions you did not know about.
  • Very few people think about retirement and when they realise it, it is too late to start saving. Plan and save for retirement from your first paycheck to ensure a comfortable retirement.
  • Choosing wrong insurance plans will affect how much you can receive when you are in need. Think carefully about the policies you are offered and read up about which insurance plans work out best for your lifestyle.
  • Credit card companies have a range of incentives which encourage people to spend more. Spending is encouraged with 'reward points', lucky draw, privilege discounts and more. Beware of these marketing gimmicks and stop yourself from spending on things you might not actually be able to afford.
  • Many people save a lot of money by doing their homework before shopping - finding out which merchant has the best price for the product they want. You can also take this further, by always trying your luck to negotiate for better prices on big item purchases. You never know when you might get a good deal.
  • It takes a certain kind of bravery for people to dabble in investments. Many experts have warned that making investment decisions based on your emotions and fear can jeopardise your ability to reap rewards.
    "You can't let the outside environment dictate every single change you make," Mr Scott Thoma, investment strategist for Edward Jones told Fox Business.
  • Many consumers are guilty of this - signing away their lives to credit companies in exchange for products they want but do not need. While credit cards make it easy to spend, paying for debts is not as easy, especially with interest rates. Try not to reach your credit card limit every month and if you can, avoid using it at all.
  • Spending money on entertainment and leisure is good, but make sure that you can also afford to spend on classes and opportunities which are good for your career. Taking up a Chinese for business class, for example, could be very useful if you plan on expanding your business networks overseas.
  • If you need to take on a loan for your house, car, education or other purposes, be sure to do your research and obtain for a loan which is best for you. Don't fall for marketing gimmicks. Instead, think about interest rates and the realistic capability you have to repay the debts incurred. If you don't need to take out a loan, maybe you should not even apply for one at all.
  • Spending $5 a day on coffee adds up to a lot of money over a month. You could save a considerable amount if you cut down or stop spending so much on things you do not need to have every single day.
  • You can afford to have a meal without buying a drink when dining out. Bring your own water or wait till after the meal to drink some. This means healthier meals for you too!
  • Many people are used to having lunch out of the office because they are too lazy to prepare a meal beforehand. If you have time to spare, prepare a sandwich the night before so that you don't have to spend a single cent at lunch. Dining out could gradually damage your wallet in the long run.

The Fifth Person is a digital investment magazine that publishes the latest investment news, stock analyses, AGM reports, and financial education.

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