Do you feel poorer? You may be.

PNC recently published their 2011 True Cost of Christmas Index [pdf]. The cost of the 12 days of Christmas is up 4.4% this year.

So true love is more expensive.

This is a fun way of highlighting an important principle of personal finance – you can lose money without really trying.

In fact, you don’t have to actually lose money to lose money!

The hidden tax

Money itself is essentially useless. It’s just a tool, a means of exchange for goods and services.

Your purchasing power is what matters. And if you stuffed all your money in your mattress in 2011, you would need to cut back just to break even.

You will still spend $25. But it will only buy you $24 of the same goods and services you’ve been used to purchasing.

Now, on the surface, that doesn’t look so bad. But take a family with a household budget of $50,000 a year.

They will have to cut $2,000 from their budget just to maintain the same standard of living!

In other words, inflation is a hidden tax. You don’t see it, but you sure do feel it.

Little by little, it eats away at your ability to buy the things you want and need. You feel poorer because you are.

So what can you do about it?

Cash is the best asset to have, but the worst asset to hold.

You need cash to survive. We all pay bills with cash – mostly in electronic form these days, but cash nonetheless.

However, cash loses its value day by day in an inflationary environment. So holding cash is the worst thing you can do.

It’s a delicate balance, but one that must be found to get the most you’re your money.

The difference between nominal and real returns

If inflation spikes up, interest rates will follow eventually. Here’s where a lot of people fall into a trap.

It may be especially tempting as an encore to the low current interest rates. What if CD rates jumped from 1% to 5%? Sounds great, right?

But it’s a losing proposition. Here’s why:

Let’s say you were able to find a one-year CD that pays 5%. You invest $10,000 so you’ll earn $500 ($10,000 x 5%) over the course of the year.

But you still need to pay taxes on this money. Assume your marginal tax rate is 25%. After taxes, you’ll only earn $375 ($500 income x 25% tax rate = $125, $500 income – $125 taxes = $375).

In other words, your nominal return is 3.75% ($375 ¸ $10,000).

If inflation is 4%, your real return is -0.25%. (3.75% – 4.00%). So you’re losing purchasing power even though your return seems high by today’s standards.

Granted, it’s better than stuffing it in your mattress. But you’re still losing money even though you’re trying not to.

Buy now, use later

One safe thing you can do to preserve your purchasing power is to buy ahead. Note that we said buy ahead, not just buy.

Buy things now that you would normally buy later. More specifically, when you see a great deal on an item you use regularly, stock up.

Hard assets generally trump financial assets

Financial assets often struggle in an inflationary environment. For example, traditional bonds tend to get destroyed because interest rates are rising, making the bonds less valuable.

Of course, now you can get Treasury Inflation Protected Securities (TIPS) which helps protect you.

Stocks may do alright if the company is able to pass along price increases to its customers.

Hard assets (e.g. real estate, commodities) have tended to perform well in inflationary times in the past. Of course, the past is no predictor of the future, as we always hear.

In addition, how long will it be before real estate market really starts to recover? Can gold, silver, and other commodities continue their meteoric rise?

You have to decide for yourself. Or get help.

We highly recommend working with a financial planner. More specifically – work with a professional who gets paid to advise you, not sell you investment products.

They’ll earn every penny you pay them!

The quest for more income

BIGG success is life on your own terms. It’s about taking control to design and build the life of your dreams – no matter what the economy is doing.

One way to do that is to start your own business. You can do it part-time.

The extra money you make will help you preserve your purchasing power. And if done right, it could be your first step to financial freedom. That’s BIGG success.

Image in this post from stock.xchng

Money is one of the five elements of BIGG success. When you really think about it, there are only two core paradigms when it comes to personal finance:

The more money you have, the more you can do.
The less money you need, the sooner you can do it.

The more money you have, the more you can do.

Money means options, options to do what you want.

To buy what you want. To spend your time how you want.

Time is another one of the five elements of BIGG success. You can exchange money for time.

You can pay people to do chores for you. You can pay people for tasks outside your strength.

Money can buy time. Money can buy things.

Money means freedom, at least to some extent. So focus on accumulating more money.

An attitude of “more” propels you forward. The desire for “more” makes us grow. For us humans, growth is where we find meaning. Be happy, not content.

The less money you need, the sooner you can do it.

But there’s another side to personal money management. It’s the second mindset of personal finance.

This is the one people often don’t think about. Or talk about.

But BIGG success is life on your own terms. If your definition of BIGG success requires less money, you will likely reach your destination sooner than someone who requires more.

In other words – if you can be happy with less, you can enjoy it longer!

An attitude of “less” also has other benefits. “Less” may very well mean less stress. Because you need to protect your nest egg once you accumulate it. So more money often means more worries.

Another benefit of “less” is perhaps the most important one of all. “Less” helps you stay within your boundaries. It stops you from crossing the line. “Less” helps you get to your vision of BIGG success with your values intact.

That’s it. The essence of personal finance in two sentences.

How much is enough for you?

Image in this post from stock.xchng

Uncertainty. It’s a word you hear a lot these days.

