Taking Control of Your Finances
Setting Goals
As you embark on the task of getting your personal finances in order, it’s helpful to have some goals. Of course, if you do not yet know what’s wrong with your finances, it might not be easy to set these goals-not yet, anyway. But the fact that you are reading this suggests you think something is not as it should be. As you work through the chapters in this book, keep the thought of goals in mind and formulate them as you go along.
For many people, financial goals are centered on saving money. America has one of the lowest saving rates of any developed country, so a lot of people are in this boat. You might want to save for something major, the most common things being to buy a house, to pay for your children’s college, and to fund your retirement. Perhaps you just want to build up a reserve against emergencies. Many financial planners recommend you have enough savings to live off of for six months in the event of a job loss. Very few people have this cushion.
It’s interesting to note that Americans’ personal debt ratio has not increased significantly in decades. This means that on average we are not borrowing more relative to our income. But we are still borrowing, and those payments are still due regardless of a job loss or other hardship. This is one reason the low personal savings rate is worrysome. With a decent cushion of savings, you will be able to continue your loan payments through a period of decreased or no income. Without that cushion, you will find creditors knocking at your door.
Whatever your goals, the first step in achieving them is to take control of your finances. What exactly do I mean by taking control of your finances? There are three parts to this as I see it.
First, you need to avoid unnecessary expenditures. No, I don’t mean that set of Elvis CDs you bought off late-night TV. After all, I am not here to tell you how to spend your money. I mean really unnecessary expenditures, such as checking account overdraft fees and excessive credit card interest payments. These are the sorts of outlays you really need to avoid because they are a total waste-you get nothing in return. With some planning (and this book), you should be able to avoid them entirely. Every dollar you do not spend on these unnecessary fees is another dollar in your pocket to be spent on something more important and enjoyable.
Don’t believe that these little fees can add up to much? Then look at this hypothetical but realistic example. We have Jane Q. Careless who
- Does not pay attention to her checkbook balance, so she bounces an average of one check a month. The bank charges $25 per bounced check and the typical merchant bounced check fee is $15. That’s (25 + 15) x 12 or $480 per year wasted.
- Withdraws $100 twice a month from an ATM that does not belong to her bank, incurring a 2.5% charge each time. That’s 100 x 2.5% x 24 equalling $60 a year down the drain.
- Maintains a $3,500 balance on a credit card that charges 21.99% interest. She pays $61.14 in interest each month for a yearly total of $769.
- Forgets to pay her credit card bill on time four times a year. The late fee charge is $35 (never mind the extra interest!) for $140 a year.
Are you ready for the result? All those unnecessary charges add up to close to $1,450 a year for Jane. I know that I have a lot of better things to do with that kind of money, and I’ll bet you do, too.
Second, you need to be a wise consumer of financial products and services. Pretty much everyone is going to have a checking account and one or more credit or debit cards. Many also have mortgages, home equity loans, investment accounts (whether stocks or mutual funds), one or more retirement accounts, consumer loans, and money market accounts. Knowing how to evaluate and compare these products can make a big difference in your financial picture.
Finally, you need to be savvy about how things work in the world of money. Many people make bad financial decisions, not because they are lazy or stupid, but because they just do not have the information necessary to make the right choices. Unfortunately, in our society financial education is almost always left up to chance, and most people enter the adult world poorly equipped to handle the financial challenges that lie ahead. This book provides the required information about the world of finance and the tools you need to make informed decisions.
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