There Is No Secret to Financial Success

by Kevin

As we wrap up the year and head into 2012 you will undoubtedly see a lot of products associated with making 2012 your best year ever. You’ll walk the aisles at the bookstore and see books aimed at a new diet, an exciting exercise plan, a peculiar take on getting on a budget, and the hipster way of paying off credit card debt.

While I’m all for you buying whatever it is that will finally motivate you to get off your butt and get your finances in order, let’s be real for a second. There is no secret sauce. There’s no special methodology to getting out of debt. There’s no seminar that can save you from your poor spending habits. The foundations of a successful financial life do not change. Sometimes it takes special wrapping around those foundations to get us to act, but the core principals are the same. Let’s review those for good measure.

Core Principals of a Successful Financial Life

I think there are 4 principals every single person should understand.

Make More Than You Spend

It is mathematically impossible to get ahead if you are spending more money than you have coming in on a consistent basis. No matter what amount you start with — $100 or $100 million — continuing on a path that has less money coming in than you spend every month will bankrupt you. Every. Single. Time.

You always hear this as Spend Less Than You Make. It is essentially the same thing; this just emphasizes getting out and making an income rather than focusing on not spending as much of that income. If you want to go spend $100,000 per year, that’s fine, but find a way to go earn $101,000.

Be Prepared for Emergencies

My Dad always says “It’s always something“, and you know what? He’s right. Life is crazy, chaotic, and impossible to plan down to the microscopic level. The roof will leak, the transmission will go out, and the new suit you just bought for an interview will rip as you step out of the car. Emergencies happen. The only question then becomes did you have the foresight to prepare for them? Did you save money for a rainy day and can handle the emergency? Or are you left outside with no umbrella?

Avoid Paying Interest Where It Makes Sense

Paying interest makes sense — but only in the rarest occasions. If you are confident you can earn a 10% return on your money in the stock market and your mortgage interest rate is 4.5%, then you should take every extra dollar you have and put it into your portfolio. You’re winning by 5.5% every time you do that rather than paying off your mortgage.

However, under normal circumstances, interest is bad. You’re paying extra money on top of the actual cost of whatever it is you bought. Credit card debt falls squarely into this category. Paying for a $1,000 item is fine, unless you’re financing it at 21.99% interest for 6 years. That’s a terrible decision. This is the kind of interest you want to avoid.

Invest for the Future

Lastly, you need to prepare well into your future — your retirement. Don’t rely on government handouts or programs to finance your basic living in your old age. You can make smart decisions today and save just a fraction of what you would need if you start early in the process. Let the power of compound interest benefit you by starting as soon as you can. Even a few thousand dollars per year, given a healthy growth rate and a long enough period of time, can grow into a sizable nest egg.

The problem most people have with saving for retirement is they feel there is never any money to save… and that’s true because of the above problems. If you’re spending more than you earn, there will never be any money for retirement. If you are paying high interest rates on items, you are limiting the amount of cash you have available to invest. Cut out the above problems and you will naturally have more money to invest for your future. Do it — your future self will thank you.

{ 1 comment }

How to Prepare to Be Laid Off

by Kevin

Hearing the whispered rumors throughout your corporate campus that layoffs are coming is a terrifying experience. No one that has the facts — upper level management — is talking. Your departmental coworkers don’t know if the rumors are true or not, but everyone is scared. Could your department be skipped over and not lose anyone? Will the decision makers decide to do 5% cuts across the board or will they take an honest look at the business and make bigger cuts in areas that aren’t as productive?

If you find yourself in this uncertain and scary situation, don’t let your emotions freeze you from action. You need to take time to begin preparing to be laid off. Here’s some pointers.

Financially Prepare for a Lay Off

Preparing yourself to be laid off by your employer isn’t a fun task, but it is necessary. Even if the layoff rumors are not true — or if layoffs happen and miss you — the exercise of preparing for the unemployment line is beneficial to your financial situation. Knock out these four important tasks if you fear for your job.

