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…