Like a lot of things in life, what we need to do to be financially successful ends up being pretty simple — not easy, but simple. Take dieting for example. We all know that to lose weight, we need to eat less and exercise more. Yet weight loss is a huge industry. I think it’s because the simple thing is so hard that we try to find a way around it. So my financial secrets may not be very secret, but I do believe they are the foundation of all the other financial tips we follow.
1. Give generously. This may seem like a counterintuitive first step. Shouldn’t we get our financial houses in order, and then decide if we can give? Maybe, if we look at it logically, but we as humans have a very hard time doing things logically when it comes to money. Our spending and investing decisions often have to do with meeting an emotional need that may not even be conscious. Giving generously up front helps us to tame those emotions, and keep money in its appropriate place as a tool to accomplish our goals. Through giving we can make the world a better place, and reap intangible benefits that give us joy, while breaking the hold of the materialism that so often derails a financial plan. In that case, I guess you can say giving is a logical part of a financial plan after all.
2. Spend less than you make. Here we are back at the dieting comparison: so simple, yet so hard to execute. The temptation is always there to spend it now, and save tomorrow. But tomorrow is always a day away, isn’t it? By definition, anything we don’t spend is savings, or an increase to our net worth, so if we’re spending it all, or worse, borrowing to spend, our net worth is staying the same or decreasing. The only way to stay solvent in the event of an emergency in the near term, or to accomplish goals like buying a house, paying for college, or giving up the rat race one day, is to spend less than we take in and save the rest. Or rather — save first, and spend the rest. Simple, not easy, but oh-so critical.
3. Avoid debt. Albert Einstein once called compound interest the eighth wonder of the world because of its power to build wealth. Picture compounding interest in reverse when you are in debt; imagine the power it has to instead erode your wealth. In a world where debt is a way of life and credit cards are more common than cash, it’s very easy to slip into a hole without realizing it. Certainly there are times when life circumstances like a health issue or job loss unfortunately lead to debt, but avoiding debt in general is a solid principal to live by. The discipline of saving for a car or furniture is hard, but rewarding when you can pay with cash and know that your new purchase is really yours and not the bank’s.
4. Maintain adequate liquidity. That’s a fancy way of saying make sure you have enough money available and not subject to stock market risk to carry you through a financial catastrophe (or two). The typical rule of thumb for an emergency fund is six months of living expenses, but that should be adjusted based on your personal situation. How easy (or hard) would it be for you to find another job if you lost yours? Do both you and your spouse support the household financially, and how likely is it that you would both lose your job (for instance you both work for the same company)? How is your health? If you lost your job would you need to purchase health insurance as well or could your spouse’s employer cover you? Liquidity also refers to any funds you may need in the near term, such as money you may need to cover a maternity leave or a planned home improvement project. The key to liquidity is that those funds should be some place safe, insured and accessible — but not too accessible if you have the tendency to “borrow” from it. You may want to keep some in your local bank where you can access it right away, and some in a different bank or credit union that may take enough effort to get to it that you wouldn’t be tempted.
5. Set long term goals. My last tip is to live your life purposefully. Take time to think about where you want to be, how you want to get there and how you will fund it. Life can get hectic, I know! But looking ahead and having a vision for your future is motivating and makes getting up every day more rewarding. Set long-term goals for yourself personally and financially, and break them down into benchmarks you can measure. Celebrate your successes and learn from your missteps. Time goes by too fast; don’t let it slip by without making it matter.