Personal Finance 101

The subject of personal finance is very broad, but aslearning just five years ago, Iwould have missed out
abeginning, I would like to discuss what I consideron the Internet revolution, email, websites and the
thefoundation of personal finance: security.majority of the income I now enjoy.
SecurityKeeping myself informed and up to date takes time
Security to me means that I am prepared for theandresources, but it helps me protect my current
"hit by abus" scenario.income andexpand my skills to help me earn income
I have life insurance to provide for my wife andin other areas.
children.This increases my stability by allowing me to not
Health, disability, auto and home insurance policieshave torely on one client, employer or source of
alsoprovide me additional protection in theirincome. A chairwith four legs will always be more
respective areas.stable than a stool withonly three.
I also have a list of where these policies are, whoGrowth
myagents are, phone numbers and basic policyThe next level of personal finance, as I alluded to
informationbefore,is growth.
(#s, amounts, costs, etc.) I keep this informationOnce you are secure and stable, you can begin to
both in afile at my house and in a safety deposit boxthink aboutbuilding your wealth. Not that you have to
at the bank (afriends home will also work - think:figure out howto become the next Bill Gates or
"house burns down"scenario). Also my wife and myWarren Buffet. But youhave to start building the
brother and sister-in-lawwho live nearby also know"nest-egg" that you will rely onwhen you retire.
where these things are.And don't think that Social Security has you covered,
I also try to maintain an emergency fund of cash in aorthat your 401k will grow back to what it was a
bankaccount or money market account (with checks)couple yearsago. Or that your current employer is
so that I amprepared for a financial disaster, layoff,going to re-institutethe generous pension plans of
or naturaldisaster. It took several years to build upyesteryear. 401ks are muchcheaper to administer and
this cash fund.you, the employee, take the hitwhen the market
I started with a goal to have enough cash for 6goes down, not the employer.
months of mynormal financial needs (mortgage, food,My father is nearing retirement age and I think he
insurance,transportation, etc.). Now I am trying for 12has agood plan. He has done some research and
months'worth. I do this by saving a little each month,estimated what hisexpenses are going to be when
andhe is retired. He then took alook at his potential
"investing" a portion of all "found" moneysources of income during hisretirement.
(gifts,inheritances, tax returns, anything unexpected).He figured that Social Security would cover about a
I have a will and update it each year around Newthird ofwhat he wanted to live on. Only a third! And
Year's toreflect any changes in my life during thehe has workedhis entire life. Would you like to
past year (newchildren, new home or business, etc.).instantly have to liveon only one third of what you
Most people don'tneed an extensive will, the formscurrently make? Retirement issuppose to be the
you buy at your officesupply store will do. But ingolden years, so where's the gold?
some states if you die withoutone, watch out. WhatLuckily throughout his career, my father has worked
happens to your money and even yourchildren couldforcompanies that have had pension plans and he had
be entirely up to some state or courtappointedworked longenough at each company to be eligible
official.for some pensionmoney. This is rare these days
Stabilitybecause today the averageworker will change jobs
The next level of personal finance is stability.and companies at least five timesduring his/her
Stability to me means that first of all I live withincareer. Also, as I mentioned before,companies are
mymeans. I don't spend more than I earn. Otherwiseswitching to lower cost 401k plans that do
I amspending my savings, investments, emergencynotguarantee you any fixed payments.
money, orgetting into debt. I have a lot of debt, butIn my father's situation, his pension money would
most of it isreal estate which is producing somecoveranother third of the retirement income he
income. I try to avoidcredit card debt and purchasewanted. So now hehad to either figure out where
everything with money Ialready have. I don't buythe last third was going tocome from, or start
things expecting that next monthcutting out expenses during retirement,like not visiting
I will have more money or I will get a big raisehis children so much. None of us likedthe sound of
orpromotion. You can't sell me a car based on athat.
monthlypayment amount; I want to know the finalSo my father started learning about the stock
price!market andinvesting in stocks and mutual funds. He
In order to make sure that I am living within mymade a plan forgrowing his wealth and then educated
means, Icreated a simple budget and I track myhimself as to how hecould accomplish his plan.
expenses using SimpleI wish I could say that he is doing better than he is,
Joe's Expense Tracker. I can tell how much I havebutluckily he has some time still to put his plan into
spent ineach budget category and I know when toactionand ride out any market downturns. (He can do
keep a closer eye oncertain types of expenses, orthis becausehe has the security of insurance and
when and where I can cutexpenses and what I canemergency money, andthe stability of little debt and
live without in order to stay withinmy budget.a strong set of skills.)
Counting pennies is pretty tedious, but trackingwhereBy learning about how stocks, bonds, mutual funds,
the dollars go can be eye-opening.indexfunds, options, futures, commodities, real estate
Another aspect of stability is avoiding or eliminatingand otherfinancial tools work you lay the foundation
debt.for growing yourwealth. You may start with just
Debt in itself is a form of stability; you always have$100 in a bank CD, but asyou learn more and
tomake those payments until it is all paid off.become more sophisticated, you can investin more
Some recent reports show that the averageand more opportunities.
