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Although being good at managing finances is essential to long-term success, schools still do not provide students with a basic understanding of personal money management. Tragically, after graduating, young people have almost as little knowledge of money management as when they were infants. To help young (and older) adults make sound financial decisions, in ‘’Why Didn't They Teach Me This in School’’ business executive Cary Siegel shares the essential money lessons he learned throughout life. So, get ready to learn all you need to know about budgeting, saving, investing, and more!
If you want to manage your money successfully, you should always live below your means. According to Siegel, this is one of the most critical money management principles to follow. Unfortunately, this is challenging to achieve in the age of consumerism, when we usually want to have everything now and therefore spend far more than we can afford. Moreover, the prevailing misconception among people is that living below your means equals living badly. Let me ask you something: Does having extra money to save and invest means living badly? No, it only means living smartly.
Saving money and getting rich requires lots of patience. After all, very few became millionaires overnight. When you stop caring about excessive consumption, you will start saving money, and hence, your income will gradually grow. More importantly, while progressing on your journey to wealth, you will develop personal money management principles that will navigate you throughout life.
If you want to manage your money well, you should set short-term and realistic financial goals. Basically, they include saving and investing plans as well as rewards for sticking to them. Both monthly and annual goals are short-term. For instance, your monthly goals can be putting $250 in a savings account, $350 in a 401K account, $150 toward a vacation, and saving for and buying a new iPad. Your annual goals can, for instance, be adding $3,000 to a savings account, $4,200 to a 401K account, increasing your net worth by $12,000, taking a vacation to Jamaica, and buying a fifty-two-inch television.
Make sure to create long-term goals once a year when you are planning your budget. Note that, compared to short-term, long-term goals are more demanding to achieve since they are easy to lose track of. That is why you need to be relentless and setting and recalibrating them. They may include: buying your next car with cash (within five years), paying off all college loans by the age of thirty, owning a home by thirty-five, and retiring by fifty.
One of the secrets to becoming financially secure is having more money that comes in than goes out of your pocket each month. ‘’There is no alternative,‘’ emphasizes Siegel. ‘’You can’t spend more than you make.’’ Although this is contrary to how the government and most Americans manage their finances, it is the only right way to gain financial security.
To keep track of your income and expenses, you should first develop a monthly budget. It simply means to list what is going in your pocket—salary, bonuses and commissions, dividends and interests and gifts—and the amounts of money spent on housing, utilities, automobile, food, entertainment, insurance, loans, charity, savings, and emergency fund.
Once you develop a monthly budget, use paychecks and investment statements to track your income and card and cash receipts to track expenses. Then, analyze your budget on the first day of every month by looking at the amount of money you spent. Where did you spend too much? Where didn’t you need to spend as much? After summarizing your performance against last month’s budget, prepare the budget for the following month. Also, think about what you can do to save more money and define financial goals for the next 30 days.
There will be times when you get a salary increase. Before considering what you will spend the extra money on, think about how you lived with the old salary. Why not continue with your old lifestyle or a little better while saving/investing 50% of your salary increase for the future? Sounds like a good plan, right? Think about it: if you do this every time you get a raise, you will find yourself ultimately saving a significant amount for your future. And, if you have the discipline to do this, then why not also try to use bonuses and unexpected income to get ahead financially? Siegel advises you to take 90% of the sum you are awarded and save/invest it. Other 10% you can spend on buying something you really want (or need). He says saving half of every salary increase combined with saving 90% of bonuses allowed him to save over 50 % of his total income annually for several years.
The first lesson about spending to learn is that you should not be concerned with where you are financially in relation to others. In other words, do not try to keep up with the Joneses because maybe they are heading to bankruptcy. For instance, if your neighbor gets a new BMW, you do not need to follow them. Perhaps that purchase is above their income—if not, good for them. The point is, there will always be people who live better than you, and your goal is not to look up to them but to be financially responsible now so you can gradually increase your financial standing in the future.
Another important lesson to learn is about prioritizing your spending. By this, Siegel means distinguishing the money you spend on your wants and needs. A roof over your head, food, clothing, transportation, entertainment, and health care are your needs. When it comes to your wants, be aware that you cannot have it all—so, decide what is important to you. If that is socializing, for instance, budget more dollars toward social events and eating out. If a nice car is important to you, then compromise on the size of the apartment you rent. Needless to say, it would be desirable to make setting money aside a top priority of yours.
