Monday, April 27, 2009

Stick To The Basics


Saving Money Tip #126 - Stick To The Basics. When it comes to ones finances, many people are overwhelmed. They say that finances are difficult. Or they claim that they do not know anything about investing. Or they say they are not good with math. Or they say they just don’t understand any of the financial terms. However you should not be afraid when it comes to personal finance. Just stick to the basics:

1. Keep your expenses below your income.
2. Put a certain percentage away for future purchases; and
3. Save a certain proportion for retirement.

Just do those three things and you should be fine with your own finances. You do not need to understand what preferred stock is or what a company’s price/earning ratio is. In fact, you can understand pretty much know next to nothing about investments and still become rich or at least financially comfortable. Someone who borrows money and then invests it in high-risk stocks is not necessarily going to do better than a person who puts away part of his income each year and invests them in Certificates of Deposit (CDs). In fact, he may even do worse.

So for those of you who are just starting out with personal finance and are learning the different investments and finance terms, do not be overwhelmed. Stick with the basics. Live on less than your income. Many rich individuals (those who have lots of money put away in savings, not necessarily those who drive fancy cars and live in big houses) say they got rich because they lived on less than they earned. Some of them lived on half of their income. Some maybe lived on 70% of their income. Either way, they lived on less than they earned. If they had big purchases on the horizon, they saved up for them. Maybe 15 percent of their income would be put away each year for a new car in the future, home repairs, a special vacation or a combination of all three. Lastly, they put away money each year for when they would not be bringing in an active income (i.e. retirement). Some experts recommend that you save at least 15 percent of your income for retirement. Others say put away as much as you can. A lot depends on when you will retire and how much income your retirement fund will generate. If you do not take on much risk, you should put away more. If you are more aggressive in investing, you may be able to put away less.

Really, that’s all there is to personal finance. Yes, it is nice to understand what a mutual fund is and it would be good to comprehend asset allocation. And if on your personal finance journey you become interested enough to study investment terms or at least go beyond the basics, you will probably do better than someone who just puts all of his money into a money market fund. But if your eyes glaze over listening to talk of finance, take heart. Do the above three basic things and you should still be okay.

In Real Life (IRL) – I like math and I am interested in finance. I even got my degree in it in college. But frankly, I don’t care to learn that much about various types of high-level investments. In fact, I couldn’t care less about them. My money is currently invested in CDs, mutual funds, and some government bonds. That’s it. I don’t even own any individual stocks anymore.

Over the years, I have accumulated a fair sum of money, not because I know anything more than the next person about which stock is hot or how to get rich quick. Quite the contrary. The only thing I have done is lived on less than I earned – always. I’ve never gone into debt to keep up my standard of living or to buy things. I’ve worked things I want into my budget or I save for them over the long-term. Lastly, I put away a percentage of my income for retirement. It started out as 3 percent and quickly moved up to 13 percent. Now we put about 20 percent of our income away for retirement. We don’t invest aggressively. In fact, we are probably a bit more conservative than most. Yes, I understand different retirement account advantages, such as 401(k) and IRAs. And I know where to put away college money (in an Education Savings Account or a 529 plan), but beyond that I operate our family’s finances very basically.

The point of this of this post is to let you know that you do not have to be an expert or even too interested in the financial world to accumulate money. And just because you don’t understand much or are not interested in finance doesn't mean you should just avoid it all together. In fact, the opposite is true; even if you get overwhelmed by investment terms or math or various financial accounts, just do the three things mentioned above and you will be on your way to a financially secure future.

There are many excellent personal finance and investment blogs on the Internet. I am just discovering some of them myself. To that end, I participated in a Carnival of Finance this week. Check out this blog carnival and learn more about finance, investing, and frugal living, in case this stuff doesn't overwhelm or bore you. ;-)

1 comment:

Thomas Watson said...

Sticking to your budget is the key.