One hopes that one will learn a few things over the course of one's life.
A few weeks ago, I wrote a post about assembling documents if you should die. One of these was a document on all of things I've learned about money so I could pass it on to my kids. So today's post will be that exact topic.
Hopefully, you can learn from my mistakes and eliminate or lessen the worries you have.
1. Spend Less Than You Earn:
There is nothing revolutionary here.
When you spend less than you earn you have a number of benefits.
This frees up money to put into savings, buy income-producing assets or pay off debt. All of these are great and increase your net worth.
You learn to be disciplined with money. Where I got into trouble with money was when I wasn't paying attention, did whatever I wanted without regard to the consequences, or was against prudent financial advice. The discipline of watching your spending forces you to make sure you stay focused and on track, knowing one day you will arrive at your goal - retirement, the freedom to do what you want when you want.
Spending less than you earn now will make the transition to retirement much easier. Frequently, when people retire they have to live on less income. The typical number that is throw around is 80% of your earnings before you retire. If you're already doing that it won't be a big issue when retirement rolls around.
How much less should you spend?
If you're able to, spend 50% of your income and save/invest the rest. If you're unable to save that much, start by spending 99% of your income and saving 1% and increase that every year. One day you'll look at your savings rate and realize you're saving 20% or more of your income.
2. Start Saving Small and Increase the Rate Every Year:
I alluded to this in point number one.
We can be successful in personal finance, like a lot of what we do in life, by developing good habits and sticking to them. When it becomes a habit, we don't have to even think about the task, it's done.
When you take on a task like saving for retirement or paying off your debt, the total needed can be overwhelming and prevent you from even getting started.
To overcome this, start small. Even when things are extremely tough financially, you can find $25 a month to save. Start there. If you have a company retirement program sign up to have 1% deducted from your paycheck. Make a note on your calendar on January 1 of next year to increase this to 2% - 5%, whatever you want as long as it's an increase.
You'll find you won't even notice the amounts being taken out of your pay and it will give you the discipline to live off the remainder.
3. Eliminate Debt:
Again, nothing new here, just good sane advice.
Some debt you may need to take on early in life such as a student loan, a mortgage, car loan...Other debt, like credit cards, should be avoidable.
In any case, once the debt is there attack it with fierceness until it has been obliterated.
Credit card debt usually means you are spending more than you can afford (see rule #1). So, it will be hard, if not impossible, to eliminate your credit card debt if you can't get your spending under control.
Debt has interest charges. The more debt you have, the more you will pay for interest. Would you rather your money go towards interest and loan payments or towards an early retirement, a European vacation, or a rental property that pays you money? You don't have to answer, I know what you would say.
Debt takes away your freedom. It makes the option of leaving your job, starting your own business, or taking a sabbatical nearly impossible. Without debt, you have that freedom and eliminate stress in your life.
So, how do you go about eliminating debt?
First, take a look at what you have for debt. Credit card debt should be the first to go by getting your spending under control then applying all excess income towards paying off the debt. If you have more than one credit card, make minimum payments on all but one of the cards and apply the rest towards the remaining card until it is gone. Repeat until all of your cards are paid off.
Do the same with your remaining debt starting with the one with the highest interest rate.
I plan on doing future posts about how much to spend on your house, cars, and college so that even if you do have to take on debt you do so with totals that you can manage.
4. Invest Simply and Consistently:
Most of us don't have the time or expertise to manage investments well.
I am not a professional and can't offer you investment advice, but I can tell you what has worked for me.
Start investing at an early age. By putting your money into assets that will appreciate over time and can produce income for you, like dividend stocks, bonds and rental properties. Do this instead of putting your money into assets that decrease in value or produce no income, like expensive cars and homes.
Take advantage of company retirement plans that move money out of your paycheck into your 401K plan before you've had a chance to spend it. Many companies will match your contributions or give you a percentage of your earnings back as profit sharing.
Add money to your accounts every pay check and raise your savings rate every year.
Watch the fees associated with the mutual funds. Aim for funds with expenses less than .50%.
Use funds that are index funds or targeted funds (allocations based on your expected retirement year).
You will have years where the stock market declines or you wished you had put your money in gold instead of stocks, but stay consistent year after year and watch your net worth grow.
5. Work on Your Marriage:
Approximately 30 - 40% of all marriages end in divorce, according to an article by the Washington Post. This is down from the seventies and eighties when the rate was around 50%, but it is still high.
Divorce is painful for a person's emotions, but it is also damaging for a couple's finances. Legal fees, selling homes quickly at a loss, doubling expenses to maintain two residences and liquidating retirement accounts to pay for everything, can set your financial planning back years.
