Essays on Personal Finance

When the Music Stopped

The height of the financial bubble was much like the children’s game of
musical chairs. I often told friends and clients that one day the music would
stop, and you did not want to be left without a chair.

Well, the music stopped, and a lot of people have no where to sit.
So, what do we do now?

It’s time to reexamine our goals, evaluate our plans to achieve those goals, and make needed changes to both our investment portfolios and how we live our lives. The following is a list of items that I believe can help you keep your financial “house” in order:

1.    Stop living beyond your means.  Your budget should be representative of your current income, and you shouldn’t spend more each month than you bring home. Your monthly budget should include at least 10 percent set aside for savings and investments.  The percentage can change depending on a variety of factors specific to you, but 10 percent is a reasonable target.

2.    Use home mortgage debt carefully.  Many have learned the hard way that using our homes as ATM machines for whims and wants is an expressway to financial ruin.  The total amount you pay for your mortgage should not exceed 28 percent of your gross income.  Your total debt -- from mortgages, car payments, credit cards, student loans, and anything else you pay over time -- should not exceed more than 36 percent of your income.

3.    Credit card balances can be financial poison. Sure, use them to acquire points for free travel, but pay off all credit card balances each month. This is the easiest step to take, but one that very few actually do.  Be one of the few.

4.    Understand the difference between saving and investing.  Savings is money set aside that should not be put at risk.  Savings are for short term use or for emergencies.  Every family should have enough savings for three to six months of living expenses.  Investments are money set aside for potential long-term gains and can bear some risk, based upon your stated risk tolerance.  Depending on your financial goals, you should be prepared to potentially hold investments for several years. 

5.    Inadequate savings puts your investments at risk.  You could be forced to liquidate investments at bottom basement prices to pay for living expenses in unforeseen circumstances.  Regrettably, many people discovered last year that they didn’t have enough savings.

Some may find these considerations too restrictive, but it is time to bring some order and discipline to our financial houses.  A return to basics and fundamentals can open up a new world of opportunities for everyone -- opportunities that we can afford!  Make sure the next time the music stops, you’ve got a chair to sit in.