Good debt and bad debt. Can you make the difference?

A debt is generally a sum of money that you borrow from a lender to buy something that you don't have enough money to buy now. In the past people used to borrow only in exceptional cases. Like buying a house, a surgery or any emergency. However today people borrow all the time to satisfy even the flimsiest of urges.

So how to control your debt?

There are two types of debt:

1. Good debt

Debt that you take that would truly benefit you. Like a mortgage, a loan to buy a car, a student loan or a loan to start a business. Such a loan will give you benefits in the future and would increase your financial security.

2. Bad debt

Bad debt is any debt that you could do without. Most if not all of the time it is just a fancy, to be trendy or to do as someone else is doing. Such debt will make your financial future insecure and will make your life miserable over the long run. They are debt to buy furnoture, clothing, vacations, etc.

It is important to avoid borrowing to buy things that you cannot afford or that you ca go without. As such the environment that you are evolving is important. It is better to stop meeting people who are living way above their means as it would influence you over time. Live around frugal minded people and discuss ways of reducing spending with them.

The next important thing is to limit the part of your income that go towards servicing debt. While some people can be it i not always possible. So keep the percentage of your earnings that goes towards paying debt as low as possible. Around 30 % is about right. Remember that increase in interest rate ca increase that percentage and make servicing those debt unbearable.So keeping that percentage as low as possible would benefit you both in high and low interest rate times.

Avoiding debt is just one of the way to be financially secure. If you add hard work, frugality, saving, investing, etc with it then your wealth will increase with time.

What is a stock ?

A stock or a share is a simple investment instrument. In fact it is the most common and easiest to buy. When you hold stocks in a company it simply means that you are part owner of the company. You also have all the rights and responsibilities that come with owning a company.

When you own stocks in a company you have a say in how the company operates - though if the company has issued millions or even billions of shares, your 10 or 100 shares might not make you the most influential shareholder. You also have a right to part of te profit in term of dividend. You get to participate in annual general meetings and vote on different issues related to the company like who sit on the board of directors, what percentage of profit is given as dividend, when to issue more shares, etc. The list of issues where you can vote is endless.

A companies issues stocks so that it can raise capital to run its business, to expand, to pay debt, etc. A company issues stocks on an initial public offering(IPO) where it offers stocks to the public and institutional investors. Later on any offering of share will require approval at an annual general meeting. You may want to be on the look out for IPOs of companies.

A company can issue two types of stocks, namely common or preferred stocks.

Common stock represents a simple share of ownership; if the company were to go bankrupt, it would have no liability to common shareholders, so you would lose your investment.

Preferred shares, on the other hand, get some special advantages, which might include higher dividends, fixed return every year or a larger vote in running the company.

In order to start trading and buying you will have to open an account with a brokerage firm. You will give them orders and they would buy th shares for you. There would be a registry where it will be recorded what stocks you own and it what amount. The dividend will be deposited in that account at the brokerage firm.

Shares are traded on the stock exchange. People that own stocks place them for sale. You will not actually know who will sell the shares to you but you will be the new owner of the shares.

Shares are among the investments instrument that has the most return but they are also the most risky. So be careful when buying shares.

Good luck to all of you new investors.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
How to choose a broker?
Stocks have higher return than bonds
How to be rich buying stocks!!
Should i sell my stock and hold cash?
How and when dividends are paid?
what is a stock exchange?
How to choose a broker - part 2?

Should I buy gold?

One of the most important questions that investors are asking themselves at the moment is whether to buy gold. There are a lot of investors out there who fearing inflation or the loss of value of paper money are asking themselves this question: Should I sell my stocks and buy gold? There is no definite answer, however each investor should think about the risk and benefits of holding the metal and act accordingly.

Benefits of holding gold

1. Gold preserve wealth
Gold is very important to preserve wealth especially in troubled times. Gold and silver had existed for thousands of years and has not loss value. It keep up with inflation. It can simply be said that one ounce of gold was as valuable in the 30s as it is today. However a dollar was worth much more than it is today. Unless appropriately invested so that it can earn above inflation return a dollar will lose value over time.

2. A hedge against inflation
Preserving wealth is very important in times of high inflation. Very few investment instruments can keep up with high inflation. Many economists are forecasting high inflation in the years to come due to the huge amount of money being injected in the economy. They are also forecasting a declining dollar as nations shift away from the dollar as a reserve currency. Gold is the ideal instrument to preserve your wealth if you believe them. With rising inflation, gold typically appreciates. You would probably remember the 70s when high inflation decimated the investment of many people, whereas those who invested in gold preserved their wealth until inflation was back under control in the 80s.


