The key to financial well-being is not so much having a lot of money but how you manage it. To be sure having money helps, but it’s not entirely necessary for financial security.
The key to financial bliss is financial security and that does not depend upon your income but the relationship between your income and your lifestyle. Being financially secure means living a lifestyle that’s in line with your income. The biggest mistake people make, especially younger people, is striving for a particular lifestyle even if they don’t have the income to support it. They buy more house than they need and stretch every month to make the payment. They finance one car, then another and count on credit cards to cover the gap between where the money runs out.
Avoid Debt Like a Plague
You may have heard some financial pundit talk about “good debt” vs “bad debt”; that is absolute nonsense. There is no such thing as good debt and that includes credit cards, auto loans and a home mortgage. Sometimes it’s not possible or practical to avoid debt completely, but that should be your goal. Inevitably someone will jump in with how much cash they get back on their credit card rewards program. That’s great for them but be late or miss one payment and all those rewards will disappear under a pile fees and penalties.
I see people claim you need to save a fixed percentage of your income ranging anywhere from 10% to 30% every month. That tends to be a little constricting and doesn’t account for months with higher than usual expenses. For months with big expenses like auto insurance, quarterly self-employment taxes or a big home or auto repair bill, you’ll save less or maybe none at all. Other months, with lower expenses, you’ll be able to save more. Trying to force fit your finances into a fixed percentage quickly becomes frustrating and many just quit.
Learn About Investing
You don’t have to be a stock picking expert who routinely outperforms the market, something that is nearly impossible for small investors, but you do need to understand how to invest your money so that it at least matches the overall performance of the market. Well managed mutual funds with low expense ratios are run by investment professionals who manage stock funds for a living. It’s really okay to pay them a small percentage of your fund gains to manage your investment for you.
Learn to find and analyze those funds on your own. Asking a stockbroker or investment advisor is almost always a mistake and the majority are nothing but salespeople.
Plan For Emergencies
Cars will break down, you will get sick and unexpected expenses will arise. If you don’t have an emergency fund then borrowing will be your only option to pay for those unexpected expenses. Borrowing to pay for car repairs balloons the cost and, with interest charges, turn the repairs or emergency expense into an albatross that clings to the neck of your finances for months.
Be Brutal On Expenses
There is nothing as powerful in your financial life as your ability to say no to expenses. It’s easy for expenses, like your cable bill, to get out of hand if you’re not paying attention. Twice a year it’s good to take stock of your recurring expenses and consider less expensive alternatives. If you’re a safe driver don’t hesitate to shop your auto insurance. For ten years we stuck with a single auto insurance company, never filed a claim and yet we still saw our rates go up every year. Finally we had enough and went out for bids. Imagine our surprise when we got competitive coverage for close to half of what we had been paying.
We routinely apply the same competitive shopping technique to all the services we get including cable and cell phones. Sometimes we don’t have an alternative, sometimes the alternative doesn’t offer a compelling reason to change, but the way to get ahead is to be brutal on expenses. We saved a ton on our grocery bills when we switched to shopping at Aldi. No household expense goes unreviewed.
Some people may decide these steps are more than they can handle or further than they want to go. Yet there’s nothing quite as empowering as being debt free.