A Dummies Guide to Personal Finance

So, what is Personal Finance?

No shit... are you serious man? You are making an ID – 10 – T (idiot) error... everyone knows what personal finance is... it is finances of a personal nature... I mean, it is all you your money, right?

Yes, you are right and on the surface that is exactly what most people think about the subject which is one reason why so many millionaires die broke and why so many senior citizens have a hard time surviving financially during their retirement years.

Basically, personal finance revolves around the following:

1. Earning Money
2. Budgeting Money
3. Spending Money
4. Protecting One's Money

Let's suppose for the sake of having ourselves a starting point, that you are a recent college graduate with a Liberal Arts degree and very good grades which actually mean very little in the business world since during my 45 year career no one ever looked at my grades.

So, now what do you do with this College Degree and a shitload of debt?

Here is where it gets a little confusing because when I ask my students about this I want them to start with two simple questions:

Who are you?

What do you know?

What are you man... on some kinda trip or something dude?

No, not at all.

If you do not know the answers to these simple questions, you are going to have a difficult time putting together your Financial Plan or doing any kind of financial planning for that matter.

• What job are you going to look for?
• Who are you going to marry?
• How many children?
• What industry(s) are you going to work in?
• Are you willing to relocate?
• How much debt can you handle?
• How much in tithes are you giving your church each year?
• Where are you going to live?

And, the one question that basically most people ignore until that day is sitting on their doorstep like an abandoned infant, and that is:

How much will you need when you retire?

Well shit man, doesn't that revolve around what it is that I might want to do in retirement?

Yes, it does, so what do you want to do?

I dunno... man.

So, back to those two questions: Who are you and What do you know?

However, annual income is only one slice of pizza because do you want to stay with that company and count on their annual raises or do you want to job hop every 3-5 years. Companies typically pay employees a 3% raise each year and job hopping (providing on what intellectual property that you have acquired) will generate 5-10% and in some cases more if you are willing to relocate out-of-state. But, that is kinda like a family decision and have you made any plans in include a family in your thinking through initially plan? Thought so...

Once annual incomes are realized, then one needs to budget one's money and see if you can determine what your cash flows might be from one month to the next. So, what might one consider for one's budget:

Expenses:

Food

Rent/Mortgage

Student Loan

Credit Card Debt

Utilities

Household supplies

Phone or cell

Cable

Internet

Pets

Car Insurance

Health Insurance

Disability Insurance

Home/Renters Insurance

Car maintenance

Car gasoline

Clothes

Church Tithe

Haircuts

Vacations

Holidays

Birthdays

Gym Fees

Entertainment

Yard Maintenance

Home Repairs

Property Taxes

Savings

Notice that Savings is down on the bottom because it is really going to be difficult for the first few years out of college to really saving anything... much less be able to afford all the expenses... unless you are married and can add in your spouse's income...

But, is this a good reason to get married?

Now, let's suppose that the two of you have combined your incomes and have managed to come up with a plan to save a little money... where are you going to invest that money not just for save keeping but so that it will grow?

I can tell you this that it should not be the bank or a credit union.

• Do you invest in stocks?
• What kind of stocks?
• What is your risk profile?
• Do you invest in bonds?
• What kind of bonds?
• Do you invest in Mutual Funds?
• What kind of Mutual Funds?
• Do you invest in IRA's or 401K's?
• Do you invest in Annuities?
• Do you invest in Art and Antiques?
• Do you invest in Gold, Silver, Nickle, Tin?
• Do you invest in Diamonds or other precious jewels?
• Do you invest in real estate or rental properties?

And, what kinda degree did I say you had... Liberal Arts? Did your Liberal Arts Degree teach you about any of this shit? If you were a Business Major, it should have provided you will a little bit of this knowledge... but not so if you were a Chem Major or have a Journalism Degree or even an Engineering Degree... but, at least with an Engineering Degree you are structured enough to research.

Do you know about the Rule of 72?

Basically, this rule states that if you take an interest rate and divide that interest rate number into 72, that the answer will approximate the number of years that it will take for your money to double if left alone for a period of 20 years.

For example, the stock market has an historical average of generating between 8-10% each year on investments... so, if we split the difference and use 9%, and divide 9% into 72, then your money will double every 8 years if left alone for 20 years.

If you are 21 years of age and invested $25,000 into a popular Mutual Fund, your money would perform (on average) accordingly:

1. Age 21 - $25,000
2. Age 29 - $50,000
3. Age 37 - $100,000
4. Age 45 - $200,000
5. Age 53 - $400,000
6. Age 61 - $800,000
7. Age 69 - $1,600,000

Now, let's flip this around a little and say you owed someone $25,000 and that you were paying 4% interest on that money... so, 4% divided into 72 gives us an answer of 18 years... so, if it took us 18 years to pay off that debt, the person or entity who loaned us the money would actually be received back from us $50,000 even though we only borrowed $25,000.

Do you want to keep your money or give it away to someone else?

So again, back to my original two questions: Who are you and What do you know

The other concept that one needs to know about Personal Finance is the Time Value of Money which seem a little Star Trekish to me... what about you?

Let me explain this one...

In 2015, we invest $1 in something so that by the end of 2016, we have $1.05 and looking at that growth as something constant, we can also say that if we had $1 in 2015, that it would only be worth $0.95 in 2015.

It is because of this concept that Financial Analysts have stated that the dollar actually purchased more stuff in 1968 that it did in 2013, 2014, and so far in 2015.

Also bear in mind that everything is relative to some point-in-time... and, we could say that our present economy is improving and getting stronger than it was last year... but, if we compare our economy today to what our economy was like in 2008 before the financial meltdown, we are much, much weaker now than we were then.

Another example... when I was in high school , my father earned enough money so that my mother did not have to work but when my daughter was in high school, both her mother and I had to work.

So, thinking of one's retirement, what is it that you would want to do or be able to do providing your health is satisfactory... and, once that is determined, you can begin to estimate how much you will need, even though your wants and needs are going to constantly be changing throughout your lifetime.

Using the Rule of 72 again, if the inflation rate stays constant during your working career at 3% the cost-of-living will double every 26 years, and that knowledge will help you plan your approach a little bit better.

At what age, do you want to become debt free and what is going to be your plan in order to get you to that position of security?

What, if anything, are you going to do to ensure that you remain in relatively good physical health all of your working career?

Have you got any kind of plan in place that has been specifically designed to help you manage stress? And, the better you know who you are, the better you will be at developing that plan to manage stress.

However, Financial Planning is tedious, time consuming, labor intensive, and full of unknowns and unknowables and leaves most people very uncomfortable with the process so while it is almost always attempted it is almost always abandoned.