subject of personal finance is very broad, but as a
beginning, I would like to discuss what I consider the
foundations of personal finance: Security, Stability,
Growth and Protection & Management.
Security to me means that I am prepared for the "hit
by a bus" scenario.
I have life insurance to provide for my wife and children.
Health, disability, auto and home insurance policies
also provide me additional protection in their respective
areas. I also have a list of where these policies are,
who my agents are, phone numbers and basic policy information
(#s, amounts, costs, etc.) I keep this information both
in a file at my house and in a safety deposit box at
the bank (a friends home will also work - think: "house
burns down" scenario). Also my wife and my brother and
sister-in-law who live nearby also know where these
I also try to maintain an emergency fund of cash in
a bank account or money market account (with checks)
so that I am prepared for a financial disaster, layoff,
or natural disaster. It took several years to build
up this cash fund. I started with a goal to have enough
cash for 6 months of my normal financial needs (mortgage,
food, insurance, transportation, etc.). Now I am trying
for 12 months' worth. I do this by saving a little each
month, and "investing" a portion of all "found" money
(gifts, inheritances, tax returns, anything unexpected).
I have a will and update it each year around New Year's
to reflect any changes in my life during the past year
(new children, new home or business, etc.). Most people
don't need an extensive will, the forms you buy at your
office supply store will do. But in some states if you
die without one, watch out. What happens to your money
and even your children could be entirely up to some
state or court appointed official.
The next level of personal finance is stability.
Stability to me means that first of all I live within
my means. I don't spend more than I earn. Otherwise
I am spending my savings, investments, emergency money,
or getting into debt. I have a lot of debt, but most
of it is real estate which is producing some income.
I try to avoid credit card debt and purchase everything
with money I already have. I don't buy things expecting
that next month I will have more money or I will get
a big raise or promotion. You can't sell me a car based
on a monthly payment amount; I want to know the final
In order to make sure that I am living within my means,
I created a simple budget and I track my expenses using
Simple Joe's Expense Tracker. I can tell how much I
have spent in each budget category and I know when to
keep a closer eye on certain types of expenses, or when
and where I can cut expenses and what I can live without
in order to stay within my budget. Counting pennies
is pretty tedious, but tracking where the dollars go
can be eye-opening.
Another aspect of stability is avoiding or eliminating
debt. Debt in itself is a form of stability; you always
have to make those payments until it is all paid off.
Some recent reports show that the average American is
$7,000 - $20,000 in debt. Most of it is consumer debt:
credit cards, store accounts, rent-to-own, auto loans,
etc. And those types of consumer debt usually charge
a higher interest rate than any savings account, CD,
or money market account; even more than most high-flying
This means that $1,000 in debt at 18% is costing you
9 times what your $1,000 savings account at 2% is producing.
Consumer debt is a dangerous spiral that is very hard
to get out of.
The first problem is, as mentioned before, living within
your means. Don't get further into debt to support an
extravagant lifestyle. Or even if you are frugal, if
you are using credit cards and debt to finance your
purchases, you either need to stop purchasing luxury
items or find a way to increase your income to support
You may even have to lower your standard-of-living because
you have racked up considerable debt and need to free
up some money to pay it down. But don't wait to start.
Those minimum payments are often designed to keep you
paying 18% interest for 40 years! That's longer than
most home loans. You could even end up paying more than
10 times the original cost of the item just in interest
payments. Is that new stereo really worth that much?
To help people get themselves out of debt we created
the "Pay Off My Debts" tool in Simple Joe's Money Tools.
It is also available as a stand-alone product called
Simple Joe's Debt Eraser. These tools help you create
a Rapid Debt Reduction Plan which shows you how much
to pay on each debt each month in order to save as much
on interest charges as possible and pay off your debts
as soon as possible.
These tools can help you systematically eliminate your
debts whether you owe $1,000 or $100,000. The key is
to start living below your means and start focusing
on paying off your debt.
It doesn't make much sense to be worried about whether
or not your 401k earns 8 or 9% this year, if you are
paying 21% on your credit card debt.
A third aspect that starts in the stability category
and transcends to the next personal finance level, growth,
is the concept of investing in yourself. By this I mean
spending time to educate yourself in personal finance
matters, as you are doing right now and spending time
gaining more knowledge and improving your skills or
even developing new ones.
As an employee, this can have a direct relation to who
gets laid off during the next round of cutbacks. If
you have some skills or have demonstrated some abilities
that are not possessed by your co-workers and these
skills make you a more valuable employee, you are less
likely to get the pink-slip.
Also while you are making yourself more valuable to
your current employer, you are also making yourself
worth more to future employers. It is much easier to
land a job if you have some special skills that are
in high demand or even if you bring some special knowledge
or experience that you fellow job-seekers may have overlooked
or failed to invest in.
Being in the computer industry, I have to spend hours
each week reading trade magazines, exploring web sites,
and reading emailed newsletters to keep abreast of what
is new in my field. If I stopped learning just five
years ago, I would have missed out on the Internet revolution,
email, web sites and the majority of the income I now
Keeping myself informed and up to date takes time and
resources, but it helps me protect my current income
and expand my skills to help me earn income in other
areas. This increases my stability by allowing me to
not have to rely on one client, employer or source of
income. A chair with four legs will always be more stable
than a stool with only three.
