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The Three Most Important Rules of Money September 1, 2009

Posted by shaferfinancial in Finance.
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Sometimes we complicate things.  When it comes to money we can simplify all that we do into three rules.

1.  Liquidity:  When we start accumulating money, our ability to access it without penalties [ liquidity] is perhaps the most important factor.  This is perhaps the most fundamental mistake people make.  They start saving inside a 401K and then something happens; a layoff or a sickness.  So they either have to borrow from the 401K [and then pay it back or suffer a penalty] or they take the money out and end up at least paying income tax and many times paying a 10% penalty.  That is why people need to first develop a reserve fund in a money market or a savings account or cash value life insurance [usually the life insurance is done in conjunction with a these liquid accounts].  As we develop our net worth, we can then move up the liquidity chain and start to invest in less liquid accounts.  Finally, when we have built up substantial reserves, we can invest in non-liquid investments.  The bottom line is to keep liquidity in mind, plan on your emergency needs, as you make investment decisions.

2.  Rate of Return/Risk–  Here you really need  to have done some planning.  What is the rate of return you need to reach your goals?  How do you obtain that rate of return keeping the risk within reasonable levels?  Thinking outside of the mutual fund box is really important here.  But as important is to look at historic averages for the various categories of investments so you can make an informed decision.  Are you willing to become an active investor?  Or remain passive?  This makes a difference.

3.  Leakage.  Taxes are most people’s biggest expense, yet it is not generally thought through.  At best, folks consider deferring taxes instead of how to avoid them altogether.  Fees and interest payments come next.  It surprises many of the folks I counsel that they are losing over 50% of their income to leakage.  Imagine if they can cut that in half!!  That’s like getting a 25% raise!

Pay attention to those three items and you can significantly improve your financial life.  But don’t get fixated on one of the three at the expense of the other two.  That is equally as damaging.

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Comments»

1. Jorge Herrera - September 2, 2009

Good job David; Good information on your blog.


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