Friday, June 29, 2007

Paying less for what you usually buy

This post falls into the category "How to spend your money correctly", as said here.

Money is like mass, energy and many other conservative entities, which means that you can write a money conservation equation:

(money you save) = (money you earn) - (money you spend)

This equation tells us, basically two things:
1) money does not disappear.
2) to save more money you can either earn more money, or spend less money. Each $1 you earn more, or that you spend less, has the exact same impact on your savings.

That said, lets work on spending less money. The easiest way to spend less money is not to spend money, a.k.a do not go out, do not buy things, do not pay for anything, but that is not possible. There are ways with which you can spend less money buying the same things.

First, research prices before buying. Look for 2-3 suppliers of what you are buying and check the best price. It does not matter if it is a mobile phone service, a car or a can of soda, each $1 counts. An example of a very good price finder is Google Product Search. Or Price Watch for computer-related products.

When buying, choose the best payment option. This one is more complex. The best payment option is the one that has the lowest net present value.

The net present value is a number that means how much all the money you will pay is worth now. $1 today is not worth $1 in month from now, because if you had $1 today you could invest it and make it be worth $1.01 or even more. So lets look at this through an example:

Payment option 1: You can pay in cash $100 today.
Payment option 2: You can pay by credit card $100 and your credit card bill needs to be paid in 30 days.

At first a look both seem the same. But if you look closer option 1 is more expensive than option 2, because in option 2 you could just take your $100 cash and invest for a month, pay your credit card bill and then have a residual profit. In other words, option 2 has smaller net present value.

Does it really make such a difference? If what you are buying is valued at $100, we may be talking about $1 or less. Try repeating that calculation when you are buying a house or something with considerable value.

For more complex payment structures, where you have an upfront payment and then monthly payments you will need a financial calculator (HP 12C), MS Excel or similar. Wikipedia has a great article explaining, in depth, how to calculate it.

Thursday, June 28, 2007

$1,000,000.00 - My teenager dream

This blog is inspired in one of my teenager dream: to make a million dollars before 30 years old. It may surprise you such an ambitious dream for a young person, however it is maybe in that stage of life that we have our most ambitious dreams.

Is that possible? Yes. Here are a few simulations of how it could be achieved starting at 15 years old:

Saving $3,300 per month, investing it at 7% yearly interest; or
Saving $2,000 per month, investing it at 13% yearly interest; or
Saving $1,700 per month, investing it at 15% yearly interest; or
Saving $1,100 per month, investing it at 20% yearly interest;


I could spend the whole day making simulations to prove my point. It is easy to notice that the higher is the yearly interest (or yield), the less you need to save. Two basic questions may pop in your head when you read this: How to save that much money? and How to get so much interest?

I will not give you an easy answer to neither of the questions, because there is none. In general, to save money you need to make money and to spend less than you make. To do so, we will have to discuss how to make money and then how to spend it correctly. To get so much interest you will need to know a couple of complex different investment alternatives, which include, but are not limited to, bonds, index, futures, stocks, real estate and, naturally, starting your own business.

I hope to be able to share a bit of what I know about each of those.

"Hello World!"

Back in the day I was trying to learn programming, each and every book I read about any programming language started by teaching me how to make a simple script / executable / page that would print "Hello world!". Since this is the very first post of this blog, I thought I would start by saying hello and explaining a few things.

In this and every post I will try to share with you some things I know about money, especially how to make money, using online and offline opportunities, how not to lose money and how to increase your overall financial intelligence.

You have probably heard the term financial intelligence. If you haven't, you should read Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not!.

Financial Intelligence is what makes you take always the best choice on your day to day financial decisions. It does not matter if you are buying a book, a car or going into Real Estate investing, you should always select the payment method which is most profitable for you, based on net present value, which shall be discussed in a separate post. By doing that you will be paying less for the things you buy regularly, and thus creating greater savings to add up for your first million.

I hope you enjoy your stay here while we dig our way into our first million dollars.