Start the Journey To Grow your Pennies

by Magical Penny on February 10, 2010

I’m really excited to begin teaching you about investing: the best ways to invest; how to avoid the pitfalls and costly mistakes; and how to enjoy the process and sense of empowerment that investing can bring. However, many people jump into investing before they are ready. This article is part of a foundational series at Magical Penny to ensure that you are ready before you start seriously growing your pennies.

For many of us, saving money, really saving money, just isn’t practical right now. We’re at the start of a career, perhaps just getting to grips with a monthly salary. We all have expenses to pay and a limited income. For many of us, it’s not a question of having enough money left at the end of the month but how to survive when there’s still some month left at the end of the money. When this happens we may have a bank overdraft to cover us until the end of the month, or a credit card to tide us over.

But overdraft costs can soon add up and credit card interest can quickly get out of control, your balance increasing with interest and fees, resulting in even higher fees next month: the dark side of the power of compounding.

Take Control

You may be tempted to wait until you get a pay-rise or a better job before you start saving. However, look into your future. You may be earning more but I’m positive that you’ll have more expenses too: perhaps a mortgage; children; a nicer car? There’s never a better time to get to grips with our pennies than now. Getting into the mindset is half the battle, but the next stage is just as important: developing a written plan: a plan to take control of your pennies.

What’s in a name? that which we call a rose

By any other name would be as sweet?

Shakespeare’s Romeo and Juliet, 1594

It might not have a sexy name….but it’s a powerful penny-building tool:

A budget

It might seem obvious to you or it might seem completely unnecessary,  but a budget is so effective it’s almost magical!

However, even after I discovered the power of compounding I was slow to come around to actually writing a budget. Here’s a passage written just over a year ago when I began penning some thoughts on personal finance; the first spark of inspiration that, a year later, would become Magical Penny.

Sunday 21st December 2008

I have a confession. I’ve never written a budget.

After graduation when I started earning meaningful amounts my general philosophy was “Save everything you can”. And I did, thanks to my parents who let me live at home with most of my expenses covered until I found my feet post-university. My ‘save everything’ policy came about as I wanted to honour their generosity and set my money to work for my future self.

Whilst reaching saving milestones felt great to achieve, my “save everything I can” strategy was not perfect:  Firstly I could not expect my parents to foot the bill forever. [Note: I had already moved out when I wrote this] Whilst I appreciated the savings opportunity that living at home gave me it was by no means easy adjusting to ‘home life’ after 3 years of university freedom. Secondly, watching my savings account balances grow felt great but was I really saving ‘everything’? Some months I would save a lot more than others. I was generally frugal but I couldn’t help but wonder if I could optimise my spending and saving further if I had some kind of plan.

I wrote this shortly before I had written my first ever serious budget. I gave it a go and a year later I can safely say that having a written budget each month has a powerful effect on your spending and saving habits. And it doesn’t have to mean you have to spend a lot less: in fact you can spend extravagantly on the things that you have decided in advance mean a lot to you, and if you can fit it in the budget, then the spending is guilt-free!

It may sound simple enough but here are 5 things to keep in mind as you set up your first budget (or to help you refine the one you already have in place):

Budget with last month’s income for the month ahead

Don’t rely on any additional pennies you think may come your way in the month ahead. Put last month’s income at the top of a page or spreadsheet and then write down all the things that you will need to spend money on in the month ahead.

When you first do this you may find that you already have financial commitments that are bigger than last month’s income. Don’t worry about this for now: the purpose of a first budget is simply to make you pay attention to what you are spending. Just get everything down.

Don’t push yourself with goals straight away

When I first started budgeting I set ambitious savings goals for myself:

“I’ll only spend ½ of my income and save the rest!”

Don’t do this in your first month of a written budget. You are bound to have forgotten something when you first wrote down all of your expected spending and setting ambitious goals will just make you disheartened when you miss the targets you set.

