Five Steps to Financial Freedom

I know you’re extremely busy and your life is so complicated that setting up a budget or getting your financial house in order feels just overwhelming. But I can assure you that setting aside some quality time with a calculator, a cup of coffee, pen and paper, and your spouse (if you’re married) will save you major headaches going forward … especially when you or your spouse comes down with a case of the “really wants” or the “gotta haves.” A budget, in conjunction with a money management software, is just the first step in the long path toward financial responsibility and freedom.

Your financial security lies in the following five areas:

1. Budgeting

The foundation of personal finance is a budget. I know, just the word sounds intimidating, as well as boring and uptight, right? My brother-in-law is an accountant and during college he and his wife budgeted verything to an extreme. The family still jokes about the way he would ration a 2 liter of Coca Cola for an entire week. But budgeting doesn’t have to be rigid and boring. Most people, even if they don’t keep a budget on a paper, keep a daily budget in their mind. Ever thought twice before buying that book or new pair of jeans, because you know if you spend the money you won’t be able to buy that sweater or make your cell phone payment? Then you’re already budgeting. It’s important, though, to start listing out your specific budget to gain a bird’s eye view on your money, what you spend it on, how often, whether you’re over-spending in areas you could cut back on, etc.

2. Reduce Your Costs

After you’ve started your budget, you will have a clearer picture of where you can start cutting your expenses. Do you really need that $9 lunch? Can you find cheaper car insurance? These are the kinds of questions you’ll be asking yourself as you start discovering where you can shave expenses here and there and maybe even uncover ways to make extra money. Every dollar counts in the long run … and the short run too.

3. Dig Yourself Out Of Debt

Maybe you shouldn’t have taken out that loan to go on a European cruise … or charged the entire trip on a credit card that you’re still paying on four years later. Maybe your student loans have gotten the best of you and they’re taking decades to pay off. Or maybe you wished you had waited to find a great deal on a solid used car instead of buying that brand new car. Whatever your case, it’s very difficult to make money or save money while you’re in debt. Why? Because when you borrow money, you’re being charged a fee to be able to use it. This fee is called “interest” and it’s what you have to pay on top of the money you borrow. Using credit isn’t necessarily a bad thing; we all need a good credit history to make the bigger purchases in our lives, such as a mortgage to buy a house. But if the monthly payments on your credit card or other personal loans begin growing and it’s getting harder and harder to make those payments, then it’s time to get your financial life in order.

What’s the secret to digging yourself out of debt? Pay more than the monthly minimum every month … much more. You aren’t really “saving” if you’re losing money by taking longer to pay off borrowed money. Why take 5 to 10 years to pay off a credit card with the minimum amount every month (the minimum will cost you thousands of dollars in interest), when you could pay it off as fast as possible and save for bigger, better things? (hint: refinance to a zero interest credit card)

4. Save Your Money

There are many ways to save money. They key is to put your money into a savings account and allow it to grow. It does you no good to put $200 into savings only to withdraw it 10 days later to cover an overdraft in your checking account — that’s why budgeting is so important as a first step.

5. Invest For Your Future

Virtually all of us will need a nest egg to fall back on once we retire or if we want to retire early. Don’t get lazy with investing for your future (retirement) and mistakenly believe that someone else, such as a family member, spouse or Social Security, will save for you and dig you out if and when you’re in too deep.

Take advantage of the fabulous benefits of investing in IRAs and/or your company’s retirement plan — doing so is essentially taking out an insurance plan on your financial life.


4 Things To Do When Stocks Decline

It has been a tough decade for stock investors, with stock market averages about where they were at the beginning of this new century. So we know, in case we have forgotten, that stocks don't always go straight up. But it is also important to remember that stocks have historically offered a good return over the long haul, and should comprise a portion of almost everybody's investment portfolio.

But given all of this, how can an investor protect the stock component without abandoning the stock market entirely. Here are some tips:

Look To Defensive Stocks

Defensive stocks are those that have tended in the past to resist the general declines of the stock market. This would include large consumer goods companies and utilities (electric companies, water companies) which pay a good dividend. Remember that as defensive stocks these companies have tended to lag the market as the averages shot to new records, but are well positioned for any downturn. Look for a strong cash flow, consistent earnings over a long period of both good and bad economic times, and a high quality balance sheet with little debt.

Examine Dollar Cost-Averaging

Dollar cost averaging is the investment of an equal amount of money at regular periods. For most people this means investing a fixed amount each month, in effect taking money from a pay check and giving a portion of it to investments in the stock market. The result of this process is the purchase of a larger number of shares during market declines and fewer shares during periods of a strong market.

