I read a lot of business articles and business books, watch a lot of CNBC, and listen to audio books to learn as much as I can about the world of business and finance. One thing that I think all these forms of media have in common is that they all advertise a one size fits all approach to personal finance. I understand that part of it is about branding your book or show or whatever, but I think it really intimidates and confuses a lot of people. Especially the people who aren't truly passionate about reading and those who do not consistently study the subject of money. I think a huge part of the problem is the lack of focus on personal finance and money in our education system, but that is a debate for another day. In an effort to continue to provide all that I have learned and to discuss what I continue to learn, I am looking to make Money Tips a fairly common post on my blog.
Well I have already established that we are constantly bombarded with different books and articles with flavor of the week "get rich" approaches, all claiming that they have the only way to successfully achieve your financial goals. I have friends who are as interested, if not more so, in the topic of finance than I am and we get confused, frustrated, and overwhelmed with all the different advice. However, it seems to me the underlying question on most people's minds is "what should I be doing right now?" My advice to the already overwhelming mass of information out there is....it depends.
It depends might sound like an answer built for Washington, but I can truly say that I think this might be the most beneficial concept I have grasped in my quest for knowledge surrounding finance. Are we to assume that a 60 year old about to retire should follow the same strategy as a 20 something young professional just starting out? I think not. My advice is simple. 1.Know where you are. 2. Know where you want to go. When you tackle these two critical pieces of financial introspection you will be well on your way to rejecting the thousands of end all be all financial freedom formulas. Most importantly, you will be able to answer the simple but important question "What is your strategy?"
My first Money Tip post is a perfect start to discover where you are financially. Check out my first post and go to Mint.com to see where you are at. Create a budget that will allow you to successfully start saving/investing your some of your income. The second step of where you want to go can be addressed by a simple exercise. Write down your financial goals! There are plenty of ways to do this. For example 5, 10, and 25 year goals or short and long term goals. Whatever approach you use is less important that the fact that you actually write them down and refer to them. This keeps your actions focused on your goals and begins building your own strategy.
So now you know where you are and where you want to go...now what? Here are some important components that you should consider for your strategy as well as some lessons learned from my own tribulations and triumphs through the personal finance journey.
1. Save. Even if you start at 1% just start saving something. Choices include savings accounts, money markets etc. If you are struggling with this read The Richest Man in Babylon which is on my Bookjetty list on the side of my blog. The classic book clearly illustrates a concept often lost in today's world of business and politics. You must save more than you spend. In fact, the book goes as far as to declare that if you save just 10% of income you will be wealthy, period, dot, DO IT!
2. IRA's (Traditional vs Roth), 401K's, retirement planning in general is the foundation of your investment portfolio. Its hard to invest now for something so far down the road. Just do it! You can't rewind life and with the power of compounding interest every day you wait is opportunity lost. If your employer matches then max out your 401k to the extent they match. This is free money and there is no excuse for not taking it. If you are employed by Uncle Sugar like myself then you are not so fortunate. My next advice would be to max your Roth IRA. Although your contribution is after tax (taxed on the way in), any earnings you build will be tax free upon retirement (tax free on the way out). My little rule is if you are young choose Roth as time is on your side. If you are older and/or you need to reduce your tax burden now then the traditional may be a better move. Once again it all depends.
3. Passively managed index and mutual funds. These allow you to mindlessly invest with historically higher gains than money markets or savings accounts and lower expenses than actively managed funds. Read A Random Walk Down Wall Street or the Intelligent Investor if you are wanting to have a broker actively manage your money, especially if you aren't wealthy. I personally haven't made any money in this realm for the 6-7 years I have been investing. In fact I am pretty sure that over the life of my portfolio I have lost money (this is now becoming easier to track with Mint.com). Am I bitter? A little. No not really. I have learned a lot and my strategy is a long term purview. Remember that losses are only true losses when you cash out. I am still accumulating shares that in theory will continue to rise in value over time.
4. Real estate. I find that the business and finance community constantly downplays the benefits and hypes the risks of real estate. Do you think that it has something to do with the fact that brokers, analysts, financial planners etc. don't make any commission off of real estate (except REITS). However, the more I read the more I am vectoring in this direction. Between tax benefits, access to capital (OPM), and the general tangibility and control of the asset I really don't think anything else comes close. Like I said though it all depends and this post is about determining your strategy. So get reading and get learning and find out what is your favorite vehicle.
Obviously this list is not totally inclusive and to be honest it is beyond general. However, I intend to dissect individual topics as my Money Tips posts continue. Here are a few additional motivational tidbits to help get you on your way:
1. Read. Read everything you can. Even if you don't fully understand or agree, learn something from everything you read. These are your tools to start building your own strategy.
2. Learn from every action you make. Put on your learning goggles and never take them off. You are only bettering yourself in everything you do.
3. Error on the side of action. Don't time the market. There is never a bad time to invest only the wrong approach at the wrong time.
4. Don't compare yourself to anyone else. Only compare yourself against your own goals.
5. Don't lie to yourself. People often do this when saving. They say they need something when it is not a need....it is a want. Your personal discipline is key to your success.
6. Become rich. To me, rich is a mindset. If you are saving more than you are spending you are in essence rich. From that point on there are only varying degrees of rich. If you couple this with a learning mindset you will achieve what you set out to achieve. Be rich.
7. Have fun. Make saving fun. Make investing fun. If you win and make money, great that is fun. If you lose some money (as I have done a lot of since the day I started investing) great, what did you learn, because learning is fun.
8. Keep perspective. In the long run we all end up exactly where we are supposed to be and only you can take responsibility for that. We all have good luck and bad but in the long run you are exactly where you have earned to be. Think long term, work hard, and react positively to any external event and you will be happy and be where you deserve to be.