Don’t aim for perfection in a budget

Every month there will be things that will come up that take you off track. It took me about 3 or 4 months before I got anywhere near close to my written budget, and I was already being quite careful with my spending. But as time goes on and you make edits to your budget, you will get closer to the plan and will be able to start making measurable progress.

Start again each month

if you go way over-budget, don’t try to ‘catch up’ the next month. It will just make it harder. The great thing about a budget is that you get to start again each month, aiming to be ‘just a little bit better’.

Include a budget category for irregular spending

There will be things that you need to pay for but not every month. For example, if you need to pay your car insurance once a year, you could ‘budget’ 12 monthly payments to yourself then send in the lump sum when the payment is due. When you get really comfortable with saving you could even start saving a little for Christmas or holidays each month. However if you’re starting out with a budget then don’t worry so much about this: just try to get to the end of the month without adding anything to a credit card or going further into your overdraft.

In Summary

Do you really want to grow your pennies? Consistency can be magic: By doing a written budget each and every month you will eventually be able to work towards more ambitious savings goals, and to ‘pay yourself first’ –saving money or paying off debt as the first thing you do each month rather than simply saving anything that is left:  do this and you can ensure that you never again find yourself with some month left at the end of your money.

Have a dream. Have a plan.


There’s so many recent articles to help put your first budget together:

How to Build a Zero based budget @Bargaineering

5 factors that will determine what your budget will look like @balancejunkie

The one thing to do @Doughroller

Pay Yourself First @Sweatingthebigstuff

Let me know how you are getting on! What’s the hardest thing about budgeting? Do you have any tips that help you and may help others? Leave a comment and join in with the discussion.

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First Carnival

by Magical Penny on February 10, 2010

It’s Carnival time here at Magical Penny and I am thrilled that two of the foundational articles at Magical Penny passed through the nomination process to appear in not one but two carnivals!

For those of you who have not come across a blog carnival before, it is a weekly collection of recent articles on a particular subject (in this case, fiannces). The carnival moves from blog to blog, and gives readers a chance to see the best of each week’s writing.

The Carnival Of Personal Finance

This week the Personal Finance carnival was hosted by JD Roth of Get Rich Slowly fame, one of the largest personal finance blogs on the Internet. I am thrilled that my article ‘Why it’s okay to lose money in a savings account’ was selected from 72 submissions to be included in the carnival. Here’s what JD had to say:

Adam at Magical Penny has a thought-provoking look at why it’s okay to lose money in a savings account. He argues that even while inflation is chipping away at the value of your cash, there are great reasons to build your savings. I think his advice is right on.

The Best of Money Carnival

The second blog carnival that Magical Penny was featured in was the Best of Money Carnival hosted this week by Rick Francis, editor and writer of Pondering Money, a blog that aims to think “in different ways about money“. This carnival only features the top ten money posts each week so I’m thrilled that my Thermals of Wealth article was selected from over 50 article submissions:

Adam presents Thermals of Wealth posted at Magical Penny.   Adam focuses on the first step to financial success: saving. I liked Adam’s writing style and I hope you will too.

A big thank you to both Carnival editors for featuring these Magical Penny articles.

There are some brilliant posts in both carnivals covering every side of personal finance: from the basics, if you are starting out on the journey to growing your pennies, to more complex investing strategies. I highly recommend that you click through to the carnivals and see what might be of interest and inspire you to think about your pennies in a different way.

The Carnival Of Personal Finance

The Best of Money Carnival

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Get A Job that Pays Dividends

by Magical Penny on February 8, 2010

Make you future self look goodThis is part of Adam’s foundational series making sure you have prepared the groundwork of your financial life before seriously growing your pennies.

How you would like an extra job? It could be well paid, have flexible hours and you could start today! Sounds good?

I warn you: your employer will be quite a bit older than you and they won’t be able to give you any positive feedback. Worst of all, no matter how hard you work, you may not get paid straight away, and you won’t even know your true wage. But I can assure that that it will worth your time.

