Archive for August, 2009

What Did Chemical Engineering Teach Me About Money?

The first thing I learned about Chemical Engineering as an undergraduate was Mass Balances. In summary, all of chemical engineering is governed by:

In + Generated = Out + Accumulated

Pretty basic stuff, but this principle applies in general to any kind of scientific process out there: electricity, heat, motion, chemical reactions etc. If you have ever taken a science course, you have surely encountered this expression in some simplified form (also known as conservation of mass)

Here’s the real geeky part: this balance also applies to finances. Financially, this  equation looks like

Money in + Money Generated = Money Out + Money Accumulated

In: For chemical engineering, the mass in refers to the raw materials coming into the reactor. This is the starting point of all chemical reactions.  Similarly in finance, the money in is your income and just as in engineering, it’s the starting point. It comes in form of income from your job, parents, relatives etc.

Generated: A generated mass in chemical engineering refers to materials that are being formed within the reactor. The raw materials are mixing and colliding to form new materials. In finance, money generated is the additional money you can get from your income i.e. interest (on investments, savings accounts etc). One of Murphy’s laws says “Before you do something, you always need to do something else”. Before you generate money, you need to begin with money (income).

Out: In chemical engineering, these are the materials that are leaving the reactor. It usually contains some of the raw materials that didn’t convert and the products you are trying to generate. In finance, money out would be the expenses e.g. bills, taxes, overdraft fees etc.

Accumulated:  In chemical engineering, these are the materials that stay in the reactor without coming out. It is on the same side as the materials coming out because this is detrimental to the process. Therefore for a chemical engineer, accumulated materials are BAD. This is where finance and chemistry will disagree because money accumulated is a good thing. It’s actually what determines your wealth. If I rearrange the previous equation,

Money in + Money Generated – Money Out = Money Accumulated

In the words of Archimedes: EUREKA! Money Accumulated is essentially your NET WORTH and is the determinant of your financial health.

While most people only focus on increasing income as way to accumulate money, this equation shows that if attention is not paid to the other two factors, it won’t have any effect. Take into consideration how much you are making now and compare it to 1 or 2 years ago? You’re probably making more money, but as your net worth increased? Are you keeping more of the money you’re making? I have found that as soon as I started making more money, the things I wanted increased. So my equation was a mess and often resulted in negative accumulation. It’s not just enough to earn more, you need to control your expenses and let generate interest.

Reactor

In the illustration of a reactor, it’s even clearer to see why accumulation and generation are often easy to ignore. These are the things happening behind the scenes (inside the reactor) that you don’t notice. Unfortunately, that which is easily overlooked is often very important. We feel the joy of earning money and the pain of expenses, but there is hidden joy in generating and accumulating money as well.

Overall, there are 3 ways (mathematically) to increase your Net Worth/Accumulated:

  1. Increase Money in (Income)
  2. Increase Money generated (Compound Interest)
  3. Decrease Money out (Expenses)

We’ll get to look at each of these in the week(s) to come.

Picture courtesy of http://www.biofilters.com

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Embody your goals

I find myself continually chasing my dad’s achievements. I look at all he has done and it drives me to be him and one day one-up his accomplishments. He has single-handedly made it possible for me to get educated here in the states and is doing the same for my sisters. He has sown the seed that every parent wants to sow for their children: opportunity to make their way in life and I am yet to meet someone that I think works harder than he does.

If you got a chance to ask Tiger Woods what his goal, he would tell you, “To win more majors than Jack [Nicklaus].” If you were to ask a Christian what their goal was, they would (or should) tell you, “To be like Jesus.” Benjamin Franklin said “Imitate Jesus and Socrates” What do all these 3 statements have in common? Each individual’s goal is embodied by someone. Not just anyone successful person, but someone who has been successful in the area they have chosen to conquer.

When we set out to achieve, it’s very easy to think that we are reinventing the wheel and doing something that no one has ever done before. We make statements like “That happened to them, but with me it’s going to be different” or “These aren’t the olden days, it’s 2009 and things are different.” Is that really the case though? Yes there are new niches that crop up here and there e.g. Mark Zuckerberg’s success with Facebook, but even he is doing what Bill Gates did decades ago with Windows. There’s not much happening today that someone didn’t already blaze a trail.

