(MP) Personal financial management is a subject that is not taught in many schools or homes but is something that nearly everyone has to deal with in throughout their lives. According to a recent survey of effective financial habits, only 30 percent of Americans knew how to handle their money. In Russia, 96 percent of those surveyed were financially illiterate. The best-performing countries were the Germans (53 percent got perfect scores) and the Swiss (50 percent), but this still leaves almost half of each country’s population without a basic understanding of financial matters. In countries with somewhat strong economies, the numbers are alarming: 79 percent of Swedes, 75 percent of Italians, 73 percent of Japanese, and 69 percent of French seemed not only to not handle their money properly but, couldn’t understand the basics of financial matters.
These findings were recently published in the Journal of Economic Literature by two economists, Annamaria Lusardi and Olivia Mitchell, and the results show startling levels of financial illiteracy around the world. They call attention to a perilous paradox: Financial ignorance is bliss, even as the global economy has changed in ways that make such ignorance more dangerous than ever before. For a large and fast-growing number of people, personal bankruptcy is just one bad decision away. This threat will become more critical as the global middle class continues to expand. So, offset any future catastrophe from happening to your family the question is: Do you understand your money? And if you happen to fall anywhere outside of the 30 percent of American who do, here’s your chance to create new financial habits and become effective.
How to Upgrade Your Financial Habits?
1. Save Like Your Life Depends On It
Effective people make savings a priority in their lives by putting away as much expendable (excess) income as possible. Even if your budget is small, tweak your finances so that you save greater than 10% of your total earnings.
- Think of it like this: If you manage to save $10,000 per year — which is less than $1,000 per month — in 15 years, you’ll have $150,000 plus interest. That’s enough money to put a kid through college today, but not tomorrow if that child has just been born. So, start saving and you may have a significant down payment for that child or for a wonderful house.
- Start saving young. Even if you’re still in school, saving is still important. People who save well treat it more as an ethic than necessity. If you save early, and then invest that savings wisely, a small initial contribution can snowball (compound) into a significant sum. It literally pays to be forward-thinking.
2. Financial Emergencies
Emergencies, by their nature, are unpredictable. When they happen, they can derail your financial stability. A sudden illness or accident, unexpected job loss, or even a surprise home or car repair can devastate your family’s day-to-day cash flow if you aren’t prepared. While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. This amount can be challenging at first, but the idea is to put a small amount away each week or two to build up to that goal. You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors. Emergency savings are best placed in an interest-earning bank account, such as a money market or interest-earning savings account, that can be accessed easily without taxes or penalties. The concern with placing your emergency savings in mutual funds, stocks or other assets is that they may lose value if the funds need to be accessed quickly.
3. Diversify Your Assets
Effective people know that having a lot of investments does not make one diversified. To be diversified, you need to have lots of different kinds of investments. That means you should have some of all of the following: stocks, bonds, real estate funds, international securities, and cash.
Investments in each of these different asset categories do different things for you.
- Stocks help your portfolio grow.
- Bonds bring in income.
- Real estate provides both a hedge against inflation and low “correlation” to stocks — in other words, it may rise when stocks fall.
- International investments provide growth and help maintain buying power in an increasing globalized world.
- Cash gives you and your portfolio security and stability.
4. Maximize Your 401k
Often, employees can opt into a retirement 401(k) plan. In this plan, a portion of your paycheck is automatically transferred to a savings plan. This is a great way of saving because payments come out of their paycheck before it’s cut; most people never even notice the payments.
- Talk to your company’s HR representative about employer matching. Some larger companies with robust benefit plans will actually match the amount of money you put into your 401(k), effectively doubling your investment. So if you choose to put in $1,000 each paycheck, your company may pay an additional $1,000, making it a $2,000 investment each paycheck.
5. Keep Fees Low
Investment fees can have a significant impact on an investor’s total net returns over long periods. As The Wall Street Journal noted in a recent story, annual fees reduce or eliminate the adviser’s incentive to recommend investments simply because they provide bigger commissions. Annual fees also reduce the incentive to “churn” an account, or make frequent trades rack up more commissions. And annual fees are easier for the customer to see and tally than older systems that used a hodgepodge of commissions, “loads” and other charges. As a result, the Journal points out, advisers are more willing to offer customers a wider range of funds and other investments.
There are are a few tiers to the advisor fee structure that can help investors get the most out of their money without costing them a whole lot in fees. The digital advisory options, or “robo advisor,” uses a computer algorithm to build a low-cost portfolio that charges fees as little as 0.5% of total assets a year. Greg Vigrass, president and chief executive of Folio Institutional, notes that investors focused on simply the end result can be well-served by easing into advised investments through a robo advisor.
6. Use a fiduciary Advisor
A fiduciary is responsible for managing the assets of another person, or of a group of people. Asset managers, bankers, accountants, executors, board members and corporate officers can all be considered fiduciaries when entrusted in good faith with the responsibility of managing another party’s assets. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust. Find the best fiduciary advisory services.
7. Spend Less Than You Earn
You may think of yourself as a high earner, but if your money doesn’t back up that statement, you’re shooting yourself in the foot acting like you are. The first and greatest rule of spending money are this: Unless it’s an emergency, only spend money that you have, not money that you expect to make. This should keep you out of debt and planning well for the future.
8. Always Be Insured
8. Always Be Insured
They say that smart people expect the unexpected, and have a plan for what they’ll do just in case. Good financial habits say: you never know when you’ll need a large sum of money during an emergency. Having good insurance coverage can really help tide you over through a crisis. Talk with your family about different kinds of insurance that you can purchase to help you in the event of an emergency:
- Life insurance (if you or a spouse unexpectedly dies)
- Health insurance (if you have to pay for unexpected hospital and/or doctor bills)
- Homeowner’s insurance (if something unexpected harms or destroys your home)
- Disaster insurance (for tornadoes, earthquakes, floods, fires, etc.)
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