It’s tough to build good financial values but certainly not impossible. How do you parse the good advice from the bad? We are here to help you.
Personal Finance Is Hard
Schools teach it, but not very well. Personal finance remains one of the most difficult issues for adults in the United States to master, for good reason. Managing money is hard and everywhere you look, it seems like someone or some company has better advice than the rest.
Dave Ramsey, the vaunted financial advisor, would suggest that consumers save money, eliminate their credit cards, and never buy anything they can’t afford to pay for in cash. That’s a sound strategy from someone who has advised tens of millions and is an expert in his field.
Ramsey’s philosophy, however, ignores a myriad of other financial advice that demonstrate the benefits of leverage (spending money from other people so you can use yours for a higher return.) For example, if you wanted to buy a rental property to generate income on the rent while the tenant pays your mortgage, he’d suggest you shouldn’t – but millions who have succeeded and built wealth doing this would say he’s wrong.
Warren Buffett, the former richest man in the world and Oracle of Omaha, famously avoided tech stocks not just because he thought they were a fad, but also because he simply didn’t understand the underlying business. He plays bridge with his best friend, Bill Gates, and was passed this year by tech billionaires Jeff Bezos of Amazon.com, and Elon Musk of Tesla and SpaceX.
If you can’t take investment advice from Buffet, where else can you turn?
The fact of the matter is that the most important part of personal finance, is personalizing it. What works for your situation, your financial goals, the choices you make that allow you to live your life and enjoy it. The good news is that contrary to popular belief, you can have your cake and eat it too.
Financial Goals
Setting a goal (financial or otherwise) is a key determinant of a successful outcome.
“If you want to live a happy life, tie it to a goal, not to people or things.” — Albert Einstein”
Financial goals are the same as any other and goal setting should have the following criteria:
- Quantifiable – you should be able to verifiably measure the outcome
- Attainable – you should be able to realistically reach your goals if you follow your plan
- Stretch – your goals should require you to stretch
Each of those require further examination.
Quantifiable goals means that your goal shouldn’t state that you want to “be rich.” What’s rich to one person, isn’t so rich to another. How does one know when it’s been achieved or even overachieved? A better goal would be “My goal is to retire with two million dollars in net worth by the age of 50.”
They should be attainable goals. An unrealistic goal will become clear that it won’t ever be met and goal-setters will abandon any improvement in the desired area out of feelings of defeat.
Consider a person with $75,000 in student loan debt making $40,000/year; setting a goal of paying off debt in two years would be a nearly impossible feat. An attainable goal might be, “My goal is to pay down my student loans in half the term of the loan or less.” It’s realistic, it’s achievable, and with each passing month progress is possible.
Attainability isn’t enough, however, as goals shouldn’t be set too low that they are most certainly accomplished – it’s no longer a goal and becomes simply an executed plan.
Rather, the goal should be elevated enough that it’s still possible but it’s a stretch and will take effort and dedication to complete. Looking back on the student loan example above, it might be better to stretch that goal further, “My goal is to pick up a side hustle and apply all of that money toward my student loan debt to pay it off in one third of the term of the loan.”
Once you achieve your goal, it’s time to set a new one. If you want to be a multi-millionaire, start with a goal of becoming financially-independent. Then to have a net worth of one million dollars. And though they say the first million is the hardest, then set your sights on two before jumping to ten.
Building Good Financial Values
Where does one start? High interest debt is bad, but is all debt bad? We turn to Jeff Rose of Good Financial Cents who highlights 10 good financial values for 2021:
- Have a Well-Stocked Emergency Fund
- Get Out of Debt – Completely
- Plan For Early Retirement
- Create Multiple Income Streams
- Have Enough – But Not Too Much – Insurance to Cover Contingencies
- Be Able to Live on Less Than You Earn – No Matter What
- End Any Addiction to Stuff That You May Have
- Plan to Do Work That You Love
- Get Comfortable Sharing Your Good Fortune
- Plan to Leave Your Financial House in Order Upon Your Death
Of those, the most important for anyone first looking at improving their financial health is to have a well-stocked emergency fund. Financial advisors agree that this should cover expenses in the event you cannot generate income for six months. Most Americans cannot cover a $400 emergency even when borrowing from family and friends.
Set goals, achieve them, and set new ones to follow – these are the stepping stones of building good financial foundations.
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