Have you ever seen that graphic of a cat looking in a mirror and seeing a lion? It’s a future picture of where you want to go that keeps you on that path. Sometimes it can be hard to see or visualize where you want to go, but when you look at someone else who has “been there and done that” it makes the goal real and keeps motivation alive and burning.

Embodying goals not only provides motivation from the accomplishments of that role model, but we are able to see and learn from their mistakes. This is another reason why history books are still relevant today. We get to see what got Nelson Mandela through those nights he spent in prison. We get to study the actions and regrets of Abraham Lincoln and how this led him to be continually considered one of the best Presidents the United States has ever had. We get to see how hard Thomas Edison worked and lived the principle that “Genius is 99% perspiration and 1% inspiration.”

Superman

Sometimes our embodied super-heroes don’t even have to be people entrenched in history. It could be a parent, family member , teacher, guardian. These are tangible pacesetters who we have actually interacted with and been touched by in one way or another.

Even better, you can be your own competition. Just this past week, Usain Bolt broke records in the 100m and 200m. If you have ever seen him race, you will notice that he is consistently watching the sidelines to see if he has broken the record in the race. He doesn’t even concern himself with the people he is running against, but rather with breaking his own times because at the end of the day that will ensure a win.

In life just as in sports, records were made to be broken. In the end, knowing your goals get you started on the path to continual improvement, but your hero provides a tangible mark to pursue. So Superman That Goal and then pursue it.

Disclaimer: I don’t endorse Souljah Boy

One Small Step to your goal = One Giant Massage for your Morale

Why is it so hard to stay motivated? I think sometimes it’s because we don’t give ourselves enough time to savor the small victories. For instance, at the beginning of the school term you have decided you want to get an A in your math class. So the first mid-term arrives and you have gotten an 80%. Not the A you expected, but a step in the right direction. So instead of focusing on that and taking time off to watch a movie, you are already worrying about the next text and assignment due. Basically, rather than give your morale a “Red Bull”, you are pounding it with worries.

No war is won in any single battle, but by a series of victories. After each victory, the general will tell his troops to celebrate. If they are on home turf, they go home to their wives and families. If they are away, they take the night off and celebrate. The general realizes the importance of troop morale =and knows giving them that time to savor the victory. This is also true in life. Celebrate avoiding that store when it moves you closer to saving some money. Celebrate that mid-term goal when it moves you closer to that A in the class. Celebrate making it through a week of cardio workouts when it moves you closer to being a fit person.

Stairs

Sometimes we’re already thinking of the next step and we miss the chance to give our morale the boost that it needs. Of course this doesn’t mean that celebrating at the detriment of ruining the overall goal. After all it won’t make sense to save money by not buying new clothes and then going out to spend another $25 on food and drinks.

Another way in which small victories can have an effect is to go back and review them. Make a mental note because this way you are not looking towards an external source for motivation, but at yourself and your track record. Think about the times that your small efforts in another area of your life and how that made you feel.

Constant reminders like this help towards moving ahead and staying on the task. Give yourself a pat on the back. Now excuse me while I go and celebrate writing 2 articles last week :-).

Picture obtained from http://kunangkunangku.wordpress.com/

Stay ready so you don’t have to get ready

Luck is what happens when preparation meets opportunity

Enough Said


Where is my money going?

Those who cannot remember the past are condemned to repeat it – George Santayana

When I began this blog, one of the things I wanted to discuss was managing money i.e. budgets, investments, frugality etc. This will be one of my first articles towards that end with more to come in the future.

When I first got out of college, I took a year off to try to find work before I returned to graduate school. At this point, I was in credit card debt. The first credit card I ever got extended me $5,000! First of all, I had no business being handed a credit card equal to that amount as I was earning about $6,000 annually (from tutoring and working in the dorms). However, I was the one who mismanaged credit and handled the card as free money. When I was broke, I would pay for things using the card and buy stuff that I could honestly have done without. I got drunk with purchasing power and over time, I got other cards and bought more stuff. Therefore it was inevitable that when I got out of college with no income, I would end up being very broke. I knew I had to fix my leaking boat before it sank and I drowned with it. This was the point where I began to figure out what personal finance was and how to be the navigator of my financial journey.

