The Ten Commandments Of Personal Finance by Fritz

The Ten Commandments Of Personal Finance Posted on November 18, 2015 by fritz@theretirementmanifesto.com Is it possible that there are some basic principles upon which your personal finance journey should be built? It turns out there are. I’ll warn you in advance – you may not like some of them. Just as THE Ten Commandments guide us away from our personal nature which is sometimes tempted to do things which seem fun at the time, but lead to long term harm, these “Personal Finance Commandments” can guide you away from doing things which will bring harm to your long term financial goals. In full transparency, I didn’t come up with the original list. That honor goes to this article from MoneyStepper, which I just read tonight. I liked the concept and the guidelines presented so much, I’ve decided to build on the original article with original thoughts of my own, including the “10 Commandments” title. In my quest to “Help People Achieve A Great Retirement”, I think there’s a lot of room to share some of the best concepts I come across in my heavy reading on personal finance topics. This one’s a good one, and worth my effort to build upon the concept. Strive to achieve as many of these commandments as you can, and you’ll be well on your way toward financial independence. Break them, and suffer the consequences. The 10 Commandments Of Personal Finance I. Keep Your Housing Costs Under 25% of Your Net Income Personally, I like these “rule of thumb” guidelines to help you decide how much of something you can afford. When you’re shopping with a realtor, or talking to a banker, they often attempt to “stretch” you to a ratio that’s higher than you should really undertake. So, look at your last paycheck. How much went into your bank account? If you rent, your rent should be less than 25% of your monthly NET pay (after taxes). Ditto on your mortgage payment. If you’re spending more than the 25% “commandment”, consider downsizing, or seek out a job with higher pay. II. Keep Your Mortgage Under 2.5 Times Your Annual Salary Interesting that the first two “Commandments” focus on housing costs. Appropriate, given the cost of the roof over your head is the highest expense you’ll incur in your personal finance journey. Manage it carefully, and don’t buy “too much” home. If you’re making $50,000/year, your home should be worth $125k or less. III. Don’t Buy A New Car Unless You’re A Millionaire I LOVE this one. Bottom line: buying a new car is stupid (yes, I said Stupid!). It depreciates immediately, and it’s expensive. It’s one of the worst personal finance decisions you can make. Don’t “Buy New”! After a few months, it’s “just a car”. Within a few years, if you’re like most people, you’re “itching” for another one. AVOID the materialism – focus on the function. My wife and I have bought used cars for years, and paid cash for all but our first one. We bought her last car new (a 2012 Hyundai Sonata for $25k), but I’ve told her she can’t sell it until it has over 200,000 miles on it. Oh the fun we have on this topic. Yes, this one is a HOT button for me. Don’t let Madison Avenue talk you into a mistake. Here’s a challenge for you, which I’ve accomplished with several of my cars: “$1,000 PER YEAR” Depreciation, that is. Make it a personal goal. Think on it. If you buy a $20,000 car and sell it in 3 years, you’d have to sell it for $17,000 to achieve this goal. It can be done, I’ve done it twice (most recently with my 2002 Miata, which I bought for $12,000, and sold it 6 years later for $7,000). It’s really, really hard, but it helps you keep your car expense where it should be – MINIMIZED! IV. Maintain A Savings Rate of 20% or More I know, I know. You have a million reasons…… Get over it. When you get your next pay raise, divert the majority of it to savings. For example, if you get a 3% raise, increase your savings rate by 2% ON THE SAME MONTH that your pay increase hits your paycheck. You’ll never miss it, and within a few short years you’ll be over 20%. With pensions gone the way of the dinosaurs, and Social Security anything but secure, it’s critical you save at the 20% level to have a realistic chance of a “normal” retirement. Or, you can keep making