10 Rules of Personal Finance (Plus 1)
I constantly look at what I do, what did I do well, and what could I do better. Although there
is no perfect solution, each person has to do these 3 things: 1) receive money, 2) decide
where to spend their money, 3) pay taxes. Although some can be pushed off for a time,
assuming the person is a working productive member of society, they will do these 3 things.
Now comes my 10 (+1) Rules to Personal Finance.
1. You must understand you financial position. The choice to ignore where you are, is
unacceptable that will result in you being a financial failure. I did not say a bad person, just
that you have no chance to be successful in your financial life. You must take the
responsibility to become aware of your finances. How you make money and how you spend
it. I know some very bright intelligent people who make a hefty income and at the end of the
month have no money to their name. You cannot allow this to happen.
2. There is a difference between monthly bills and debt. Monthly bills are those items that
come to your mail box each month on something that you used that month. Your electric bill
is energy you used, water bill, cable/satellite, and trash removal are good examples of these
services.
Debt is something you buy and usually carry over a period of time to pay off. A house
mortgage, car loan or credit card bills are examples here. But do you know there can be
good debt and bad debt? Good debt is usually tied to a final payoff. A car loan is good
example, meaning for 60 months you pay this set amount each month and after the agreed
payments are completed, you no longer have the debt, and own the property outright.
Credit cards are generally considered bad debt, as many people pay the monthly
recommended amount that pays all the interest, but very little of the principle. You
constantly pay interest and as this can run over a long period of time it robs you of valuable
income to push toward your savings and investing. We will talk more about how to get rid of
your debt.
3. Many people do not know the difference between assets and liabilities. An asset is
something that has value and can grow for you. A liability is something that will cost you in
the long run. A house and car are often considered assets, by their expenses can cause
them to become liabilities. If the cost of having and maintaining cost more than the
increasing value then the investment maybe a liability. How do you know? Track your
expenses over the last year to how much you spent to operate and maintain. If the amount
is above any increases of the value it may turn out to be a liability.
4. Do you have a written budget that includes every penny you earned, and where it went?
The hidden costs of eating out, entertainment, shopping and necessities often get blurred so
quickly you have to break down your receipts to separate the spending accurately. Make
sure you track quarterly events and annual payments for various expenses as well. When
you do, you will be amazed where all the money goes.
5. Many people cannot define the difference between savings and investing. Although you
move money into an account to use at a later time the differences are vast. Savings is
defined as having access to your fund immediately, for a long term or short term goal, or as
your needs arise. If your car breaks down and you need $1000 to fix it, that would be a
good use of your savings. You would not want to take money from an IRA and pay the
penalty and taxes to take money out to pay this expense.
6. Defining investing. This is so important I think you need to research 3 definitions and find
the similarities and differences of this concept. I recommend you build your investment
accounts through an IRA. We recommend a ROTH account that will be tax free (at
Investment Daily and Tom Dorsey Enterprises do not provide tax advice). If you roll over a
401k or similar account, then you must use a traditional IRA. Investing is moving money
into a long term account you do not plan to use until you reach retirement age and can
invest this money to grow in various vehicles to maximize returns based on your investment
risks and strategies (at Investment Daily and Tom Dorsey Enterprises do not provide
financial planning or investment advice).
7. We recommend you build a financial plan for yourself. No one can build the one you
need and every person’s plan will be different. This will include a budget from number 4
above, and some thought and discipline on your part. You must write out some goals.
These goals will change over time, but put down in writing a short term goal (like a month to
3 months), mid-term ( target 6 months to a year), and long term (that includes what you
would like to see in 5 year, 10 years and at your retirement age). Like I said, these will
change, but you need a target on the wall to shoot at.
8. During the development of your financial plan you need to address your debt. How do
you plan to reduce it or eliminate it? There are many techniques, but you must decide how
to do it and put in writing, your plan to achieve it.
9. Savings vs Investing. The difference is important to understand and key to implement in
your financial life plan. Savings is for accessible needs without restrictions to get your
money. Investing is the actual commitment to depositing funds into an account that has
your name, but will cost you penalties to withdraw. A Savings Account in a banks will only
go up (slowly), but investments can go up or down, based on the performance of the shares
in the company or investment you buy.
10. Define your investment strategy. Buying this investment or another investment based
on some guys recommendation is not a strategy. This needs to be written out, similar to
your budget and debt elimination plan. Sit down and review what are your risk tolerance
and goals to build your strategy. Your investment strategy can include goals like “I want to
find investments that will grow over time (this would be a growth focused strategy maybe
more buy and hold). If you wanted to use dividend growth you could focus on “I want to find
dividend stocks that grow my portfolio over time.” This would target higher dividend yielding
investments. If you want more aggressive, “I want to trade more often seeking opportunities
that increase my portfolio through trading activities.” I would also add “I understand there
will be higher costs in trading and events can and will affect my accounts.” This will also
change over time as you increase your knowledge and understanding in the market and
how you are progressing. There are no right and wrong strategies, but you must find the
right one for you. As you become old, closer to your retirement age you may choose to
move toward less volatile investments and adapt your strategy likewise.
My plus 1 is your responsibility of paying taxes as they are due. I cannot tell you all the
details of your tax responsibilities, and you are responsible, with or without the knowledge
(ignorance is not accepted at the IRS). What I will tell you is to seek advice from
knowledgeable professionals in the tax field to keep yourself out of trouble with the IRS.