My suggestions on Personal Financial
Management
by Jesse Walker
Okay, so there aren't original... but for those of you that haven't
read much about how to play with money the right way, there may be a
few ideas here you haven't read before. Here's a list of the
things I would do (in order) when trying to establish myself
financially... most of these I've done, and I feel they've helped a
lot. Just about everything on here can be considered "the
basics"... I haven't gone into any "advanced" topics yet (more to be
added later).
1. Figure out where you're at now
Financially, most people know
what they want (wealth... duh!). And while most people realize
that they need to figure out how to get there, it's hard to
conceptualize where "there" is if you don't know where you are
*now*. So, start out by making a little inventory... how much
money do you have in the bank? Is it in checking accounts?
savings accounts? CD's? Something else? How much
money do you have in your wallet? How much money do people owe
you (only add in things you actually think will end up being
repaid). Write all this stuff down.
All that goes on the positive side
(your assets)... the other important thing to consider is your
liabilities: what you currently owe other people. If you have no
debts, wonderful! However, lots of people have debts to consider:
car payments, credit card debt, school loans, etc. While some of
these aren't as bad as others, they all go on the negative side.
Once you have all that, you can just
subtract the negatives from the positives, and figure out your "net
worth"... basically, one measure of financial "wealth".
In my opinion, however, all that
doesn't
mean very much. What I consider to be more important is your
financial attitudes and habits. If you have good habits, you'll
come out on top, regardless of where you happen to be right now.
And, since you're reading this, I assume you actually want to learn
something about improving your own knowledge of financial stuff!
Awesome! That's how we should all be. Education is the key
to personal growth and success.
Back to the important stuff: in
order to complete the picture of "where you are now", you'll need to
know how you currently spend your money. The absolute best way to
get a handle on this is to track your expenses for a period of time...
a month seems to be a good time-frame to accurately represent
this. So, carry around a piece of paper for a month, and anytime
you spend any money, on *anything*, write down how much, and what you
spent it on. Simple, huh? At the end of the month, divide
all your expenditures into categories, and see how much you spent...
generally, most people have a good idea of how much they're paying for
rent, and car payments, but can be really surprised how the "small"
stuff adds up... eating out, buying CD's... etc.
2. Set some Goals
Once you know where you are,
it's essential to clearly define where you want to be. What are
your financial goals? For most people, I'd suggest setting a few
realistic goals, rather than the lofty "I want to be a millionaire"
type. Something like "I want to have all my credit cards paid off
in a year", "I will establish a retirement fund within three months",
etc. Start with whatever is most important to you. While
you're at it, set some educational goals... like "I will read one
financial book a month for the next year" (don't worry, there are
plenty
of interesting ones). The two things you should include in every
goal are 1. What you will do, and 2. When you will do it
by. Without both elements, goals are much less likely to be
accomplished.
3. Plan to achieve your goals
Now
that you know where you are, and where you want to be, *now* it's time
to figure out how to get there. For each goal of yours, figure
out what it would take to achieve it in the specified time span.
Then divide that into smaller goals that you can check off
periodically to track your progress. For example, if affording
a new computer is one of your goals, and you know it will cost
approximately $900, and you want it within 12 months, divide 900 by 12,
and you've got the amount you need to save every month to be able to
buy it in a year. Then find a way to save that $75 a month,
setting it aside in a special "computer" fund (not a bad idea to set up
a new savings account specifically for goals like this). As for
how to save that $75, well... let's move on to our next topic.
4. Important Habits
Now that you're underway, you
may run into setbacks... like "how can I afford to set aside $75 a
month when I'm justy barely getting by now?". Below, I'll outline
a number of things that I feel are essential (or nearly so) for
achieving financial success (however you define that).
A. Learn to
save
If you ever want
to have more money than you do now, it's essential to learn how to save
money. No, not the coupon-clipping type of savings, but the "set
money aside and watch it grow" kind of savings. The easiest, and
best way to do this, is by living the "pay yourself first"
principle. Here's how it works: when you get some money
(your monthly paycheck, for example), put a certain percentage of it
into savings. 10% is a good starting place. 15% is even
better. The best place for this money when you're just starting
out is probably a savings account, although there are lots of better
ways to invest it that become available as the sum grows. But
when you're just starting, the growth on the principal is the main
goal, since interest (or investment returns) aren't going to amount to
much compared to the amount you're putting in. Resist the
temptation to just leave it in your main checking account.
Putting it in a separate account will make it less tempting to
spend. This savings
should be dedicated to long-term financial growth. If you want to
save for a new computer, for example, that's a separate financial goal,
and should be in addition to the 10% you set aside for your financial
future. The savings funds aren't dedicated to anything but
"watching your savings grow". As the account increases, resist
the temptation to spend. This money is for *long-term* savings...
like maybe the beginnings of a retirement fund. The best time to
start a retirement fund is *now*... the longer you have it established
for, the more the money will grow. There's a lot of information
on that available online, and no, it's not too early to start a Roth
IRA if you're only 20 (if you have debt under control, etc).
Establishing a retirement fund (in my
opinion) is one of the best things you can do with your money (more on
this later).