How do you live with uncertainty? How do you face the great unknown?

Think like an entrepreneur!

BIGG success is life on your own terms. You’re the person in charge of your life.

Entrepreneurs know that you can’t predict the future.

So don’t try. Instead, do what they do – create your future.

But not just any future. The future you want.

Build your own personal economy day by day, moment by moment.

Watch the inflows and outflows in your economy. Build a baseline for future flows of money.

Inflows

How much do you plan to increase your income next year? The year after?

Build a plan for three to five years. Then ask a very important question:

How will you get from where you are to where you want to be?

Be on the lookout for opportunities that match well with your passions and proficiencies. Then go for the ones that you think are the most profitable.

It’s a powerful combination when your passions and proficiencies meet profits.

Outflows

Many people never stop to think about this basic reality:

It’s easier to control your outflows than your inflows.

So while you project your income to grow, be careful about future increases in expenditures.

Sure, some will go up. Inflation will play in. And you probably want to enjoy some of the fruits of your labor now.

But controlling your outflows will give you more options and create a more sustainable personal economy.

Surplus

You do plan on a surplus, right? No deficit spending here!

With the surplus you generate, you can invest. Your money starts working for you. It’s a powerful thing.

Because, eventually, your Department of the Treasury will dwarf your Department of Labor.

It’s what you want – the freedom to work when you want, where you want, with who you want. That’s BIGG success!

Image in this post from dleafy

A recent study from Ohio State University shows that Gen Y feels empowered by debt. Participants with higher levels of debt reported both a higher self-esteem and a sense of mastery.

Now, you might think it was because they took on debt to pay for their education. But the researchers thought about that, too.

They found that education debt increased the feeling of well-being among participants in this nationwide study. But so did credit card debt.

Can you blame these young people for thinking this way? Didn’t many people in the two generations before them feel the same way at one time?

Buy now, pay later

Buy now and pay later. It sounds great now. But now becomes later faster than one expects.

It may feel great now. But it can lead to misery later.

Debt is a tool

You have to know how to use debt to get the results you want.

• Debt can be good or bad. The walls of fame are paved with people who used debt to accomplish something BIGG. But so are the graveyards of shame.
  

• Debt solves timing problems if used correctly. Buy an asset that returns 8% using debt that costs you 6% and you will increase your wealth.
  

• Debt creates money problems if used incorrectly. Invest in an asset that only returns 5% with debt that costs you 6% and you will destroy the wealth you already have.
  

Want to feel poor? Become a slave to debt by investing in low return (or no return or worse) assets.

Want to feel empowered? Focus on building your net worth.

BIGG success is life on your own terms. Your terms, not your banker’s.

Image in this post from lusi

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But then the reality kicks in.

Research shows that we tend to quickly spend our new found cash. It also shows that new material possessions make us happier for a very short period of time.

More importantly, we make an incorrect assumption about what it takes to make more money. We often have to spend more time working and commuting. So we actually have less leisure time.

We end up in the rat race.

We work more to make more money. Then we spend more money so we have to work more to make yet more money. Then we spend more so we have to work more and on and on.

There are two lessons here for us:

• Be careful how you define bigg success. If it means more money, understand that there is a price. You’ll almost certainly have to invest more time.

• Our definition for bigg success is life on your own terms. For you, that may mean more money. But it may not. We focus so much in our society on money. It’s important to remember that money is the means to an end, not the end itself.

The funny thing is that you often end up with more money when it’s not the center of your focus. Here are four ways to make your money multiply magically:

Focus on your whole life.

Find work that you love. Take up a hobby if you don’t have one already. Build strong relationships personally and professionally. You’ll find that it often doesn’t take much money to spend your time doing the things you love with the people you love.

So your money will multiply magically!

Spend less than you make.

Sounds pretty simple, doesn’t it? But we all know that it isn’t. It isn’t simple but it is necessary.

Don’t fall into the trap of thinking life would suddenly be much better if you just made more money. Make the best of the money you make now and your money will magically multiply.

Avoid consumer debt.

If you have it now, pay it off aggressively. Get used to paying for purchases with cash. This is a timeless principle that applies to all economies and all people. We’ve recently relearned this lesson.

Here’s a question to ask anytime you’re tempted to buys something with borrowed money:

“If I can’t afford it today, what makes me think I can afford it, with interest, tomorrow?”

Many people assume they will make more money in the future. They don’t factor in that their costs will likely be higher in the future. That’s how they end up in the rat race and debt just compounds it.

Note that we didn’t say avoid all debt. It may make sense to borrow money for a legitimate investment. You have to prove out the opportunity, but a lot of people have made their money multiply magically by using leverage.

Invest wisely.

As we learned last year, stocks don’t go up forever. As we’re seeing this year, they don’t go down forever either. So invest in a diversified portfolio of assets. One of the best ways to do this is through no-load mutual funds as part of a qualified retirement plan.

Don’t let your money control you. Control your money and watch it multiply magically! That’s bigg success!

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Thank you so much for checking in with us today. Please join us next time when we’ll look at the first win entrepreneurs must achieve. Until then, here’s to your bigg success!

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