Personal Financial Management Basic Strategy

Document created by jim_1 on May 16, 2016Last modified by on Dec 5, 2016
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     The foundations of sound personal financial management have general application across all income levels and degrees of wealth. No matter what  your situation is, you should start with a budget. Do not forget to include food, entertainment, and gas for your car. These budget items get overlooked. The goal of the budget is to understand your ongoing financial concerns and also to determine where to allocate your excess funds after your monthly bills have been paid.


     Goals can be viewed in terms of "buckets". For example, you have a "bucket" for the goal of paying down your debt. You have another "bucket" which contains your investments. Another "bucket" is for your retirement. Perhaps you have a "bucket" to buy a house or car. A bucket can be thought of as an account within an accounting system. Your first bucket should be to set up an emergency savings account and your second bucket should be to pay down high interest debt.


     Once you do a budget, you should document all of your debts so that you can make a strategy to pay them off. Ideally, you pay them off in the order of those debts with the highest interest rates first. For example, if you have an extra $100 to apply to a debt, you would benefit by making an extra credit card payment before paying off your auto loan because the credit card will have a higher interest rate than the auto loan. You would benefit by paying down your auto loans before paying down your mortgage, etc.


     The best advice I can give you is "Do not take any financial advice from anyone who claims to be a financial advisor!" Throughout your life, you will be approached by people claiming to be financial advisors. The reality is that most of them are untrained financial product salespeople who make commissions from selling you financial products of the firm they represent. One of their favorite product is life insurance byproducts (such as Variable Life or Whole Life). Do not deal with these people! Ask them "what credentials they possess to give out financial advice to anyone." The only people who you should listen to are CPAs, CFP (Certified Financial Planners), estate planning lawyers, and professionals who are paid hourly to give you impartial independent advice. If someone is paid by commission based on the investments that you purchase, there is a conflict of interest between you and them.


     Your first goal should be to establish an emergency savings account which contains enough money to pay three to six month's worth of your monthly expenses. This is very important and should not be confused with a savings account to purchase items.


     Once you have your emergency savings account funded to handle at least three months worth of expenses, you should then focus on paying down your debts while simultaneously building up your investments. But remember to start with the debt with the highest interest rates first.


     Tips to keep in mind are that if your credit card balances are less than 50 % of their credit limit, your credit rating is improved. Once your balance exceeds 50 % of the credit limit, it starts to hurt your credit score. Older credit cards help your rating more than newer cards. You should only keep a few credit cards and keep their balances less than 50 % of the limit. Ideally, they should be paid off as soon as possible. If you make two payments each month, rather than one, it actually helps your credit score.


     Take advantage of the fact that you can view your three credit reports for free every year buy going to Ideally, it makes sense to see one of the reports every four months. For

example, view the Transunion report every January, the Experian report every May, and the Equifax report every September. That way, you never go more than our months without seeing a snapshot of your credit report and it is free.


     Do not take out a home equity loan. Do not borrow money to fix up your house. All you will be doing is fixing up the bank's house. Fix up your house over time and do not borrow unless it is an absolute emergency, for example if your furnace breaks.


    Leasing a car is generally not a good financial move. The leasing company has all the information and you have none. You would be better off buying a car that is coming off a lease or one that is two years old and has already depreciated by 50 %.


     Rather than buying individual stocks, you should buy mutual funds because they have much better downside protection and generally have the same upside potential. In fact, you would do well to simply buy a mutual fund that is an index fund on the

S & P 500. It is difficult to beat that over the long haul.


     The purpose of life insurance is to replace the bread winner of the family in the event that person dies. Therefore, the only type of life insurance that most people (95 %) should have is "Level Term" (ideally 30 or 20 year level term). Do not buy "Whole Life", "Variable Life", or any variation thereof. Never buy life insurance on a child. Only the most unscrupulous people would try to sell you life insurance for a child.


     In most cases, the best investment for childhood education is a 529(b) plan.


     After paying your monthly bills, paying down your high-interest debts, and establishing your emergency fund,  you should then invest your money for future goals, such as buying a house, car, etc.


     Many people think of their house as an investment. It is not. You must live somewhere. You have your house and then you have your investments and neither the twain shall meet.


     There are very few times in your life when you get "free money". So when that happens, you should take advantage of it. One of those times is if your employer offers a "match" of your retirement contributions, for example a 401(k) or 401(a). Take full advantage of this. Make sure you contribute the full amount into your 401(k) in order to get the maximum employer match. And set this up the first day you start working there.


     Lastly, endeavor to save at least 10 percent of your income.  And do not underestimate the power of giving to charity. You reap what you sew.