Tuesday, August 14, 2012

Notes on my reading: Securing Your Financial Future by Chris Smith

Chapter 1

1.Compounding is the most powerful force in personal finance. It is slow at the beginning, picks up speed in the middle, and is super fast in the end.
2.Compounding works for you in investing and against you in borrowing.The two important factors are interst rates and the number of periods of compounding. Remember the rule that it takes (72/interest rate) for your money invested/borrowed to double. Hence it is very important to look at the rate of interest and the number of periods that you have.

Chapter 2

1. Net worth measures your financial health = assets - liabilities.
2.Bathtub example. The water level in a bathtub only rises when your faucet is pouring in more water than the drain is letting out. Drain control is key.
3.Save at least 10% or more of gross income

Chapter 3

Building high net worth comes from controlling your spending, not from earning a high income. Although a high income can help grow net worth, the main source of building net worth is the concept of spending less than you earn year after year.

Chapter 4

1. Personal finance is a long term play ~ 50 years or more in length.
2. Right brain dynamics/short term thinking will prevent you from realizing those long term plays unless you guard against them.
3.Right brain dynamics causes us to think of small, automatic expenses as small expenses whereas they can add up to be big ones over time.
4.Follow a structured, decision process for financial matters and you'll allow yourself not to be controlled by the right brain's impulsive nature.

Chapter 5

1. Rule 1: Save at least 10% of your income.
2.To accelerate: increase savings percentage OR increase income at same savings rate OR both.
3. Active income: job income, portfolio income: investment income, passive income: rental property income/business income.
4. Diversification into all sources of income is important as you grow up.
5. Simple but most effective way to increase net worth: Increase your income in all the above ways while keeping your lifestyle the same.

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