Who will you be working for? You may have guessed: Your future self.

During this foundational series of articles here at Magical Penny, I’ve been hoping to shift your perspective forward a few years. This is essential if you are going to grow your pennies. Working for your future self might not seem fun all the time but it pay dividends… literally.

Having a vision in your mind about what the future will look like is important as you begin down the road to saving and investing.  It helps you to reconsider when you are tempted to steal from your future self: Sooner or later you will want to prioritise today over tomorrow.

Here are 6 ways to earn ‘employee of the month’, impress your future self (your boss) and improving theirs and your bottom line:

Learn about your boss

Where do they live ? What are they doing? You will need a clear view of this future life if you are going to be successful at saving consistently. If you don’t, you’ll just as easily take those pennies and spend them. For example, I’d like to buy a car soon (if I pass my test this month!). However, the pennies that I have saved so far have already been ‘ear-marked’ for other plans: Plans that my future self is determined to make happen. I’m going to keep listening to him and leave those pennies alone: what those pennies represent is much more significant than their monetary value. My current self is therefore saving up for a car in a separate savings account. Separating your savings into different ‘piles’ can be a really useful way of psychologically controlling what your pennies are eventually spent on.

Listen carefully

Everyone’s boss will have different goals, different dreams. Listen to them and write them down.  If you begin saving for goals that don’t mean much to your boss, you will not get promoted to a life where your goals will have come true. Listen to your future self when you begin working out a savings plan. Perhaps you want to save for a house? Or a new car or a wedding? Some of us might need to save for all three at the same time!  but listen to what your future self might say as it help put your current priorities into perspective.

Remember, there isn’t one right way to handle your money so use what is written here and elsewhere to give you a framework but then customise it for you. The main objective of Magical Penny is to get the ball rolling and make you think about your pennies. What can they do for you if you give them a chance to grow? It’s something you may not have thought about before to the same level of detail but it can have a huge impact on your future life. Listen carefully to your future self and save with intent.

Set some goals

Setting goals helps you pay attention. And not paying attention is the easiest way to find yourself in trouble. Your future self is relying on you to reach their goals but they are not going to be achieved without your focus and hard-work. It’s therefore no surprise that goal setting is an important part of most careers. Measuring progress is also a great motivator, particularly as your future self finds it hard to thank you for your effort in real time (until space-time is transcended of course). Start by setting some cash-based goals, perhaps for a holiday or buying your next car instead of taking out a car-loan.

Don’t waste time or pennies on the job

Your boss is not going to appreciate expensive habits if they stop you from letting your pennies grow and work for them. It’s OK to indulge now and then but when you find yourself doing something day in, day out, and it is costing you your pennies and distracting you from your goals, ask yourself if it is worth it. You’re certainly unlikely to be impressing your future self. You do want to be employee of the month don’t you?

Help your boss look good

Reading and learning about new things that you’re passionate about is one of the best things that you can do for your future self. However, it is important to remember that it is action that makes your future self look good. For example when I was starting this journey I wanted to know everything I could before I started investing, but it was only once I had made that first step that the real progress was made (Magical Penny will help guide you through this process when you’re comfortable to make your first step).

Have fun and don’t forget about now

Working for your future self never actually stops. With any luck your boss will be an incredibly old and wise person who has had an amazing life. But don’t deprive yourself of everything for the sake of your future self –you do not want your boss becoming bitter!

For me at least, spending on travel is a win-win: My ‘current self’ gets to enjoy the sites and experiences while my ‘future self’ gets memories and a new perspective on the world. On the other hand, I doubt my ‘future self’ would be so impressed if I bought my current self a new shiny laptop – and it would seem primitive compared to the million times faster computer that my future self will have in 2050.

As with everything, balance is important but to sum up, the work you can do for your ‘future self’ will most likely have a greater impact on your life than work that you do to satisfy your ‘current self’.

