From time to time I am asked what the most important component is to achieving financial success. I have given it much thought, and to be honest, there is no one-thing you can do that will lead you to financial success. The road to financial freedom requires a commitment and a well-laid plan. That said, there are some things that I think everyone should know, or at least keep in mind. I call them Ted’s Tips for Financial Success. They are as follows:
Establish Goals, Both Long Term and Short Term and Develop a Plan to Achieve them: It has been said that if you don’t know where you are going you are never lost. The same is true on the path to financial freedom. It is important to take some time to examine what you truly want to accomplish financially, and develop a plan to get you there. Remember, thinking long-term is key in this process.
Establish and Maintain an Emergency Fund: Every now and then something unexpected happens that either causes an added expense in our lives, or a diminished income. It is for that reason that it is imperative that you maintain an emergency fund equal to 3-6 months worth of living expenses in cash should an emergency arise. The purpose of building this fund is to satisfy living needs until your income increases to normal levels. Take for example a disability situation. If your disability income policy has a 60 day elimination period, you will need to use some of the emergency fund to pay your living expenses until you disability policy begins paying out.
Remember the True Measure of Wealth: The truest measure of wealth isn’t measured in your earnings; it’s measured in net worth. Net Worth = Assets – Liabilities. Simply stated, Net Worth = What You Own – What You Owe. It is a measure of financial solvency and the best measure of true wealth. In order to truly build wealth, you need to build your net worth. To do this, it is important to keep you assets high and your debts low. To increase your net worth, keep in mind that it isn’t the amount of money you make that is important, it’s the amount of money you are able to keep that will help. If, for example, you make $300,000 a year, and spend $300,000 a year, you won’t be able to build wealth the same way someone that makes $300,000 a year and spends $250,000 per year and saves/invests the remaining $50,000 will.
Invest According to Your Risk Tolerance: It bears mentioning, especially in these volatile times, that when you invest money for the long term you must it is extremely important to make sure you invest in what is appropriate for you. We are all familiar with the Risk/Reward relationship. It is natural to be a little nervous in down times. However, if you find yourself getting more nervous or upset during periods of poor market performance than normal it may make sense to re-visit your strategy and make sure it is still appropriate. Your plan is flawed if you are losing sleep over investment performance.
Make Sure you Have an Estate Plan: Having an estate plan put together will not only provide for the distribution of your property in the event of your death. It will also define who should make medical decisions for you in the event of your incapacity, when extreme measures should be taken to save your life, and, if applicable, who would be guardian of your children in the event of your death. In addition to executing the necessary documents to accomplish the above, you should also communicate with those people that might be involved in your estate plan. Let them know what their role is and share any information they might need such as account and insurance information. Having an estate plan put together allows you to make decisions as opposed to depending on family or court system to decide what is best.
The 5 above suggestions are not the only things that are important to keep in mind on the path to financial freedom. However they are some of the basic fundamentals that are important to keep in mind as you continue the pursuit of your goals and financial freedom.
Tuesday, October 14, 2008
Back to School Credit Cards....BEWARE!
Another summer has come and gone. This time of year finds many young people leaving home, either again, or for the first time, and heading off to various institutions of higher learning. While this is a very exciting time, it is also a prime time to for students to learn some lessons in financial responsibility. Lessons that can hopefully be learned here, so that they don’t have to learn them the hard way, from experience.
One of the most important lessons that a college student can learn about money is to be responsible with credit cards and credit card offers. Nowadays students walking around college campuses are bombarded with credit card offers. Ironic, considering most students are either not employed, or have low-paying jobs. Some credit card companies even sweeten the deal with a free t-shirt or coffee mug. However, remember, the credit card company is not on your side! Most card offers look very attractive, especially when you convince yourself that the card will only be used for emergencies. It is not uncommon for credit card companies to advertise, “teaser rates” of 0% interest for the first year, then increase to somewhere near 24.99% after that. Ouch!
Visa and Master Card are not our only adversaries in the process of teaching credit responsibility. Department store credit cards must also be approached with caution. We have all been there; you bring your purchases to the counter of a department store, the clerk rings up your items, and then asks if you would like to put today’s purchases on your store charge card. When you decline, or tell them that you don’t have a store charge card, the clerk delightfully brings to your attention that if you open a store charge account, you can save 15% on today’s purchases. If you agree, you fill out the card application, you are most likely approved, and you leave the store having saved 15% today and a brand new credit line to maintain.