The next level of personal finance, as I alluded to
before, is growth.
Once you are secure and stable, you can begin to think
about building your wealth. Not that you have to figure
out how to become the next Bill Gates or Warren Buffet.
But you have to start building the "nest-egg" that you
will rely on when you retire.
And don't think that Social Security has you covered,
or that your 401k will grow back to what it was a couple
years ago. Or that your current employer is going to
re-institute the generous pension plans of yesteryear.
401ks are much cheaper to administer and you, the employee,
take the hit when the market goes down, not the employer.
My father is nearing retirement age and I think he has
a good plan. He has done some research and estimated
what his expenses are going to be when he is retired.
He then took a look at his potential sources of income
during his retirement.
He figured that Social Security would cover about a
third of what he wanted to live on. Only a third! And
he has worked his entire life. Would you like to instantly
have to live on only one third of what you currently
make? Retirement is suppose to be the golden years,
so where's the gold?
Luckily throughout his career, my father has worked
for companies that have had pension plans and he had
worked long enough at each company to be eligible for
some pension money. This is rare these days because
today the average worker will change jobs and companies
at least five times during his/her career. Also, as
I mentioned before, companies are switching to lower
cost 401k plans that do not guarantee you any fixed
In my father's situation, his pension money would cover
another third of the retirement income he wanted. So
now he had to either figure out where the last third
was going to come from, or start cutting out expenses
during retirement, like not visiting his children so
much. None of us liked the sound of that.
So my father started learning about the stock market
and investing in stocks and mutual funds. He made a
plan for growing his wealth and then educated himself
as to how he could accomplish his plan. I wish I could
say that he is doing better than he is, but luckily
he has some time still to put his plan into action and
ride out any market downturns. (He can do this because
he has the security of insurance and emergency money,
and the stability of little debt and a strong set of
By learning about how stocks, bonds, mutual funds, index
funds, options, futures, commodities, real estate and
other financial tools work you lay the foundation for
growing your wealth. You may start with just $100 in
a bank CD, but as you learn more and become more sophisticated,
you can invest in more and more opportunities.
You will learn about how risk and reward are related,
that as the risk increases so does the size of the potential
reward. Just like at the race track, you'll make more
on the long shot, but the odds are against it. Also
you can learn how to tilt the odds in your favor and
protect yourself against risk.
For those who are just starting out in the growth phase
or who want to dabble a bit before completing the other
levels of personal finance, my suggestion would be to
look into index mutual funds. Especially no-load index
funds (no initial/sales fee).
These funds are made up of the same stocks that make
up the popular market indexes like the Dow Jones, S&P
and NASDAQ100. The costs are low because management
is simple and as a mutual fund you can invest a little
at a time. Also they are easy to follow since you see
them on all the news shows and in the newspaper.
Protection and Management
The final level of personal finance is the protection
and management of your wealth. Most people never develop
wealth enough to need this level. But some of the concepts
can be applied to any amount of wealth you possess,
$10,000 to $10,000,000.
Part of the protection harks back to your will as we
discussed on the first personal finance level: security.
With any significant wealth or valuable asset (your
home, car, heirlooms, 401k, IRA, business, etc.) you
will want some way of disposing of that asset upon your
death. Whether it is go to go your family, favorite
charity, or local church, if no one knows about it,
"it ain't gonna happen".
As you start to accumulate wealth in excess of $350,000,
you may want to consult an attorney about creating a
trust. A trust is an entity that can own property and
pass that property to anyone you name in your will.
Usually the trust is designed to provide income to children
from the assets that are placed in the trust.
The trust can survive you so that your assets and income
may be passed on to your children or next-of-kin without
excessive taxation and legal entanglements. Some states
will take up to 55% of your assets as taxes when you
Protection also relates back to insurance. Now it may
be time to look at a multi-million dollar umbrella policy
that will protect you from lawsuits designed to part
you and your wealth. You may now be a bigger target,
so purchase a suit of armor.
The management aspect comes into play where you may
start to concern yourself with taxation, ownership,
distribution of income and possibly endowments to charities
or other non-profit institutions.
You may hire a person or company to manage your wealth,
or you may choose to do it yourself. Most people who
have earned their wealth through the "sweat of their
brow" have already become adept at managing their assets.
Some continue to personally manage their wealth because
of the enjoyment or challenge it gives them.
Others are ready to turn it over to a trustworthy manager
(who only gets paid a percentage of your increase) and
travel the world, or sit on a beach and count the waves.
Whatever your dreams for retirement (and why wait until
you are 65), understanding the different levels of personal
finance and spending the time and resources to educate
yourself will pay off whether you live next to Bill
Gates or Homer Simpson.
© Simple Joe, Inc.
David Berky is president of Simple Joe, Inc. which sells
the Simple Joe's Debt Eraser PC software. Debt Eraser
can help anyone get out of debt quickly and inexpensively
by creating a Rapid Debt Reduction Plan.
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