I listened to a nice and inspiring story about money value from a local radio channel today. I would like to share it over here:

Long long time ago, there was a rich businessman living in an old town. He exchanged all his assets and money for golds the time he retired. He buried all the golds under a tree. Everyday, this rich man dig out from the soil, count the gold and buries them again under the tree. He is happy to find that all his golds are there every day.

But his habit was discovered by a thief. One night, this thief dug out all the golds and ran away with them. This rich man was sad and cried in front of the tree when all his golds had gone. At this time, a monk passed by. After understand the whole story, this monk took up a few stones and gave to the rich man. The rich man was shocked.

The monk explained and said:” Your money is like a stone because you buried them and never fully utilized its value”.

That is the end of the story. Do you learn something from it?

We all know that money is a figure in our account or just a piece of paper in our wallet. Before this I read a book saying that money just a piece of paper that doesn’t have any big value on it. However, it has the power to exchange goods. This is the real “value” of money. Therefore money is just piece of paper before you really use it to exchange for something.

I have a few friends who are good in money management. They spend money wisely and they have their own budget. What they are focusing is saving more money. They don’t active in any other charity activities or help people. They just ignore them by saying that they don’t have enough money to do so. They said so because they want to save more money!

But I have a question for them: how much they want to save? Hundred thousands? 1 million? or 1 billion? They never have the answer for me! In fact, they will never have the answer. The time you save one hundred thousands, you will think that you can save 1 million. The time you hit it, you will say there are people who has hundreds of million inside their bank accounts. So you decide to follow and keep saving. This is a small little rat race. Can you see this?

Saving is a good habit that we must learn. But if saving too much without a purpose or goal, then you are just saving a pile of papers in bank. Money will always be a paper unless you spend it on something that has value.

I’m on my way to achieve financial freedom. Saving is very important for me but it never becomes a lifetime goal for me. For me, there are a few purposes saving money for:

1. Save for the emergency
2. Save for the investment
3. Save for children college or education fund

So all I have to do is set a goal for each purpose. For example, I have a goal to save $50,000 for my investment plan. So once I save this amount of money, I will release the power of my money and will never save again except I lost all my $50K. I will spend my money in something that is more meaningful than putting it in a bank. For example, donating to charity, helping other people, travel around with family and etc. I believe that our life is not all about money and saving money. We should unlock and break this barrier to enjoy the life that we want to. But please remember, the foundation is you must be financial secure or free. You must solve all your money problems before you can do this.

Please remember, saving is good for you and your family. You must do this first in your financial planning especially you have the common financial problems that most people have. At least you must save up the money for emergency purpose or I usually call financial security. In this article, I just want to show you that over-saving is not good. Anyway anything that is good will become bad if it is over the limit.

So start saving today but never bury the power of your money. There are a lot of people needs your money to survive. Use your money to help them and not put them as a paper in bank and calculate the figure every day just like the rich man in my story above.

One of the reason people is unhappy in their living is because lack of money and the feeling of security for their finance.

Today, we need money to settle a lot of things and problems. Basic needs such as food, clothes, houses, medicines are consuming money. We need money to survive. Therefore in order to feel the sense of real security in life, we must have some money left behind which give the sense of security to us

We all love to live in a life that full of security. No body like to have the challenges in their finance all the time. We need security to feel the peace. So achieving financial security is the basic goal that everyone of us should have. Besides that, before you start any investment, you are advised to cover all your basic needs and achieve financial security. This will not put you or your family in hot water just in case you lost money in investments.

What Is Financial Security?

My Personal definition for financial security is a level of personal finance where you don’t have to worry that you are not enough money just in case anything happen in your life. You have the true security for your life because you have all the necessary money ready to cover whatever unpredictable circumstances happen in your life. Besides that there are also no loopholes in your finance that might let you down such as debt or persona loan.

Therefore based on this definition, I have listed some of the requirements that we must have in order to achieve financial security.

1. Emergency Funds. Ok, it is very important to have an emergency funds ready for you and your family. Just in case anything happen, you have money to settle your problems. For example, if you lose your job, this money can let you to cover all your basic expenses while you can continue to look for a new job. Build up this emergency funds even you are in debt. If you are in debt, you can build up 1-2 months of emergency funds. After that you can continue to pay your debt. 1-2 months of emergency funds are better than none.
2. Become debt Free. Debt is dangerous and risky if we don’t know how to manage it properly. Therefore, I always encourage people to be debt free. There are good debt and bad debt tough. But if you don’t know how to handle your debts, you are advised to pay down the debt first. Debt is just like termites which can eat up the support of your finance. It can ruin and make your life fall down if you don’t handle it properly. So become debt free first and clear all the bad debts.
3. Saving Account. It can really give you the sense of peace and security to see that there are money left in your saving account. It is really nice to see this amount of money keep increasing. Saving account is a must because it is a fund for us to move our personal finance to the next stage. Maybe you want to start your business, maybe you want to invest or even save it for your children education. Well, this is very important for you to get into the next level of personal finance, Financial Comfortable.
4. Insurance. Life is hard to be predicted. There are things that might happen and affect our normal life. So we must buy the insurance to cover all this unpredictable things. Personally, I think an insurance that can cover death, medicines and illnesses is important for us. A life insurance is a must for everyone of us.
5. Maximize Your IRA Potential. Even though we have different financial goal to hit but we cannot forget our retirement. We should build the nest of our retirement from time to time. So spend sometime to manage your IRA and maximize its potential so that your retirement is under a protection.