The first thing I had to learn was: Where was my money going? This is usually the first step that most personal finance managers will tell you to do. Even though I had an idea that I was spending a lot on clothes and food and electronics, I needed to know what percentage was being spent where. This would help me figure out where money was being spent (or wasted) and the first things I would probably need to trim when I wanted to manage my finances properly.

I started with Microsoft Money that a relative had purchased, but it wasn’t free and I believe at this time Microsoft has actually stopped selling this program. In more recent time, numerous free online tools can be used for this same purpose. There are three that I have experience with Mint, MoneyStrands and Thrive

My favorite so far has been Mint for functionality and interface, but I’ll leave you to check out some reviews to decide for yourself (Mint Review, MoneyStrands Review, Thrive Review)

So what do these sites do? First, they consolidate most your financial information into one site i.e. checking accounts, savings accounts, CDs, credit card accounts and investments accounts as well. Secondly, they each have a feature that is able to show you graphically where all your money is going i.e. groceries, rent, food etc. You can basically pull up a pie chart in Mint that will show you proportions of where your money went for a certain month. This works very well if like me you have multiple accounts because it allows you to keep track of  how much was spent on gas overall whether it’s on a credit card or a debit card. Here’s a screen shot of my spending in August 2008 just to give you an idea of how this feature works (As you can tell I wasn’t very smart with eating out)

One of the worries that people have is about the security of having to enter bank information into a third-party site. I will tell you that I have been using Mint since May 2008 and I haven’t had any issues. If however you’re still worried, then there are other options such as Microsoft Excel and paper and calculator. In the end, your peace of mind is the most important factor to consider.
Overall, this is where you can figure out how much you’re spending on fast food per month, or how much gas you spent last month in comparison to the two previous months or how much you spent at Christmas last year and so on. This first step will help in setting up a clearer view of your financial picture as the next step is preparation of a budget.

Somebody’s got to do it

The ultimate folly is to think that something crucial to your welfare is being taken care of for you – Robert Brault

Picture this scenario: The alarm wakes you up in the morning. You shower, dress, grab a quick bite, maybe watch some TV if you have time and  if not; you rush out to begin the day with classes, meetings and other appointments.

Picture another scenario: The previous night before going to bed you wrote down two things you wanted to do and placed them under your pillow. The alarm awakens you. You reach under your pillow to remind yourself of those two things. You shower, dress and go on with your day.

Which of these two days do you think will most likely be more productive and focused?

The quote that began this post can be summed up in one word: Responsibility. Hopes and wishes will only be translated into possibilities and actions when a conscious effort is made to personally work towards them. We have all come into contact with people who blame their current states on their environment and their personality and other outside factors. Responsibility tells us that the things that happen in our lives are dependent on us and our ability to act knowing that actions translate into results. Sometimes people get lucky, but the vast majority of those who succeed take matters into their hands and actively work towards getting there.

Let’s return to the two scenarios mentioned previously. It is possible that the first scenario will be productive as well, but it’s easier and clearer to forge ahead in a direction when you remind yourself of what that direction is. It’s like a painter drawing a portrait. He will look at the object and draw a little and then look at the object again for further inspiration and draw a little more until the final result is obtained. Imagine this same painter drawing this same portrait without something to remind him of the final picture. He could still end up with a great picture, but it would take significantly longer. Brian Tracy often says “By the yard it’s hard, but inch by inch anything’s a cinch.” How can you assure yourself that you are inching closer towards where you would like to go if you don’t remind yourself of the end?

It’s probably not the first time you have heard about written goals, but the methods definitely work. Until you actually write down some of the things you would like to get down with your day, week, month etc, it’s just an idea in your head. Think about it: how many ideas have you had in your head in the past week? How many of these ideas actually translated into actions? I once had a friend who typed out his goals at the beginning of each school term and then taped them to the ceiling above his pillow. Every time I went to his room the goals were there in all their glory. I started copying that strategy as well, but I took it one step further. I started writing my goals almost every day.  I got this insight from Brian Tracy where he mentions that

less than 3% of people adults have written goals and plans that they work on every single day. When you sit down and write out your goals, you move yourself into the top 3% of people in our society and this will translate into results.