American is $7,000You will learn about how risk and reward are related,
- $20,000 in debt. Most of it is consumer debt:thatas the risk increases so does the size of the
creditcards, store accounts, rent-to-own, auto loans,potentialreward. Just like at the race track, you'll
etc. Andthose types of consumer debt usually chargemake more onthe long shot, but the odds are against
a higherinterest rate than any savings account, CD,it. Also you canlearn how to tilt the odds in your
or money marketaccount; even more than mostfavor and protectyourself against risk.
high-flying risky investments.For those who are just starting out in the growth
This means that $1,000 in debt at 18% is costing youphase orwho want to dabble a bit before completing
9 timeswhat your $1,000 savings account at 2% isthe other levelsof personal finance, my suggestion
producing.would be to look intoindex mutual funds. Especially
Consumer debt is a dangerous spiral that is very hardno-load index funds (noinitial/sales fee).
to getout of.These funds are made up of the same stocks that
The first problem is, as mentioned before, livingmake up thepopular market indexes like the Dow
withinyour means. Don't get further into debt toJones, S&P and
support anextravagant lifestyle. Or even if you areNASDAQ100. The costs are low because
frugal, if youare using credit cards and debt tomanagement is simpleand as a mutual fund you can
finance your purchases,you either need to stopinvest a little at a time.
purchasing luxury items or find away to increase yourAlso they are easy to follow since you see them on
income to support thesepurchases/payments.all thenews shows and in the newspaper.
You may even have to lower your standard-of-livingProtection and Management
becauseyou have racked up considerable debt andThe final level of personal finance is the protection
need to free upsome money to pay it down. Butandmanagement of your wealth. Most people never
don't wait to start. Thoseminimum payments aredevelop wealthenough to need this level. But some
often designed to keep you paying 18%interest forof the concepts can beapplied to any amount of
40 years! That's longer than most home loans.wealth you possess, $10,000 to
You could even end up paying more than 10 times$10,000,000.
the originalcost of the item just in interest payments.Part of the protection harks back to your will as
Is that newstereo really worth that much?wediscussed on the first personal finance level:
To help people get themselves out of debt wesecurity.
created theWith any significant wealth or valuable asset (your
"Pay Off My Debts" tool in Simple Joe's Money Tools.home,car, heirlooms, 401k, IRA, business, etc.) you
It isalso available as a stand-alone product calledwill wantsome way of disposing of that asset upon
Simple Joe'syour death.
Debt Eraser. These tools help you create a RapidWhether it is go to go your family, favorite charity,
Debtorlocal church, if no one knows about it, "it ain't
Reduction Plan which shows you how much to paygonnahappen".
on each debteach month in order to save as muchAs you start to accumulate wealth in excess of
on interest charges aspossible and pay off your$350,000, youmay want to consult an attorney
debts as soon as possible.about creating a trust. Atrust is an entity that can
These tools can help you systematically eliminateown property and pass thatproperty to anyone you
your debtswhether you owe $1,000 or $100,000. Thename in your will. Usually the trustis designed to
key is to startliving below your means and startprovide income to children from the assetsthat are
focusing on paying offyour debt.placed in the trust.
It doesn't make much sense to be worried aboutThe trust can survive you so that your assets and
whether ornot your 401k earns 8 or 9% this year, ifincome maybe passed on to your children or
you are paying 21%on your credit card debt.next-of-kin withoutexcessive taxation and legal
A third aspect that starts in the stability categoryentanglements. Some stateswill take up to 55% of
andtranscends to the next personal finance level,your assets as taxes when you passaway.
growth, isthe concept of investing in yourself. By thisProtection also relates back to insurance. Now it may
I meanspending time to educate yourself in personalbetime to look at a multi-million dollar umbrella policy
financematters, as you are doing right now andthatwill protect you from lawsuits designed to part
spending timegaining more knowledge and improvingyou and yourwealth. You may now be a bigger
your skills or evendeveloping new ones.target, so purchase a suitof armor.
As an employee, this can have a direct relation toThe management aspect comes into play where you
who getslaid off during the next round of cutbacks.may start toconcern yourself with taxation,
If you havesome skills or have demonstrated someownership, distribution ofincome and possibly
abilities that are notpossessed by your co-workersendowments to charities or othernon-profit
and these skills make you amore valuable employee,institutions.
you are less likely to get thepink-slip.You may hire a person or company to manage your
Also while you are making yourself more valuable towealth, oryou may choose to do it yourself. Most
yourcurrent employer, you are also making yourselfpeople who haveearned their wealth through the
worth more tofuture employers. It is much easier to"sweat of their brow" havealready become adept at
land a job if youhave some special skills that are inmanaging their assets. Somecontinue to personally
high demand or even ifyou bring some specialmanage their wealth because of theenjoyment or
knowledge or experience that youfellow job-seekerschallenge it gives them.
may have overlooked or failed to investin.Others are ready to turn it over to a trustworthy
Being in the computer industry, I have to spendmanager
hours eachweek reading trade magazines, exploring(who only gets paid a percentage of your increase)
web sites, andreading emailed newsletters to keepandtravel the world, or sit on a beach and count the
abreast of what is newin my field. If I stoppedwaves.