excuses. Don’t say you haven’t been warned when you’re 70 years old and fearing for how you’re going to live on your meager savings. Do it now, while you still have time. You’ve been warned. Again. Getting the hint? V. Earn A Minimum Of 5% On Your Net Worth This is a new one, and my compliments to MoneyStepper for the concept. He argues that you should look at the return on all of your assets (including home value) and strive to achieve a minimum of 5% return. This is necessary to grow your savings into a large enough asset pool to offset inflation and provide the income you’ll need in retirement. The takeaway for me – keep your assets widely diversified, and don’t get in the trap of “too much in cash” beyond your 6 month emergency fund. You must earn a higher return than is possible on fixed income investments to grow your assets at the rate they must grow to reach your objectives. VI. Think Before You Act I’ve modified MoneyStepper’s rule, which read “consider every financial decision carefully via an investment analysis”, to a simplified “Think Before You Act”. Personally, I think the use of “investment analysis” scares people off, and it’s not necessary to make the point of this Commandment. The point here is to realize that your longer term personal finance success is nothing more than a long journey of little steps, every day. Don’t make spontaneous decisions on topics related to money (see Commandment III above), but realize that every decision you make has a long term impact. I’m a big fan of annual Net Worth tracking, as it gives you a nice way to see the results at least once a year from all of the little decisions you made during the year. VII. Pay Off Your Highest Debt First Make getting out of debt a huge focus. One could argue whether it’s best to pay off your “Smallest Debt” first (Dave Ramsey’s “snowball” method) or your “Most Expensive” debt first. Viewed strictly from a financial perspective, you’ll come out further ahead if you tackle the most expensive debt first. From a motivational perspective, the “smallest first” may be more encouraging. The point is: attack debt, and attack it HARD. It’s the fiercest enemy of your longer term financial goals (right up there with Procrastination!). VIII. If It’s Not In The Budget, Don’t Buy It Yes, that means you need to have a budget. A friend and I have had this discussion, and he believes if you’re saving more than 20% of your pay you don’t need a budget (as long as you’re not in debt). His logic – you’re saving 20% and you’re debt free. You don’t need to micro manage as long as you don’t spend more than the 80% remaining after your savings. I’ll give him that. Using the same logic, if you’re NOT saving 20% or more, or you’re in debt, you need a budget. If you’ve never done one, try it for one month. The purpose of the budget is to avoid making mistakes in your discretionary spending, which is exactly the point of this Commandment. IX. Never Go Shopping Without A List We’ve all been there, right? This one works. Make it a habbit, and only buy the items on the list! X. Always Think In Terms Of Hourly Value The MoneyStepper author uses this rule to guide you on what you should hire others to do. If you can make $20/hour working, but instead you spend an hour mowing your yard that you could pay the neighbor kid $10 to complete, pay the kid. I have a bit of a different opion on this one. You should only pay the kid if you WILL work the extra hour making $20 instead of mowing the yard. If it’s a choice between watching TV and mowing the yard yourself, mow it yourself. You just made $10 more by investing your time instead of paying the kid. Also, I think it’s helpful if you think of items you’re considering purchasing in “Hour Terms” instead of “Dollar Terms”. If you think about how much work it took you to pay for something, you may be just a bit more hesitant to open your wallet buying yet another thing you really don’t need. So, there you have it. 10 Commandments For your Personal Finance. See how many you can apply in your own life. The next time you’re facing a money decision that falls within these commandments, stop and think. If you do that, the past 2 hours of my life spent writing this will have been invested wisely. Make me proud.

