6 Habits for Personal Financial Success

(The outline for a seminar I presented at the University of South Carolina
School of Music for students on 5 September 2014.)

(NOTE: The material for this seminar was derived from my personal experiences, lessons learned, and what I've read. I can't include everything that pertains to this subject, so I have provided references for more detailed information. It is my attempt to help instill in college students, good habits in the hope that they will make educated decisions, avoid costly mistakes, and achieve their personal financial goals.)

H-1: Live below your means

  • Spend LESS than you earn (MUCH less, is better)
  • SAVE as much as you can
    • minimum: 5-10%
    • optimum: 15-20%
    • more: ??%
    • If you're not saving at least 10%--you're spending too much!

H-2: Run your financial life like a business

  • Track your expenses--every cent!
    • find out where your money goes
    • 6-12 month's worth to start
  • Create and follow a budget
    • a way of making better decisions about your money
    • you can waste 20-30% of your money if you don't know where it goes
    • reduce & reallocate expenses
    • the first step toward getting control of your finances and
      growing your net worth (assets - liabilities)
  • MINT.COM: free internet software (but beware of ads)
  • Relate expenses to income

H-3: Pay yourself first: "starting early is the greatest gift you can give yourself"

  • Create a savings/investment plan and stick to it
    • open an account with a fund family
      • Vanguard
      • Fidelity Investments
      • T. Rowe Price
    • don't wait--invest when you get paid
      • direct deposit of payroll checks
      • automatic savings plan
        • retirement savings
        • non-retirement savings & emergency/unexpected expenses
  • Increase savings/investment AT LEAST in proportion to increases in earnings
  • Build a cash emergency fund (3-6 month's expenses)
  • Take advantage of "free" money, compounding (time), dollar-cost-averaging, employer match to retirement plan

H-4: Minimize (and ultimately eliminate) debt

  • Debt is the enemy of wealth & is the leading cause of financial disaster
  • Excessive borrowing is like feeding a drug addiction
  • If you use a credit card, pay the FULL balance due every month
    • avoid cash advances on credit cards
    • pay off credit card debt BEFORE investing
  • Avoid borrowing money
    • a mortgage is the only acceptable debt (but it is not an investment)
    • know the TOTAL amount you will have to repay including costs & fees
    • shop to find the best deal and ask other lenders to beat it

H-5: Don't be a GREEDY investor; take PRUDENT risks

  • Smart investing is taking fairly predictable risks in anticipation of fairly predictable returns
  • Primary determinant of risk ---> % invested in stocks vs. % invested in bonds
  • Generally speaking, the younger you are, the more risk you can tolerate
    • stocks: higher historic returns, but more risk
    • equity/bond allocation: bonds % = age-10 to age-20
  • Buy (regularly) and hold (indefinitely)--no day trading, no "churning"
    "It's not market timing that matters, it's time in the market."
  • Don't fear the market (that's where the money is)
  • Forget short-term market swings-->increases risk
  • Be satisfied with market returns (a diversified mix of index mutual funds over several
    asset classes will serve you well)
  • Ignore the hype of" financial pornography" (the media, investment advisors, stock brokers, etc.)
    and "hot tips" from anyone, all of which cater to your emotions
    • NO ONE can predict the future (time the market) over the long term
    • prospectus disclaimer: "past performance is no guarantee of future results"
      (protects the broker/advisor if things go bad)
    • EMOTIONS (greed & fear) are most to blame for bad investment decisions
    • the hype feeds on emotions

H-6: Minimize cost of investing

  • Investment costs, trading, taxes, expenses, fees, commissions
  • No need for financial planners/advisors, brokers, etc. (salesmen)
    • they make money whether you do or not
    • if you choose to work with a financial planner, choose one who
      works by the hour, NOT for a percentage of your assets under management
  • The enemies of high returns are high fee, taxes, and costs
  • Everything you don't give to someone else is yours to invest
  • If you want to grow rich on an average salary, you CAN'T afford to invest
    in the expensive products sold by most financial advisors.

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

An ACCEPTABLE, LOW RISK INVESTMENT STRATEGY: Index Mutual Funds

  • What's an index?
    • a "slice' of a market
    • all stocks in the market (index) have a specific characteristic(s) in common
    • e.g. Dow Jones Index (30 stocks); S&P 500 (500 stocks); Wilshire 5000 Total Market Index
  • An index fund includes all of the securities in the index
  • "The best strategy for the individual investor is to build a portfolio of
    low cost index mutual funds"
  • Don't take my word for it
    • Warren Buffett (author of above quote)
    • Paul Samuelson--Nobel Prize winning economist
    • John Bogle--founder of Vanguard, world's largest mutual fund company
    • Burton Malkiel--professor of economics at Princeton University
  • Why invest in index funds?
    • diversification: own ALL the stocks in a market (index), not just a few
    • predictable risk due to diversification and large number of companies in index
      • the younger you are, the more risk you can tolerate
      • greater return from equities probably means greater risk
    • large choice of index funds (more diversification)
    • low cost of investing (costs and fees reduce your returns)
      • very low expense ratios
      • no commissions (NTF designation)
      • tax-efficient
      • almost no trading costs
      • no hidden fees
    • market returns (+ dividends) are a virtual certainty over the long term
    • simple, easy, low stress strategy
  • How: Create a portfolio of index funds allocated over several asset classes
    • asset classes (NOT market sectors) are the key to diversification
    • start with 3: domestic stock index, international stock index, domestic bond index
    • make regular contributions, according to your plan, until you retire
  • spend an hour a year (or less) on your investments
  • take satisfaction in knowing that your money is working for you (not for others)
    and watching your wealth grow steadily

REFERENCES:

  • "The Smartest Money Book You'll Ever Read: Everything You Need to Know About Growing, Spending, and Enjoying Your Money" by Daniel R. Solin
  • "Millionaire Teacher: Nine Rules of Wealth You Should Have Learned in School" by Andrew Hallam

ALSO:

  • "A Random Walk Down Wall Street" by Burton G. Malkiel
  • "Common Sense on Mutual Funds" by John Bogle
  • "The Smartest Investment Book You'll Ever Read: The Simple Stress-free Way to Reach Your Investment Goals" also by Daniel R. Solin
  • "The Smartest Portfolio You'll Ever Own" you guessed it, by Daniel R. Solin

  • "Rick's Retirement Page"
  • Contact me thru this website.