Aside from a multitude of offers, one of the reasons that it is so easy for young people to get into trouble with credit cards is because there is a psychological disconnect when making a purchase on a credit card. This is so because you are not physically taking cash out of your wallet or writing a check, thus making it more painless to buy often and overspend. Even if you are someone who likes to use debit cards that draw automatically from your checking account, you are more likely to track debit purchases because the money is immediately removed from your account. It is for this reason that credit card holders must exercise great caution in purchases.
As you know, when you use a credit card to buy something, you are in effect, borrowing money from the credit card company. If you pay the credit card company in full at the end of that billing cycle, you will not accrue any interest and you will have essentially used the credit card company’s money for free for that time period. However, credit card companies make it all too easy for customers not to pay off their balances in full every month. For a college student, it’s very easy to overlook the part of the billing statement that lists the full balance, and instead concentrate on the part that lists the much-smaller minimum payment.
This can be a dangerous game, especially if you continue to charge on the card and only make the minimum monthly payments. For example,
If you have a $500 balance on your credit card with a 24.99% APR, and make a minimum payment of $20 per month it will take you 3 years to pay off that credit card. Furthermore, you will end up paying a total of $720 to the credit card company for $500 worth of purchases. This assumes you don’t make any additional purchases!
From the above example, it’s no wonder that so many students get into credit card trouble.
Credit cards are not inherently evil. Credit is a financial tool that, if used effectively and responsibly, can help you to achieve your goals. It is important to know how credit works, and how and when to use it appropriately.
One of the most important lessons that a college student can learn about money is to be responsible with credit cards and credit card offers. Nowadays students walking around college campuses are bombarded with credit card offers. Ironic, considering most students are either not employed, or have low-paying jobs. Some credit card companies even sweeten the deal with a free t-shirt or coffee mug. However, remember, the credit card company is not on your side! Most card offers look very attractive, especially when you convince yourself that the card will only be used for emergencies. It is not uncommon for credit card companies to advertise, “teaser rates” of 0% interest for the first year, then increase to somewhere near 24.99% after that. Ouch!
Visa and Master Card are not our only adversaries in the process of teaching credit responsibility. Department store credit cards must also be approached with caution. We have all been there; you bring your purchases to the counter of a department store, the clerk rings up your items, and then asks if you would like to put today’s purchases on your store charge card. When you decline, or tell them that you don’t have a store charge card, the clerk delightfully brings to your attention that if you open a store charge account, you can save 15% on today’s purchases. If you agree, you fill out the card application, you are most likely approved, and you leave the store having saved 15% today and a brand new credit line to maintain.
Aside from a multitude of offers, one of the reasons that it is so easy for young people to get into trouble with credit cards is because there is a psychological disconnect when making a purchase on a credit card. This is so because you are not physically taking cash out of your wallet or writing a check, thus making it more painless to buy often and overspend. Even if you are someone who likes to use debit cards that draw automatically from your checking account, you are more likely to track debit purchases because the money is immediately removed from your account. It is for this reason that credit card holders must exercise great caution in purchases.
As you know, when you use a credit card to buy something, you are in effect, borrowing money from the credit card company. If you pay the credit card company in full at the end of that billing cycle, you will not accrue any interest and you will have essentially used the credit card company’s money for free for that time period. However, credit card companies make it all too easy for customers not to pay off their balances in full every month. For a college student, it’s very easy to overlook the part of the billing statement that lists the full balance, and instead concentrate on the part that lists the much-smaller minimum payment.
This can be a dangerous game, especially if you continue to charge on the card and only make the minimum monthly payments. For example,
If you have a $500 balance on your credit card with a 24.99% APR, and make a minimum payment of $20 per month it will take you 3 years to pay off that credit card. Furthermore, you will end up paying a total of $720 to the credit card company for $500 worth of purchases. This assumes you don’t make any additional purchases!
From the above example, it’s no wonder that so many students get into credit card trouble.
Credit cards are not inherently evil. Credit is a financial tool that, if used effectively and responsibly, can help you to achieve your goals. It is important to know how credit works, and how and when to use it appropriately.
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