Delayed gratification is great...but can we take it too far?

Delayed gratification for a greater reward is something we all learn as children.  In fact, my parents used to explicitly teach it with chocolates and other rewards.  The concept of delaying reward or gratification for a better outcome is one that has been taught as a virtue for many years and we all know the benefits of it.

In our financial lives the benefits are obvious - if you save more before you buy a house, the burden of loan repayments for a similar property will be much less...or you can buy a bigger house. You can extend this type of analogy to almost any financial transaction.

But can we take delayed gratification too far?

If we are particularly good at delayed gratification we are probably better savers than we are spenders.  I recently wrote a post on the difference and how to tell which one you are.  This is not necessarily a problem but I think it can be taken too far.

With financial matters delayed gratification can be taken too far because the payoff from tomorrow will almost always be greater than the payoff today.  Does this mean that we continue to delay our gratification until we are old or unable to really enjoy the fruits of our labour?

I am particularly good at delayed gratification - if I can see a bigger payoff (especially financially) from not spending money today then it will go under lock and key.  However this means that I often set a financial goal (spending wise) that I am then delay further.  An of this was my purchase of a sports car.  I went back and had a read through my posts and I first mentioned my sports car in my 2012 financial goals...almost exactly 2 years ago.  For one reason or another I have continued to delay this purchase.

I have been thinking about my 2014 financial goals and once again looked at putting off my purchase of a sports car.  This time I was thinking of

Christmas Giving: A little microfinance can go a long way

I recently wrote about how I had budgeted for my Christmas gifts and how I always allocate some money (not a lot - normally around $50) to buy a present which is donated to someone who cannot afford to get presents for Christmas.  Although I still think this is something which is really worth doing this year I did something a little different - I lent money via Kiva, a microfinance organisation.

What is Microfinance?

Microfinance, very simply, is providing financial services to very poor people while taking little or no collateral.  These are the poor of the poor, and the loan often allows them to start or grow their small business (it may be as simple as allowing them to buy a goat or a pig or may be to provide extra working capital for their business) and they pay back the loan like a normal borrower.

Why does microfinance appeal to me?

The beauty in microfinance is that you are effectively helping people help themselves.  Whereas a 'handout' is often necessary and helpful, once that money is spent, it cannot do any further good.  However, when you are repaid the loan, you can then on lend it to someone else and with the same money you can do good for multiple people over time.

If you add a little bit more money to your 'lending pot' each year then the amount of good you do grows significantly over time!

Isn't there the possibility that the borrower won't repay the loan?

Of course there is the possibility that you will lose some of your money and that the borrower will default. This is normal for a lending organisation.  Banks normally diversify their loan book so that no one loss will hurt them too

Are you and over-spender or an over-saver?

The way we think about money is different for every person and has a lot to do with the way we are raised and the circumstances and life experiences we have been through. I am sure we all know the person who is unable to save 2 dollars - they spend every last penny they have on silly things - cars, holidays, good clothes and food - and they have no savings or investments to show for it.

Conversely I am sure we all know the person who could afford to loosen the purse strings a little.  They earn quite well though are so tight you wonder when they are actually going to spend all that money they are saving. They do not enjoy the money they earn and they could definitely do with (and afford) a nice long vacation.

Are you an over-spender or an over-saver?

So where do you fall - I think we all instinctively know which side of the coin we fall on.  Perhaps you are the type of person who finds it really hard to save for a house deposit because you seem to blow your cash and you have no idea where.  Or perhaps you are the person you has not treated themselves to anything for as long as you can remember.

Assessing where you fall on the spectrum is important when it comes to setting your financial goals and working out what you

FKP's rights issue made me a tidy profit

This is just a quick post to update you on one of my investments that I have written about on this blog.  I wrote recently about how I had participated in the FKP equity raising through their rights issue.  I took up my rights and I applied for an over-allocation.

The allowed application for an overallocation was $100,000 however given that the share price was trading at a significant premium to the issue price I figured there would be a massive scale back.  The last time there was a big scale back (in this very stock) I got quite lucky because my broker allocated me much more than I would have received had I held the stocks in my own name.

Below I have outlined how I made my investment decision, what I applied for and what I ended up getting.  I have not yet been able to sell the stock because my work has a minimum holding period for stock trades (which is very common if you work in the finance industry).

A walk through of my investment rationale

First and foremost in an equity raising you need to look at:

1. Is the company going to go broke?
• When companies do equity raisings (especially to pay down debt) there is a chance that they are going to go broke anyway 
• This is the first thing you need to think about before rushing into an equity raising
2. Does the price represent a good deal for you?
• If you do not participate in an equity raising you are going to get diluted (especially if the equity raising is non renounceable - i.e. you can't sell your rights) so if the company is not going to go broke you would normally want to take up your rights
• You need to think about the fundamental value of the company you are investing in and whether it represents a good deal to invest more into this company

The FKP equity raising looked particularly compelling because:

Start thinking about your 2014 Financial Goals

With only 3 weeks to go until the end of the year it is once again time to start thinking about your goals for the next financial year.  Although this is a finance blog and I will be putting up my financial goals, it is a great time of the year to be thinking about all of your life goals for the year.

Last year, around this time, I put up a post on how to set goals for the upcoming year and this post is going to be much of the same.  However, this year I will focus much more on what you should be thinking about when it comes to your financial goals.

It is very hard to separate your financial goals from your life goals

Trying to set financial goals without thinking about what you want for the rest of your life is pretty pointless.  Not only are you unlikely to set good goals, if your life goals involve some pretty big expenditures, your financial goals should reflect this and should aid in the achievement of this goals.