Are you up for the job? If you are, then go out and impress your boss!

If you liked this post you might like:

  • J Money coming to same conclusion about travel. @Budgets are Sexy

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Why It’s Great to Lose Money in a Savings Account

by Magical Penny on February 5, 2010

Seeing a smaller figure than you expected in your current account is never fun: a night out here; an extra bit of shopping there; and your account can soon start looking a little bare. Because it is so easy to spend your pennies with a swipe of a debit card, one of the first steps to establishing a savings habit is moving some of your pennies out from your everyday account into a dedicated savings account each time you get paid.

However, once in the savings account, your pennies are still not safe from the spectre of inflation: the gradual decrease over time of a currency’s purchasing power. With the current high levels of inflation in many countries around the world, your pennies are worth less every day, and low interest rates are preventing us from earning much in a savings account. At times like these, most of us are actually losing money in terms of what our pennies can buy when we come to spend them.

I actually have a friend who semi-joked (or at least I hope he was joking!):

“Adam, why bother saving if I’m actually losing money when I do? I may as well spend it and enjoy it”

Losing money is never fun but here are 6 reasons why you should keep saving. Yes, even if that means that are you slowly losing money in the short to medium term.

Emergencies

Nobody knows when an emergency might come: most us of know someone who has lost their job recently or had a pay cut. Perhaps your boiler will break unexpectedly, or your car might need major servicing. In any case, it’s great having enough pennies stashed away to make it through an unexpected event – it turns any ‘emergency’ into a temporary (but still annoying) inconvenience rather than a disaster.

Opportunities

Having money in a savings account, even if it is slowly losing ‘real’ value, can give you a sense of empowerment: not only does it give you reassurance that you could cope with an ‘emergency’ but you can have confidence to say yes to other opportunities that may come your way.

For example, what if your friends invite you to join them on a holiday or go travelling? Go ahead. You won’t regret it and it will feel great saying “yes” knowing that it won’t affect your everyday finances. Even modest savings allowed a friend of mine to quit a boring job to dedicate a few months to a search for something more fulfilling. Often the best opportunities require solid finances, and you are not going to be able to take advantage of them if you have been spending your money as you earn it (either through a desire to consume or for fear that inflation will take its value away from you). There’s more to the ‘value’ of money than just the figure in your account.

Confidence (to invest)

A favourite reason of mine to save money:  Having savings in cash for ‘Emergencies’ (#1), and ‘Opportunities’ (#2), even if the account is not earning any interest (and even if it is in fact losing value due to inflation), is a real confidence booster. You can begin to feel financially secure enough to invest extra pennies  in other asset classes (different types of places to put your pennies), like the stock market.

More ‘risky’ investments may go up and down in the short term but because of your savings for #1 and #2, it doesn’t matter day to day. Investing is a long term thing and over time the value tends to go up considerably: the real protection against inflation (more on this subject @Magical Penny in the coming weeks).

Better mortgage rates

Many of my friends are saving for a house. You may be too. One of the most important things is knowing if you are financially ready to buy a house. One great indicator is the size of your down-payment.

Don’t rush to take advantage of low interest rates (which are generally seen as ‘bad’ for savings but good when you are borrowing money)  if your down-payment is too small or you think that you are ‘wasting money’ by renting.  Being patient and saving up an even bigger down payment  than suggested by a mortgage advisor for property in your price range  will save you thousands over the mortgage period (and helps avoid getting trapped in a house in the event of  negative equity).

Ride the interest rate rise

Even if your pennies are earning nothing now, when interest rates do rise again in the future, your regular contributions will benefit  from the rising tide. The more pennies in the account, the bigger the increase.

It would depreciate more when you spend it!

