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To Your Wealth, Michael P. Haubrich, CFP Three Personal Finance Rules for
all Seasons |
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Will peak
price oil, rising interest rates, natural disasters and a possible bird flu
pandemic impact your financial well-being and if so, how? How can you help
ensure your financial security in a world that is anything but secure? A first
step is to recognize what you can and can not control. For those things we
can control (also called endogenous factors), we need to have a strategy and
action plan. For those things we cannot control (also called exogenous
factors), such as interest rates or the next world calamity, all we really
can do is accept them. The good news is that endogenous factors are a greater
determinant of your financial well-being than exogenous factors. Endogenous
factors include things that happen in your life like education, occupation,
marriage, children, health, spending and savings – all things that we can
ultimately control. Once we
focus our attention to what we can control then my three rules of personal
finance can serve as guideposts to financial well-being. The first
rule is to spend less than you earn. This rule, which simply means to live
within your means, applies regardless of your age. This means you will need
to buck the “must have” messages delivered by advertising agencies on behalf
of their consumer product clients. Do you really need that designer dress or
that brand new car? Are you overspending on your housing? At the end of every
month, does your checkbook reveal that you’ve spent more than you brought in?
The only way you can consistently spend more than you earn is by financing
with consumer debt. A lifetime of excessive spending will actually leave you
with a lower standard of living compared to someone of the same financial
means who follows the rule of spending less than they earn. That is because
consumer debt is the most costly way to pay for your lifestyle. The
biggest risk of overspending financed by consumer debt is developing “debt
warp.” In his book, The Number, Lee Eisenberg refers to “debt warp” as
the phenomenon whereby we grow accustomed to overspending and financing with
revolving debt. Debt warp allows us to become delusional in believing that we
are more affluent and better set for the future than we actually are. The
byproduct of spending less than you earn is a positive savings rate. Both the
savings and the difference between earnings and savings is your safety net
for any exogenous event that may occur. We can only control our personal
finance decisions – how much we consume, how we pay for what we consume, and
what we save. Those are really big factors. The concept here is to control
spending. The
second rule is to adopt a habit of life-long learning as an investment in
your career asset. This rule will serve you well throughout your life. As a
young adult entering the job market, the habit of life-long learning keeps
you relevant in the constantly changing employment market. The best
protection from unemployment is up-to-date and relevant skills that you can
exchange in our global employment market. Even if you are in your 50s, improving
your relevant skill set not only protects your career asset, but also
positions you for a healthy transition to eventual retirement, in terms that
you decide. My
recommended read on the reasons for developing a habit of life-long learning
is The World is Flat by Thomas Friedman. Friedman lays out the case
that the global economy not only produces the greatest aggregate wealth, but
also the greatest financial opportunities for individuals prepared to play by
the flat world rules. For more information on managing your career asset,
check out www.careerassetmanagement.com In this
column next month, we’ll explore some suggestions for the third rule,
avoiding common money mistakes. Mike Haubrich is president of Financial Service Group, a registered
investment advisory firm in |