In fact, I think the first thing you need to do is to sort out exactly what life goals you want to achieve in the coming year and then set your financial goals after this.  For example

• If you want to get engaged this year (as many of my peer group do), you will need to buy a ring.  This should then feed into your financial goals.  For example - I want to get engaged in June, and I want to pay for the ring in cash so that my savings are not affected so I will need to save $5,000 / 6 = $833 per month
• If you want to go on an expensive holiday you will need to pay for this - do the same as the ring example above - set a time frame and savings objective and this will lead to a financial goal for the year
• If you want to buy a house in two years time then perhaps you should start saving for a deposit now and your financial goals should revolve around this

It really depends on what you want

Tips on budgeting and spending this Christmas season

Christmas has come around again and like most people (I imagine) I have not done my Christmas shopping in advance.  Now Christmas is an expensive time of the year for almost everyone but especially if you have a family with children or a large amount of close relatives and it is the norm for you to give Christmas presents to everyone.  It is the time of year where it is really easy to blow your budget and to rack up some serious credit card debt.

We all know that we shouldn't however invariably we get carried away.  This post will give you several strategies to keep your spending in check (even if you have children and a large family) and will hopefully mean that you wont be suffering as badly from those post Christmas credit card blues.

Set a clear list of people that you need to buy gifts for

The problem with Christmas shopping is that we often buy gifts for people on impulse based on things we see that we may like for them.  While this is very thoughtful it really blows out the budget.  The best thing to do is to make a defined list of people that you need to buy a gift for.

For example my list includes my immediate family (2 people), my girlfriend, one Kris Kringle (or Secret Santa) present and one 'wishing tree' present.  My list used to be 4 - 5 times as large but I really found that I was spending far too much money on Christmas presents.

If you have a large extended family that gives gifts set up a Secret Santa (or Kris Kringle)

This is something my extended family started doing years ago and it made so much sense.  When I was a kid I used to get a present from every single one of my aunts, uncles and extended relatives.  What I didn't realise was that my parents had to fork out for every single other child and most of the other adults in the group.

What our extended family instituted was a Secret Santa system.  A few weeks before Christmas we would pick names out of a hat and we would only be allowed to a buy a present for that person which would be shared on Christmas day.  You were not allowed to spend more than $20.  The cost that your family would need to bear was directly proportionate to how many people were in the family.  For example a family of 4 would be buying gifts for 4 other people so the total cost could not exceed $80 instead of the many hundreds of dollars that it used to cost.

Set a budget for each person...then stick to it

You know how much you can afford to spend on Christmas presents.  It is best to sit down and work out how much you 1) can afford to and 2) want to spend on each person.  You need to do this before you go out and start looking for

November 2013 Expenditure Tracker

This is my second last expenditure tracker for the year and uses my reset expectations for 2013.  It also continues to be influenced by my smoothed expenditure technique.  This month had a lot of one off expenses - I travelled overseas for 1/3 of the month, my bonus got paid and I subscribed to a rather large rights issue which took a significant amount of cash out of my offset account and put it into my share investment account.  Full details are below:

Item	Nov 2013	Target (new)	Over/(Under)	Target (old)	Over/(Under)
Share Investments	+$31,094	+$2,500	+$28,594	+$2,000	+$29,094
Offset Acct.	-$11,256	+$2,400	-$13,656	+$3,500	-$14,756
Personal expenditure	+$6,355	+$2,800	+$3,555	+$2,200	+$4,155

As you can see above my personal expenditure has once again blown out in quite a large way - I will go into the reasons for that below) - but this was counter balanced by the large inflow of funds from my bonus.  The major movements in my three accounts are discussed below.

• Share investments
• This month I transferred $30,000 into my share investment account as I wished to take up the FKP rights offer - I already had a significant balance of cash sitting in this account so the amount I actually applied for was quite a bit higher
• I continued to invest in my employee share plan 
• I have not yet sold out of the shares that vested in the previous period nor have I sold out of the shares associated with my bonus last year which were subject to holding periods 
• I have been waiting until the currency drops a bit to get a 'free kick' however my exposure to my company's stock is getting beyond where I want it to be so I am thinking of doing a sell down soon
• Home Loan Offset account
• The $30,000 I transferred into my share investment account came out of my home loan offset account however this was partially offset by

November 2013 Net Worth: $457,000 (+10.2%)

	Value	% Change
Assets	$814,000	+5.5%
Liabilities	$358,000	+0.0%
Net worth	$457,000	+10.2%

My strong net worth performance continues to surpass my expectations.  They are driven by a share market that seems to have no bounds as well as better than expected performance in other areas.  As mentioned last month I had hoped to get to $435,000 this month and to $440,000 by the end of the year.  As you can see above I did much better than this which was entirely due to my bonus being announced and paid during the month.

My bonus was (for the first time since I started working), better than expected.  It's not that I got paid the most I ever have - I'm still not even close to what I got paid as an investment banking analyst - but rather I was expecting a number that was 5 - 6% lower than I actually received. Part of my bonus is deferred and invested in the stock of the company that I work for and I can't touch this for several years.  I include this at the full face value as I don't intend on leaving this company any time soon - if I do leave I would forfeit a reasonably large sum of money.

This month actually have many moving factors which I have outlined below (both positive and negative).

Positive factors

1. The payment of my bonus
• As outlined above my bonus got paid this month
• The cash amount I actually received was only about 40% of the headline number due to tax as well as the deferred component of my bonus
• With this bonus I saved most into my offset savings account, I put a bit into my expenditure smoothing account for Christmas presents and I also kept aside $500 for myself to buy something 'special' although I haven't worked out what that is yet
• A more detailed outline of this split will be detailed in my expenditure tracker tomorrow
2. A continued strong performance in the share market
• The share market continues to perform positively and although this month didn't have a crazy jump like the past few months it was still driving strong performance
• I also continued to save into