“Adam, why bother? […] I may as well spend it and enjoy it”

The biggest flaw in the argument about spending now: the stuff that most people buy loses value quicker than inflation. Is it really worth it? Is the item or experience going to give you lasting, (or medium-term!)  joy? If you can truly answer yes, then go for it: Magical Penny is not about depriving yourself or hoarding your pennies. It’s about telling them where to go and making them work their own special kind of magic for your benefit.

Ultimately saving is a good idea so don’t let the recently published inflation figure in the UK, or around the world, change that. Hopefully next time you look at your bank statement you won’t see falling or stagnant numbers and the spectre of inflation hovering over-head: instead you’ll see numbers that represent security, opportunity and confidence. Act on these points by beginning to save something every month and you can ignore the doom and gloom news reports and walk around with a smile on your face, knowing you’ve got things covered.

Liked the post? You might like:

Why do 20 somethings hate learning about personal finance? @Studenomics

From my perspective I think it’s because we haven’t really thought about how skipping out on some things in your life now can get you a paid-for Ferrari just in time for your mid-life crisis!

If you’ve not already, sign up for my free newsletter for extra info not yet available on the blog.

This post was featured the Personal Finance Carnival #243 hosted by JD Roth’s Get Rich Slowly, one of the biggest blogs in the PF blogosphere.

“Adam at Magical Penny has a thought-provoking look at why it’s okay to lose money in a savings account. He argues that even while inflation is chipping away at the value of your cash, there are great reasons to build your savings. I think his advice is right on.”

http://carnivalofpersonalfinance.com/

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Thermals of Wealth

by Magical Penny on February 3, 2010

Starting anything can be hard. When it comes to growing your pennies, that first little pile can be a difficult step. And they say that the first million is always harder than the second!

Come dance with the west wind

One analogy I find useful is about learning to fly. Imagine that you are on the ground, and high above you, in a clear blue sky, is a eagle. You have wings yourself (a fun analogy I know!), but every time that you flap them, you barely lift off the ground. You keep trying to get higher but you always tire and fall back to the ground. It seems impossible to stay up in the air, let alone reaching the dizzying heights of the eagle above.

Then, looking around, it appears that some of your other winged friends have all the luck: an updraft comes along and blows them into the sky. They flap their wings and they are away, chasing the thermals and gradually going higher and higher, joining the eagle, who effortlessly, appears higher still.

Strengthened with a new resolve, you begin to flap again, and with a bit of luck and a lot of determination, you make progress and perhaps catch a small updraft yourself and begin the ascent into the sky. As you move higher it seems to be become easier and easier. There’s still work to be done but you’re on your way.

Sail o’er the canyons, and up to the stars

Looking down to the ground you think back to how lucky it was to catch that updraft. But you then remember: it was because you were focused:  that you were ready and could fly up into the sky, rather than being blown over into the dirt. The lesson: keep flapping those wings, be intentional, and have a written plan to help keep that focus.

This analogy works for a number of things that require consistent effort and mindfulness: writing; setting up a business; and yes, you guessed it: growing pennies!

And reach for the heavens, and hope for the future

When people first have a financial epiphany they realise that they are being blown around by life events and not getting anywhere. They make a resolution to ‘save’ money. They may be able to ‘deprive’ themselves for a few days, weeks or even months, but they soon get tired: holidays come around or they need a new car, or something else comes up that’s more important. They are soon back to having nothing, waiting for another pay-day.

This post is about the importance of sticking with your resolve: keep flapping those wings and you might just make it into the sky.

You will need to be ready to take advantages of occasional updrafts too: small inheritances, promotions, investment returns (keep reading and they will be coming!) and lucky breaks that may come your way. If you’re already flapping your wings, and focused on the task at hand, they can become blessings to take you to the next level rather than gusts of wind that pass you by, without having any long-term impact. In worse cases ‘lucky breaks’ can even harm you: one only has to look at those who have reached dizzying heights without effort: lottery winners for example:  There are multiple accounts of lucky winners who have not learnt how to fly financially and come crashing down to bankruptcy after being catapulted into the sky.