3. Can be used in troubled times
Some people called survivalists are forecasting a major breakdown of the economies of different countries. If such a thing happen, then only hard assets like gold, silver and land will have value. So these survivalists are buying gold to this effect. One example is Zimbabwe where the dollar is worthless. In such an economy only gold and silver will have value. So if you think that your economy will collapse then it would be a good idea to invest in solid gold.

4. A part of a diversified portfolio
The last reason to hold gold is as part of a diversified portfolio. You will allocate a certain percentage of your portfolio to gold because of its ability to hold its value. This will reduce the volatility of your portfolio. You will thus diversify your investment which is always a good thing. If you hold gold in order to diversify your portfolio, the percentage should not be too high.

Types of gold investments
The following are possible investments in gold.

1. Gold Futures
A future is a contract on commodities that gives you the ownership of future gold that has not yet been mined. It is like owning next years wheat harvest.

2. Gold Coins
Coins in gold that are minted and sold mainly for collection. They are however more valued that the value of the gold in them.

3. Gold Companies
Shares in gold mining companies or companies that service or support gold miners.

4. Gold ETFs
A security that will track the price of gold, gold index funds and so on. Its value will mirror the price of gold.

5. Gold Mutual Funds
A fund that will buy stocks in various gold related companies. You will invest money in the fund. It will be like owning gold stocks.

6. Gold bullions
Gold in bulk in the form of ingots or coins. They can be bought in real or stored by third parties. It is unclear what would happen to your gold if the storing companies go bankrupt.

7. Gold jewelry
Jewelery are more expensive and the weight of gold in it is less that the price of the jewelery.


As you can see gold is a very versatile investment instrument. Whether you want to hold real gold or benefits from the rising price of gold is up to you. However the rising in the price of gold in the near and medium term is certain. Hence it is a must for every investors to either hold real gold or at least invest in gold shares.

A last piece of advice. I see with great suspicion the proliferation of companies that buy gold and store it for you. I would prefer to hold my physical gold in my own hand. A paper saying that i own gold is not the same as owning real gold.


Good luck in your future gold investments.

Should i sell my stocks and hold cash?

Should I invest and stay in the stock market or sell everything and keep the cash when the market is falling? Sadly for most investors the answer is yes. As a result many of them are selling their investment to hoard cash. Is cash really a safe haven and better that other investment? I would say no, so lets have a look at the arguments against holding Cash.

Advantages of holding cash

If a stock is falling like a knife, selling the stock and holing cash will help to stop your losses.
Also some people have a low tolerance to falling stock market so having cash is a good thing.
While your portfolio can fall and rise, cash in bank and safe retain their nominal value. In some countries cash in account is guarantied so that their is little danger of it losing its value.
Its face value at least.

Disadvantages of holding cash

While holding cash might feel good in the short term it is an unwise move over the long term. Stock market go up and down but it usually in the long run. So even if it is going down now it will go up again and recover the loss value. It is only a temporary loss ,a paper loss. If you sell now you will make the loss permanent. When stocks are falling the only chance to regain their value is to hold on to them until their value rise again. On the contrary when the stock market is down, you should buy more stocks at bargain prices.

The second problem with holding cash is inflation. Cash loses value with time and gradually the value will decrease. You will have no such problem with stocks. The return on stocks is usually greater than that on cash and also greater than inflation. The stock market has always outperform cash. While adjusted for inflation a stock portfolio will increase with time, a cash portfolio will fall with time.

If you sell your stocks now, you will have to get in again. You will thus have to time your entry. This is very difficult to do as you will be trying to time the bottom. Chances are that you will miss it, and as I have written in a previous post, missing the bottom is like running after a train it is very difficult to catch. So your best chance of regaining the value of your portfolio is to remain invested and be patient.

So guys stay invested and wait for the bull market. The rise will be quick and brutal. When it start i will be on the train. Will you be on it or running after it trying to catch it?

The choice is yours.

How to be a successful investor

Many people have been searching for the secrets to be a successful investor. However many of them would refuse to listen to sound advice but would fall prey to charlatan and people like bernard madoff. The reason is that most people want to be rich quickly and people like madoff tell them that they can. While some can get rich quickly many would lose everything they have.

