Financial education is not emphasized enough in our country. Unfortunately, evidence of our financial illiteracy crystallized during the economic downturn that affected each and every one of us. Make it a goal to learn – and practice – the five keys to financial success.
I started volunteering at Tabor Community Services in 2009. Tabor, which is a non-profit organization that serves Lancaster County by helping families find housing and financial solutions, is probably best known for its consumer credit-counseling services.
I volunteer in the default-mortgage division, helping people avoid foreclosure on their homes. Tabor was swamped with requests for mortgage counseling at the end of 2008, which prompted me to get involved. Lancaster County was not spared from the economic downturn that brought job losses and falling realestate values. While our county held up better than many other parts of the country, that fact brings little comfort to someone who is personally facing foreclosure on their home.
As I counseled Tabor’s clients through their unique situations, I was reminded of how common financial illiteracy is in our community. Therefore, this month’s column is devoted to what I consider to be the five keys to financial success. Learn them. Share them with your children and grandchildren. You may even need to teach your parents a lesson or two!
1. Live Within Your Means
This would appear to be an obvious and simple rule to follow. If you take home $1,000 per week, you cannot spend more than $1,000 per week. Yet, people spend or commit to spend more than they make in the hope that a bonus, overtime pay or a tax refund will eventually help them to get caught up. I often hear people say, “If I just made more money, all my financial problems would be solved.” The problem is not that they don’t make enough money. The problem is that they spend too much.
You will never make enough money to solve your financial problems. Instead, you must learn to control your spending. The way to control spending is by having a budget and living within it. Without a budget, you will always be blindsided by expenses for which you are unprepared.
A budget is a financial plan that allows you to determine in advance how your income will be dispersed. Tabor holds regular classes on budgeting that are free to the public.
2. Save Regularly
Not only do you have to live within your means, you have to live below your means in order to accumulate savings. Your savings account is a liquid reserve, your “go to” money for the little things that happen regularly in life – an appliance that breaks down, car repairs or any other unexpected expenses. Don’t use your credit cards to handle these expenses. Have a savings account and only use it for the emergencies.
A good rule of thumb is to have three months of your monthly expenses held in reserve. The self-employed, anyone with a seasonal job or someone prone to layoffs should keep six months of expenses in reserve. This may seem like a lot if you currently have no savings. You start by saving something from every paycheck. A good goal would be to save 10 percent each pay period.
3. Eliminate the Use of Debt
Some people may think that it is crazy for a financial planner to suggest the elimination of debt. What about leveraging your investments to improve the return? Isn’t mortgage interest tax-deductible? What I’m talking about is eliminating the use of debt to maintain your lifestyle. Don’t carry balances on your credit cards. Buy used cars for cash until you can save up enough to buy newer ones. Have a plan to pay off your house. Just because you took out a 30-year mortgage doesn’t mean it has to take 30 years to pay for it. I have found that the path to being debt-free begins with making the decision to be debt-free. Once you’ve decided this is your goal, the rest will fall into place.
4. Invest Regularly
George Classen wrote a magnificent book, The Richest Man in Babylon, in which he tells the story of a working man’s quest to become rich. He describes his investments as “an army of golden slaves” that would eventually support his standard of living. The theory is that if you start out working to build your investments, one day they will work to support you. Have a plan to invest regularly and be diligent. Don’t let the noise from the financial press scare you in and out of the markets. Use broadly diversified mutual funds to hold your stock positions and add to them regularly. Stick to this strategy and one day, you will find that your army is large enough to support you by itself.
5. Maintain a Financial Plan
Yogi Berra said, “If you don’t know where you’re going, you wind up someplace else.” This is especially true in financial planning. You need a short-term financial plan that we call a budget. You also need a longterm plan that establishes the level of savings you maintain, a plan to get out of debt and an investment plan that will take you to financial independence. The plan becomes your road map. There will be detours along the way – your goals and the plan will need to be adjusted as you progress in life. Keep working at it. Don’t be distracted by outside influences you can’t control. You don’t want to get to the end of your working career only to find you haven’t saved enough to maintain your lifestyle and you still have a mortgage on your home.
Addressing these five keys can help eliminate financial stress in your life. It all starts with planning. Stop allowing the financial winds of life blow you back and forth. You’ll go nowhere. Set your own course. Write your plan and then work steadily toward achieving your financial goals.
This article originally appeared in Lancaster County magazine.