Apr 24 2014
Whether I’m talking with individuals, in front of groups or to you on the pages of our publications, I work hard to cover matters that you hope you like or need to know. Sometimes I’m left with the feeling that there should be something more cosmic or at least a lot more interesting. That leads me to this. Generally good financial planning is boring. If you find it exciting, stressful, regretful, depressing, combative or any other state of high emotion, you’re probably doing something wrong. Here are eight boring financial rules to live by to live a happier financial life (in no particular order).
Live within your means. Zzzzzzzzzzzzzz….wake up! That’s right folks this radical bit of news is a major challenge for some families. If you can’t live within your means, you’re doomed and the rest of your life is made miserable as a by-product. Credit is not a valid method for supporting a family. You know how it’s said that finances are the major cause of relationship difficulties? This first point is a major culprit.
If you are already in trouble, start living within your income today. Sketch out a common-sense budget, cut expenses, make a plan to pay off the debt, start an automatic savings deposit at some minimal level. “Cut expenses!” That’s right you heard me. Every expense falls into one of two pots—an absolute requirement, no questions asked or a desire, a want, a luxury. Guess what? Bye-bye luxuries. When the debt is paid off, bulk up the automatic savings and investment amounts and live off what is left after savings and investments. Who left the coffee pot empty!
Make a plan for your future. Without a plan, you are walking through a totally dark doorway with no idea what’s on the other side. Don’t go crying to momma when you end up somewhere undesirable. Your plan should be pretty simple. Starting today, make your objective a small financial footprint as you go into retirement. Financial footprint = your living expenses. Ideally and relatively speaking, a small financial footprint either requires less retirement income or allows you to live a larger life on the income you created. Win-win.
Protect your family. Noooooooo not insurance! I’m sorry but I warned you. Splash some cold water on your face and hang with me. Death will strike us all at some point. Tragically some earlier than others. If death takes away your family’s living income, you must have alternative sources of funds available for them to continue to live at a reasonable standard of living. Role play your or your spouse’s death and see what happens. Where will the survivors turn? How much will they need? How long will they need it? How will they manage their funds? Who will help manage the funds? Consider all these questions at different ages because your needs will change over time. Also, home, auto, health, disability, long term care, liability—protection for worse-case scenarios. Now was that so bad?
You must invest. However, it doesn’t have to be complicated. There are several posts in this blog about investing; the who, what, where, when, how and why. Bottom line…
• You should be contributing to your employer plan (401k, TSP) or an Individual Retirement Account (IRA); or both.
• Keep your investment expenses cheap.
• Contribute every pay check.
• Have the right allocation of funds in your account.
• Rebalance to your original allocation of funds annually.
All of these concepts are described in this blog in other posts.
It doesn’t have to be complicated as I said and you can do this easily. But it does take some reading and understanding on your part or you’ll fall into all the dumb and expensive mistakes people can make. A few test questions for your consideration. It’s open book and the answers are in this blog.
• What’s the difference between “risk” and “risky?”
• How can risk be managed to minimize risk while investing in stock funds that ensure long-term wealth creation?
• Most people think the stock market going down is the risk but why must the stock market go down for you to build wealth?
• How can you use your fund allocation to manage risk?
Take a little time to become familiar with investing basics and these questions will be easy.
Have a savings account. How mind-numbingly basic must I get? You must have access to quick and stable value money. Why? So you don’t go into hock or debt for one thing. You occasionally need money for emergencies, large purchases, expenses after a job loss, a splurge every once in a while (you have to live a bit sometimes). Remember, credit is not a valid way to pay for life. Have money available at all times.
Consolidate (and eliminate where possible) accounts. KISS! I mean Keep It Simple “Silly.” Too many accounts complicate your life. If you were a juggler, you can juggle only so many balls in the air. You take on too many and balls start falling to the ground. Fewer accounts, better control, easier management and realized objectives. Accounts to consolidate/eliminate: credit, loans, retirement, savings, investments, etc.
Pay your bills on time. Seriously?! I seriously have to mention this especially to the folks who have a problem with the first rule above. Paying on time (and when possible more than required) positively affects your credit rating. The better your credit rating, the cheaper future borrowing rates can become. Plus it allows for better or more financing options for you should you need credit. Creditors prefer to do business with people they can trust.
Get you and your spouse on the same page. You cannot be working against each other. This one may not be so boring. These actions are the basic building blocks to financial success—like the foundation of a home. To disagree or disregard these actions is risking ruin.
You do these things and you are on the road to happiness because you’ll have your financial house in order. Please pass the No-Doze.