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April 28, 2011, 6:00 am

How You Can Prevent Money From Ruining a Friendship

by: MD    Category: Financial Cliché

Money and FriendsFriendship and money. Always a fun topic. As you work on growing your career, starting a side business, and trying to get out of debt, you’ll start to feel overwhelmed at times. We all know that there’s nothing like going out with friends to shoot the breeze and have a few drinks. What would happen if you lost your friends over money? What would you do if money ruined a friendship? These are all thoughts that we don’t want to think about. The reality is that we will friends over money issues.

I wanted to talk about how you can prevent money ruining a friendship and to look at ways to overcome awkward financial situations:

Loaning money.

I personally am totally against the idea of loaning money to friends. A financial loan between two long time friends or family members is always going to be awkward. You’re either going to have to be on the side where you swallow your pride and have to ask a friend for money or you’re going to be on the side where a friend comes to you to ask for money. Both sides suck.

My advice on this issue is simple and I feel that one question needs to be answered by both parties: how will this money be paid back? If a friend can’t pay you back the money for whatever reason this will cause obvious hardship on your friendship. This is why you need to come to an understanding right away before the money is handed over. There needs to be a plan for paying the money back and a deadline in place. If not, then you might not see your money for a long time, which would definitely kill the friendship. I also recommend that you loan an amount of money that you’re comfortable with never seeing again. There’s always the slight possibility that your friend won’t be able to pay you back. You don’t want this amount to be high enough to ruin your own financial situation.

Splitting the bill.

Loaning money will get odd and so will splitting the bill when you go to a restaurant that’s way out of budget for one of the people involved. It’s easy to get envious here. If you make $30,000 a year and your friend that you’re at dinner with just pulled in a new salary earning him $100k per year, the natural instinct will be to want them to cover the bill or to pay a larger chunk. They make more money than you, so they should pay more of the bill. This isn’t how it works though.

From my own experience I found that the best way to deal with splitting the bill is by deciding on the location in advance. Everyone should agree on the location in advance, instead of being surprised about getting dragged into an expensive place. If you’re budget is tight you really don’t want to get stuck in a restaurant where the main course is over $50. If you’re the friend that has a deep financial buffer, you don’t want to put your friends in a position where they’re spending way too much money on food. By deciding on an affordable location in advance you guys can all enjoy your evening with worrying about how much the dinner will put you behind on your budget.

At the end of the day there’s a solution to every awkward situation that will arise between you and your friends as it relates to finances. This is just apart of life. With that being said, it’s time for some general tips to help you not resent your friends for making more money and how you can benefit from hanging out with friends that make more money than you:

Don’t hate someone for working hard.

We have a friend that makes lots more money than us. The major caveat is that he works insane hours. I’m talking 18 hour days with no social life at all. I’ve heard others make remarks about him and how he’s so rich. It’s simply unfair to resent someone that’s willing to put in the long hours to earn more money. We all have different values in life. Some of us value money more, while others place a greater emphasis on the relationships in life. Either way, it’s not worth resenting anyone for holding different values than us.

Use this as motivation.

You have tangible proof that it’s possible to earn lots of money in life. Don’t fall behind in life by chasing false hopes and trying to get rich quick. Very rarely does anyone get rich quick or while slacking off all of the time. Being around like-minded people should motivate you to strive for more.

You should never let money get in the way of a solid friendship. Hopefully after reading this article you’ll be able to better deal with financial situations with your friends.

(photo credit: petroleumjelliffe)

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September 7, 2010, 5:00 am

Media Conspiracy Theory

by: The Financial Blogger    Category: Financial Cliché,Personal Finance

I was driving my car to work this morning (an hour ride each direction, there’s time to think a lot!) and I was thinking about the recent economic events and how they were reported in the media. I got this idea because as a banker, you are constantly confronted against what has been reported in the news and how your clients perceive that news.

When you look at how the media reports economic news, there are 2 big issues:

#1 Most individuals have a very limited background in finance/economics but since we all deal with money, think that they know what they are talking about. Therefore, they will take any economic news to the first degree and won’t do further research to understand fully why there is a recession or why there is a bull market.

#2 The Media industry (especially newspapers) is in the midst of a business model crisis. Therefore, the new “good” journalist is the one who reports the “biggest news”. So let me ask you a question:

What is more interesting between the following news items:

#1 The housing market in Canada will generally slow down based on our economic review and some inflated markets such as Vancouver, Calgary or Toronto might be facing a more important correction in housing prices.

#2 There will be a housing bubble burst in Canada! Interest rates will rise to 7%, people will lose their jobs and then their homes. Florida is nothing compared to what is coming our way!

I’d say that most editors will take option 2 as their headline ;-). I have my opinion on the topic (housing bubble in Canada?) but let’s take a look at some major economic news from past years:

2007: Oil price will rise to $200/barrel; We don’t have much oil left.

