Three Simple Vital Financial Lessons

Three Simple – But Vital – Financial Lessons
A fee simple lessons will serve you well, starting with three ideas that will have enormous
impact on your financial future:
1. The value of your money is constantly changing, so you need to understand how time
affects your financial health.
2. Small sacrifices early in life can have a huge payback later in life.
3. Every financial decision you make involves trade-offs.
The Value of Your Money is Constantly Charging
 A dollar today does not equal a dollar tomorrow.

 Depending on the financial decisions your make, then, time can be your best friend or
your worst enemy.
 The time value of money refers to increases in money because of accumulating interest.
 Time is even more powerful when your investment of debt is subject to compounding,
which occurs when new interest is applied to interest that has already accumulated.
 Saving is about the only legitimate way to earn money by doing nothing.
Small Sacrifices Early in Life Can Produce Big Playoffs
 Keep your expenses down and start saving as aggressively as you can.
 Of course, saving during the early years of your career is no easy task, and it may be
impossible, depending on your starting salary.
 A few simple choices may be able to free up hundreds of dollars every month.
 Even if you can save only small amounts early in your career, the sooner you start, the
better off you’ll be.
 Just keep increasing your monthly investment every time your salary increases, and do
everything you can to take advantage of the time value of money.
Every Decision Involves Trade-Offs
 By now, you’ve probably noticed that the time value of money and frugal living involve
lots of choice.
 You can be investing that amount every month and build up enough money to start your
own business or perhaps retire a few years early.
 Even the smallest habits and choices have consequences. Addicted to potato chips?
Let’s say you spend $3.19 for a big bag two or three times a week. Kick that habit now
and invest $400 or so a year instead. Over the course of 40 years, you could earn
enough to treat yourself to a new car when you retire. Sounds crazy, but over years,
even tiny amounts of money can add up to large sums.
 Other choices involve risks versus rewards.
 As you gain experience with financial choices, you’ll recognize your own level of risk
tolerance.
 Figuring out the best choice is difficult in many cases but simply recognizing that every
decision involves a trade-off will improve your decision making. Too often, people get
into trouble by looking at only the risk (which can stop them from making choices that
might in fact be better for them in the long run) or only the potential rewards (which
can lure them into making choices that are too risky). Consider all the consequences of
every choice you make, and you’ll start making better financial decisions.
Creating Your Personal Financial Plan

 Creating and following a sensible financial plan is the only sure way to stay in control of
your finances.
 A good plan can help you get the most from whatever amount of money you have,
identify the funds you’ll need to get through life’s major expenses, increase your
financial independence and confidence, minimize the time and energy needed to
manage your finances, and answer a question that vexes millions of people every year:
Where did all my money go?
 The right advice at the right time can make a huge difference.
 Fee-only planners charge you for their services, either an hourly rate or a percentage of
the assets they’re managing for you. In theory, the major advantage of fee-only
planners is complete objectivity, as they don’t make money on the specific decisions
they recommend for you.
 In contrast, commission-based planners are paid commissions on the financial products
they sell you, such as insurance policies and mutual funds. Although you can certainly
receive good advice from a commission-based planner, make sure he or she has a wide
range of offerings for you.
 Even if you decide to rely on a full-service financial adviser to guide your decisions, you
need to stay informed and actively involved. Keep in mind that even if you get advice,
you are ultimately responsible for- and in control of-the choices involving your money.
 Don’t count on anyone else to secure your financial future for you.
Figure Out Where You Are Now

 Successful financial planning starts with a careful examination of where you stand right
now, financially speaking. Before you can move ahead, you need to add up what you
own and what you owe, where your money is going, and how you’re using credit.
 You might not like what you see, but if your finances are heading downhill, the sooner
you learn that, the sooner you can fix it.
 Start by listing your assets – the things your own – and your liabilities- the amount of
money you owe. Assets include both financial assets, such as bank accounts, mutual
funds, retirement accounts, and money that people owe you, and physical assets, such
as cars, houses, and artwork. Liabilities include credit card debts, car loans, home
mortgages, and student loans.
 After you’ve itemized everything you own and everything you owe, calculate your net
worth by subtracting your liabilities from your assets.
 Your balance sheet gives you a snapshot of where you stand at a particular time. The
second major planning tool is your income and expense statement, or simply income
statement.
 This statement answers the all-important question of where your money is going month
by month. Start by adding up all your sources of income from jobs, parents,
investments, and so on.
 If you have irregular income, such as a one-time cash infusion from your parents at the
beginning of each semester, you can divide it by the number of months it needs to cover
to give you an average monthly value.
 Next, list all your expenses. If you’re in the habit of using debit cards, credit card, or a
checkbook for most of your expenses, this task is fairly easy, since your statements will
show where the money is going. However, if you tend to use cash for a lot of purchases,
you’ll need to get in the habit of keeping receipts and recording those purchases.
 Using cash has the major advantage of limiting your spending to money that you
actually have, but it doesn’t leave a “paper trail” the way credit and debit cards do, so
you have to keep track of the spending yourself.
 Assembling your balance sheet and your income and expense statement can be a chore
the first time around, but updating it as your make progress is much easier.

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Three Simple – But Vital – Financial Lessons

 A dollar today does not equal a dollar tomorrow.

Creating Your Personal Financial Plan

Figure Out Where You Are Now

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