So what's the answer?
Spend time working on your marriage so you don't end up in divorce. I make it sound easy and it is not. If you're married you know it can be the hardest part of life at times. But people give up too easily. Stick with it, read, go to counseling, recall why you fell in love in the first place, and say positive things to each other.
Yes, it's work - A lot of work, but it's worth it...on many levels.
6. Right Way to Pay for College:
A college education can be expensive. Many people wait till the last minute and find they can't pay for their college education and are forced to take out huge loans (see the section on debt elimination).
Here's several ways to help:
a. Start saving early using good 529 plans.
b. Search for all colleges that offer degrees in you or your kid's program. Pick an accredited school that has one of the lowest tuitions.
c. Attend junior college for the first two years and transfer.
d. Take out loans that total a maximum of your first year's salary.
e. Attend a local college and commute, saving money on room and board.
f. Compare the average salaries for your field to your education cost to see if it returns a decent rate. Would it be worth it to you to spend $50,000 for a degree that will earn you $25,000 per year, maybe or maybe not?
7. Forget Get Rich Quick Ideas:
I have to admit I was sucked in frequently to get-rich-quick schemes. Surely, rich people are willing to show you how to get rich in 30 days, right?
Don't be duped.
Get rich slowly by saving as much as you can, paying off debt, putting your money in 401Ks and IRAs, rental properties, or starting your own business.
These methods are tried and true and have helped millions of people get rich.
Why not go for the methods that work?
8. Educate Yourself:
I graduated from college years ago, but that doesn't stop me from learning.
I read 50-70 books per year, take online classes and figure out things for myself by researching the problems online. These are all great ways to learn personal finance.
There are good reasons to use a financial consultant, but there's also good reason to educate yourself, with at least the basics.
I will publish a post in the future about my favorite books for you to read.
One of the biggest things to learn is the awareness of your money and how you spend it and save it. If you track your spending, your net worth (watch it grow) and your savings rate (start as big or small as you can and increase it over time) and watch those numbers every month, you will be light years ahead of the crowd.
9. Watch Out for Mutual Fund Fees:
This tip gets mentioned a lot now, but years ago no one mentioned it. It wasn't uncommon for a mutual fund to charge 2% or more to manage the fund. When you add that up over say forty years, you could lose hundreds of thousands of dollars.
Many people were attracted to the best performing mutual funds based on rankings in magazines and were not aware of the fees associated with investing with these funds.
Now, there is no excuse for not investing in funds that have fees less than 0.50%. You may be limited on your choices at work, but check any way and let your company know if they are high (hey they invest in those same funds).
Vanguard and Schwab are two that offer low management fees.
10. Create a Simple Budget to Track Spending:
Everyone knows they should have a budget, right?
How many people do one or keep using one? Not many.
I am accountant and I don't like tracking every penny.
The key to a budget is to create a simple one that you will stick with. This can be different for every person.
Start with the biggest and fewest categories, say your top five. These can be things like housing, transportation, food, medical and other.
Compare your totals, as a percent of income to suggested totals to see where your problem areas are.
You may find some quick fixes. If your food spending is out of control determine if it's from groceries or eating out. If it's eating out start by cutting out one restaurant trip per week. Something that small may save your $1000 or more each year.
Some may not be quick fixes. For example, you may have fell in love with a house, bought it and now you realize you're spending 40% of your income each money on housing (mortgage, insurance, taxes, utilities, repairs...). It's not going to be simple to reduce this expense, but now that you're aware of it consider putting the house up for sale and moving to a smaller home, one in a different town or to another part of the country (or world).
One of my favorite TV shows was "Lost". They had a group of evil people called "the others". This is what I think about for budget categories called other or miscellaneous. These are catch-all buckets to dump every thing else and can quickly get out of control. After you get the other categories analyzed delve into this one. If this category makes up more than 10% of your income you probably have opportunity to trim. Look for the heavy hitters in this category and try to reduce. Don't nit pick here only look at large items.
Once you are spending less than 90% of your income (so you can save the other 10% or more) make your budget nice and easy. Most people nowadays use their credit cards to pay for almost everything or pay bills online with their bank. Usually the bills you pay online are not your trouble spots. Frequently it's your credit cards. So create a budget for just your credit card total.
As an example, "I will only charge $1000 every month on my Visa card". Most credit card companies allow you to set up an electronic warning when you're account reaches a dollar limit you set. Or you can use something like Mint to do the same. This way when you receive the email from the credit card company you know you're done with spending for the month.
