Here is literally the A to Z of good personal finance rules that I try to live by. Think of it like my saving and investing philosophy. Writing this list provided a good opportunity for some introspection and I have already identified a few things I need to do to get back on track. I could have added a lot more items for each letter, but wanted to focus on the main ones. I have also linked back to some posts that provide more detail on the letter’s topic. Feel free to suggest your perspective or where you disagree with me. Have you got an A-Z list?
A – Avoid paying credit card balances late. You’ll end up paying the overly high interest rates and before you know it you’ll owe much more than you actually spent. Credit card debt is the worst form of debt, easiest to get into and the first one you must eliminate.
B – Budgeting. There is a simple rule to getting rich – Spend less than you earn. You normally know what you earn because it comes from one to three sources (paycheck, investments, side income). However most people have many more spending channels. So to control spending, keep a budget for a few months to get an idea of your outflows. Once you know how you spend, you can control it by cutting back and changing your spending patterns. Budgeting gives you the information you need. Information is power, and budgeting is one of the most powerful tools in effective personal finance.
C – Credit Cards. These can be good or evil financial tools. Use them wisely and pay off your balance on time, could mean you get up to 55 days of free credit (money that you leave in your high interest account) and plus there are all the reward and cash back programs you could benefit from. However, if you just use your cards to fund bad spending habits, you end up in debt and credit cards will become the bane of your financial life. One of the best ways to avoid high credit debt, is to pick the right credit card for you. There are a number of sites that help you choose the right credit based on your current and expected future needs.
D – Debt. As per the above point, there is good debt and bad debt. Bad debt, like credit card debt, keeps you underwater and struggling financially. Good debt, debt you can afford to pay back, allows you to expand your purchasing and investment options to boost your returns. It allows you to buy a house, pay for college and take margin loans to boost your investment returns.
E – Equity. Whether you are building up equity in your house or equity via investing it is always a good thing. Just remember to diversify your equity holdings (for example, don’t have everything in stocks). If you have paid off your bad debts, then building your equity should be your main focus. The best thing about investing to build equity is that you enjoy the benefits of compounding over time.
F – Family and Friends. This should be your most important focus in life. The rest comes afterward. There is no point having millions of dollars if you don’t have family and friends to share it with.
G – Generous. Be generous and the generosity will be returned to you ten-fold. So when you make money or are in a financially strong position, give something back to the community or support a charity. My one exception to this is tipping, where I believe the reward should be proportionate to the service.
H – Hope. Dangerous if mixed with unrealistic expectations like running with a loser stock in the hope it will return to being a winning stock despite all the bad news surrounding it. Hope is a good thing when it comes to realistic dreams and an optimistic outlook. Some commenter’s questioned my recent investment in Apple (AAPL) as a “hopeful” investment. If I had just done it as a whim or bought into the short term hype, then it would have been a loser investment. In reality though, I had spent time researching the stock and followed it for 6 months before buying. I just got unlucky with the timing of the trade and one of the worst stock markets in recent history. Still as a long term investor (my L point), I am comfortable with the prospects for the stock and the company.
I – Investing. To get financially free you must do it. You are probably investing even if you don’t realize it, like through your 401K and IRA. So the more you know about smart investing the better off you will be in maximizing your returns. Investing is one of the key topics in this blog and there is always something new to learn about good and bad investing.
J – Just do it. Procrastination is the biggest stumbling block to achieving your goals. Break down an activity which seems overly large into small chunks and do it over time. The key is to start attacking that task now.
K – Kill two birds with one stone and increase my 401K contributions. This way I get to have a tax efficient long term investment plan and also enjoy the benefit of a employer match.