5 Things Rich People Do With Their Money by Fritz

5 Things Rich People Do With Their Money Posted on July 19, 2016 by fritz@theretirementmanifesto.com Do you think you can learn something from rich people? How much do you know about them? Have you studied their habits to see what you can learn? Do you think they inherited most of their wealth? (They didn’t. In fact, only 10% inherited their wealth). Did they start on their paths toward financial responsibility earlier than most? (They did, with the average wealthy person starting to save by the age of 14). What are the top 5 things rich people do with their money? Are there common themes which could benefit you if they were applied in your own life? Today, we’ll review some interesting traits of wealthy people. 5 Things Rich People Do With Their Money I read an interesting survey this week from US Trust, which covered 684 high net worth investors, with at least $3 Million in investable assets. There are some very interesting findings in the survey, which is my focus for today’s article. There are, indeed, some very common traits among these folks. All of us could benefit from studying their habits and applying them in our own lives. Rich folks have some common traits regarding their finances. How many can you apply yourself? CLICK TO TWEET Here, then, are the top 5 common traits regarding how rich people manage their money. Think about which ones you already do, and attempt to apply a few that you don’t. 1. They Start Early start early According to the US Trust study, a common trait among the wealthy is the fact that they had parents who instilled a strong sense financial responsibility at an early age. The average wealthy person began saving at Age 14, began working for money at Age 15, started charitable giving (time or money) by the Age of 23, and started investing in the stock market by Age 25. I started working (and saving) when I was 10. In elementary school, I started shoveling driveways in the neighborhood, and got my first “real job” (a paper route) at age 13. I saved diligently, and had several thousand dollars in my savings account by the time I graduated from high school. Clearly, my parents instilled the work/thrift ethic in me, and my wife and I have worked to instill it in our own daughter. 2. They Delay Gratification delay gratification I had a discussion during lunch with a financial planning friend last weekend, where we discussed the single most important attribute required for wealth creation. We both agreed that delaying gratification is likely one of the most important things within our control for creating wealth. (By the way, my friend’s name is Ed Wolpert, and he’s written 3 books on personal finance. Have a look here). Apparently, the wealthy feel the same way about delaying gratification, with 80% of them saying that investing in long-term goals is more important than funding current wants and needs. As I explained to my daughter when she expressed a desire for a motorcyle, if you want to build wealth you need to save the money first and buy things you WANT in cash. It helps you delay your gratification, and insures your money works for you (instead of the other way around). 3. They Focus Their Investments On Buy-And-Hold buy and hold In spite of significant wealth, 85% of high-net worth investors say they made their biggest investment gains through long-term buy and hold strategies. Rather than being savyy day-traders, they automate their savings month in and month out, and gradually watch their net worth grow. They keep their investments simple, with 89% using a traditional buy and hold approach in mostly stocks and bonds. In addition, the wealthy maintain cash reserves, with 54% of them holding at least 10% of their portfolios in cash. They also invest in tangible assets, with roughly half of high net worth investors owing real estate or farmland that produces income and appreciates over time. Compare this to the “average” person, who borrows an average of $30k on a 68 month loan to buy a new car, which depreciates immediately. Smart? Not. 4. They Are Charitable Charity Wealthy folks share a common trait of feeling a deep commitment to give back to society. 74% donate their money, 61% volunteer their time, and 47% serve on boards. They find a way to contribute to others, which is counter to the stereotype so often attributed to the wealthy. As I wrote in “No One Has Ever Become Poor By Giving”, generosity brings unexpected rewards to the giver. The wealthy have discovered that reality, and most do not hoard their wealth. 5. They Manage Their Own Destiny destiny Whether the wealthy gained their riches via private business or corporate roles, they all agree that owning a business is a path to greater wealth than working for someone else. I read a lot, and there are dozens of articles like this one that point to the reality that entrepreneurship is the surest way to real wealth. It can be a difficult path, however, as 70% of the wealthy who are business owners agree that it’s more challenging than just “having a job”. Regardless, 80% still prefer to run their own business, demonstrating their motivation to take control of their own destiny. The wealthy work hard, and often make sacrifices. 71% say work responsibilities take priority over personal needs. Think about what you really want in life before you pursue wealth, there are tradeoffs. Summary Wealthy people share some common themes in how they manage their money. I don’t know whether it’s cause or effect, but the principles outlined above have been proven time and time again to be fundamental building blocks for wealth creation. Yet again, this survey by from US Trust proves these principles are critical, and followed by a majority of people with significant wealth. How about you? How many of the items on the list above are apparent in your life? Are there a few that you can begin applying to your personal situation? Work toward implementing all 5 in your personal finances, and you’ll be well on your way to…

