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Financial words of wisdom, what do they really mean?

We have heard them our whole life and some even try to live by them, but do we really know what they mean?  Understand how we can put some of these financial words of wisdom into practice can be very helpful for long term financial success.
Let’s start with the one we hear all the time – “save early and often”?
There are two financial ideas at work here.  First is that if you start when you are younger, because of the power of compounding you will have more at retirement than if you start later.  The second concept is that if you make it automatic, you will save every month developing a habit of savings.
One that we hear often is “live frugally, save generously”?
This can be put into practice every time that you get a raise.  Instead of spending the entire raise amount, try to increase your spending only slightly and save a greater percentage of your raise.  The tendency is for us all to spend at the level of our income rather than what we need.  Imagine if you didn’t spend more than you were spending even 7 years ago and saved almost all of your raises over that time.
“Living within your means” is a very popular piece of advice?
This might be one of the most difficult concepts to follow. As we move through life, we actually have access to more and more credit giving us the means to live a much higher standard of living than our income might dictate if we just lived off our monthly income.  The key to living this concept is to not overextend on credit and definitely not use credit to fund everyday living expenses. 
When is an appropriate time to use credit?
Credit should be used for asset building purposes or key living needs such as transportation.  Education expenses can be another option as long as it is within moderation based on future income potential. You can also use credit for short term cash flow needs as long as you have a reasonable plan to pay it off over 18 – 24 months at the most.
What does it really mean when one is told to “save more than the average”?
The goal is to save 10% for your retirement, the average is likely less than 8%. To save more than average means to save more than what people should be saving, so to make this work, your retirement savings should be 15% or higher.
How can we “practice for a major life” change, such as a baby or only 1 income?
This is concept that can be very helpful if you want to see how you can live with additional expenses or lower income. You simply live as if you had additional expenses or less income.  The difference is put into savings account. If you don’t have to access your funds in savings for six months, then you have proven you can live in this new financial situation.
How can we put the advice “diversify your portfolio” into action?
First it comes with understanding investment concepts and the types of investments you have in your portfolio. For most people, working with an advisor is the best way to develop a diversification strategy of being in stocks, bonds, mutual funds for types of investments as well as diversifying within each of the investment types based on risk and return.
How does “rebalancing your portfolio” help your investment strategy?
If you have a diversification strategy in place, over time, you portfolio mix will vary from your strategy because of the different returns from each type of investment.  It is always good to annually put your portfolio holding back at the intended percentages by moving funds from one type of investment to another to achieve this.  If you don’t, over time, your diversification plan will be obsolete.

Posted: 3/31/2016 with 0 comments

Categories: Money, Money Matters, Saving, Spending

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