It is really hard to live in a life that full of stress and worries about not enough money. Financial security is a stage that we must achieve for the peace of life and happiness. So please set a goal to achieve financial security as fast as possible. Good luck.

All this time, we only discuss the inflation rate. We care about inflation because it can affect the value of our money. Inflation can reduce the real value of money and also our buying power along the time. This is the reason why it can affect our financial planning and also our retirement. For example,  if you are putting your retirement money in a saving account at 3% interest rate, but the inflation rate is 3% on average, then your money is going no way but remain at the same value in future. This won’t help you if you want a better retirement life. Therefore, we must invest our money in the matter that can generate average returns greater than inflation rate. This is why we must pay attention on inflation and change our financial planning accordingly so that it won’t eat up all our money.

Today the market is different. All this time we are having the positive value in inflation rate. But according to some economists and statistic reports, negative figure of inflation is happening. Negative inflation is what we usually call deflation. Again, this is another factors that can affect our retirement and financial future. We should not take this easy instead we must understand it and change our plan accordingly.

What is Deflation?

Deflation, also called Disinflation, is the opposite meaning of inflation. While Inflation drops the value of our money and increase the price of goods, deflation increase our money’s value and decrease the price of the goods. Therefore you might see the “price dropping” trend happens around the market in deflationary period.

Deflation is a decline in general price level that often caused by a combination of four factors:

1. The supply of goods goes up.
2. Demand for goods goes down.
3. The supply of money goes down.
4. Demand for money goes up.

Understand The Theory of Supply and Demand

In order to fully understand how supply and demand on money and goods will affect our market, following are some of the example that I would like to give:

For factor 1, the supply of goods goes up, let assumes that we usually spend $10 to buy product A. The ratio between the money’s value and goods’ prices are always remained at the same level.

Deflation happens if the supply of product A goes up. For example, we can use technology to double the production speed of product A. At this moment, if the supply of money is maintained at a certain level, then the supply of product A will be overflowing. Sellers have no choice but have to drop the price so that selling speed of product A can be maintained. This is why deflation happens.

This is a good deflation as the price of goods drop because of high production. This can increase the GDP rate and provide even more job opportunities to the market because those factories will demand a lot of labors for their productions At the same time, consumers have their jobs and they can continue to buy product A again and again. In a nutshell, the business cycle is not affected here.

Deflation happens too if the supply of money goes down. Fed’s decision on interest rate will determine the supply of money and how wealthy people is. If Fed raises the interest rate, less money will be pushed out to the market and hence lower down consumers’ wealth. Consumers will become less interested to spend money and hence drop the demands on product A. Guess what, deflation happens again as sellers have to drop the price in order to push the selling

Above is an example of bad deflation. This is because the business cycle is being affected.  When the sales of product A drop, the retailers and manufacturers will be greatly affected. In order to maintain their business, they may cut jobs and big layoff will happen. The problems will go back to consumers because they lost their jobs and become more demand on their money rather than spend it. Therefore, another chain effect happens that can let our economy down.

Guess what, bad deflation happens!

However, if something bad happens to the market such as recession, spending confidence of consumers will be greatly affected too. People will save their money rather than spend it. The demand for money goes up. Since people will not exchange their money for any goods, then the demand for product A goes down. Bad deflation also happens.

If we look back to the history, deflation always happen due to the high supply in goods(increased productivity) without the increasing on the supply for money. One of the biggest deflation that caused Great depression happens in Japan in the early year 1990 where the demand for goods and supply for money are low. It was the worst economic scenario that no body wishes to happen.

The Negative Effect from Deflation, Even Good Deflation

Some people thought that deflation is a good thing since the price of goods are trending down and they can buy some cheap stuff. However, in most cases, many economists and experts are worry about deflation because of its negative impact on our money.

Like what I said, if deflation happens because the increasing of the goods production and make their price drop accordingly, this is a good deflation. However, deflation cannot happen for too long because it can generate massive of negative effect on the market. This is why our board of Fed uses the Interest rate system to control the market’s inflation and avoid the deflation.

The primary effect of deflation is that it can affect consumers’ buying decision. If all the goods drop in price continuously, consumers can feel the trend and delay their spending so that they can get the goods for a better price in the future. This is another starting point for the chain effects on the economy. If the products sales drop, business will slow down and eventually great layoff will happen and hence making consumers increase their demands on the money.

Besides that, if the price drops continuously, eventually companies cannot afford the low price and they have to cut off their employees in order to cut their business operating costs. Again, this will affect the business cycle and hence start the bad economy chain effect.
What You must Prepare for Deflation

Today, we can see that deflation is happening in the market. According to the latest article from Business Week Magazine, consumer prices in U.S. fell nearly 13% in the last three months of 2008. This includes all sorts of goods, ranging from clothing to electronic products.

