My Best Observations about Personal Financial Planning
1. Never get a mortgage more than 2.5 times your annual salary. If you earn $50,000 a year, your mortgage should not exceed $125,000. Housing is one of the biggest “lifetime” expenses for most of us, and I understand there are a lot of considerations: schools, location, etc., just don’t get tempted to buy too much home.
2. Housing Costs. Never let the cost of your housing, (mortgage, taxes, utilities, etc.) exceed 30% of your net income. (See #7).
3. Save. It doesn’t matter how much, just as long as you do it regularly. Saving is a habit… like spending!
4. Good Debt vs Bad Debt. Understand the difference. Mortgages, and to some extent existing education loans, can be considered "good debt"; at least they’re tax deductible. Automobiles are a fiercely depreciating asset. Aim at keeping your auto costs between 5%-7% of net income per year. Carrying credit card debt through protracted periods of time is incredibly expensive. Variable interest rates will, in most cases, exceed investment rates of return and can seriously derail a financial plan. If you have credit card debt, pay on time. Nothing erodes your credit score more than paying late. There are lots of debt reduction strategies out there: find one you like and stick to it.
5. Learn How to Budget. Simply put, if we don’t have a method of budgeting we end up with a lot of debt and disappointment. (See # 4).
6. Insurance. Make sure you have enough life insurance to cover your family’s obligations and debt. Term insurance is a low cost way of securing your loved ones’ future if you’re not around anymore.
7. Understand Your Net Income. Look at your pay stub. Know where all of those deductions are going and why!
8. Always keep around 3-6 months of net income in a savings account for emergencies! We all experience unforeseen crises from time to time: losing a job, the AC unit going out, having a transmission quit or unexpected health issues. But remember, these emergency savings are for emergencies. A new fishing boat is not an emergency.
9. Understand that long term financial success is the habit of making good decisions daily.
10. Make the decision that you want to be in control of your affairs. Ask questions. This stuff ain’t “rocket surgery,” but we all need a little assistance from time to time, right?
If you think we can help, call us: 513-834-9383.