Good luck and much success in achieving your financial goals! If you want to succeed, have a plan!
The following is a high-level education to put you on the path to master basic finance. Begin with these concepts and grow from there.
Learning should be a lifelong endeavor. If you stop learning, you will fall behind as the world is forever moving forward.
So, let’s get started with some basic concepts. Take these concepts and grow your knowledge in each area. Master them or hire experts in the related field to teach you and help you reach your financial goals.
Budgeting is Your Friend
Do you budget, live on less than you make, provide for your basic needs? Many folks do not budget, but I will tell you, this is a key building block. If you do not know where your hard-earned money is going, then you are in trouble.
Do you take a trip without knowing how to get there? Well, a budget tells your money where to go. When you set up a budget, every dollar gets assigned a purpose such as food, clothing, rent or mortgage. There are the essentials and then there are the savings and the niceties to consider.
If your expenses are higher than your income, you either have an income issue or you spend too much on the niceties.
Emergency Fund for Protection
Build an emergency fund for a rainy day. I can guarantee that it will rain, so at some point you will have an emergency. An unexpected car repair, a home repair, perhaps a sudden trip to see a loved one, maybe even a job loss. It will happen. If you are prepared, it will not be a big deal.
An emergency fund is a form of insurance against those unexpected life events. It is recommended that you build a fund to cover at least three to six months of expenses.
Debt Elimination
How many credit cards to you have? Do you like that car loan? Do you still have student loans? How much are you making in payments every month? What would you do with that extra money if you eliminated those debt payments?
Debt is robbing you of your wealth. As a matter of fact, the banks and credit card companies are getting rich off of you. Take a look at their headquarters. Nice, right? You paid for it.
Make a full-court press to eliminate these pesky debt payments and see how much your life becomes simplified. Pay cash for everything. Budget for it and stick to your budget. Stay away from impulse buying.
Save For the Future
This is another key concept: retirement savings, large purchases and that nice vacation. Again, the budget is the guiding tool, as these items must be included in your budget. Budget for that vacation, that new car purchase even that large home repair such as a new roof.
Retirement savings is a key component of savings. You want to make sure that you will have enough for your twilight years. Start an IRA or a Roth IRA, contribute to a 401k if your employer has one. Your goal should be to get this to about 15% of your income. Over the long term, one can accumulate a nice nest egg. Start early and contribute regularly.
Invest for Passive Income
In the savings section, we discussed briefly putting away 15% for retirement. The next step is creating a fund that grows over time. One must learn about basic investing and where you can get the best results. What do you know about investing?
Now is the time to begin to get some education. This can be very intimidating. Learn about the markets – stock, bond and real estate markets at the very least, to name a few. Learn about mutual funds. Hire a professional to help you, but make sure it is someone who is willing to teach you.
This is where you will grow your wealth exponentially. Create that passive income and turn $1,000 into $2,000. It can happen. Remember: This is a marathon, not a sprint.
Learn enough to be dangerous and hire a professional. Don’t be cheap here. Do your homework and hire a reputable firm.
Homeownership
Certainly this is a goal for many. That dream home. Well, if you do not lay the groundwork as outlined above, that dream home can turn into a nightmare. Owing a home is the great American dream, but preparing for it financially is necessary.
Then there is the mortgage. What is the best one for you? Once again, this requires more homework. The most optimum is a 15-year fixed rate. If you eliminate this payment in 15 years, you can then use that payment to invest or whatever you want.
Taxes
I probably just lost readers on this one. I want nothing to do with taxes. Well, if you learned a little, you may reduce your tax liability and keep more of your hard-earned money. My theory is to only pay what I owe – nothing more and nothing less.
Learn a little and hire a professional. Keep your taxes to a minimum.
Insurance
You have put all the previous pieces to the puzzle together as outlined above and now it is time to make sure you keep it.
Don’t get carried away; just get what is necessary. Certainly auto and health are No. 1 and No. 2. Then there is life insurance to protect your family, should you meet your demise.
If you own a home, homeowner’s insurance is essential. Then you have disability short-term and long- term insurance.
Do your homework here. Not every type of insurance is necessary, but some is essential. Know what your exposure is and then protect it.
Net Worth
What is this? This is how we keep score. You have done all the smart things as outlined above. Now, it is time to know where we are.
Let’s define what net worth is. Very simply, it is all your assets minus all your liabilities. In plain English, it is everything you own minus everything you owe. Calculate this regularly and watch it grow!
This has been a high level review of basic personal finance concepts that will put you on the path to financial wealth. Apply them and watch your net worth grow!
Good luck and much success in achieving your financial goals! If you want to succeed, have a plan! QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.
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