Monday Mantra - "Time is Money"

Time is Money

There is an actual way to figure how much time is worth in actual money. The formula is: V=(W((100-t)/100))/C, where V is the value of an hour, W is a person's hourly wage, t is the tax rate and C is the local cost of living. Time also equals money at work, in business, and in investing. If paid by the hour at work you will make more money the more time spent working. Spend more time in growing your business and you will gain more money from your business. Obviously the more time you spend saving, meaning the earlier you start, the more money you will end up saving and the more times your money will compound.

Opportunity cost

Time is not always accounted for with actual money, but, can be valued by what is gained by using time for things that are more important to us. For instance you might gain valuable time with friends or family that one can’t put a cost on by foregoing spending that time making extra money at work or in your investments. One also has to carefully evaluate time consuming tasks that can be delegated or contracted out which can add valuable time to one’s life. It is impossible to put a monetary value on time spent doing what makes us happy.

What does this mean to us?

This saying is never more relevant than during the holidays. I find myself wishing I had more time to shop for gifts, spend with family, finish work, and get things done around the house. We all need to evaluate the value of our time and how we spend it. Are there changes that can or even should be made for us to make the most use of our time? Are we spending too much of our time at work, at play, or doing nothing at all? As with everything in life we all need to find a balance as too much time spent doing any one thing can be detrimental to ourselves and the people around us.

Monday Mantra - Big Rocks

“Big Rocks”

During a guest lecture to a class of high-achieving M.B.A. students, a time management expert announced it was “time for a quiz.” He set a one-gallon, wide mouthed Mason jar on the table and began to fill it carefully with about a dozen fist-sized rocks, one by one,. When the rocks reached the top, he asked, “Is this jar full?”

Everyone answered, “Yes.”

“Really?” asked the expert. He reached under the table and pulled out a bucket of gravel. He dumped some in and shook the jar, causing the gravel to work itself down between the big rocks. One more time, he asked, “Is this jar full?”

By now the class was on to him. “Probably not,” said one student.

“Good,” said the lecturer. Next came a bucket of sand and sure enough, it filled all the spaces left between rocks and gravel. Once more he asked the question.

This time the entire class yelled, “No” “Right,” agreed the lecturer, grabbing a pitcher of water and filling the jar to the brim.

Then he looked up at the class and asked, “What’s the point of this illustration?”

One eager beaver raised her hand and said, “The point is – no matter how full your schedule, if you try really hard, you can always fit some more things into it.”

“No,” replied the speaker. “That’s not the point. The truth this illustration teaches is:

If you don’t put the big rocks in first, you’ll never get them in at all.”

What does this mean to us?

What are your big rocks?
A project you want to accomplish? Time with loved ones? Your faith, your education, your finances? Teaching or mentoring others? At work, what are the big rocks that will make the most impact on your company’s success? And which items on your “to do” list are gravel…or sand…things to do if time permits or, better yet, to be delegated to someone else?

A warning – gravel and sand are often easier to accomplish than big rocks. They can distract us from our big rocks and allow us to pull ourselves away from tough decisions and major projects. My advice? There’s enough time to do everything, so take care of your big rocks first!

Monday Mantra - Compounding, man's greatest invention

“Compounding, Man’s greatest invention”

Compounding

Many years ago Albert Einstein was asked what he thought mankind’s greatest invention was, he simply replied “compounding interest” This is one of the most brilliant human beings ever telling all of us how important this formula of compounding is for growing wealth. Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding.

Rule of 72

The “rule of 72” is a very easy way to figure out compounding of wealth based on a percentage return. Divide 72 by the interest rate you are earning to determine how many years it will take your money to double. For example, if you are earning 8% per year on your money it will take 9 years for your money to double in value. 72 divided by 8 equals 9. Eight percent is a decent average annual return and the number I set as a goal to beat every year. This should be easy for everyone to achieve as the average return from the stock market is said to be 10% if you invest in an index fund that tracks the market. For fun check what percentage you are earning on your money and calculate how many years it will take for it to double in value.

What does this mean to us?

The importance of compounding to us as individual investors is that we must set aside investment money for the long term and not withdraw the money earned from investing. It is necessary to compound the earnings on top of more earnings in order to maximize “mankind’s greatest invention” How much should you put away for investing? The general rule should be at least 10% of all earnings, after taxes, go into some sort of investment account. I would recommend an IRA either Roth or traditional if you qualify as the compounded earnings are tax deferred.

Cash

Cash

Right now is a tough time to be invested in cash. By cash I mean CD’s, money market accounts, government bonds, and actual cash whether it be under the mattress or in the bank. Interest rates are going down causing less return on cash investments and inflation is going up making that cash worth even less. The weakness in the dollar is also contributing to the need to find a better investment for the cash portion of our portfolios. In finding these alternatives you have to be weary as to the amount of risk you are willing to tolerate to avoid the eroding of your cash. I have CD’s that are ending soon and the renewal rates are much lower than what I was getting previously. If you are in a similar situation or just want to look at putting your cash in higher return investments read on.

Alternatives

Unfortunately there aren’t very many alternatives to consider that are safe enough for the cash portion of our portfolio. One option I am currently looking at is preferred stock. Preferred stock is like a hybrid stock/bond investment offered by many corporations. Many corporations are having the same problem home buyers are having right now, getting a loan. Offering preferred stock is a way to raise cash for many corporations. Preferred stocks pay a much higher dividend than normal stocks and have a higher priority when it comes to payment of those dividends. Another alternative is placing cash in the hands of a capitol management company in the form of a high dividend paying reit. One that looks attractive and that I have owned in the past is symbol NLY; with a yield over 6% per year it’s a lot better than any current short term CD offering. Also consider what I have mentioned in an earlier blog, P2P lending at prosper.

Consider

Consider what the investor group from Abu Dhabi has done investing 7.5 billion dollars in what is essentially a “super” preferred stock stake in Citigroup. Could this be a sign of what we could follow? Could this be a sign that the financials might be near a bottom? I personally am looking at the preferred shares of Citigroup which pays a nice dividend and I am already invested in Citigroup common stock which also has a good yield. There are many other preferred stock offerings out there currently with great yields, but, I would still be weary of investing in any preferred stocks that are exclusively in the housing sector. As always please feel free to email me AJSinvest@gmail.com with any questions.



Real World Money Management’s editorial goal is to provide a forum for personal finance and investment ideas. My blogs and other features should not be construed as investment advice. An investor's best course of action must be based on individual circumstances.