Stop Spending

You need cash. Stop spending money on things you don’t need. You should treat your spending like you would if you had already lost your job. Get back to basics: utilities, food, and housing costs. Stop eating out and really cut back on any extra entertainment costs. Yes, it can make you feel discouraged to have to cut these things out of your life, but imagine how much more discouraged you would be if you didn’t stop that extra spending and then lose your job. You would likely rather want that cash on hand.

Stash Cash, Slow Payments

Hopefully you have built up an emergency fund for just this type of situation. Singles should have at least 6 months of living costs (those monthly utility, food, and housing costs) above saved up. Married couples should probably have 12 months of expenses saved up. As you are looking at ways to save cash you might consider paying off your credit card, but it depends on your situation as to whether this makes sense. I almost always want your credit card debt wiped out, but if you paid off a $10,000 balance with one check and then lose your job… you’re right back where you started. That extra cash would come handy in an emergency.

Whether or not you should cut out these extra payments depends on how seriously you believe the chances of getting laid off are and how strong your emergency fund is.

Update Your Resume

If rumors are swirling that your company is going to lose a lot of employees you should probably take some time to update your resume. It can be hard to remember what you’ve done over the past few years with your employer. This task is much harder if you are emotional after having just lost your job. Be sure to consistently update your resume every 6 months to make this process easier.

Build Your Network

Connect with as many of your trusted coworkers while you all still work at the same employer. Swap contact information, connect on LinkedIn, and grab lunch. Ideally you want to genuinely build up these relationships throughout your tenure so that if you do get cut, you have a strong work network to help you land on your feet. But even if you have to scramble toward the end to get your network back into shape, it is much better to do that than to wonder how to get in contact with someone after you have been laid off.

{ 0 comments }

Change Your Financial Family Tree

by Kevin

From the moment we come into the world we watch our parents closely. We learn how to navigate life. Whether it is how to speak politely or cook a good meal, our parents are there showing us the ropes.

Dealing with all facets of money and finances is no different. We learn how money works by watching our parents and the ways they interact with it. Whether good or bad, we see the decisions they make and we are learning from them. Our financial future is largely based on what we have witnessed and learned from our family. What if your parents don’t have a healthy relationship with money? What if you have watched them struggle through the years and know they have made poor decisions?

How can you avoid following in their path?

Change Your Family’s Relationship with Money

Avoiding the mistakes you’ve witnessed can be difficult to do unless you are making a conscientious effort to do so. To stop the cycle and alter your family financial tree, you will need to follow a process of four steps.

Evaluate

Take the time to look into what you’ve learned growing up. Did you see your parents using credit cards in excess? Were they always living paycheck to paycheck? Did they have to tell you that money was too tight for vacations or something extra that you asked about?

Think about their behaviors and how it affected your family. Evaluate what you saw and what the results were of those actions. Take notes and then divide them into two categories: what you do not want to repeat and what you would like to continue. Chances are, the categories will be disproportional. There may not be anything in the positive column. This part of the process allows you to really see how important financial literacy is to your life.

Set Goals

Now that you know what it is that you do not want to do, set some goals. These goals will lay out the path for how you would like your financial future to proceed. Do you want to own your own home some day? Maybe you’d like to become a landlord or have your own business. Does going to school without incurring debt sound like a great goal? How would you like your retirement to look?

Set short term goals that include an emergency fund. Plan the steps you will need to take in order to achieve your long term goals. If home ownership is in your future, decide when you will start a saving account to use as a down payment. These goals will serve as inspiration for you to continue on.

Educate

You have your goals set out and you know how you do not want to live. Now it is time to ensure you are successful. Educate yourself on financial literacy. Read books by a variety of financial advisers. Search out websites on how to make a budget. Explore the different ways to invest in your future. Meeting with a financial adviser would be wise as well. There is a host of information out there on the internet written specifically to help you improve your situation. Grasp it. Education is a key to your success.