New College Financial Aid Program Aims to Get Students Jobs, Not Debt Consumer Reports Tue, Aug 16 5:27 PM PDT The Obama administration is tackling two key problems in higher education today: Too many students go into debt to get a college degree, and too few land a job that puts their expensive education to use. Today, the Department of Education announced a pilot program, the Educational Quality Through Innovation Partnerships (EQUIP), that for the first time will give federal financial aid to students enrolled in nontraditional education programs, such as coding boot camps, online courses and corporation-based training initiatives. The aim is to give more students the chance to get trained for in-demand jobs quickly and affordably. In its pilot phase, the financial aid initiative will give up to $17 million in grants and loans to students enrolled in eight programs that have been preselected. The programs are partnerships between public universities and less-traditional education providers. All provide students protections, including refunds if they don’t get jobs after completing their training. Training Future Engineers and Managers EQUIP programs, which are largely focused on providing skills needed for high-tech jobs, include: Colorado State University Global Campus and Guild Education. A one-year certificate program in management and leadership fundamentals aimed at helping students move from low-wage jobs into supervisory roles. Marylhurst University in Oregon and Epicodus. A 27-week certificate program in web and mobile software development for low-income students to get jobs requiring computer software coding skills. Northeastern University and General Electric. An accelerated bachelor’s of science in high-tech manufacturing, initially only open to GE employees who will do their training at a GE jet-engine manufacturing plant. University of Texas Austin and MakerSquare. A 13-week computer-programming course to prepare students for mid-level software engineer jobs. The programs target lower income and nontraditional students who are either older, go to school part-time or want to update their skills mid-career. “In too many cases, low-income students have been unable to get the training they need because they don’t have access to financial aid to pay for them," Under Secretary of Education Ted Mitchell said in a press briefing. The ability of people to get jobs after doing the training is critical, he added. “It’s not enough to measure access and enrollment. We need a laser focus on outcomes.” In the next decade, 11 of the 15 fastest growing occupations will require some kind of post-high school education. New Model of Education Welcome but Not a Cure All Consumer advocates applauded the move. “It's no secret that there are skilled jobs in the U.S. that employers are having a hard time filling—and that online education and training has a role to play more broadly in expanding access to learning opportunities,” said Suzanne Martindale, a staff lawyer at Consumers Union, the policy and mobilization arm of Consumer Reports, who focuses on higher education issues. The financial aid program comes as a growing number of people question the cost of higher education. Today a four-year education at a state school—including tuition, fees, and room and board—costs an average of $78,000; at a private university, it’s more than double that. More than 70 percent of graduates leave school with debt. And it's wreaking financial havoc on their lives. A Consumer Reports nationally representative survey (PDF) of more than 1,500 student loan borrowers found that 44 percent of those who've left college say they have had to cut back on daily living expenses, and 28 percent have had to delay major goals like buying a house, and 37 percent put off saving for retirement. The financial impact is so daunting that 45 percent of borrowers say knowing what they know now, their college experience was not worth the cost. The EQUIP programs aren’t a cure-all, said Martindale. “They won't be the right fit for everyone—not everyone is going to be a software engineer,” she said. It's important that these programs remain affordable, "especially if they recruit from low-income communities, so that if a program doesn't work out for the student she isn't stuck with a ton of debt at the end," she said. The financial aid programs will start rolling out early next year. The institutions are in the process of setting them up and getting final approval from the Department of Education. Mitchell estimates about 1,500 students will enroll in the first year.

