Putting your financial house in order: My 4 basic rules
Recently I had a conversation with a couple friends who assumed from the way I live that I was financially not well off. They soon learned that I was just being frugal and smart with my money. I don't drive the nicest car (not even my car, it's a company car) and I live with my parents (they are elderly and feel more secure with me there, I get cheap rent!)
After a few questions, I realized my friends were much like I was only just a few years ago. With terms that I now think of as basic, they gave me blank stares.
So I came up with my four basic rules for financial independence. Starting down the road towards improving your financial situation can seem awkward and scary at first, but soon it becomes second nature.
Rule#1: Spend less than you make
Living within one's means is a crucial first step in financial independence.
It is crucial to get the household spending under control. Scrutinize your spending and determine just what are your necessities. If it is not housing, food, or clothing, is it really a necessity. Not sure where the money is going? Try keeping a journal.
Rule#2: Eliminate your debt
Living on credit and paying the minimum payments is a huge pitfall of many working class folks.
Credit is a necessary evil, credit ratings play a big role in determining the interest rating we get and the loan amount we qualify for. Finance charges while maintaining a large credit debt can quickly spiral out of control. Some cards have hidden clauses which allow the credit company drastically raise your interest rate if you miss a payment. I have one credit card with a 10K limit. I pay off the balance every month so there is no interest paid.
Rule#3: Have an emergency fund and insurance.
Each individual or household should maintain a cash reserve that can sustain them for up to six months or more. At a minimum an individual or household should have basic insurance: Health, Dental, Car if you have a vehicle, Life if you have dependents.
Life has its pitfalls, a little reserve and insurance helps weather the unexpected waves. Just a couple of months ago, I needed an unexpected root canal but the limits were already exceeded on my policy. It hurt, but I had enough of a reserve to cover it. In the time since then I have raised my dental insurance and just about have my reserve built back up.
Rule#4: Plan, save, and educate yourself.
Putting aside a little now is a lot easier than trying to put a lot aside later.
Each individual needs to decide what is important to them. My personal emphasis is on building up my retirement funds, I neglected them for many years. For others, it might be buying that first home or saving for a child's college education. So do your research, I cannot stress enough that a little education goes a long way. The financial marketplace is exceedingly good at making itself seem indecipherable. They want you to be afraid to make financial decisions for yourself, so that you will pay some supposed financial expert dearly to make the decision for you.
Some resources that helped me:
www.fool.com
Ignore the special services they try to sell ya' but stay for the basic tutorials.
marketplace.publicradio.org/RSS/
These are a set of shows on public radio, I prefer to download them as podcasts. The format is very entertaining and the topics vary.
Little Book of Common Sense Investing
by John C. Bogle - Not sure where to invest in the stock market? Most people don't, so invest in it all. This little book will convince you that index funds that are low fee and low hassle are the way to go.
After a few questions, I realized my friends were much like I was only just a few years ago. With terms that I now think of as basic, they gave me blank stares.
So I came up with my four basic rules for financial independence. Starting down the road towards improving your financial situation can seem awkward and scary at first, but soon it becomes second nature.
Rule#1: Spend less than you make
Living within one's means is a crucial first step in financial independence.
It is crucial to get the household spending under control. Scrutinize your spending and determine just what are your necessities. If it is not housing, food, or clothing, is it really a necessity. Not sure where the money is going? Try keeping a journal.
Rule#2: Eliminate your debt
Living on credit and paying the minimum payments is a huge pitfall of many working class folks.
Credit is a necessary evil, credit ratings play a big role in determining the interest rating we get and the loan amount we qualify for. Finance charges while maintaining a large credit debt can quickly spiral out of control. Some cards have hidden clauses which allow the credit company drastically raise your interest rate if you miss a payment. I have one credit card with a 10K limit. I pay off the balance every month so there is no interest paid.
Rule#3: Have an emergency fund and insurance.
Each individual or household should maintain a cash reserve that can sustain them for up to six months or more. At a minimum an individual or household should have basic insurance: Health, Dental, Car if you have a vehicle, Life if you have dependents.
Life has its pitfalls, a little reserve and insurance helps weather the unexpected waves. Just a couple of months ago, I needed an unexpected root canal but the limits were already exceeded on my policy. It hurt, but I had enough of a reserve to cover it. In the time since then I have raised my dental insurance and just about have my reserve built back up.
Rule#4: Plan, save, and educate yourself.
Putting aside a little now is a lot easier than trying to put a lot aside later.
Each individual needs to decide what is important to them. My personal emphasis is on building up my retirement funds, I neglected them for many years. For others, it might be buying that first home or saving for a child's college education. So do your research, I cannot stress enough that a little education goes a long way. The financial marketplace is exceedingly good at making itself seem indecipherable. They want you to be afraid to make financial decisions for yourself, so that you will pay some supposed financial expert dearly to make the decision for you.
Some resources that helped me:
www.fool.com
Ignore the special services they try to sell ya' but stay for the basic tutorials.
marketplace.publicradio.org/RSS/
These are a set of shows on public radio, I prefer to download them as podcasts. The format is very entertaining and the topics vary.
Little Book of Common Sense Investing
by John C. Bogle - Not sure where to invest in the stock market? Most people don't, so invest in it all. This little book will convince you that index funds that are low fee and low hassle are the way to go.