First posted over four years ago, I continue to believe these approaches to financial health work. I have made one or two edits, like CD rates, to the original post but otherwise it is how I wrote it.
Up front I'm telling you I am not an investment guru. I'm not pushing the next hot thing. I'm just an average guy who has managed to stay afloat by adhering to a few basic rules of financial sanity. How many are you following?
- Don't Chase Returns That are Well Above Average. If most CDs are paying .9%, you can assume that one paying 5% has some problems. If a broker or friend says you can make a 15% return on your money, turn and walk away quickly. If it is too good to be true, it usually is. Greed kills.
- Home Equity Loans are Dangerous. Why? Because too many people use the equity in their house like a piggy bank. The problem is if this piggy bank breaks you could lose your home. My rule is simple: if the equity loan money is for a permanent repair, replacement, or upgrade and I can handle regular payments, then it is OK. But, I never use equity money for something that depreciates or disappears. That means never for a car, big screen TV, or vacation.
- Use On Line Bill Pay. There is no reason to write a check, put on a stamp, and hope the Post Office delivers it on time. Virtually every bank allows you to pay your bills, on-line, for free. It is more secure than the mail. Often you can upload the data right into your budgeting software.
- Get a Free Credit Report. Go to annualcreditreport.com for a free report at least once a year. Don't be confused by sites that promise a free report, but require you to purchase some other service. The one linked above is absolutely free. Look over your report for mistakes or problems. Contact the credit bureau immediately to fix anything that is wrong. The rate you pay for your credit card, auto loan and mortgage are directly affected by these reports. Know what they say.
- Use A Budget. If you do nothing else, keep track of what you spend so you aren't surprised at the end of the month with more days left than money. There is no other way to keep yourself safely afloat. Otherwise you are leaving your financial well-being to chance.
- Live Beneath Your Means. Spend less than you bring in. How do you know? Use a budget. Your goal is to spend 10-20% less than your income or investments generate. Why? That is the only way to build up a sufficient emergency fund and give you enough wiggle room to adjust to unexpected expenses or inflation. I wrote a post about this subject with more details. If interested, click here.
- Whatever You Don't Buy is Money You Still Control. If the urge to splurge hits take a cold shower, take a walk around the block, take some time to think before you buy. After 24 hours if you still want the item and you won't break any of the rules above, get it. Too many people wind up in too much trouble by making impulsive decisions regarding money. Distinguish between a want and a need. Get the need, wait on the want.
These are good reminders, just as sensible as when you wrote them four years ago. Now that it's tax time, it's important for all of us to take time to look at what we are doing with our money, no matter how much or how little we have. Thanks for the review!
ReplyDeleteGood reminder about tax time. I am set to file mine but just read that Turbo Tax has had an issue with fraudulent state returns filed electronically. I'd better let the dust settle on that problem before clicking the send button.
DeleteGood advice, Bob! These are guidelines we have followed, also, and they have served us well. When my husband and I married we promised each other to talk over all the big purchases (back then, anything over $100 was up for discussion). Our first home was a 1100 sq ft fixer-upper, and when we were able to sell it for a profit, we did it all over again--four more times--until we'd cleared enough to be debt free. Back then, we'd eat a frozen pizza on Fri nights and dream about the future. We learned how to do so much, together. It was grueling and great at the same time. We'd sit down and look at our finances every month, and plot our progress. There were bumps along the way, and mistakes made, but our faith and commitment got us through. The joy is surely in the journey. Now that gray-haired guy and I are planning for retirement, using the same guidelines that have served us well all these years. We've been incredibly blessed and have faith that there will be more than enough for us to live well. I believe you're right on target here, Bob, and people of all ages would benefit by planning and paying close attention to their finances.
ReplyDeleteA great story, Pam. You and hubby have made a great life together by learning the financial basics and sticking to your plan. Once that part of the puzzle is put together everything else kind of just begins to fall into place.
DeleteA checkmark in all boxes, except, perhaps the home equity line. I use the Dave Ramsey school of thought here - would you take money out of your home in order to invest in the financial market? Most people would say 'No.' In essence, taking out a loan instead of using savings is doing just that. A home equity loan creates a property lien, which does not make retirement financial sense to me.
ReplyDeleteInstead, we have a budget line for large item purchases that accrues year to year. That should ensure any costly home repairs or upgrades can be handled with cash. If anything ever arises that ends up exceeded our allotment, it would then probably be time for us to consider downsizing.
