In Financial Management — Debt Free Living Part 1, we looked at developing a mentality of thrift and wealth building; strategies for managing debt—elimination, prevention, and prudent usage when required; setting rules for saving and spending; as well as financial records keeping.
This post, Management — Debt Free Living Part 2, tackles more on debt management, investment management, and teaching children financial responsibility. Let’s jump into it.
Using Credit
Develop a distaste for paying interest
Learn to view paying interest as an additional tax, as burning money.
Add up all the interest & fees you paid last year and work it out as a percentage of your take home pay. Paste these numbers on the fridge door, the bathroom mirror, and the closet door. Learn to hate these numbers. Heavens forbid that you actually paid out more interest than you received.
Credit is not an income source.
Credit comes with interest.
Paying interest is bad and must be avoided at all cost.
Borrow judiciously
The only time to borrow without a thought is to save a family member’s life.
That leaves two other borrowing scenarios:
1) to acquire things that will have at least half its value after the loan is repaid, and the item will last for at least twice the financing period, for example a car or house;
2) to fund a project that is guaranteed to return the full investment and twice the interest cost, and additionally, does not jeopardize any other asset that you currently own, for example, further education for a career change, or career or investment training for yourself. You have 18-20 years notice to save for the kids’ college, so you shouldn’t need to borrow for that.
Anything else is business, and there are different rules for that.
Separate business and personal
Don’t speculate with your personal finances and keep as much distance as possible between your business and personal loan obligations. If you have to borrow for business purposes, create a business entity and let that person (they say that a business is a person) speculate and assume it’s credit responsibilities in it’s own name.
Still, there may be times that you will be called upon to vouch personally for your business. Think long and hard about the risks and seek legal and accounting advice about shielding your home and retirement income from your business credit obligations.
If it comes to a crunch, eat less …at home, walk instead of drive, plug out stuff, wear out your clothes, but always pay back your loans on time.
Honor your financial obligations before all else
Pay back what you owe. Pay according to the agreed terms, or better.
Set a limit on the number of credit cards you have and always hold one with a zero balance in reserve. Rotate the use of the card(s) every six or so months. Repay the full balance on your credit card(s) each month.
Whenever you can, overpay on your installment loan and mortgage so that you build up equity early as well as reduce the overall interest and loan period. Pay off loans before the full term, even if it is only by a few months.
If it comes to a crunch, eat less …at home, walk instead of drive, plug out stuff, wear out your clothes, but always pay back your loans on time.
Using credit — final thoughts
One last point on using credit.
A credit card is a convenience card to be paid in full each month and not a loan source.
Use installment credit for anything that requires financing for more than one year and will have value at the end of the financing period.
A mortgage is to pay for the house you live in. Do not mortgage your home for convenience or for repairs; you need it to live in so don’t run the risk.
Instead, tap into savings and, in emergencies, supplement with one of those interest-free credit card promotions if you are one hundred percent sure you can repay the full balance within the credit period.
Investment Management
Carefully craft your investment strategy
Going with your gut or your cousin’s sure tip is not an investment strategy. Think, read, plan, read, analyze, and then read some more before you act.
Our article How to Live Within Your Means offers great advise on this topic.
Define your investment profile based on your retirement needs and goals and your natural tolerance for risk, then develop your long-term investment strategy. Put it in writing so that you have a reference when building and maintaining your portfolio.
Your investment strategy must define the portfolio mix (influenced by your risk tolerance and general investment risks), a required return rate (influence by your investment horizon and goals), your investment timeline, and must identify your stop-loss point for each investment type. Once you have decided these parameters, stick with them.
You may choose to seek advice and assistance from professional advisors and brokers to navigate this process. Just remember that, if you do, the funds and assets are yours, as will be the losses, while everyone else walks away with a fee whether you lose or not. Do not relinquish TOTAL oversight and control of your funds and assets to someone else.
Every five years or so, as well as after any major life event, you should do a review of your investment strategy to determine if you need to make any adjustments to ensure that the projected portfolio value will still be sufficient for your future needs.
If you seek assistance from professionals to navigate the investment process, remember you are the owner of the funds and assets, as well as any losses incurred.
Do not lose oversight and control of your funds and assets.
Monitor portfolio
Keep an investment diary which includes your long-term investment strategy along with all your investment accounts details and portfolio performance, even if they are managed by a brokerage.
Every 12–18 months, you need to do a review to determine whether changes are needed in the portfolio make-up to realign it with your long-term investment strategy. Your review should also include a plan for additional investments, if any, for the next year.
Unless you are a financial broker, investing is a long-term venture, a get-rich-slowly proposition. There will be market fluctuations in your investments but keep your eye on your portfolio trend and how performance stacks up against your return requirements and stop-loss point.
If you identify items that need extra monitoring or adjustments, do further research and then address the issue. However, if all is well, leave it alone—don’t get nervous, don’t get greedy.
Teach Your Children Basic Finance
It is your responsibility to teach your children basic finance, and the value of earning, saving and investing. You can start with our article Teach Your Children Financial Independence.
Do not assume they will follow by example and somehow work out the rationale behind your financial decisions.
You already know you have to tell them things at least three times before they even acknowledge that you’re speaking to them.
So speak with them often about money and how to make good financial decisions.
Explain how money works—how you get it and the sieve-like nature of earnings; how you can lose it to interest, convenience, and lax money management; and how you can make it grow by planning, saving, and prudent investing. Once you get their attention, they will listen.
