Thursday, August 3, 2017

Back to Basics--Again!

Every once in a while, it is good to get back to the basics. Finding our way to financial freedom is important. The rules of the game are simple, but nobody other than a late-night infomercial huckster babbling about real estate millions on an obscure cable station is going to tell you it will be easy.

Here is the money equation. This equation and a little bit of grade school arithmetic are all the head knowledge you need to get started.

Money In = Money Stored + Money Spent

There are only two ways to move Money Stored in a positive direction; earn more money or spend less of the money you earn.

There are no silver bullets. Most big lottery winners end up in bankruptcy court and few family fortunes last past the second generation after their creation.

First on your to-do list. Stay out of debt. Starting your adult life with a large negative balance in the Money Stored column is a recipe for a lifetime of debt slavery. Carrying $100,000 in student loans for a degree with a starting salary of $35,000 a year will steal at least two decades out of your life. In essence, you have a mortgage without a house. That first car loan will become a monthly car payment for the rest of a middle-class American’s life. Don’t bite the hook. Pay cash. Drive that clunker until you can afford something better. If you are making that car payment to yourself instead of the bank, you will be amazed at how soon the day will come when you can pay cash for new or at least low mileage, late model cars. Credit cards? That’s easy. Never, ever carry a balance. Never, ever pay a late fee.

If you are unfortunate enough to find yourself in debt, pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last. This is called the Debt Avalanche. It works. Or, pay off the debt starting with the smallest account and then work your way to up to the largest balance, probably your mortgage, last. This is called the Debt Snowball. It works.

Start an emergency fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month. If you have less than $1,000 in your emergency fund, consider that an emergency.

Live on a budget. We have never had a budget except the one in my head. That worked pretty well for us, because I was born with a third generation fear of debt in a family that boasted that we could squeeze a nickel so hard that the buffalo would bellow. If you are having problems making it to the end of the month, don’t mess around. Sit down with your spouse on the first day of every month and negotiate a zero-based formal budget. Then live on it. Forms and instructions are free on the Internet.

No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them. Having a pink and blue account for husband and wife to spend without explanation will help avoid arguments, but what goes into those accounts is a part of the monthly negotiation process.

When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.

Start thinking about retirement when you are young. Take advantage of anything offered by your employer. 401(k) matching money will give you an instantaneous 100% tax deferred return on your investment. How can you beat that? This was not a problem or an issue 50 years ago. If you are under 40, your retirement picture is positively scary. This is likely to be a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.

Investment isn’t rocket science. The key is to keep doing it; month after month, year after year, here a little and there a little until you are free. If you don’t want to think or learn, all you need to know is four words Vanguard Target-Date Funds. These funds will automatically provide you with an age appropriate mix of stocks and bonds at a minimal cost. As you learn, don’t be afraid to start buying a mix of conservative dividend paying stocks. Look up Dividend Aristocrats on Google for some ideas.

Don’t forget. Give something to God without expectation of return. It is good for your heart.

That’s all folks. No matter where you are in the process, there is something you can do to improve your situation.
Don’t wait. Start today.