Considering whether or not your personal finances are prospering or just barely surviving depends on a variety of things. Discover the top 10 personal financial considerations in the following paragraphs.
On this site, we spend a lot of time talking about the finer points of investing and personal finance. Examples include attempting to reduce the expenditure ratio of your portfolio by 10 basis points, determining the value of DFA access, determining whether riders on a disability insurance policy are cost-effective, choosing the best real estate investment strategy, and deciding whether or not to slant your portfolio towards tiny and value companies.
However, the reality is that many who are struggling financially are not at all concerned about these matters. The majority of people who read financial blogs are “maximizers” as opposed to “satisficers.” A maximizer will pay every penny of tax he owes to the IRS but will not leave even a 1 cent tip.
To save $50 on his tax bill, a satisficer isn’t going to document his philanthropic mileage. The truth is that only a select few factors truly count when it comes to personal money. Not only will I be arrogant enough to list what they are in this post, but I’ll also rate them from most important to least essential.
1. Get Married and Stay That Way
Divorce is the single worst thing that can happen to you financially. An Engineer or a high net worth individual typically loses a significant portion of their income for at least a few years after losing half of their assets. However, studies typically demonstrate that married individuals are happier, wealthier, and live longer than single people. While being single isn’t an awful alternative, since two people don’t live as cheaply as one (they do, however, live as cheaply as 1.4), it isn’t a good decision either. One spouse, one home, a content wife, and everything else. Everyone has acquaintances who are not financially compatible. Many high-earning, thrifty investors have been hindered from achieving financial security by a spendthrift spouse.
2. Make a High Salary
The effect that a big wage has on your personal finances is frequently understated. Even if it’s possible for someone with a high income to be just as broke as someone with a low income, it’s still true that those with high incomes have a far higher chance of being truly wealthy and enjoying financial independence. By virtue of their exorbitant compensation, physicians have essentially already won the money game. Even for a physician with a small salary, they have a variety of disadvantages, so don’t ignore this significant one.
Don’t undervalue the advantages of earning $300K per year as opposed to $150K per year as an engineer/IT professional, though. Although both wages are respectable, they actually aren’t comparable in terms of purchasing power and potential wealth building. You have a lot of power on your wage in your life, whatever it may be. You might need to relocate, put in more time at the office, or take on more calls, but income is the foundation upon which wealth is built, so increasing it never hurts.
3. Ensure Career Longevity
How long you can sustain your profits is more significant than your peak earnings. While working really hard for 15 years at a salary of $350,000 a year is one possibility, it turns out that working for $200K for 30 years is a far better choice for a variety of reasons. For starters, despite making more money, you pay less in taxes. Additionally, you end up with a significantly greater social security benefit since you leave more time for your money to grow and less time during which you must live on it (allowing you to spend more in each year of retirement). Determine your daily activities for the remainder of your productive life. Better still if it’s something you’d do for free. However, even if you are like the majority of us and wouldn’t practice medicine for free, doing it in a way that guarantees the longevity of your profession would help you accumulate riches.
4. Insure Against Catastrophe
Having insufficient insurance is one of the worst financial decisions you can make. Malpractice, personal liability, disability, property and term life insurance are vital if others are dependent on your income. Lack of insurance results in significant financial destruction.
5. Live Well Below Your Means
This, the fundamental guideline of personal finance, ranks a pitiful fifth on my list. You might have noticed that I added a new word to the sentence that isn’t normally there. Living within your means does not, at any realistic rate, lead to wealth accumulation. Living much below your means is the key. I frequently mention allocating 20% of gross income to retirement, but in reality, this is only a rough estimate. You should be fine if your percentage is 15%. But if you’re serious about accumulating money, earning $20,000 a month and spending $19,000 of it won’t cut it.
I have a lot of wealthy friends, yet none of them broke this rule. The greatest offender is housing, which is often a person’s biggest expenditure. A substantial impact will be made if you keep your mortgage to two times your gross income.
6. Don’t Sell Low
An Engineer or IT Professiona in his 50s who experiences a down market, panics, and converts all of his stock into bonds is one of the worst disasters I frequently witness. Many other crucial components of investing, such as managing expenditures, asset allocation, and tax efficiency, are overshadowed by investor behavior. Overestimating your risk tolerance may cause your riches to disappear quicker than Joe Hazelwood’s barman, especially if done late in your career.
7. Buy and Hold a Reasonable Portfolio
It never ceases to amaze me how many people have unreasonably large portfolios. The majority of them consist of a variety of assets, including a few individual stocks here, some mutual funds that were popular a few years ago there, and a few privately traded REITs over in the corner. No asset allocation or overriding plan exists. When people just invest their money in bank accounts, certificates of deposit, or whole life insurance, they may not be taking on enough risk. When they invest heavily in hedge funds, penny stocks, or even a few “blue chips” like Enron or Worldcom, they may be taking on much too much risk. Other times, they may have their whole 401(k) invested in business shares.
It simply seems ridiculous to not have one when it is so simple to have a respectable portfolio. Check out these 150 portfolios that are superior to yours if you’re unsure of what a decent portfolio should look like.
8. Be Uncomfortable With Debt
I have a minor problem with this one. Individuals who owe $450,000 in student loans frequently get in touch with me and behave as though it doesn’t matter. These individuals almost always want to live in a region like NYC or the Bay region and work in comparably low-paying discipline. Another typical occurrence is a individual who owes money on three different properties: a large, opulent house, a second home, and a cottage.
While some debt is required and some leverage can be useful occasionally, everyone I know who is financially stable has a healthy respect for debt, and the majority of them have broken free from its bonds years ago. Even $200K in student loan debt at 8% is significant, much alone $400K. Even $500K in home debt, much less $2 Million, is significant. It’s not acceptable to purchase vehicles or even appliances on a payment plan. Cards for credit are not for credit. Become uncomfortable with debt and prosper.
9. Minimize Educational Costs
Education is a valuable asset, and the more you learn, the more you earn. However, there is a low correlation between the quality of education and the price tag. In 2014, George Washington University and Trinity University were ranked #52 by US News and World Report, but their education was ten to forty times better than those at Brigham Young University and Berea College. Private elementary schools in the Bay Area are routinely $30K a year, while public schools are $8-10K. Housing is the biggest expense, but education, when improperly done, can be even more expensive. For example, sending a 5-year-old to George Washington for $47K per year and an expensive school for $82K per year would require a monthly savings of $2400 per child, in addition to private kindergarten fees. While it is possible to maximize in many areas of life, it is important to be satisfied when it comes to education. The quality of education is more than just the name on the front of the administration building.
10. Pursue Inexpensive Hobbies
There are numerous enjoyable activities available, some of which are cheaper than others. The ideal hobby is a job that you love and enjoy doing for free, but you get paid to play every day of your life. While this may not be feasible for most people, a hobby that pays you is a nice second. For example, a blog owner could have pursued wakeboarding, which costs $120,000 and includes maintenance and operation costs. However, hobbies like flying, boating, antique cars, and horse racing are more expensive than hobbies like knitting, mountain biking, basketball, or bridge. If you enjoy two equally enjoyable activities, choose the cheaper option.
What do you think, then? Is the top ten correct? Did I follow the correct order? Please share any information I missed in the comments area.