Back in 2007, we were surfing on a huge oil price rise and more and more “specialists” with tons of diplomas were writing theses on how little oil was left on earth. Gasoline was ridiculously high, people were investing in oil income trusts like they were GICs offering 10% interest and Alberta was so prolific that they cut their taxes and their inflation went through the roof.

Result in 2010:

– The barrel of light sweet crude is struggling to get to $80

– Nobody talks about the lack of oil anymore or about all that was spilled into the Gulf of Mexico

– We don’t even care to report US oil reserves in the news (at one point, it was reported weekly!)

2008: Economic crunch; this is the end of the capitalism and all banks will follow it to the grave

In 2008, the market plummeted like it was the end of the world. Economists on Oprah were declaring that our economic system will never survive and that our banks will collapse. Even in Canada, it was the end of our Canadian banks. They saw their stock price fall by 50% in a span of a few months.

Result in 2010:

– We are getting out of a big global recession but capitalism is not dead.

– Most banks survived and Canadian Banks showed interesting profits, even throughout the crisis.

– The stock went back up almost to their peak prices in 2008.

2009-2010: Economy is back in Canada; Interest rate to jump through the roof!

After seeing Australia increase their interest rate in late 2009, some economists increased significantly their Canadian interest rate forecasts. We were talking about the Bank of Canada increasing their rate faster than expected. I even heard about variable interest rates going up to 7% within the next five years (I wonder if the same guy called the lowest interest rates for 2008 back in 2003 😉 ).

Result in 2010:

– The Bank of Canada didn’t budge until June 2010 (which was announced 18 months prior)

– Variable interest rate hikes by 0.50% so far and no important increase is forecast for the rest of the year.

– Inflation is under control and there is no need to hike the interest rate anyways.

So back to 2010: Canadian housing bubble to burst or housing market going to slow down to a normal level?

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July 22, 2009, 5:00 am

6 Investing Rules Revisited Part 6: You Are Better Be A Owner Than A Renter

by: The Financial Blogger    Category: Financial Cliché,Investment, Market and Risk,Trading

home-owner*** Hey! Where is part 5? It’s over at INO Blog… It’s about asset allocation according to your age. (link will be updated later on today)***

If I was to start over my financial life, I would do something differently: I would buy a property right after signing my first employment contract. During almost 4 years, I gave $30,000 in rent instead of building equity within my own property.

When I was young, my parents basically lived on the profit made on each property sold. They used to buy a property, move into it, do renovations and sell it 2 years later. They always though (and they still do!) that real estate was a sure value. In fact, they always told me that property values always go up. Wrong!

Those who bought big properties back in 2007 and 2008 in USA or Western Canada can surely tell you about it. Making money from real estate is not an absolute basic of personal finance. While the real estate market is more stable than the stock market, it doesn’t mean value cannot drop.

Property value in Alberta and British Columbia dropped by 20% so far and it is even tougher in some states down south such as Florida and California. Back in the 90’s, several North American regions saw their property value remain stable for 5 years straight. Considering inflation, those people had probably to wait 10 years to make a decent return on their “investment”.

The main risk when you purchase real estate relies within liquidity:

#1 To ensure the property maintenance. There are no points of buying a huge property when you can’t put furniture in it!

#2 If you plan on sell your property to pay something else or do another project, it may take more time than expected.

#3 It is harder to get the equity from your property (you either have to sell it or request a mortgage). In both cases, fees can occur.

#4 Your main residence should not be considered as an investment. It constantly requires that you inject money for taxes, maintenance, improvements, etc. On the other side, your main residence will never generate stable income. The only gain will be realized once you have sold it (usually to buy a bigger one and stick to the very same situation!).

You Are Better Be A Owner Than A Renter: Revisited

Real estate should not be considered as the Investor’s El Paradiso. There should be a big difference to be made between owing your main residence and rental properties. While the first remain an expense that you must buy according to your means, the latter can generate interesting profit (and stable income from rent over time).

In both cases, it is highly important to revised your budget and consider all expenses related to real estate before making a decision. If you can afford it and you do not face liquidity problems previously mentioned, investing in real estate may be quite profitable.

I hope you liked my series on investing rules revisited. Do you have any other investing rules that don’t fit our financial landscape anymore?

