Simple Rules for Financial Success

9 Simple Rules for Financial Success

©Paul Krieger, 2006

Anyone who earns a decent income can be financially successful.

Just follow these simple rules:

1. It’s not how much you MAKE, it’s how much you KEEP that matters.

• If you earn $40,000 per year and spend $50,000, then your spending is out of control. Similarly, if you make $400,000 per year and spend $450,000, you are also out of control.

In other words, you can always spend more than you earn.

• Set aside a certain percentage of your income every month to save and/or invest. Start with about 10% and gradually increase this amount.

• Most Americans are not financially successful because they choose to buy new cars and

luxury homes that they can’t afford. They also buy too much on credit and end up wasting their money paying off the interest.

• If you can’t afford it, don’t charge it on a credit card. Credit card debt is one of the worst kinds of debt and it can bankrupt you.

2. Consciously CHOOSE to live beneath your means.

• Are you “living to work” or “working to live”?

• If you make $50,000 per year, live like you earn only $30,000 per year. This makes it much easier to save.

• Resist the urge to purchase the latest and greatest electronic gadgets, cars, and other expensive items. Americans waste lots of money doing this.

• More stuff is not going to make you happy in the long run. Learn to enjoy what you have instead of craving the things you don’t have.

• If you can’t afford it, don’t charge it on a credit card. High interest credit card debt is the WORST kind of debt and it can ruin you (yes, it’s worth repeating!).

3. Learn to live on a budget.

• Set up a monthly budget and stick to it.

• Keep track of how you spend your money for a month. You might be surprised where your money goes. Then, re-evaluate your spending habits. Take charge of your spending!

• When buying, distinguish between personal “wants” and actual “needs”. This will prevent lots of wasted money on impulse purchases.

4. Establish an emergency fund.

• Before any other investing, establish an emergency fund to cover 6-8 months of living expenses

• If you lose your job, this will take care of your basic needs while you look for new employment. It might also help you avoid becoming homeless.

• This is your safety net to be used ONLY in the case of an emergency like unexpected medical expenses, major car repairs, or loss of a job.

5. Avoid “BAD” debt.

• Bad debt is anything you purchase that needs to be financed but it loses its value quicker than you can pay it back.

• Examples: car loans, credit card debt.

• Credit card debt is the worst. Many credit cards have very high interest rates. Did you know that if you ONLY pay the suggested monthly minimum payment on your bill that you are only paying off the interest and none of the principal. This is financial suicide and it can bankrupt you (yes, it’s worth repeating … again!).

6. Follow the “pay yourself first” philosophy.

• Have monthly deductions for savings and investments automatically deducted from your paycheck. This makes your saving automatic.

• Does your employer offer a 401 (k) plan? If so, contribute the maximum you are allowed.

• Force yourself to live on what remains after you have paid yourself first.

7. Make saving money a habit.

• Creatively look for ways to save money like packing a lunch for work every day.

• Consider making your own brewed coffee every morning instead of ordering that expensive latte.

• Do you really need the deluxe cable television package? Try the basic package or no cable television at all. Reading books from the library is free entertainment.

• Shop at garage sales for good bargains. This is a great way to save money on children’s clothes, toys, and other items.

8. Buy reliable USED cars rather than new.

• A new car can lose as much as 20% of its value the minute you drive it off the lot.

• Over your lifetime, buying used cars instead of new ones can save lots of money.

• A car depreciates very quickly over time and wastes lots of money.

• Choose reliable vehicles with good resale values.

• Consider keeping your vehicle at least 8-10 years if it is running well.

• If possible, purchase a good, certified used vehicle for cash so you can avoid a car loan.

Paying cash for a vehicle also gives you more bargaining power.

9. Learn about investing in stocks, bonds, mutual funds, and real estate.

• Learn about the power of compound interest. For example, let’s imagine that instead of buying that $4 latte every day of the work week, you invested the money in a good mutual fund. That’s $80/month or $960/year. Let’s assume you invested this money for 25 years and it earned an average of 8% interest per year. Guess how much money you would have? Believe it or not - $75,796.24.

• For stocks, I suggest low fee, no-load mutual funds with good long term (5 or 10 year) track records. Index funds are a good choice for a big chunk of your portfolio.

• Investing is not difficult if you just follow some tried and true philosophies. You do not need to hire a professional financial planner. Be a long term investor and let compound interest work for you. Slow and steady wins this race.

• Check out the Coffeehouse Portfolio. It is a sound strategy for the long-term investor. Click on this link: www.coffeehouseinvestor.com.

• Check out this website for sensible financial advice: www.daveramsey.com.

• Consider buying an affordable home as opposed to renting. A small mortgage is not a bad debt if your home is appreciating in value. But a large mortgage can make it very difficult to save and invest. Don’t buy more home than you can afford.

• Suggested reading:

1) The Millionaire Next Door by Thomas J. Stanley and William D. Danko.

2) The Only Investment Guide You’ll Ever Need by Andrew Tobias.