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FOOL'S EYE VIEW
Earlier this week, I was discussing personal finance with one of my Foolish colleagues. Our conversation began with me mentioning that 2004 could be the first year of my adult life during which I've been in credit for an entire year. Yup, I haven't been overdrawn by even a single penny for a single day this year. Until I discovered The Motley Fool, my finances were in a right royal mess, and being in the red was something that happened almost every month. Anyway, back to my colleague. After I'd declared that 2004 has been a good year for my personal financial management, my Foolish chum then told me about his financial history. It was an inspiring tale, which included a number of useful lessons that I'd like to share with you. Think of it as a blueprint to getting rich without a hitch! Lesson one: Spend carefully My Foolish colleague believes in "early to bed, early to rise, makes you healthy, wealthy and wise". He arrives in the office very early each morning and leaves around mid-afternoon to avoid the rush hour. My life is more along the lines of "Late to bed, late for work, I must be an utter jerk"! What's more, he hardly spends any money at all during the working week. He brings a packed lunch to work, whereas I lazily spend about £6 a day on lunch, snacks and drinks. Over the course of a working year, say 240 days, he spends about £100 a month less on weekday food than I do. And, of course, that's £1,200 a year extra to save or invest. So, in a quiet moment over Christmas, why not sit down and think about what you waste money on each week, and how you could cut back. Don't let that daily cappuccino or packet of cigarettes to deprive you of your fortune! Stop paying interest: get a 0% credit card today! Lesson two: Try to avoid borrowing money I was amazed to learn that - apart from a mortgage to buy his home - my colleague has never taken out any credit in his life. When I asked if he'd ever had a personal loan, he explained that he saved up to buy his first (used) car, and his second. What's more, he paid for holidays and other big-ticket items by saving hard, too. My Foolish pal has had a credit card for most of his adult life, but he uses it wisely and always pays off his bill in full every month. When pressed, he admitted that he was once late with a payment, which caused him to pay a little interest. However, he scrambled to solve that problem as soon as he realised his slip up. So, no credit-card debt or personal loans – very impressive so far. He then informed me that he'd only been overdrawn once in his adult life. Again, this was the result of a youthful oversight and, after bringing his bank account back to order, he's never made the same mistake again. By avoiding overdraft charges, credit-card interest and personal loans, my colleague has avoided seeing his wage being eaten up by interest charges and credit repayments. Over the same period, I paid tens of thousands of pounds in interest to a long list of card companies and loan firms. If only I'd adopted my friend's attitude: "I don't do debt"! Lesson three: Start saving and investing early He has been saving from an early age, and had already got into this good habit before leaving school. By living well within his means, he's made sure that he's always got money left over at the end of each month. His savings have gone in tax-free havens such as cash mini-ISAs, which are savings accounts that pay high rates of tax-free interest. However, my Foolish buddy is a big fan of the stock market, where much of his money ends up. Every month, he saves a fixed amount into a cheap, flexible index tracker, which simply tracks the stock market up and down. He also picks his own shares, after doing his own careful research, of course. And, finally, he invests a healthy chunk of his wage into our low-cost company Stakeholder pension scheme. By doing this, he gets extra contributions from the taxman and from our employer. Learn more about cash ISAs and pensions. Lesson four: You don't need to start rich to get rich! This is a crucial point to learn. You don't need pots of money to get rich slowly – all you need are good habits. My colleague has spent most of his career in modestly paid jobs. And yet, thanks to more than ten years of Foolish financial management, his earnings are boosted considerably, thanks to savings interest, share dividends and investment returns. As it turns out, our Foolish hero has everything in place to become an Automatic Millionaire. Now, if only I could learn to do as he does, instead of being a financial maverick! More: Check out these superior savings accounts | Get a cash mini-ISA and an index tracker.