If you were fortunate your parents sat you down at some point and you had “the talk.” No, not the talk about sex. The talk about personal finances. Or maybe you were like me and your parents never discussed money with you. I guess mine thought I’d either figure it out on my own or just sort of pick it up by osmosis. In any event I finally did learn the important lessons about personal finances but in some cases it was definitely the hard way – like the time my wife and I decided to have a home custom built for us when we hardly knew what a mortgage was.
Even if your father or mother did have “the talk” with you, the odds are that there were some things they neglected to tell you that are important and here are 10 of them.
1. Being in debt is like indentured servitude
If you’re not familiar with the term indentured servitude the online encyclopedia Wikipedia defines it as, “a voluntary labor system whereby young people paid for their passage to the New World by working for an employer for a certain number of years”. The reason why debt is like this is because basically what you’re doing is sacrificing future earnings (working for a credit card company) in exchange for instant gratification (passage to the new world). How do you avoid going into debt? It’s pretty simple. If you have a credit card make sure you pay off your balance on time every month. Ditto store charge cards, and an auto loan – if you have one. I understand that it takes a certain amount of self-discipline to do this but it will pay off in the years ahead when you’re not sending 20% or 30% of your hard earned income off to a credit card company or companies.
2. If you need to ask your boss for a raise, you need a new employer
Assuming that you come to work every day on time and are good at your job you should earn a raise without having to ask for one. If you work for a corporation you probably get an annual review accompanied by a raise of some kind. If not, you’ll be at the mercy of your employer. But, again, if you’re doing a good job you should earn a raise without having to beg for one. And if you do have to beg for one, you might want to think about finding a new employer.
3. You can’t manage your money if you don’t track your income and outgo
The cornerstone of good money management is to know how much you earn and where your money’s going. Most of us do know how much we earn but if you’re not tracking your spending, it’s like playing baseball without keeping score. You may believe you’re ahead but you could actually be falling further and further in debt. There are a number of smart phone apps available today that make tracking spending drop-dead simple. Alternately, you could just use a pen and a notepad. But whichever method you choose it’s important to note all of your expenditures right down to the penny. Add them up at the end of the month and you’ll then know whether you’re winning or losing. If you find that you are losing – or spending more than you earn – you will need to find areas where you could cut costs.
If you would like more information about tracking spending here, courtesy of National Debt Relief, is a video that reveals three ways to do this.
4. Only suckers play the lottery
If you’re carrying a boatload of debt don’t think that playing the lottery is your way out. A very smart person once said, “Lotteries are for the mathematically challenged.” We have radio commercials for our state’s lottery that generally ends with words like, “chances of winning the Powerball lottery are one in 25.4 million”. You have a better chance of getting struck by lightning than winning a one of those lotteries.
5. Shun those credit card “convenience” checks
“Convenience” checks are those that you receive periodically from your credit card company or companies. They might seem like a convenient way to get cash but the interest rate on these things are often anything but convenient. Convenience checks usually come with a fee of 3% or 4% of the amount you’re borrowing, plus a very high interest rate. Most credit card companies charge the same interest rate on a convenience check as cash advances. This means the interest on a convenience check could be twice that of purchases.
6. A spreadsheet can help even the most disorganized
Even if you’re a very disorganized or scattered brained person a spreadsheet could help you successfully manage your personal finances. You could use one to track your spending, create and stick to a budget and help you pay off your debts. If you don’t have a spreadsheet program such as Excel, there are free ones available through OpenOffice.org, Google Docs, Kingsoft and a number of other sources. While it may take you 30 minutes or an hour to set up a spreadsheet once you’ve done this it probably won’t require more than a few minutes a week to keep your personal finances under control.
7. Patience is a huge virtue when it comes to saving money
You’ve undoubtedly heard the old story about the tortoise and the hare. When it comes to saving money, the tortoise is clearly the winner and by a wide margin. This is due to compounding interest. You could put as little as $50 a month in a savings account and end up with several hundreds of thousands of dollars. If you’re not familiar with compounding interest it’s basically where you earn interest on interest. For example, if you put that $50 into a savings account that pays 2% annually, you would have $612 at the end of the year and $1236 at the end of year two – or your $612 plus $600 plus 2%.
8. Money won’t buy happiness
A friend of mine used to say that while money won’t buy happiness it will rent a bunch of fun until happiness comes along. But that, of course, isn’t really true either. Real happiness doesn’t come from having enough money to buy a bunch of stuff. Nirvana comes from financial freedom. You might think that the guy that drives an almost new Lexus is better off then your friend who drives an old beater but this is often not the case. The guy in the Lexus may be up to his belly button in debt while the friend in the old beater has more than $100,000 in his 401(k). If you live prudently and save a good portion of your income the day will come when “no man will be your master” and you will be financially free, which is true happiness.
9. Not everyone needs a budget
We don’t know of a single financial guru that doesn’t preach the importance of having a budget. But the truth is that not everyone needs one. Some people just instinctually know how much they’re spending versus their income and how to keep the former from getting ahead of the latter. You may also not need a budget if your finances are relatively simple.
10. Frugality is not the be-all and end-all
You may have read some of the many articles regarding the importance of living frugally. Of course, living frugal is never a bad idea. However, frugality has its limits. You could cut your spending to the very bone and still not have enough money to create an emergency savings account or to invest. The best answer sometimes is finding ways to earn more money. For example, this might be harsh but you could get a second job. Our economy is mostly back to what it was before the Great Recession and there are many companies now hiring part-time employees. These jobs generally don’t pay much – usually nine dollars or $10 an hour – but 20 hours a week could go a long ways towards funding your savings account or making investments.