Find the full 6 investing rules revisited:

Part 1: Stocks Always Go Up

Part 2: Blue Chips Are Safe Investments

Part 3: Diversification allows reducing portfolio risk

Part 4: Gold Goes Up When Stock Markets Go Down

Part 5: You Are Better Be a Owner than a Renter

Part 6: If You Are Young, You Should Invest the Biggest Part of Your Portfolio into Stocks

image source: flickr

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July 21, 2009, 5:00 am

6 Investing Rules Revisited Part 4: Gold Goes Up When Stock Markets Go Down

by: The Financial Blogger    Category: Financial Cliché,Investment, Market and Risk

golden-flowerBefore I was born, gold was used as the reference value for our monetary system. Each country had their dollar linked to gold and depending on the fluctuation; they had to purchase more gold to maintain their economy. Since history is written, gold always played an important role in the economy. It was once used as a payment method but we now prefer credit cards… they are lighter 😉

This would probably explain our unconditional faith in gold. When the world is about to fall apart, we all agree that gold will remain a sure value. When we are not able to give a value to a piece of paper written $20, we will still recognize the value of a golden piece.

This is how several investors though of selling their stocks and transfer most of their investments into gold. They though it would be a good idea because:

#1Gold always has an intrinsic value (so do good company by the way)

#2If several people do the same thing, chances are that the price of gold will go up and they will have made a good investment being one of the first player to play their card.

Unfortunately for them, the price of gold hit the very same brick wall than stocks, bonds and real estate. Therefore, gold has proven its limit as a “sure value” during market crashes.

There is a strong mechanism regulating the price of gold: the consumer. When the price of gold goes up, it is followed by the price for golden jewelleries. Then, the demand for jewelleries decreases and the price of gold is back under pressure.

An additional factor to consider is the recent investment from mining companies in the discovery for golden mines. This should increase the offer of gold on the market and stabilize the price.

So while we think that people may leave the US dollar to buy gold, the price of this precious metal might not jump. The above mentioned mechanisms will slow down the price progression and help create equilibrium.

Gold Goes Up When Stock Markets Go Down: Revisited

It is still true that gold will show a smaller volatility and may protect a part of your investments from the market turmoil. However, this should not be used as the ultimate solution to protect your portfolio against markets drops. Those who think that investing in gold will bring back their losses from the stock market might be deceived.

However, holding 10% gold in your portfolio will improve your diversification and reduces your risk.

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July 20, 2009, 5:00 am

6 Investing Rules Revisited Part 3: Diversification allows reducing portfolio risk

by: The Financial Blogger    Category: Financial Cliché,Investment, Market and Risk

candiesI remember my finance classes where our teacher was hitting our brains with a bunch of theories explaining why diversification was the only way to insure an optimal yield while reducing the volatility (called risk by the common investor) of a portfolio. There was tons of big brain that became famous in the finance world providing investing strategies based on diversification. This is also the main reason why we have so many mutual funds and why they are so popular. Everybody is selling them 😉

The point of being well diversified still stand. However, we are not as protected against a drop in the market as we thought we were. The point was to invest in several industries among several geographic markets. Therefore, if the oil industry in Canada was stalling, you could always hope that the manufacturing industry in China would perform or that the big blue chips from the USA would consolidate their position and grow stronger.

Unfortunately, in 2008, there were no escapes. While the S&P 500 were losing 38% of its value, the Brazilian stock market dropped 40% and the Chinese companies fell by 51%. This is a surprising consequence of having a global economy: each country is linked to others and influences their global economy. It’s like 50 kids in a daycare: if one gets the flu, the daycare is half empty by the end of the week!

The only survivors from 2008 were the money market and government bonds… Not much to keep investors happy about their “well diversified” portfolio! They look at their statements and they only think about calling their financial advisor and ask about investing in several countries in order to reduce their risk…

Diversification allows reducing portfolio risk, revisited:

Being diversified will optimize your investment return and reduce the volatility of your portfolio. However, this does not mean that it will save you from important market crashes. There are several ways to be diversified:

Economic sectors (financials, materials, techno, health, etc.). Having all your money invested in a few economic sectors makes your vulnerable to them… Just think about financials and resources in 2008 or the techno’s back in 2000.

Countries (USA, Canada, International). Even though all economies are linked to each other, you are better off not taking the chance of not picking the right country. Worst comes to worst, you will still benefit from the markets come back.

Asset classes (stocks, bonds, commodities, real estate). Then again, if you are invested solely in real estate, you might miss great opportunities on the stock market and vice versa.

However, I do not believe in being diversified by:

Financial institutions (this only duplicates your investment statements and makes it difficult to follow).

Mutual fund companies (you may be able to find a good mutual fund company and stick with them. You will probably save more money on fees with a bigger amount).

Financial advisors (you are better off with only one financial advisor as he can see the full picture and give you proper advices. What if he doesn’t know that you have 30% in the US market elsewhere and suggests US investment products since you don’t have any in your portfolio with him?).

Mutual funds (by selecting more than one fund doing the same thing you automatically select one with higher MER’s than the others and therefore, pay more for nothing.)

Those methods are more related to “diworsification” than diversification 😉

The key point to remember is diversification reduces the risk but does not make it disappear.

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