You want your dentist to have clean straight teeth. You want your personal trainer to be fit. Your nutritionist to eat healthy. So I am sure you expect your financial advisor to be an expert at saving money, right? As a natural born spender, I have to admit that saving money does not come easy for me. Here are 5 financial tips I learned in college after reading the "The Richest Man in Babylon" by George Clason that still help me to this day:
1) Pay Yourself First
"Deride not what I say because of its simplicity. Truth is always simple."
The reason why so many people fail at saving money is because they wait until the end of the month to see if there is any money left for them to save. But at the end of the month there is nothing left and the saga of living paycheck to paycheck continues. Instead, pay yourself first. As soon as you receive your paycheck, set aside at least 10% of your income. Set up an automatic draft from your checking to your savings or investment account (your GK advisor can help you with that) and learn how to live on the remaining 90% of your income. You and your future are the most important bills you have.
2) Control Your Expenses
"How can a man keep one-tenth of all he earns when all the coins he earns are not enough for his necessary expenditures? What each of us calls necessary expenses will always grow to equal our incomes unless we protest to the contrary."
Learn how to separate the necessary expenses (rent, utilities, groceriesâ€¦) from the desires (Starbucks, massages, dining out). Your housing expenses should not exceed 33% of your income. Your car expenses (car payment, insurance, gas) should not exceed 10% of your income. Your total debt payments (credit card, student loans, auto loans) should not exceed 20% of your total income. If you are over these limits, you need to make adjustments right away to stay within a reasonable budget. Get a roommate, cut the premium channels from your cable bill, get a more fuel-efficient car, and brew your own coffee. I know some of these adjustments are hard to make, but remind yourself what you are trying to accomplish. Being financially independent is far more important than some of the desires you are giving up.
3) Invest Your Money
"Put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse."
Now that you have accumulated some savings, it is time to put your money to work for you. Wealthy people do not keep their money under the mattress. They are always looking for opportunities to grow their savings. We all need a checking account to pay bills. We need a savings account for emergency cushion (3 months of expenses), but beyond that, keeping your money in the bank where it earns very little can be a costly mistake. For example, let's take a 30-year old person saving for retirement 35 years down the road. This person diligently saves $5,000 a year at the bank at an average rate of return of 3% (pretty generous for today's standards). At age 65, this person will have approximately $309,000 versus $956,000 had this person earned a hypothetical rate of return of 8%. Which retirement basket would you rather have?
4) Work with a Financial Planner
"Everyone is tempted by opportunities whereby it would seem that a man could make large sums by investing his money in most plausible projects. Often friends and relatives are eagerly entering such investment and urge him to follow. Consult with wise men. Secure the advice of those experienced in the profitable handling of money. Let their wisdom protect thy treasure from unsafe investments."
We all hear stories of famous entertainers and athletes who made a lot of money, only to lose it all. Mike Tyson, Michael Jackson, Nicolas Cage, Lawrence Taylor, Lenny Dykstra, and the list goes on and on. What went wrong? In summary, not having a proper financial plan done by a reputable and tested financial advisor. These people failed to recognize that money is a finite resource. They overspent, invested in crazy ideas, did not set money aside for the future, and lived beyond their means. At the end of the day, it is not about how much money you make, it is about how much money you can save and invest that really creates wealth.
5) Buy a Home
"If you pay rent to a landlord all your life, at the end of your life, you will have nothing to show for it. If you can instead pay a mortgage on a house, at the end of your life you will have a house to show for it. Own thy own home."
One of the best financial decisions I made was to buy a house in 2002. I was 23 years old and I couldn't believe that a bank was willing to give me a loan for 100% of the value of the house. My mortgage payment was slightly higher than what I was paying in rent, but since mortgage interest is income tax deductible, my net outlay was virtually the same. It was a no brainer. That house doubled in value in two years and I quickly cashed out. Those days are long gone. If you are thinking about buying a house today, you definitely need a down payment. There are loan programs offering as little as 3% down payment with the ideal down payment being 20%. Don't expect your house to double in price anytime soon. The good news is that houses are much more affordable today and mortgage rates have never been lower. With a down payment and a good credit score, you can qualify for rates as low as 3.5%. A $400,000 30-year fixed loan at 3.5% would cost you around $1,800 a month, which is less than many people spend in rent each month. The American dream is closer than you think. Ask your GK advisor about our "Buying a Home" program.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Securities offered through Sagepoint Financial Inc., member FINRA/SIPC. Investment advisory service and fixed insurance service offered through Gerber Kawasaki, Inc., a registered investment advisor, not affiliated with Sagepoint Financial, Inc.
Danilo Kawasaki*, CFPÂ®
2716 Ocean Park Blvd. #2022
Santa Monica, CA 90405
*Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.