B. Pay off
Debt
I should have mentioned this first, I
guess. Before you start your "saving" regime, you should pay off
any high-interest-rate consumer debt. If you carry a credit card
balance from month to month, this is the first habit that has to
go. Credit cards are fine (I'll talk more about rewards cards
later on), but interest, in this case, is your enemy (always pay your
balance in full every month, avoiding the financial trap of the
"minimum" payment). Pay off high interest rate cards first.
Put all available financial resources towards this goal until it is
accomplished. You don't need to start a savings account (which,
as of right now, will get you a little over 1% interest), when you're
paying 10-20% interest on the credit card balance. Pay it
off! School loans, and mortgage payments (if you have any), are
less critical. Not only is the interest rate lower on these types
of loans, but the interest you pay can be written off on your taxes
every year. So don't feel like you need to pay these off
immediately, although if you have the financial means to do it, it's
not a bad idea either.
C. Reduce expenses
This is (in my
opinion) the most important step to achieving your financial
goals. The first step is to "live within your means"... to reduce
expenses until they're less than your income. The ease of
obtaining credit seems (for many people) to have overshadowed the
common sense rule that you can't spend more than you earn. So
people get into trouble. Making your expenses match your income,
however, doesn't make you wealthy. And a large income doesn't
necessarily help here either: it's not how much you make, but what you
do with it that counts. We've all heard lots of stories about
famous people with high incomes that suddenly declare bankruptcy and
find themselves without anything. The secret to wealth is not
making a lot of money. It's saving (and wisely investing) the
money you *do* have! I'm not sure I can emphasize this
enough. Anyway, it's important. Learn to be frugal!
In a wonderful book on finance called "The Millionaire Next Door", the
author explains how many wealthy people are living "in disguise" right
along with the rest of us... driving old used cars, living in small
homes, and using coupons in the check-out line at the supermarket...
they're wealthy because they've learned to dissociate the money they
make with the money they spend; they've learned to be content (happy,
even) living on less than they could truly afford. All the
"extra" money gets put away, invested wisely, and not disturbed.
This way, over time, it grows into a sizeable fortune. As you're
learning how to build wealth, try to avoid making long lists of "things
I'm gonna buy when I can afford it". Though having a few of those
might provide needed motivation to save, if that's where all your
savings goes, it certainly won't grow. Go through that list you
made of your monthly expenses, and see what you can cut out.
There's a handy rule of thumb called the "step-down" principle that
goes something like this: look for ways to receive the same service or
product for less cost than you're currently paying. One example:
food. Eating out costs a lot, even if it's just at fast food
places. Rather than buying a combo meal every day for lunch, buy
a couple things off the value menu. Better yet, pack your own
lunch. Rather than going to see a movie the evening it comes out
in a nice theater, wait a day and go for a matinee showing. Or
wait a week and go see it in a budget theater. Or wait til it
comes out on video. Or just watch a video from your own
collection, or borrow from a friend or a library when you want to see a
movie. Anyway, enough about that.
By now, you should have picked up a few tips about how to plan your
financial future. I've only scratched the surface, however, and
there's a lot more you can learn... enjoy it! There's a lot of
good books to read, websites to check out, and people to learn
from. Have more financial conversations with your friends... a
lot of people try to avoid the subject of money, but think of what
would happen if we discussed it more openly, sharing our knowledge and
experiences! We could all learn how to live in such a way that we
would never experience financial hardship. Share what you know,
and look for new educational sources whenever and wherever you can...
I'll end with a list of some of the things that I think have helped me
the
most... I've got two lists below: the first for books, the second
for web sites. Check them both.
Good Books on Financial Management
(in no particular order, and with links to Amazon):
The
Richest Man in Babylon: The book to start with. It's
short, in story form, and contains EXCELLENT advice.
The
Millionaire Next Door: Good advice on how they live, and how
to become one by developing the right attitudes.
The
Wealthy Barber: In story form. Good for learning about
the basics.
You
Have More Than You Think: A good intro book from the "motley
fool" crowd (see their website link below)
The
Motley Fool Investment Guide: A sequel to the previous
book... good basic investment advice (focus: stocks, index mutual funds)
Rich
Dad, Poor Dad: This author has a different focus than some of
the others, but also emphasizes how to think about money. Good.
Common
Sense on Mutual Funds: The book to read if you're thinking
about index mutual funds.
Think
and Grow Rich: Haven't read it yet, but it's recommended a
lot. I'll get to it soon.
Good Websites:
Fool.com: a great
online community. I learned a bunch there. The forums are
the best part, but now have to pay for access past the free trial.
Bankrate.com:
LOTS of good educational stuff on here, besides the up-to-date banking
info (where to get the best CD, etc).
Morningstar.com: Their
focus in mutual funds, but some other educational stuff here too.
Vanguard.com: In my
opininon, the best place to invest (with index funds) once you have a
chunk of change. Open a Roth IRA with $1000.
"Investing for your Future"
Home Study Course: sponsored by Rutgers Univeristy Extension
American Savings Education
Council: "Tools and Resources" page: lots of "financial
calculators", etc.
Okay, that's enough for now... this
page is a work in progress, so check back from time to time to see if
I've added anything.
Last
Updated 27 July 2004