So what are the secrets of investing?

To most people the stock market is a strange world where they hear stories of people losing money and companies go bankrupt. However there are opportunities to make it in the stock market, provided that you adhere to some sound principles.

Most of the investment gurus (John Templeton, Peter Lynch, Warren Buffett) have explain some pretty simple principles to which the beginner investor must adhere to.And if there’s one thing that they all agree on, it is the fact that the beginner investor must go for the long term and not aim at making large profits on the short term. In simple term, invest in the stock market not to make money today, but to make money in the long run. Successful investors that make alot of profits have invested for the long term and are not looking for the hot stock that would make them rich. The problem with this way of investing is that it is impossible to get to the hot stock before its price goes up.

Investing principles 1

Although it has been said time and again, it doesn’t seem to stick: when investing, time is on your side. The stock market always go up on the long run even if they go down in the short term. The longer an investment is held, the greater its chance to increase in value.As an investor, if you understand this, day-to-day market fluctuations will not drive you crazy and you will be able to concentrate on the one variable that you can (literally) bank on: TIME. Also buying and selling make your broker rich because each time you do a transaction you are paying a fee to him.

Investing principles 2

Start out small and build your confidence while taking small risks. Invest only $100 or $1,000 instead of your entire savings.There are a lot of things that you will never know unless you’re learning by doing.

Investing principles 3

Imitate the investment masters and read about successful investors. Talk to successful people you may know and ask them how they accomplished their goals. You could be surprised how open truly successful people are.

Investing principles 4

Don’t panic and sell if things go down. Actually you should even expect them to. If you buy good companies with sound fundamentals, drops in the market value of the stock will only be temporary and might even be good times for you to buy the stock when it’s “on sale”.

Here you go guys. Keep investing and stay put in this recession.

Good luck.

How to calculate the interest in your loan

The question that many people have been asking me is how to calculate the interest in the monthly payment, the part that is capital and how much capital is there left to be paid.

So i am going to explain it to you. Remember that each time the interest rate change you will have to repeat the calculation.

Suppose you have a loan of $100000 at 5% and payable in 10 years.

10 years = 120 months = 10 *365 = 3650 days.

Hence interest per day = 5 % / 365 = 0.013699%. It is better to leave a few significant figures.

Hence the interest payable for a day = 10000 * 0.013699/100 = $ 1.3699

Interest for first month = 1.3699* 30 = $ 41.097

Suppose that you are paying a monthly payment of $200

As a result you capital payment for the first month is $200 - $41.097 = $158.907

If you are using the diminishing balance method, it means that you now owe $100000-$158.907 = $99841.097

Hence, the next month your interest will be calculated on the lower balance i.e $99841.097

However if the interest rate increase the interest part would increase. If you want to pay the same amount monthly, you can pay less capital and pay the loan in more time. Or vice versa if interest rate decreases.

I hope that these tips would help you. However every lender can supply to you an amortisation schedule with the breakdown of your loan. Read about it here.

Are you having any difficulties to determine the interest part of your loan? Leave a comment below.

The snow ball. A better way of reducing your debt.
How to live within your means
Good debt or bad debt. Can you make the difference?
What is debt consolidation?
How to consolidate a debt?

The snow ball effect - A better way of reducing debt

I was once a firm believer that the best way to reduce debt is to pay high interest debt first. In fact it make sense. As you pay high interest debt first the burden of the remaining debt become less heavy and the remaining debt become easier to pay. Until i fell on this article by Dave Ramsey.

This article made me think and I actually think that he has a point there. If you think about it, a small debt is easier to pay and once you have succeeded it gives you courage. It entails an easy financial effort that is easier to make than the effort and sacrifice needed to pay a large debt.

As you have finished paying the smallest debt, then paying the next debt will be less painful and it only require a small additional effort and financial sacrifices. It also would not disrupt your budget .

As a result you would gradually increase your efforts and financial sacrifices painlessly and pay the higher debts.

I do not know about you but i think this guy make sense. What about you? What do you think?

If you have tried the opposite method and it did not work try this one it might work.

Simple and compound interest

Calculating interest on an investment is often a requirement for the budding investment.
There are several terms that must be understood before using the formula.

The principal which is the money that is being invested known from now on as P.

The no of years that the investment will earn interest known from now on as Y

The interest rate known from now on as I

The simple interest

The simple interest means that interest will be earned yearly on the same amount.It also mean that you will not allow interest to accrue on the interest. You will probably remove it for spending.