Of course, you might persuade yourself that something is on the list of your needs, even though, objectively, it is a thing you can live without. To avoid mixing your wants and needs, think twice before purchasing something over $100. In fact, the best thing to do would be to postpone the purchase for a month. If you still want a product or a service after this period, then buy it. If not, put the money you were planning to spend into your savings or investment account. The point is, be hard on yourself about really needing stuff.
Although it sounds obvious that avoiding debt is a good thing to do, remind yourself of this principle now and then. Why? Because many finance folks will tell you the opposite, which is understandable considering how they make money—through interest payments and fees they charge you. But, wait. The U.S. federal government’s debt is over $19 trillion and increasing by over $500 billion a year. So, if the government can have debt, why can’t you? Well, simply because it is irresponsible. Moreover, it will cause you to play “financial catch-up” your entire life.
In case you get in debt, after all, try to get out of it quickly. How? First, stop spending more than you have. Second, stop using your credit card. Then, develop a good plan for repaying your debt. Look at your spending habits and cut/reduce all possible expenses to fund your debt elimination. Also, make sure to pay off the highest interest rates and smallest debts first—it will make you feel good and prepare you for paying off larger ones.
Keep in mind that having a credit card can easily take you into debt. Unfortunately, you can get hooked on using them pretty easily, and spend the rest of your life having more debt than you can handle. Remember: no matter what credit card companies tell you, you can still enjoy life without having a credit card. Siegel says keeping the money on your checking account or in cash should be an inevitable financial habit, as it discourages you from going into debt. Moreover, paying in cash makes you aware of the cost and holds your spending in check.
If you decide to get a credit card after all, then make sure to shop around for the best APR (annual percentage rate), terms, and fees. Also, Siegel advises you to pay your credit card bill monthly. ‘’Once you do this, you will never consider getting behind in your payments. You will truly enjoy the financial freedom and stress-free life that doing so provides.’’
Almost all financial advisors will tell you you need help with managing your money. Why wouldn’t they tell you this when they earn money by investing the money you give them and taking a small portion of it. So, instead of having a financial advisor, start managing your own money because no one will care about it as much as you do.
Just as you should avoid financial advisors, you should also stay away from ‘’get rich quick’’ schemes. ‘’’Get rich quick” schemes,’’ Siegel writes, ‘’are investments that promise extremely high rates of return for a relatively small investment of time and money. They look and sound too good to be true because they are.’’ Some of these schemes include:
So, whenever you see anything that looks like any of these schemes, don’t walk away but run! Remember, rare are the cases when you can get rich quickly without much effort. As Siegel says, ‘’the good old-fashioned way of working hard and working ‘smart’ is the best way to get rich.’’
When it comes to investing, a good principle to stick to is buying several different investments. More often than not, investors get infatuated with a stock (bond or real estate) and put all their money into it. Nevertheless, this investment strategy rarely brings success. Siegel gives the example of a couple of individuals who invested all their money in only three stocks. Although their investments grew over five years from a few hundred thousand to several million, during the sixth year, one of the companies went bankrupt, and the other two were worth significantly less than the original investments. ‘’Thus, these individuals went from multi-millionaires to paupers in just twelve months, Siegel writes. ‘’If they had put their money in multiple investments, they would have done fine.’’
To achieve long-term financial success, always live below your means and concentrate more on saving than spending money. Also, do not try to keep pace with others when it comes to buying stuff since you can end up in debt, or worse, bankrupt.
Full of easy-to-understand and proven tips for financial success, ‘’Why Didn’t They Teach Me This in School’’ is a perfect gift for both graduate students and anyone who wants to reexamine and improve their money habits.
Do you pay your bills on time? If you don’t, start doing it next month. This way, you will save considerable amounts of money over time by not paying late (and interest) charges.
Cary Siegel is a retired business executive. He spent most of his career leading several companies in marketing and sales. Also, he has been the lead speaker at over fifty sales meetings and marketing seminars, and was honored with over twenty awards d... (Read more)
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