Simple Pound

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Richard Jenkins @ MSN Money has written an interesting article on how to simplify budgeting. He basically argues that breaking a budget down into various categories (i.e. clothes, dining out etc.) is a waste of time, since in the end it doesn’t matter where you overspend - if you do. So to simplify his life, he’s adopted the 60:40 rule, where he immediately puts away 40% of his salary for retirement savings, long-term savings, short-term savings and “fun money” and pays all necessary bills from the remaining 60%.

While I agree that it doesn’t really matter on what items you overspend, I do believe that knowing exactly where your money ends up is definitely a good thing. Obviously, if you adjust your target level every month so that you’d technically never go over, then it’s a waste of time, but if you actually realise that you are wasting money on unnecessary things and set yourself a limit and stick to it, then having a budget can only be beneficial.

Having said that, while I do track my expenses at the moment, I don’t have a specific budget as such, since most of my expenses are still highly irregular. For example, at the beginning of the (academic) year I will have book expenses that I don’t even get close to later on. What I have realised though is that I’m wasting an amazing amount of money on coffee and lunch, which is definitely £40 I could save.

In any case I think that his 40% savings target (30% if you exclude the “fun money”) is maybe a little bit ambitious - reducing your annual salary by more than a third isn’t something that will go unnoticed. Especially after moving to London I will probably have to spend much of my money on the bare necessities like rent, tube and food. Nevertheless, I want to keep this figure in the back of my mind in order to compare my monthly savings to it - once I can actually put some money aside (i.e. not before July). Nothing wrong with aspiring to challenging goals…

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While I’ve simply been talking about my own personal goals, Trent @ The Simple Dollar gives you step-by-step instructions on how to go from “I need to save some money” to “I want to save 10% of my salary until the end of the month, because…”

Personally, I like his idea of setting yourself reminders of your goals to help you visualise what you’re aiming for. Just like the model of the Aston Martin DB9 I intend to have on my desk… Incidentally, if any of you feel like giving me a present, you can find it here. But please only in Midnight Blue

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Warren Buffett is possibly one of the most successful investors - ever, and with a personal net worth of roughly 30 billion dollars he is certainly among the world’s richest.

While one would expect complex technical analysis dominating his mind from the moment he wakes up in the morning, his investment philosophy boils down to something rather simple:

“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. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” (source)

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Yesterday I rambled on about how I had all these financial goals and wanted to track them and so forth. Scott Adams, the brain behind the Dilbert comic, has a slightly different if not very amusing take on this: “My Plan for Sainthood”. If you’re not reading his blog yet, then start now…

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I have never written a blog before. In fact, I was always fairly unreliable at keeping journals, but this time I have a purpose… I am going to graduate in less than 3 months time and will be earning my first salary. And I think this is a pretty good reason for starting to think about money. There are many, many things I want in life - including material things that come at a cost. And don’t misunderstand me, I love luxury - I love fast cars, good restaurants, quality clothes and cosmetics. But I think it should be possible to afford all these with a little bit of planning and without going into debt.I’ve be using this blog for two purposes: Firstly, I want to keep track of what I’m learning and reading about elsewhere and bundle all this (for me) useful information in one place. And secondly, I want this blog to be my source of motivation where I can keep track of my (financial) goals and encourage myself not to indulge in impulse spending.

So what are my goals?

• Pay back (some of) the money my parents lent me to finance my studies - unfortunately that also includes paying a rather large outstanding invoice for repairs on my mother’s car.
• Fully fund my cash ISA for the tax year 2007/08 - the interest earned on that money is tax free and I don’t want waive free money (especially not when it comes from the government…). I intend to use this money only for long-term purposes. That ultimately includes retirement, but since I’m only 20 years old there will be a few other major expenses (property etc.) beforehand that I plan to cover as effortlessly as possible.
• Accumulate an emergency fund of 3 months worth of expenses - as I am about to move to London, I don’t have much of an idea what amount of money I will need to put aside, but I will find out.
• Build up a diversified portfolio of investment funds - at first, these will largely be index funds but I shall also look into mutual funds to aim for a little more aggressive growth. Following the saying “don’t lay all your eggs in one basket” I will try to diversify the portfolio not only by taking into account the funds’ objectives but also their location - starting off in the UK, I plan to diverge into European, American and international funds, maybe even test out emerging markets.
• Gain experience with individual shares and other alternative investment possibilities - here I will start off with growth shares, on which I have just recently read a fantastic book called “The Zulu Principle” by Jim Slater. Even though it is more than 10 years old by now, I found it very enlightening and helpful - how helpful it will prove in practice shall be seen.

These goals are loosely ordered by both importance and amount of money involved. I will not jeopardise any money on the stock market until I have put enough aside to deal with potential losses. Once I start actively pursuing these goals I plan to put up a graph to track my progress - just like the guys at We’re in Debt did. I hope this will help remind me that I don’t really need that extra pair of shoes until I’ve secured all free money from the government…

And now I really need to go and do some more revision…

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