There are a couple of thoughts behind this process. The first is the belief that trying to time the stock market is impossible, and that an individual investor is far better off to invest at regular intervals. Since the identification of periodic highs and lows is impossible, or at least very difficult, most people should aim at participating in the long term growth of the stock market.While it is arguable whether certain investors may be better off in trying to time the market, the second point behind dollar cost averaging is more widely accepted. That is that this process, much like paying down a mortgage, or even savings-based life insurance products, are a form of forced savings for most investors. A program of regular savings, whether invested in the equity markets or in some other form, is a key component of a successful financial plan.

Look At Diversification

While many people think of diversification in terms of the amount of money to be placed in stocks as compared to fixed income investments, the principles of diversification also apply to your equity portfolio. Look at adding a component of foreign equities, including emerging markets. These other markets often move in cycles that are different from your local equity market, thus softening any domestic downturn. Also consider spreading your investments across different types of companies, including resource based companies that are affected by differing market forces.

Take A Longer Term Outlook

To many investors the phrase "long term" is relative. Some may think of long term as stretching a few years ahead, while others think in periods of decades and not years. The generally accepted wisdom is that investments in equities, whether directly or through equity mutual funds, should be thought of as an investment held for at least three to five years. So, if you take this approach there is far less of a reason to be concerned with minor market corrections in the shorter term.

They have happened before and will happen again. You should never find yourself in a position where you need to sell some stocks at an inopportune time to meet daily expenses.


The Three MOST Valuable Money Lessons We Can Teach Our Children

Can you imagine a world without money? Gene Roddenbury did when he created the Star Trek franchise. With a machine called a replicator, people in the 24th century could easily replicate virtually anything, rendering money useless.

But we don’t live in that world and until someone figures out exactly how to transform energy into matter, we are stuck with using money to satisfy our needs and wants. So it becomes important to teach lessons about money to our children, since they will have to deal with money for their entire lives. Here are what I would consider the three MOST important money lessons we can teach our children:

Money is work

Money and time are interchangeable Money will work for you1. Money is workI’m teaching my kids to think of money as stockpiled work. The money I currently have in the bank represents the work I’ve performed in the past so teaching my children that money IS work makes sense. When my kids then want that new toy or gadget, I ask them if they would be willing to work all weekend to get it - when they’re teenagers they may have to work months to get the latest gadget.I pay my daughter $2 to iron and starch my shirts. When she wants to buy $70 Chacos (a brand of overpriced sandals), I tell her that she’s buying 35 shirts worth of shoes (at least $50 is just the brand’s name).Once children make the connection between money and work, decisions about where to go to college, what type of car to purchase, or what type of home to buy will take on new meaning.

Caution: this doesn’t work the same way with adults. We have other expenses that must be paid so we have to look at purchases somewhat differently. We have to look at the money/work relationship in terms of discretionary income. What that means is that if you have $250 left over each month to use as “play money,” a $3,500 vacation will cost you 14 months worth of work (assuming you don’t use debt to finance it).

Money And Time Are Interchangeable

If you have enough money, you don’t have to use your time cutting the grass, changing the oil in your car, or maybe even cooking your own meals. You pay someone else to use their time to perform these activities. Money gives you options. If you enjoy cooking your own meals but not cleaning the house, you can make the choice to hire a housekeeper. If you like to garden, but don’t want to mow the lawn, the choice is yours … if you have enough money. Simply put, if you don’t have enough money, you need to perform even the activities you don’t like to do.

Children can have a hard time comprehending this concept so ask your kids which they value more: you spending time with them or the “things” they want. Would they rather you work late each night (or constantly be out of town) and get to ride around in a new car with a new iPhone OR would they rather have you at home more often and drive an older car and maybe NOT have the fancy phone? You may be surprised at the answer.

Simply put: If you have money, you don’t need to spend time working but if you don’t have money, you need to work and that takes time.

Money Will Work FOR You

Money will act like your employee! If you put your money to work for you in a savings account, it will earn a paycheck (interest) that YOU get to keep. It’s a low paying job, but it IS steady and dependable. If you put your money to work in a higher paying job, kids should remember that occasionally people lose those riskier jobs (though many make a LOT of money). The choice, again, is yours if you have the money in the first place.One of the greatest things about teaching kids to put money to work earning a paycheck (maybe so you don’t have to?) is that most eventually figure out that the money earned from other money is really cool. If you have enough money working for you, then you don’t need to work at all. Adults call it “retirement.