PERSONAL FINANCE COMMON SENSE
By Nancy Hughes Coe, As featured in At Home Tennessee, June 2006 Issue
THE OLD FASHIONED COMMON SENSE OF OUR GRAND parents still stands as a reliable guide to money. Whether you are digging out of debt or managing substantial assets, the principles are similar.
Don't Keep Up With the Joneses
Not spending all you make: Comparing and competing with others can lead to financial overextension in which all our income disappears every month to support too much house, multiple vehicles, and premium coffee. Many things that you see others enjoying are not paid for-they may be up to their ears in debt.
The advertising driven consumerism of American society has lured millions of us into confusing our needs with our wants. Consider that most new purchases trade an income producing asset (money you can invest) for an income draining liability (new car, vacation home).
Resist the temptation of false necessities and cultivate the freedom of contentment. Enough really is enough. Possessions do not bring peace or financial independence. Pare down and clarify what you really value. If your spending expands as your income expands, you can missa great opportunity to build wealth.
Get Out of and Stay Out of Debt
Not spending more than you make: Ben Franklin said that "he who has four but spends five has no need of a purse." No matter how much money you make, if you are spending more, you are living in debt rather than building wealth.
Imagine pouring water into a bucket with so many holes that it runs out faster than you can put it in. Plug the holes. Analyze your spending are the culprits new clothes or dinners out? Do whatever it takes to control them--stay out of stores, eat at home, etc. Shred the credit card offers, choose one card to use carefully, cut up the others, and pay them off, the one with the smallest balance first, until you are debt-free. Then pay your credit card bill in full every month-no excuses.
Live Below Your Means
Spending less than you make: Live not just within the edge of your means, but well below your means. Otherwise you will not have surplus to save and invest wisely. Everyone has enough to save. If your income were cut by 10 percent you would find a way to adjust. So pay yourself 10-20 percent every month, preferably by direct deposit into an investment account, so that it is automatic and doesn't require a choice or remembering. This investment vehicle could be your company's 401K or an account with a brokerage firm, for example, or you could split your automatic investments between the two accounts.
Don't Put all Your Eggs in One Basket
Diversification is the key to preserving your invested assets. A table with four legs will stand, but a table with fewer may not. Picking one or two stocks or funds is risky. Diversification does not mean parking money in multiple accounts at multiple firms. That leads to an uncoordinated strategy and a lack of oversight. If your investments are the players on a team, and you are the owner, you still need a coach. Find a good fmancial advisor-most do not charge to consult with you.
Take Care of Yourself
Your goal is your own eventual financial independence and not being dependent on a job, a spouse, an inheritance, a company retirement plan, or your children for financial sustenance. Financial independence occurs when your investment income meets or exceeds your monthly expenses. Achieving this takes time, but leads to psychological freedom. It's a slow, gradual process built on the cumulative effects of your determined long-term choices. Forget shortcuts and trying to get rich quickly-be content to become wealthy over time. Disciplined patience and a fine-tuned will are tools of wealth-building.
Be a Good Steward
With wealth, comes great responsibility. It must be managed well and that requires education, attention, time, and effort. Even a fortune can be lost with poor management and foolish lack of attention. And with wealth, comes great opportunity. It is a delightful experience to have sufficient surplus to give charitably, to provide for others-whether family members or the poor. We have all learned from Mr. Scrooge the misery of hoarding and the joy of giving. Money is a powerful tool than can be frittered away, wasted on temporary satisfactions, or used wisely for a long-lasting legacy. Cultivate uncommon common sense in matters of finance to set your course on the ultimately more satisfying path.