Achieving A1 Financial Health Status
October 13, 2008
Many people don’t have the basics of financial education. The average school student usually doesn’t learn much beyond basic accounting and how to write a check. You can’t assume that basic math will be enough to prepare a person for “real world” personal finance and investing. If schools don’t provide this financial education, who will?
How about Indiana Jones?
Look Out for You
Whether Indiana Jones is negotiating buyers’ fees or trying to get off of a conveyor belt going to a rock crusher, Indiana Jones is a guy who knows how to take care of himself. You’ll have to learn to do the same thing if you want to take control of your finances.
The first step toward having a comfortable retirement is to put the 10 percent rule into place. This is one of the oldest and most efficient ways to figure out your finances. You should pay yourself 10 percent of your paycheck before doing anything else. This is the money you will use for investments.
This rule is popular for several reasons. First of all, taking 10 percent from your monthly income won’t have a major effect on your lifestyle. This is a goal that everyone can accomplish. Secondly, this is a percentage so it can adjust to any change in income that you might have. This eliminates the popular excuse of putting the money away when you have it. This also is a step that you can do immediately.
Take on the Biggest Enemy First
Indiana Jones always follows the rules of any bar brawl: He takes out the biggest guy first and works his way down from there. The general idea is to take on the most dangerous person when you still have the energy to take him down.
You should have the same approach for your debts: Prioritize them and eliminate them one by one. Here are the steps to decide which debt should go first.
1. Take on the highest interest debt first. This could include your credit card debt or any other high-interest loans.
2. Pay off your debts that don’t give you a tax deduction. These debts include lines of credit, bank loans, and car loans. They are any debt where you can’t write off the interest on your tax returns.
3. Tackle the debts that have tax write offs. Student loans would be an example of this type of debt.
4. Get rid of your mortgage. A paid-off house has more advantages than a mortgage.
You should not invest before you have gotten rid of your high-interest debt. Let’s look at this basic example.
When you pay yourself 10 percent of your monthly income, you have $200. You owe $400 on your credit card. What should you do with this money?
You can either invest it in an index fund or in a bond and receive between 6 and 12 percent interest by the end of the year. Your credit card debt, however, has a 13-percent interest rate. That interest costs you $52 a month. You will not make more in your investment that you are losing in your credit card interest.
Debt also puts pressure on your investments. If your debt is at 8 percent, you will need to have an investment that brings more than 8 percent. It can be difficult to find an investment that pays that much. Therefore, your first and second priority debts can be a major challenge when you are investing. Tax-deductible debts and mortgages should not stand in your way to investing.
Dodging Boulders and Ducking Arrows
You could wonder why Indiana Jones is as nervous facing an arrow as he is facing a gun or a boulder. After all, you probably could handle a few arrows without getting killed. You can’t say the same for getting shot or being crushed by a rock.
When you have more arrows sticking in you, however, you’ll get slower and your enemies can catch up to you. That makes it logical to fear all of these dangers. Why do people ignore this logic when thinking about saving money?
People often make two major finance mistakes. Buying debt is the first mistake. People buy things that will cost them dear, and continue to prove expensive for years. Unfortunately, people are not as skilled at getting assets as they are at getting debts. Cars are a primary example of this. Not only do cars depreciate in value, but the cost of the car directly influences your monthly insurance premiums.
It isn’t just the big expenses that can bring people down. The second biggest mistake that people make is that they don’t control their finances and credit card expenses. The small expenses add up even on 0% balance transfer cards: People buy lunch instead of pack one, go to the latest movies, drink fancy coffees, and rack up other expenses. People who receive bonuses don’t always invest and save more than they did before they had the added income. Small expenses can be like Indiana Jones’ arrows that try to bring him down.
These two mistakes can be a fatal combination. The rolling boulder is the more expensive lifestyle and the debts that you buy. How much you make doesn’t matter if you don’t save any money. You need to get out of the boulder’s way and start minimizing your expenses.
Walk Off like Indy
If you’ve talked your debt, started minimizing your expenses, and been paying yourself every month, you may believe you’ve earned the right to walk away. Life isn’t like the movies, though, and you can’t just end your journey at this moment. You’re just at the beginning of your great adventure of saving and investing. The challenges don’t go away as your journey goes on - it just becomes easier to find the challenges.
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