And all that we can be, not what we are

Having the resolve to save something, anything, every month is all it takes before you are ready to learn to ride the thermals of financial success: This blog is here, after all, to show you the best ways to invest in yourself and in the market to make your ascent easier still.

Are you ready, really ready, to save for the long term? If you are, then it’s going to be fun flight.

This is a foundational post for Magical Penny exploring the psychology of money management.

Subscribe for free to automatically receive future articles as the blog transitions into other topics:  debt, investments and lifestyle choices.

If you liked this post you’ll love:

  • Saving with purpose: a tactical guide to saving for specific short term goals @Frugal Dad
  • The power of compound interest: responsible for financial ephiphanies the world over. @Magical Penny
  • The Eagle and the Hawk by John Denver (source of the headings in this post) @Great Aviation quotes

This post was featured the Best of Money Carnival #37 hosted by Pondering Money, a great read in the PF blogosphere.

“Adam presents Thermals of Wealth posted at Magical Penny.   Adam focuses on the first step to financial success: saving. I liked Adam’s writing style and I hope you will too.”

http://www.bestofmoneycarnival.com/

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5 Reasons to Blog -Magical Penny Launch

by Magical Penny on February 1, 2010

When I first started reading about investing it all seemed rather complicated. 3 years later I’m a little clearer! So I decided to blog about it (See my About page).

But there’s more to it than that.

During ‘Pre-launch’ I showed a few friends and colleagues this site and told a few about my plans for it. The comments I got back both surprised me and strengthened my resolve.

“I see you’re into the stock market…our own Gordon Gekko”

When most people think about the stock market they think of shouting brokers and fat-cat bankers, then promptly get on with their real life. Magical Penny will show not only how you should invest but why you really should be in the market, harnessing the value created by people working for businesses across the world.

“What’s the best loan rate I can get for 2k?”

This guy saw that the subject of the blog was ‘money’ so immediately thought I would know about the best way he could finance a car. Too often it is only immediate ‘needs’ that motivate people to think about their finances, rather than looking at the big picture of their financial health. Magical Penny will prompt you to look into your own life to make meaningful changes in the way you think, and therefore act, with your pennies.

“What do you get out of it?”

This comment surprised me the most, perhaps because I think the benefits of blogging are so obvious, at least for me. Here are 5 reasons:

Helping people

Knowing that you are working on something with implications beyond yourself is a very powerful feeling. The internet has democratised communication, allowing ‘ordinary’ people to broadcast like never before, cultivate a following of thousands, and impact lives. Do you not want to add your voice to the global communication revolution?

Personal development

Helping others is all well and good but blogging helps the writer just as much! Although this blog is new, it is not my first blog so I know that writing for a readership changes your perception of the world. You begin ‘framing’ your experiences in the context of how you would report it later, and you begin thinking more clearly and in a more structured way. Writing about ideas and experiences codifies your thoughts and encourages you to keep learning and growing.

A fun and creative outlet

There is so much to learn about blogging and you can be creative in how you connect with a readership. It’s also a rich medium to write in, as hyperlinks allow you to connect your thoughts to other subjects and voices.

A sense of community

These other voices are often other bloggers who have similar interests but different perspectives. The social aspect of blogging is one of the most compelling reasons to join the fun, either through your own blog or in the comments.

Legacy

Do you ever wonder what your grandchildren will see when they use the Google micro-chip in their brains to find out about you? I do. This blog is part of the plan. What about you?

Finally with all of these reasons for blogging it was easier to dismiss the below comment from an early viewer of the site:

“Adam, you’ll never get a girlfriend with a site like that”

Perhaps another goal for the blog?

I invite you to join me on this journey and leave a comment telling me what you hope to get out of the site. And don’t worry, I’ll be sure to update this page if any progress is made on that last goal!

I am proud to be launching Magical Penny. Expect regular updates on Mondays, Wednesdays and Fridays.

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