The budget line item that accures for larger purpose is what we typically do, too. But, the home equity line is there if needed. The lien aspect doesn't concern me because I could easily pay off the loan at any time. It is just that with equity interest rates so low I'd rather pay that than pull money from an investment account that pays more interest if I ever find myself needing the equity loan.
DeleteHere is an example of how we are likely to use it: we are seriously looking at moving. There is about $12,000 worth of work our agent says we should do to make the house sell more easily and we will recoup more than the $12,000 in the end. At settlement I pay off the equity loan from the proceeds instead of pulling the money from investments.
Great post as usual, and a good reminder. These days with identity theft and personal security, I would propose two more tenets. First, use your debit card only within the bank that issued it, as a form of ID. You can't even trust the outdoor terminal hasn't had a skimmer installed with a nearby camera to capture your PIN. Use a credit card for day-to-day purchases, but treat it like a debit card. Know what you charge and be sure you have the money to cover it at the end of the month. With a debit card hack, you may get your money back some months later, or you may not. With a credit card, your maximum liability if $50 if you are watching your account(s) like you should be.
ReplyDeleteWith the recent Anthem hack, I realize how easy it is for bad guys to get your SSN. I'm seriously considering putting a freeze on my credit. In my state, it will cost $30 to freeze both our credit lines, and it will cost up to $30 to unfreeze it temporarily, should we need a new credit report. That added fee may just make us rethink how badly we need the new credit line.
A credit freeze is becoming a more viable option every time another company is hacked. If we don't commit to a move in the near future I will probably do so. I also change my passwords frequently and choose different ones for almost every account. They are long and a combination of letters, numbers and symbols....virtually unbreakable by anyone except the CIA.
DeleteGood, common sense points, Bob; unfortunately most Americans do not want to hear about common sense approaches, just how they can spend more, get rich quick, and so on.
ReplyDeleteI would agree with everything you state, and add one on credit cards. We use only cards to accrue either high cash rebates or points for things like Harley Davidson "stuff", so we benefit by putting purchases on them. The key is to never, ever pay a penny in interest charges on them, meaning pay them off in full every month. Have done this for years and it has worked out for us very well. I suppose this point could also go under the "living within your means" area.
Another would be not investing in financial instruments you do not understand, or have high fees associated with them. Annuities of any sort would fit this bill as far as I am concerned. I just talked with someone about a new(er) annuity instrument that actually is a tax-advantaged investing platform for all sorts of things - mutual funds, options trading, alternative investments, and so on. I was intrigued when he said it is a 1% yearly fee, since while I am very adverse to high fees, this appeared reasonable for such a vehicle. Unfortunately when I checked further I determined that the yearly cost is closer to 2.5%, which will likely kill it for me. I digressed a little there, but the point is the same - avoid high fees that will drain your pocket while enriching others.
Glad to see you and Betty are doing well financially. I am now at one year of ER (Deb's at six years) and she'll will start collecting SS early this year, while I will likely wait until closer to or actually 66. Additional streams of revenue that will help, no doubt, to help us keep our heads well above water.
That alert from the bank once a month that shows a fresh SS deposit makes my day!
DeleteWe have never carried interest charges on a credit card. Every one is paid in full every month. Our primary card has cash back or points which I use to reduce the monthly bill by using it as a credit paydown. I am sure the credit card companies aren't terribly happy with me, but they get there cut from the 2-3% charge merchants pay to accept the card in the first place.
All good advice. I believe online bill paying is one of the great achievements of the 21 century! My credit card company (Discover) has started to report my credit score on my monthly bill. Would be helpful for many people. But as a retiree ... who cares? I'm not looking to get a loan at this point in my life.
ReplyDeleteHaving a credit score as a regular feature is a nice plus. I was pleasantly surprised the last time I checked mine. I think some car and home owner insurance companies use a credit score to validate a particular rate, but otherwise I see no direct effect on me.
DeleteA year ago or so, I realized I should pay off my mortgage, given the sorry savings return I was getting. I went to my local branch bank and you would have thought I was Warren Buffett. The manager called me into his office, brought in several asst managers, and asked me how I accomplished this amazing feat. I gave them 3 pieces of advice: live below your means; save regularly, even it's only a few dollars at the start - initially, the habit is more important than the amount; and enjoy what's left. Life is for living.
ReplyDeleteScary that bankers didn't know that! You have described the three legged stool of financial independence. Good job.
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