It is calculates as follows.

Interest yearly = P x I/100
Total interest after Y years = P x (I/100) x Y

eg $10000 invested at 10 % for five years.

Interest every year = P x I = 10000 x (10 /100) = 10000 x 0.1 = 1000
Interest after five years = P x I x Y = 10000 x (10 /100) x 5 = 10000 x 0.1 x 5 = 5000

Amount after five years = $ 15000

If you are having problems with the mathematics, I have created a calculator to determine the simple interest here.

The compound interest

In compound interest the calculation is a little bit different. Each yearly interest is added to the principle to calculate the following year's interest. As a result with time the principal increases and the the interest increases. Provided you don't use the yearly interest.

Lets say $ 100000 is invested at an interest rate of 10 % for five years

After one year the interest obtained = 10000 x 0.1 = 1000
On the second year the interest obtained = (10000 +1000)x 0.1 = 1100
As you can see $ 100 dollar is obtained more than the first year. This will continue to increase for each year. More interest is obtained. However if you use the interest it would be a simple interest. The key is to leave the interest untouched.

Now this is a little bit difficult if the investment will last over several years. Here is general formula.

Lets say $ 10000 is invested at an interest rate of 10 % for five years.

I = 10 % = 10/100 = 0.1

i = 0.1+1 =1.1

The total amount after five years = P x i x i x i x i x i = P x i ^ Y = 10000 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 = 16105

As you can see compared to the simple interest $1600 dollars more is obtained. When a compound interest system is obtained the gain over the long term is more than the simple interest system.

If you are having problems with the maths. I have created a calculator to determine the compound interest here.


What is compounding?
How to calculate the interest in your loan
Fixed and variable interest.
How to calculate simple interest on an investment
Simple and compound interest
How to calculate compound interest on an investment

Fixed and variable interest

I have been asked the question lately between fixed and variable interest. Some people cannot understand the difference between the two.

Fixed interest loans have the interest remaining the same for the whole duration of the loan. While it may seems to be an advantage to have a fixed interest rate, it is in fact a disadvantage because the interest rate is set not at the medium or half way between the maximum and minimum possible rate, but at slightly above that. So that for a majority of time you will pay more than the official bank rate. This also remove the advantage of paying at a low interest rate when the official lending rate falls.

The variable rate is always a few percentage points above the official lending rate. The interest will then vary with the official lending rate. The disadvantage of having a variable rate is that in time of high interest rate the loan can be difficult to service.

Asset Allocation - How to allocate your money in your portfolio

After a person has decided to invest, the most important decision a person has to make is asset allocation. i.e. How much money will be allocated to each asset class.

For recapitulation their are several asset classes that one can invest their money in. I would leave out the most difficult and complex which are not worthy to invest into.

1. Stocks
2. Bonds
3. cash
4. Fixed deposits or certificate of deposit
5. Precious metals

The first decision to take is how much risk you can tolerate. You can learn about risk and risk tolerance here. Because some of those assets can vary widely in value, can crash and be wiped out, then your tolerance such risks and changes in the value of your portfolio will determine how much you allocate in each class.

The following list the asset class from the most risky to the most safe.

stocks, precious metals, bonds, cash, certificate of deposits

However the riskier an asset class the more the return associated with it. So those that want to have high return will have to increase the percentage of risky assets in their portfolio.
Hence there are several ways to allocate assets in a portfolio based on the tolerance of risk and the return required.

High risk, high return
100 % stocks and high yield bonds

medium risk, medium return
50 % stocks, 25 % cds, 25 % bonds

low risk, low return
25 % stocks, 25 % cds, 50 % bonds

Inflation hedge
75 % gold and silver, 25 % bonds indexed with inflation

Hyperinflation portfolio
100 % gold and silver

I choose the medium risk and medium return portfolio. I think that it can cater for all types of catastrophe in the market.

The choice is yours guys.

How to plan your investments and spendings

In a modern family many projects need to be achieved and these have to be done with some planning or else some would fail. I am going to list them in order of importance.

1. Retirement
2. Mortgage
2. Children study
3. Buying a car
4. Holidays

These expenses were done in the past without any planning at all. As a result in many families some of them failed. The money in the family was used recklessly.

So folks now we have calculators that can help us to divide our money so that these projects can be realised.
So get used to them and your budget will be healthier even in this recession.