Finding your way to financial security and eventually getting you to a comfortable retirement is pretty much what everyone is looking for in life. But how do you find this financial success?
Now that I am in full retirement mode, I can easily see where I went right and where I went wrong on my path here. That’s why it is good to at least listen to someone who has had the experience on the road to retirement and can offer you what is hopefully sage advice.
From time to time, your financial plan is something you may even utter out loud to yourself, family, and friends, but more often it’s just inside your head and tucked away behind the things you do in life and at work. After all, it is the reason you look for a good job and work hard, isn’t it?
That’s why it is a requirement to get grounded and know what the basic principles are to help get to your goals.
8 Rules for Your Financial Success
Here are my 8 “must-follow” rules to help you on your way:
1. Spend Less Than You Earn
This first principle of good finances is maybe the hardest one to actually accomplish. But as hard as it may be, it is absolutely the most essential path to follow to get to your financial success.
It may sound like some kind of religious mantra, but you must learn the differences between a “need” and a “want” and to master it. For instance, you may “need” a reliable method of transportation to move from one location to another, while you “want” the newest luxury-model automobile with leather seats, GPS system, and chrome wheels.
Use your money for essentials and save the excess for your future. You can’t afford extravagance until after you’ve reached your financial goals.
2. Track and Budget Your Spending
To achieve your long-term goals, you need to track your finances and know where you spend most of your money. It’s the only way you’ll be able to control your money.
Once you have done some tracking, you can set a realistic budget so that every dollar has a job (don’t forget to pay yourself first!). Then keep tracking to make sure you stay on budget.
Organizing your finances helps you to create wealth. Credit cards, bank accounts, personal loans, brokerage accounts, mortgages, car loans, and retirement accounts should to be tracked every day. Budgeting software or apps can provide complete solutions to track all such accounts.
3. Save for Retirement Starting When You Are Young
I can’t emphasize this more than I do, but you should begin saving for your retirement when you get your very first job. Why? Because when you do that you have the exponential advantages of time on your side to earn, save, and repeat for decades that can insure you have enough to comfortably retire.
Take advantage of the time value of money. You can start small in the beginning, but just start.
Take advantage of any employer-offered matching fund plans for retirement and accept that “free money” with glee! In some cases, employers will match your dollars up to a specific percentage in their company-sponsored plan. Taking full advantage of matching funds is a spectacular deal.
4. Get the Insurance You Need
The likelihood that you will experience an illness, medical condition, or accident in life requiring medical treatment is extremely high and the costs of the subsequent treatment can be devastating. As a consequence, the purchase of health insurance should be on every person’s priority list.
Enroll in your employer’s insurance plan if it provides one. Otherwise enroll in a plan of your choice on Healthcare.gov or enroll in Medicare or Medicaid (or both) if you are eligible. If you can qualify for a health savings account (HSA), establish one for the tax benefits it provides.
A young, single person needs enough insurance to pay his debts and burial expenses but others, such as parents with one or more children, need enough insurance to replace their incomes for the family until the children become adults or through college.
The cost of raising a child to age 18 (not including college) is hundreds of thousands of dollars for the average middle-class family. College tuition and room and board just adds even more to that already huge number.
Fortunately, the cost of term life insurance for a young adult is surprisingly inexpensive. Healthy non-smokers at age 25 can buy coverage for as low as $20 a month for $500,000 of insurance. Both income earners in the family should have term life insurance. Even non-earners who are responsible for childcare may need coverage.
The insurance industry suggests that the odds of suffering a disabling injury that keeps you from working at least 90 days are 80% for the average 25-year-old. While your specific odds may be lower, depending upon your lifestyle and occupation, the impact of a disability is such that you should protect yourself and your family with disability insurance.
Most employers who offer health insurance also offer disability insurance too. If it is available you should buy it as it is usually a very small cost that insures real peace of mind.
5. Establish an Emergency Cash Fund
Bad financial things can and will happen to you. You need an emergency fund and that fund should be at least an amount equal to a minimum of 3 months’ expenses in cash or a savings account. In other words, if you need to spend $4,000 a month to cover your expenses, have a minimum of $12,000 saved before you begin to consider other kinds of investments.
While this amount may seem to be high, you should keep in mind that the average duration between jobs lasts months. It does not make financial sense to invest funds which might be needed with little notice in investments that move up and down in value like the stock market because you are risking that it will be at a low point when you need to liquidate.
6. Trust Your Instincts But Get Expert Opinions
No one has your interests in mind to the same degree that you do. You and your family will be the ultimate beneficiaries or victims of your financial decisions or those made on your behalf. For that reason, you should seek out professional opinions of financial experts when they are available.
But follow this rule as well: never take or agree to any investment actions that you do not fully understand and are in total agreement with. If you are unsure, do not agree to do things that you do not understand.
7. Diversify Your Investments to Balance Risk and Reward
After you have adequate insurance and emergency funds, and started saving for your retirement in an employer-sponsored plan, it’s time to consider other kinds of investments.
Common stocks and mutual funds are popular with beginning investors, since their prices are readily available and securities can be easily purchased or sold. Even parts of shares can be purchased these days so investment can start small and be fairly inexpensive to do too. Despite the ups and downs of the markets that you see every day, over time the markets will go up! This is just another example of being in it long term and not looking for quick success.
Your portfolio of stocks can be managed by a highly-trained professional manager with a public track record if you desire, or by yourself. But the important thing is to diversify your holdings so that any one segment of the market that performs poorly will not have major impact to your finances.
8. Real Estate and Home Ownership
Real estate is another popular investment with special income tax benefits, but real estate is generally expensive to buy and sell and less liquid.
As an investment, the best form may be home ownership itself which provides you and your family a place to live that can also mean equity and financial security as well. That part of the “American Dream” is still very much alive.
Have Patience on the Long Road to Financial Success
If financial success were guaranteed, everyone would have it and there would never be any anxiety amongst us about money. But that isn’t the way it works.
That’s why the ability to accept the unknown and to cope with the unexpected (such as wide swings in the stock market) is often referred to as “risk tolerance”. Everyone has a different level of risk tolerance.
If you have any investment or might be considering an investment that will keep you up at night worrying about its outcome, avoid it or get rid of it.
Whether you’re just starting on the road to financial security, or a middle-ager looking at your financial picture and your upcoming retirement, these keys can help you put yourself in a more comfortable financial situation.
The final principle for success is to appreciate what you have already. Be grateful for what you have now and for what your future can bring.
Remember, achieving real financial success often takes a big chunk of time out of your life, and there are few shortcuts. If you’ve made good choices and have avoided most of life’s financial disasters, you will spend the rest of your life living on the fruits of your hard work and your good decisions and look forward to a great retirement ahead.
Are you preparing for financial success right now? When did you begin and what kind of financial freedom do you require to make it to your goals?