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Welcome to Gerry's Free Financial Advice!
"Just following a simple set of rules and stick to them." |
Have Realistic Expectations
Nothing you do is going to change your financial situation overnight, but each time you make a sound financial decision, it will make a small difference. And every financial decision you make will impact your life over an extended period of time. It is important to keep an open mind about your personal finances and to stick to your financial goals.
Live Within Your Financial Means
Actually, you should live below your means! The most important way to generate wealth is to live within or below your means. For example, if you make $30,000 a year, then live like you make $25,000 a year and save, pay down debt, or invest the remaining $5,000.
Stay Out of Credit Card Debt
Although most people agree with me on this, many people find themselves falling into credit card debt and facing large monthly debt bills. In fact, credit card debt negatively affects a lot of people’s long-term wealth and it is very important that you get out of debt.
Maintain Spotless Credit
Your credit is one of the most important resources you will ever have when saving money. Basically, the better your credit, the lower your risk profile and therefore the lower your interest rates will be. More importantly, good credit is of the utmost importance when buying a house or taking any kind of loan.
Rationalize Your Spending
Another important rule of financial advice! Think twice before spending your money. I often find myself getting excited about making a purchase and want to jump into it immediately. Before doing so, I make myself step back and weigh that decision. Do I really need that item? If you can't find a solid reason to spend your money, then don't spend it!
Understand Opportunity Costs
Opportunity cost is defined as the cost of pursuing one alternative versus another. For example, you could spend $500 on a bike or you could invest the same $500 in a savings account. In five years, the bike will be worth $25 and the $500 investment will be worth $650 (including interest). By carefully evaluating your alternatives and by weighing the opportunity cost of each decision, you can vastly increase your long-term wealth.
Understand the Time Value of Money
The most basic law in finance! The time value of money states that a dollar today is worth more than a dollar at some time in the future. It is always better to have the money now. By saving and investing today, you make the time value of money work for you.
Understand the Compounding Effect of Money
The compounding effect of money is extremely important when making any financial decision. Suppose you had invested $1,000 today in a 5% savings account. In one year, that account would be worth $1,050 [$1,000 + ($1,000 x 5%)], yielding a $50 gain. However, in year two, that same initial investment would be worth $1,102.50 [$1,000 + ($1,000 x 5%) + ($1,050 x 5%)], yielding a $52.50 gain. And in year three, the same $1,000 would be worth $1,157.63, yielding a $55.13 gain. By year ten, the initial $1,000 investment would be worth $1,629 and by year 25 it would be worth $3,386.
Take Appropriate Financial Risks
If you want to build wealth you need to take risks. The higher level of risk you take the more you can expect to earn and accumulate over the long-term. However, be conscious of yourself and your goals and do not take more risk than your time horizon or your own personality will allow.
Save Your Money
The smartest words ever said by anyone: “A penny saved is a penny earned.” Start small. Don’t give up. Don’t dip into your savings unless it’s an emergency. Every little bit helps. Did you know that if you saved $1 per day and invested it at 10%, you’d have almost $200,000 in 40 years? Every little bit counts and it is very important that you take this financial advice, get out of debt and save money - and start saving it now!
Invest With a New Frame of Mind
Let's say, Instead of spending an extra $5,000 to upgrade your new car purchase to the sport package, you could invest that money and earn over $500 per year. In ten years when you sell your car, that $5,000 will be worth closer to $13,000 (with compounded interest at 10%) and you will be earning about $1,300 per year (or over $100 per month).
Start As Soon As Possible
I can’t stress this point of advice enough. You must start today!! Assuming you have 30-40 years until retirement, every year you forego saving or investing money today will subtract 1-5 years from your retirement. Just think, by saving and investing all you can today, you may be able to retire up to 5-20 years earlier than you expected.
Prioritize Your Payments and Investments
Just as it pays to invest your money wisely, it also pays to make your debt payments wisely. And in some cases, it makes sense to pay your minimum debt payments and invest your would-be debt payments in something else. If you have several high interest rate loans, you may want to refinance or consolidate your loans to a lower interest rate loan. Be careful not to consolidate your loans and then build back credit card balances.
Diversify Your Investments and Wealth
A great piece of financial advice! It means, don’t put all your eggs in one basket. A good diversification strategy involves spreading your investments and wealth across many different asset classes. By doing so, you reduce the risk of losing a large percentage of your wealth by events that only affect one asset class.
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