Monday, January 19, 2009

Taking financial responsibility

There should have been a class. Or maybe our parents should have had that "talk" with us when we were little. No, not the birds and the bees. We seem to have that part down, lol. The other talk. How to live life responsibly; able to take care of ourselves and our loved ones and dependents.

For the rest of us, there is a book by Thomas J. Stanley, written 12 years ago, called The Millionaire Next Door. It is a classic.
How can you join the ranks of America's wealthy (defined as people whose net worth is over one million dollars)? It's easy, say doctors Stanley and Danko, who have spent the last 20 years interviewing members of this elite club: you just have to follow seven simple rules. The first rule is, always live well below your means. The last rule is, choose your occupation wisely. You'll have to buy the book to find out the other five. It's only fair. The authors' conclusions are commonsensical. But, as they point out, their prescription often flies in the face of what we think wealthy people should do. There are no pop stars or athletes in this book, but plenty of wall-board manufacturers--particularly ones who take cheap, infrequent vacations! Stanley and Danko mercilessly show how wealth takes sacrifice, discipline, and hard work, qualities that are positively discouraged by our high-consumption society. "You aren't what you drive," admonish the authors. Somewhere, Benjamin Franklin is smiling.

The steps are simple.

1. Get a paying job.

2. Live beneath your means.

3. Save 10% of each paycheck (or a minimum of 5% if you are really strapped) into a savings account. Do this first, before deciding to buy that new TV, ATV, motor home, digital cable, DVD player or other (un)necessary sundries.

4. Place the entire 10% each month into your new "emergency fund" savings account. This fund should stay liquid, meaning something you can take money out of when you need it, not a CD (certificate of deposit). Continue to contribute money to this account until it equals 6 months of your monthly cash-flow needs. Now you can rest easy that if something goes wrong with your job, car, house or health, that you have 6 months in which to figure out how to handle it.

5. When this account is fully funded, take the 10% and put it into investments. Remember not to invest all of it in one place. Try to do different things with it. This is called diversification. That makes your money less at risk.

6. If you have debt problems, you need to lower your standard of living. Get a cheaper place. Drive a cheaper car. Live frugally. Perhaps take 5% for savings and 5% toward debt repayment until you get it paid off. And stop using your credit cards as if they are your emergency fund. This is no way to prepare for retirement.

For those who refuse to listen, refuse to save money in a bank account, refuse to live beneath your means, please remember. Actions have consequences.


Michelle said...

I agree. It is so important to take responsiblity for your own money issues. The cost of living is much lower as are the cost of housing. It has help us in this crunch. Also I agree, don't live above your means. It will only get you in trouble. :)

Maisy said...

This sounds just like "Financial Peace," by Dave Ramsey. We took the course when we were first married. So, we don't have ANY loans to pay on anymore, and we don't actually use a credit card, but rather a debit card. Our motto is, "If you don't have it, you don't spend it." That goes for our set funds for main groceries, clothing, and eating out. The only thing that makes this all so hard, is that even with a paying job, you sometimes are just barely meeting your actual living needs. If we put 10% in the bank, we'd have to cut out something like food, or gasoline. But, we do what we can. Maybe some day, I'll get an "at home" job that will help bring in extra. But, primarily, my job right now is raising Owen. lol That's quite a challenge sometimes, but a delightful one. :)

LL said...

Mary Ann, please forward your post to CONGRESS. (thanks) As much as we need a reminder individually, it needs to be applied to the society as a whole.

Courtney said...

very intresting tips! thanks for that. We are trying to get back on track w/ saving again, and you have motivated me! =)

Annette Piper said...

I've got Scottish ancestry - I've always been careful :) Trying to teach my children though is a struggle!

Just A Mom (Call me JAM for short) said...

Lots of great ideas and tips. It's never easy, but I tell my kids to make savings a habit. Stopping by to say hello from Ann's VGNO!

GinSpaghetti said...

I had to star this post in my reader. This is the year I pay down/off as much debt as possible!!! I needed this, thanks! :)

Kelly @ Wisdom Begun said...

Yup! Amen and amen!

Seriously, though, I don't get the whole have to have every new toy thing. And then they complain when they have no money. Hmm. I wonder why.

Sorry, sarcasm aside now.