11. Save For or Delay Buying Things:
One big reason people get into trouble with their spending is buying on impulse. Credit cards are enablers, but they are not the cause. Yes, you could cut your credit cards up into tiny pieces or stick them in water and put them in your freezer, but does any of that trickery change your mindset?
I don't think so.
Two techniques that do work and can change your mind are saving up for things until you can pay with cash and delaying the purchase.
A technique I learned from Ramit Sehti is to open an online savings account at Capital One (I'm sure there are others that do the same). Once you have the account, you can go online and create sub-accounts and name them. For example, if you deposit $1000 you could create four accounts and call them vacation, dishwasher, new car, new camera. Then you could transfer $250 to each and watch each month as you get closer to your goal.
The other technique I can't remember where I learned it. When you want to buy something, jot it down with a date and description and come back in thirty days and see if you still want it. I have a program called "Todoist" and I can create folders in it. I have one labeled "Things to Buy" where I record things I thought about buying. It's funny to go in there and see things I really wanted a month ago and now I could care less about it.
Both of the above help delay the purchase until you can afford, delay it to see if you really want it or delay it permanently so you never buy it.
12. Track Your Net Worth Monthly:
This is my most favorite metric to track. It's easy and it tells a big story.
If you don't know what it is, a simple definition is total up the value of the things you own and subtract out the total owed. The big ones are real estate, cars, and retirement accounts.
Hopefully, when you calculate this it is a positive number. I make it easy and track on a spreadsheet and look up my home value on zillow, my car values on kelly bluebook (but only twice a year) and I can look up my retirement accounts and mortgage balance online.
What Can You Learn From Your Net Worth?
Over time, this number will grow. There will be months it may shrink due to the stock market tumbling, but the general trend should be up. It is fun and motivating to look at this number and compare it to where you were one or more years ago.
When you work on both saving and reducing debit, your net worth increases even more, as you are attacking it from both ends. Once your debt is gone or reduced to just your mortgage, you can pile the money even more on the asset side and watch your net worth really take off.
If you see this number decrease or stay the same and there's nothing wrong with the stock market or your investment strategy, then it is a quick sign that you're probably not watching your spending, and as a result not saving much or your debt is building up.
By watching this number every month you will get a great picture of how you are doing with your finances.
13. Trace Your Credit Score:
Credit scores run on a scale from 300 to 850, with an average in the 600 to 750 range. It varies by lender, but typically a score over 700 is considered good.
Keep an eye on this each month to make sure you stay in the good range and that no monkey business is happening. It can take years to correct a bad score, so make it a priority to keep yours good or to improve it if it is bad. Have the ability to rattle this number off if someone asks you.
What Contributes to a Good Credit Score?
1. The number and severity of late payments - If it all possible, set your bills up to be paid automatically. Ask your vendors if you can change the due date if all of them fall around the same date each month. Keep a spreadsheet with all of your recurring bills and record them as they are paid and you'll be able to quickly see if you forgot one.
2. Credit utilization on your credit cards - Add up the credit limits of all of your credit cards. Keep the total you charge less than 35% of this number. If you have two credit cards with $10K limits and you owe $14K total on both, you have used 70% of your available credit ($14K/$20K) and the credit reporting agencies frown upon that. It may be to your advantage to increase your credit limit or add another credit card to increase your total available credit. Just don't begin to charge more.
How Can You Obtain Your Credit Score?
1. Some credit cards report your credit score for you each month for free. I have a Discover card and my credit score is available on my home page when I log in each month. It is from only one of the credit reporting agencies, so it might be missing some details, but it is a good representation of my score.
2. You are entitled to one free credit report, from each of the three agencies, each year. Obtain your free report using this LINK. Pick one of the agencies every four months.
3. Sign up for Credit Karma. This service is also free and gives you a good approximate credit score.
14. Buy Good Used Cars:
I recently wrote a post about two online companies that can help with buying a used car, one that is in good condition, with a warranty for a fair price.
Cars are listed as assets on your financial statement and included in your net worth, but they almost should not be.
Cars are depreciating assets (unless you own a Duesenberg). They are necessary and can be fun, but financially you don't want to put a lot of your money towards owning one or several.
This post is about what makes sense financially and what I've learned is to buy cars with a good track record, in good condition that are two to four years old with as low mileage as possible.
That is the sweet spot.
The bulk of the depreciation has been removed and you're left with a reliable car in good condition that should last several more years.
There you have it.
A life time of trial and error and reading books boiled down to about 3000 words.
If you're new to personal finance or struggling, pick just one of the above strategies and give it a try.
What will you do differently this week?