Deflation for this time has the negative impact on our economy. We are currently having a big recession period and deflation for this time is happening due to the over supply of goods to the market. This is nothing to do with the high production but because of the low demands of people on to the products. Unemployment is getting higher each week and big layoff happens in most big corporations. This greatly decrease the confidence of consumers to the market and they are not willing to spend money. All the business are being affected because of this and this has caused deflation.

So the most important things for us to do now is spend our money more wisely. We cannot assume that deflation will happen forever. So we must buy something that is valuable for us if possible at this time. A lot of great deals are available at this time.

If you want to do some investment, maybe now or sometime later will be a good timing for you to buy assets such as properties, stocks, bonds etc. Deflation will affect the price of those assets and if you have extra cash on hands, you can buy them to build wealth for your portfolio.

If you don’t have extra cash, now maybe is time for you to save up some money on hands. Deflation reduces the price of goods and your expenses should be reduced too. Just remain your lifestyle, spend the same amount of expenses and you can save up some money for your account.

No matter what happen to the market, the basic of personal finance is spend less than you make, save the extra and invest it. This is the basic step to gain wealth and financial freedom. You don’t have to make everything complicated, keep them simple and you can take action easily.

Good Luck!

Every day, you hear a lot of news from media around the nation about recession. You have found that your colleagues, neighbors, friends and people around you are worried about recession.

Recession is really a word that can make people worry. However, if you are doing well in your personal finance, you won’t worry that much about this. In fact, recession also has its own benefits.

Let me show you the benefits:

1.    Recession makes people frugal. One of the reasons people worry about recession is because their personal finance is not strong enough to fight with recession. The good news is worry can make people change. Many people will learn the lesson and be more frugal.

2.    Recession helps people think about their finances. I hope that people can learn their lesson from a recession. If you are worried about recession, this is because your personal finance is not recession-proof enough. So you have to sit down and think properly what you should do to manage your money in a better way. At least you can prepare for the recession in future.

3.    Low Interest Rate. In order to help the market, Federal Reserve has already cut down the interest rate several times. If you read my article Federal Reserve Interest Rate Cut and Your Personal Finance, you will know its effect on your money. At least, credit card and mortgage interest rates will drop and this is good news for a lot of people.

4.    Inexpensive Stocks. For some investors, recession can be good news for them. Stock market drops badly during recession period. So investors will jump into the market and buy those low cost stocks. When the economy goes back to normal, the stock price will raise and they make money from this. This is a cycle of generating wealth.

5.    Great Deals on the market. Just like stock market, many things in the market will be affected and drop in price. So if you are well prepared financially and have plenty of cash, you can get a lot of great deals on the market. Currently housing market is dropping. You can pay attention on it and you might find 1 or 2 good deals for your real estate portfolio. 

6.    Win your business competitors. I don’t really wish to say this but this is the time you can beat your business competitors and stand out the crowd. Many businesses are slow or even closed down during recession. So if you can do something to boost and maintain your business, you will win your competitors and stand out in the market.

Recession can be good or bad

Like most of the things in this world, recession can be good or bad. In fact, I heard before that recession or bad economy period is a time of wealth exchange. Some people will be poorer but some people are getting richer. This is all about your financial literacy and how well you prepare your finance for this tough time.

We don’t know whether recession really hit the nation. It is professional economists’ job to research and analysis whether we are really in recession right now. In fact this is not really important for us. The most important thing right now is we should take action to recession-proof our finance and prepare for the recession.

Just like our body. It is more important that we protect and keep our body healthy. Once we make it, our body will hardly get sick. In most cases, prevention is the best. 

So let’s take some simple steps to prevent ourselves from suffering financially during recession.

11 Steps to Prepare for Recession

For Your Personal Finance:

1.      Keep and Save an Emergency Fund. Emergency fund is the most basic requirement that you must do in order to proof your finance against any financial disasters. It is recommended that you save at least 6 months of your living expenses as your emergency fund. However, if you are tight in budget, you should at least reserve 1-3 months of emergency fund for recession. The more you save, the more security you have during recession period.

2.      Spend Wisely. Start a budget and spend your money wisely. Try to live below your income and not your credit. If recession really happens, you will need to tighten up your budget so that you have more money each month to pass the hard time.

3.      Reduce Your Debt. I always recommend people around me to reduce their debt as much as possible especially credit card. Debt is just like a bomb and it can burst anytime and ruin your life. It is ok if you are having a job or income to support it. However, it will be a nightmare for you if you are downsizing or in the recession period. So reduce it and make it under your control.

4.      Keep an Eye on Your Investments. If you are investor, you may want to put at least some of the nest egg in a safer place. Recession usually hurts stock market. Nowadays, real estate market is not really stable as it is one of the causes of recession. So maybe you should retreat your money from those 2 investments options. Bonds usually do better in recession and it might be a good choice for you.