Lifetime Finance: A HOWTO

There are a lot of websites out there built around personal finance. They all feature a billion little tips and tricks to help you get “rich.” As if having money was some sort of cosmic adventure only undertaken by the most savvy and informed amongst us. Blah blah blah. It’s not. I’m certainly not a so-called expert—that was Bernie Madoff—but I do know that all these tips boil down to a few simple steps and I’m going to share those with you right here. Don’t buy finance books and don’t be a sucker for some “guru” and his financial seminar. Get out your pen and paper, take copious notes and stop sucking at money!

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Step 1: Get out of debt. And stay out.

How many credit cards do you have? Chances are you have five and they carry a combined debt of about $10,000. Nice. Do you have a car payment? Probably. How about any personal/unsecured loans? Possibly. Every dollar of debt you carry costs you money and, worse yet, makes you a slave to the lender. You can’t buy that fancy TV this month because you won’t have the spare cash after you make all of the payments you’re obliged to. The credit lenders hold that debt over your head threatening you with the possibility of bankruptcy and a shit credit score. Stressful, no? We all know that money is the most stressful thing in the world. And living under such stress is no way to live.

Step 1a. STOP ACCUMULATING DEBT!

And I mean for good… no more loans for you. This should be obvious, but that isn’t always the case and that’s why I mention it here. Take your credit cards out of your wallet, toss them into your sock drawer and forget about them. From now on if you can’t pay cash for something, you don’t need it. I’ll address the special case of whether to buy a house or not later in this article.

Step 1b. Pay off your balances.

Use the “debt snowball” or, better yet, the “debt avalanche.” Cut your costs where you can and by as much as you can. Stop going out to lunch/dinner, cut your cable package to the minimum, trim your cell phone plan, drive as little as possible… whatever it takes.

I’d recommend keeping about one month’s worth of expenses on reserve in a bank account somewhere just for a little cushion. This value is certainly flexible and is dependent on your personal level of comfort. Living right on the edge is ideal… if you have the stones to do so… but that’s somewhat radical. Once you have that money standing by, pump everything else into eliminating your life-robbing, stress-inducing and even marriage-killing debt.

Step 2: Build an emergency fund.

Phew! Out of debt and now you feel like a million bucks. All that money you were pouring into paying off your debt is now yours to do with as you please. Stress? Ha! GONE! You are now comfortably in the black and ready to increase your wealth. But you’re not quite ready for takeoff yet so hold short. Having a solid emergency fund would be a nice hedge against disaster, right? That $1,000 cushion you flirted with for the last year or so just isn’t much insurance. Now that you have no debt, you can afford a little more peace of mind. So go get it.

Most “experts” say you should hold about three months-worth of cash in a readily accessible interest-bearing account. If your household is pulling in $3,000 per month, build your savings account to $10,000. If you’d be more comfy knowing you could live for four months, six months or even only one month in the event of some catastrophe, adjust your savings accordingly. The point is to have it readily accessible and not tied up in a CD, a penalty-incurring IRA or something else similar.

Step 3: Start saving and investing.

With your emergency funds socked away and warm fuzzies from your newly-found financial security washing over you, you now have more money than you know what to do with. Sure, it’s tempting to go out and buy a new PS3, a new car or go ape shit with nights out on the town. I would venture a guess, however, that you learned a lot about yourself while skimping by on the bare minimums and now realize that you don’t need that worthless consumer junk. You’ve probably replaced the psychological boost you got from buying stuff with the excitement that comes from saving. Buying things just for the sake of it finally seems to you as retarded as it actually is. Admit it, you’ve always hated your past inability to refrain from buying things you know you shouldn’t. Well, now you’ve mastered it! Saving has become your new drug.

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The next step, an easy one at that, is to just keep on keeping on… save as much money as you can. But where to put it? Here’s a simple list:

  1. A 401K account to which your employer will match your contributions. That’s 100% return on your money. You won’t beat that with any other investment vehicle.
  2. A Roth IRA. The money you contribute has already been taxed and grows tax-free. That means any gains made with it can’t be taxed by the government in the future… pure gravy. (The government doesn’t break promises.) The current limit is $5,000 per year and there’s a good chance that will increase. If you’re married, have two of these… one for you, one for your spouse.
  3. Any other investment account with tax benefits. Government employees have the TSP at their disposal. Otherwise, a money market account is usually a comfortable spot to keep your money. Buy some gold. Invest in foreign markets and convert some of your money to foreign currencies. Whatever. Spread it around. The pros call it diversification. I call it common sense.

About buying a home.

One of the few things that may be worth taking on debt for is a home. Historically home values appreciate over time and that’s what makes them different from most all other purchases. That’s the traditional wisdom anyway. So it would seem like a good investment, right? Tell that to the more than three million who were foreclosed on in 2008 alone. The reasons for the current “reset”—which is hardly the reset that is needed to get back to a healthy market—are varied and complex, but, in a nutshell, go back to having too much money in the system which made loans too easy to get. Keep that in mind as you go forth. Anyway…

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As with most loans, the more you can put down the better off you’ll be. The standard down payment is usually 20%, but if you can do better than that, all the better. And what could be better than a 100% down payment? Living free of a mortgage until you can save enough money for a home has its benefits. The less you pay in finance charges the better. But if you do decide to take a mortgage, pay it off ASAP.

The decision to buy is also a complex one, but it all boils down to market timing which is, at its heart, gambling. If you think the market will rise, buy a home. If it drops, you’re fucked. So consider your options carefully. Depending on your market, now might be a great time to buy. But it’s a topsy turvy world… so choose wisely.

A little preaching/pleading before I move on… Before taking a large loan, do yourself a favor and learn about how the money system actually works. I cannot stress this enough. Be advised: it’s not how you’ve been told it works nor how you imagine a money system working. I recommend Money as Debt as a primer and then Money as Debt II: Promises Unleashed for a further, better explanation. Get your head wrapped around this before taking your next loan.

And that’s it!

It’s not rocket science, folks. Live within your means. At this point you’ll be out of debt and breathing easy. You’ll have money growing like weeds, a strong emergency fund and maybe a house you’re paying off as fast as you can. From here on continue to save, invest and diversify. Just stay ahead of the game and you can start getting more and more advanced with your investing.

I implore you, especially those of you nearest to me, get out of debt. Your future and your happiness depend on it.

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