Truth be told, this was the way I figured I would know if my actions where getting me closer to my goals or taking me farther away from them.

No one cares more about your goals than you do. Even if there were people who did, no one is going to work harder than you because in the end you are the one who wants and needs it the most. Take a moment today to remind yourself of what you want to do with your life and think about how you will get there.

The Flame

While on Twitter the other day and I came across a tweet that read “How Benjamin Franklin turned America into a land of with  invention” with the following link. If you follow the link, it takes you to a page showing most of Benjamin Franklin’s achievements from inventing the lightening rod, to owning a printing press, from being an author to being an ambassador. It appears that he covered every spectrum: science, media, literature and diplomacy. In this day and age when everyone is focused on one particular sphere of life, it’s refreshing to think that at one time there was a man who covered all these aspects. As human beings we are not one-dimensional. We have varied interests and hobbies and can work at being good and great at all these things. No doubt Benjamin Franklin was a talented man, but the question is was it all based on his talent alone?

His biography was the first I ever listened to and what I was most impressed about is how hard he worked at being better.  In his late 20s (my age :-)), he came up with a list of what he called the 13 virtues

Temperance: Eat not to dullness; drink not to elevation.

Order: Let all your things have their places; let each part of your business have its time.

Resolution: Resolve to perform what you ought; perform without fail what you resolve.

Frugality: Make no expense but to do good to others or yourself; i.e., waste nothing.

Moderation: Avoid extremes; forbear resenting injuries so much as you think they deserve.

Industry: Lose no time; be always employed in something useful; cut off all unnecessary actions.

Cleanliness: Tolerate no uncleanliness in body, clothes, or habitation.

Tranquility: Be not disturbed at trifles, or at accidents common or unavoidable.

Silence: Speak not but what may benefit others or yourself; avoid trifling conversation.

Sincerity: Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly.

Justice: Wrong none by doing injuries, or omitting the benefits that are your duty.

Chastity: Rarely use venery but for health or offspring, never to dullness, weakness, or the injury of your own or another’s peace or reputation.

Humility: Imitate Jesus and Socrates.

He would then pick a virtue and work on one each day and ask himself at the end of the day how well he had done in what he set out to do. History tells us that he often went astray, but it didn’t deter him from working on these virtues. In the audio book I heard, I learned that he latter abandoned the practice of working on a habit per day later on, but this happened after he had instilled the habit of actively working to make himself better.

What can we learn from Franklin’s behavior.

  1. 13 virtues: We should all ask ourselves what is most important to us and look at improving in all those areas. Personally, my life is divided into financial, intellectual, spiritual and social and I try to set goals in each based on what I want to get out of each area. Whether religious or not, there are certain principles that should guide any human being. These principles require attention.
  2. 13 definitions: Not only did Franklin list principles, he also wrote out what each meant to him which would lead to the actions to take. For instance being healthy might be an important virtue, but it’s so broad that if you don’t define what it means for you, it’ll be hard to focus your efforts. It could mean keeping a certain weight for some, or exercising 3 days a week for others. It’s when the personal meaning of these principles are defined that the activities which guide them become clearer.
  3. Daily Practice: It is often said that it takes 3 weeks to make something a habit. It’s not enough to just come up with principles and activities, but one has to consciously work at accomplishing them. We may not be able to do it like Franklin did, even he failed sometimes. I try every day to come up with a list of activities that match my personal goals and I don’t accomplish them all, however I try to make sure that I take a step towards that direction. Sometimes making a list appears to limit what you can do, just like people believe budgets don’t give you freedom. I believe these lists give freedom because you choose what you want to place on them and then they direct you towards what you really want.

One might look at Franklin’s life and think he led a very rigid life, but look at where it got him. From Philly to France (The French loved him so he couldn’t have been that rigid/boring) and almost everywhere in between. He started the torch that has guided a lot of innovative people over the years and his practices began where the spark (for me) left off.

For a look at history, here’s a page from Franklin’s journal (from the link I pointed out earlier)

Franklin Journal