7 degrees, no student loans, and 5 years of savings BY KATHLEEN ELKINS WITH BUSINESS INSIDER Justin Hall and Tina Hanisch, both 29, invested a lot of time in their education. Hall received a bachelor's degree, two associate's degrees, and a master's degree, while Tina earned two bachelor's, an associate's, and is slated to complete her master's in two years, which will up their degree count to eight. Their education came with a hefty price tag of $206,000. They whittled that sum down to $68,000, and paid it without taking out any student loans. What's more, through diligent saving and creative strategies, Hall and Hanisch—who are not married—have saved enough money that they could choose not to work for the next five years. Their impressive savings were an indirect result of living below their means and keeping expenses at a minimum. "Neither of us can sit still, so not working is out of the question," Hall, who works in financial services, tells Business Insider. Hanisch is a registered nurse and works when she's not taking classes or studying. "Being financially responsible is more about the opportunities versus not having to work. We want the ability to take more risk, to try new things, and to experience life in ways you normally couldn't." Here's how they covered $206,000 worth of education and set themselves up for several years of financial independence. 1. They Took Advantage of Company Programs and Scholarships to Cover Tuition. While their education amounted to $206,000 total, they only had to cover $68,000 out-of-pocket. The remaining $138,000 was paid for in scholarships ($65,000) and through company programs offered by their employers ($73,000). "There is so much money available to students who take a proactive approach to finding it," Hanisch tells Business Insider. "Being proactive was one of the key factors to my success. Every night I religiously sifted through online scholarship websites and local college funding programs for opportunities. I also stayed in constant communication with my [undergrad] school adviser, as they have up-to-date information about new or upcoming scholarships that you can apply for." 2. They Made Smart Investments. One of Hall's smartest investments was a home he purchased in 2008 with three partners. They proceeded to flip it later that year and earn a profit. At the time, he was completing his associate's degree from Mesa Community College. While a risky investment, he had the funds to invest in flipping the house because he was working two jobs while in school. "You always have a little fear in the back of your mind about potential risks," he tells us. "But in reality that fear is actually a tool that keeps you on your toes; it helps you stay on budget during renovations and it helps you overcome problems." Another major investment vehicle for Hall is the stock market. "I usually focus on five to 10 stocks for long-term investing. Since I do not trade for a living, I try to manage a smaller portfolio," he explains. "One of the benefits of being young is that you are able take more educated risks and still have time to secure your financial future if you fail," he says. 3. They Didn't Drain Their Savings to Buy a House. In 2011, Hall and Hanisch opted out of buying a new home together, and purchased a $60,000 fixer-upper in Mesa, Arizona instead. They've since put in $20,000 of renovations and completely remodeled the home without hiring a contractor and relying on help from family instead. They estimate they could sell it today for more than double the amount of money they put into it—for roughly a 125% return on their investment, Hall says. They were strategic when it came to buying their home. They bought it at a good time, when prices were still fairly low following the market crash of 2008, and they paid all cash. Not having a mortgage and interest payments provided emotional and financial freedom, Hall says. They were able to spend money on significant renovations to make the home their own, and never felt financially stressed about making payments. 4. They Created a Joint Account and Maximized Credit Card Rewards. Right before buying their fixer-upper, the couple created a shared account and opened a credit card to split joint costs like utilities, food, and other necessities. "All costs are run through our credit card, which gives us 1.5% cash back, so we basically get paid to pay our bills," Hall tells us. One month, he explains, they had to pay several thousand dollars on home and car repairs, but it resulted in about $550 cash back, which they will either put back into their joint account or use towards a vacation. While they set up a joint account for certain costs, Hall and Hanisch also maintained their own accounts, which has allowed them freedom to spend their own money as they please and prevented financial disagreements. They each put 10% of their earnings into the joint account, 10% into their 401(k)s, and 5% towards charitable donations. Hanisch allocates 30% of her earnings for personal expenses and 45% for savings, while Hall puts 20% of his monthly earnings towards personal expenses, 40% towards investments, and 15% towards savings. 5. They Made Sacrifices In Order to Live Below their Means. "Tina and I both lived below our means throughout school," Hall tells us. "There were times when we did not go on vacation, nor go out with friends or family. Instead we worked, studied, and saved. We really took the concept of 'live a few years of your life like most people won't so you can live the rest of your life like most people can't' to heart." Some of the bigger sacrifices included working throughout college and post-grad programs, and living with family until buying their fixer-upper. They're reaping the benefits today, and have exciting opportunities on the horizon. "We have an opportunity now where we can decide where we want to go," Hall explains. It will likely be California, where Hanisch could finish her master's online, but they're still deciding. "And I want to start my own business," Hall says. "With this financial freedom, I’m choosing to go that route." "We're going to take more risk now, step outside of our comfort zone, and travel more," he continues. "We're going to try to experience things differently. Instead of just saving, we're going to invest, experience life, and enjoy it now that we've put in the hard work."