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Financial tips, what do they really mean?

We have all heard them over and over but do we really understand the common financial tips that are often repeated?  Sometimes these tips can be misleading or perhaps their true meaning is really hidden in the details behind the advice.  And for a couple of the common tips, they are really the start of a much bigger effort.
 
Let’s start with the one we hear most often…”pay yourself first”.
This one certainly needs clarity. “Pay yourself first” means depositing money into savings (retirement, college, rainy day fund) before you start spending any of your paycheck. It doesn’t mean give yourself spending money and then pay your bills and other obligations.  The best way to accomplish this advice; have your savings automatically deducted from your paycheck so it never arrives in your checking account.
 
What about “all your eggs in one basket” that is often used?
This one is primary focused on your investments or 401k accounts. The main advice in this tip is the need to use several different types of investments not just one type.  This helps your investments grow more regularly and avoid significant up and down swings.  Advisors sometimes call this diversification of your portfolio.  It might mean having different types of stocks, bonds, mutual funds or other types of investment choices to make a balanced portfolio that meets your risk tolerance and income goals.
 
This one is used often…”you need to have a budget”
Yes, this is a very common piece of advice and the problem is that it needs to go a little farther. The creation of the budget is just the first step.  The real advice is to track your expenses and not spend over your budgeted amount.  Without using the budget as a spending limit, the effort of creating a budget will be almost entirely wasted.
 
One last common financial tip, “don’t live beyond your means”
This one can be quite confusing because we all have access to credit. This gives us the “means” to accumulate a lot of debt. One would never get ahead financially taking this literally.  The guidance is really about not using debt to finance daily purchases like entertainment, food, etc.  Of course you need to borrow for cars, houses and maybe for a few other needs but the rest of the time, use the save and then buy approach. You will be much more likely to stay within your “means” and not have more debt than is appropriate.


Posted: 4/28/2014 with 0 comments

Categories: Finances, Money Matters, Planning, Saving



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