Persevere

You have your list of goals. You educated yourself on financial literacy. You’ve done your due diligence. You are empowered by the tools you have at your ready. Congratulations, you are well on your way to changing your family’s financial tree. It is time now to put these steps into action. Deal with the setbacks and relish the successes. Slowly, over time, you will develop great financial habits.

Ensuring the success of the future

While you have the ability to change your financial tree and correct what you’ve seen in the past, it’s also important that you ensure the success of the future. Your children deserve all the opportunites to be successful in life and that includes their own financial health.

It is important to have discussions with your children about money. Start early with a cash register for the pre-schooler, a small allowance (focusing on saving more than spending) for the school age child, playing games with the pre-teens like Monopoly and encouraging your teen to get a part-time job. Also, remember to educate your teenager before he or she leaves high school on how to budget their money properly.

Never underestimate the power of setting a good example. Your children are watching how you use money… just like you did. They are listening to your conversations with your spouse. And they are learning how to use money based on what they are seeing and hearing.

Changing your financial family tree is vital. The generations before you have made mistakes and probably lived a tough life. You can be the first person in your family to achieve financial success. You can show that it is possible and you can set the course for future generations to follow in your path.

Check out an interview I did recently with Bill over on the CreditCardAssist.com blog.

{ 1 comment }

How to Value Your Time When Getting Out of Debt

by Kevin

Getting out of debt is a whole less fun than getting into debt. Getting into debt is spend, spend, spend. Getting out of debt is painful cutbacks, tough decisions, and saying “no” a lot. As you start changing your mentality toward debt and push to climb out of the hole you are in you must learn to value every minute of every day. Ideally you are doing that already because let’s face it, life if short, but your time becomes even more valuable during a push out of debt.

Why Valuing Your Time is Important

There are two reasons that valuing your time is extremely important:

Turning Down Expensive Opportunities

The first reason is that you start to look at every situation in a “what is this going to cost me?” mentality. Some argue that can be a negative way to look at life — it’s okay to grab coffee with your mother on Tuesday — but at the same time you need to be running your life like a business. Every moment is an opportunity to make or save money. Instead of meeting Mom at Starbucks you can invite her over for some bagged coffee from the grocery store. Instead of going out drinking to see the big game you have your buddies over with beverages and snacks purchased at the store.

What Can You Outsource?

A second reason understanding what your time is worth is you can begin to outsource menial tasks that you don’t enjoy and that are also taking up a lot of your time. If you’re in debt it probably isn’t good to outsource everything, but if you could get a great deal on mowing the yard and you could use that time to earn money at a how hourly wage, then it makes absolute sense. Not every hour that you are doing something menial can be turned into a profitable outsourcing — remember, you have to work to make up the cost plus turn a “time profit”, but there are some scenarios this will work for you.

Calculate Your Hourly Earning Capability

The best way to know what your time is worth is to come up with an estimate of your hourly earning capability. For some this is a simple calculation: could I get an extra shift at work this week? If you are paid by the hour it is simple to know what the cost is to you. Even if you work at a restaurant and rely on tips you probably have a mental calculation of how much money you earn in a shift. Use those figures to determine what an extra hour of your time is worth. If you could earn $30 per hour and get your yard mowed for $20 in an hour, it makes sense to outsource the yard and work the extra hour. (Just don’t forget to factor in income taxes into your hourly estimates.)

You may not have a lot of options to earn extra money. Maybe your job doesn’t have extra shifts for you to pick up. If that’s the case you need to figure out a way for you to earn additional income through freelancing, starting a business, or turning a hobby into a business. Keep your eye on the prize: every extra dollar goes towards your debt (not padding your lifestyle) and accelerates how fast you will be debt free.

{ 3 comments }

← Previous Entries

Next Entries →