Seven Financial Truths

There's a lot of mumbo-jumbo out there about the "best" ways to manage your money. The problem is that we're a mixed bunch: savers, spenders, and the in-betweeners. Then there are those of us who simply ignore money, and try our best to live without letting it control us.

Working in the financial services industry, I've learned a thing or two about money. One is that, with proper planning and consideration, you won't have to worry about money every time the paycheck rolls in. Another is that, although money can buy things that make us happy and can provide for us, it's not necessary to truly feel alive and well. Money, in fact, is often the bane of my existence as it causes numerous arguments with my fiancee.

So today, I want to share with you some of the "financial truths" I've learned in my years in finance. I'm fortunate enough to have a father who was always great with money (and is a financial planner now) and a mother who loves to spend it - so I've been exposed to both ends of the spectrum. I'm hoping, one day, I'll find that happy medium.  Maybe these tips can help you find yours.

Truth One: Budget. A key to wisely and effectively managing your money is to find out where it's going now and where it should actually be going. As I start graduate school, and live off my fiancee's income, this has become an important key to ensuring we don't miss a bill or spend too much on frivolous items. I love this handy worksheet, which is a fairly simple way to get started. Add in categories for which you need or want to budget. Once you have the numbers done, take a break. Come back to it with a fresh head, and indicate what is "necessary" (i.e., the rent!) and what is "un-necessary" (i.e., that super cable package - while it's fun to have and you use it a lot, you could live without if you had to). Then see where you can make adjustments so that you can meet your needs, save for your future, and still have a little fun. (See Step Two before adding in the fun.)

Truth Two: Pay Yourself First. Once you've taken care of the "necessary" expenses, make a point to pay yourself. This can mean a multitude of things, but at a minimum it should be:

(a) Setting up a savings account for big purchases, unexpected expenses, etc. and allocating at least 3-6% of your income to it. Emergencies can happen at any time. If you live in a hurricane-prone area, do you have the money to evacuate for a few days or weeks? If you want a big HDTV, how much should you save for it? Does your health insurance cover everything, or should you have a reserve fund in case of an unexpected medical emergency and the bills it entails? Having an emergency fun isn't just necessary, it's smart. Savings for big purchases can also help you avoid the fees and interest rates at places like Rent-a-Center or on credit cards, as you can pay CASH for what you want and never have to think about it again!

(b) Ensuring you have a retirement fund in place. While your employer may already have given you a jump-start with a 401(k), think about a Roth IRA or Traditional IRA to supplement it. We can't count on Social Security anymore, and the job market is a volatile place. The key to having the retirement you want is to save for it with every avenue that is reasonable for you. I started saving at 18 in a Roth IRA, and even though it's not much yet, it may be enough to go beyond "getting by" in retirement and truly making my final years "golden" opportunities. A target? Start with a minimum of 12% of your current income going to retirement (that includes whatever % is going into your employer-sponsored fund, but excludes the amount your employer contributes), and more if you want to truly maintain or exceed your current standard of living.

Truth Three: Live Below Your Means. I really can't stress this one enough. Do you really need a new truck, or could you do with a well-taken-care-of old one? Do you need all those sports channels, or could you just PPV the few games you'll actually watch? Do you need to buy every book you read, or does your local library have a great collection you could use up first? Are you actually using everything that you're paying for? Find ways to reduce what you're spending and to ensure that your income exceeds your total expenses. Use the extra to bolster your personal savings or retirement, and feel the peace of mind in knowing that if an unexpected bill comes, your income can help to pay it off without dipping straight into your savings.

Truth Four: Avoid Debt, except for housing and school. There is no good debt. But there is helpful debt, such as a home mortgage or student loans.

Regarding mortgages, be careful. Don't take on more house than you need and you'll avoid taking on more debt than you need. And rather than continually refinance to make upgrades, save for them. The lessons of the housing market crash should ring true: A giant house means giant bills and giant debt. A smaller house, which fits your family without too much extra, wasted space, means smaller bills and smaller debt (depending on where you live - unfortunately a condo in NYC on my current rent would be about the size of my shower, so there is a slight consideration there). Pay for space you will use - not space that will sit and try to look pretty as you stare at your mortgage payment.

Regarding student loans, exhaust all your options with scholarships and grants first, then search for work-study (if you're lucky to be awarded it), and then look at government loans. While they don't have the best interest rates, they have great repayment options and - for a lucky few - options for loan forgiveness. Avoid all other kinds of debt - including credit card debt - as much as possible.

For a great scholarship search engine, I recommend Fastweb.com. ScholarshipPoints.com is also helpful. Work-study is awarded based upon your filing of the FAFSA - and even if you, or your parent's, income makes you think you won't be eligible - file the FAFSA anyway! You never know what aid is out there until you file. My parent's income far exceeded the minimums for student aid, but I still received grants to help lower my tuition cost. Anything helps!

Truth Five: Got a New Raise or Bonus? Save it. Invest it. Do anything but spend it, unless you absolutely need something (like new tires or a much-needed winter jacket). You never know if you'll get it again, or if the economy will tank again. Your best bet when you receive extra, unplanned-on money is to find a way to save it. (But don't think I mean tuck it away forever - consider putting it into savings for your child's Christmas gifts, college fund, a new car fund, or a family vacation as well as retirement and emergencies.) You can also use it to make an extra payment on a loan (to help reduce how much interest you will pay over the long term).

Truth Six: Invest Wisely. There's a lot of hype out there about the best ways to invest. Working in financial services, I can tell you right now that a lot of it is CRAP. Straight up, can't put it plainer than that: CRAP.

Understand that most financial products are designed to be SOLD to you by trained SALESPEOPLE. The first key to investing wisely? Ignore them. Flat out turn off that TV and stop listening. You can bet that their portfolios tanked just as badly as yours did in 2008. Why are they still doing it? Because the commissions are great and there's practically no accountability for broker-dealers. So... stop listening and invest wisely.

What do I mean by wisely? Invest in a diversified, tax-efficient portfolio that utilizes low-cost, institutional-style mutual funds. Dimensional Fund Advisors is one provider of such funds. I suggest researching Modern Portfolio Theory for more information, if you're truly economic-savvy.

This can be done through financial planners, and preferably one who acts in your best interests. Want more information? Head over to the National Association of Financial Planners to continue your education & find a planner that will look after you and your money rather than his own pockets. Because true advisors know that their loyalty to you ensures your loyalty to them. And what does loyalty bring? A better portfolio and tailored strategy to meet your needs and a lot of good referrals from you.

Truth Seven: Understand that the Financial World is Complex. Unless you happen to be good with investing, money, and the like, you will need a helping hand now and then. You don't have to invest your money with a particular company or firm to get those services, either. Many good financial planners offer hourly or fixed-fee services to help you design a financial plan to meet your lifetime financial goals. The plan should also consider your tolerance for risk, your timeline to retirement and other goals, your current financial situation and needs, your health history (in case of big medical bills), and the things you want from life. Again, hit the link above for NAPFA. I've known some of these guys for a while, and I can tell you that I haven't seen anyone more dedicated to doing the RIGHT thing than them. (By the way, it's called the Fiduciary Standard - and your advisor, no matter what he/she provides, should adhere to it at all times in all aspects of his/her business.)

Note: There stated opinions here are just that - opinions. Only you can ultimately decide the best ways to utilize and invest your money. These are tips which have worked, and continue to work, for me. They may not work for you. As always, do your research before choosing how to save, spend, or invest your money. The economy is a volatile place - and the markets are unpredictable. No one has a crystal ball, but there is academic evidence out there to suggest what can work and why.