Let us imagine that you were to hire a professional financial analyst to come to your home and look over your finances. What the person will say to you will vary depending on your situation, but in general you will hear at least the following:
Why are these elements important? And why were you never told about them if they are? It is an odd thing, but for some reason there is very little "financial education" that occurs in this country. That is probably because, for most people, the education would be totally meaningless in high school. If you took a 17 year old high school senior and started talking about retirement, wills, life insurance and credit card debt in a high school class, it would all be totally meaningless. This sort of information has no relevance until you turn 23 or 24 (or even 33 or 34) and have been working for a while.
These elements are important because without them you live a life of financial randomness. You lack control, or even a basic understanding of where your money is going. If something goes wrong, you have no reserves to fall back on.
The previous articles have discussed the first three topics. If you have followed the steps as Bob has, you have created a clear list of financial goals (which you may want to revise based on what you have learned in these articles), you have built a clear understanding of your income and expenses (as well as your "hidden expenses"), and you have changed things so that income exceeds expenses and you can save toward financial goals that are important to you. The importance of your goals cannot be overstressed.
The following sections introduce you to the other elements.
Credit card debt tends to be rather wasteful and unnecessary. If you have followed the ideas in the previous articles, you have gotten your credit card spending under control so that, at the very least, the balance is no longer growing. You will want to do something fairly quickly to begin reducing the debt you owe on your credit card(s), perhaps by paying an extra $50 or $100 per month (beyond the minimum payement) if you can manage it. This is important: Credit cards tend to have very high interest rates. If you have a $2,000 balance on a credit card, you are paying something like $30 per month in interest alone ($360 per year). That's a lot of money. That's $360 that could be going toward your financial goals instead. You want your financial plan to demonstrate a clear reduction in credit card debt, and you want to stop using your card on "random purchases". It is the random purchases that prevent you from getting the things you truly want.
Experts tend to recommend a safety net of three to six months of your salary. As you recall, Bob brings home about $1,850 per month. Therefore he would want to have a safety net of $6,000 to $11,000 dollars sitting in a savings or money market account to use in case of an emergency like corporate downsizing. The problem with a safety net is that $6,000 is a lot of money. We will therefore talk about other ways to create a safey net when we talk about retirement plans.
If you are considering creating a safety net but cannot imagine saving $6,000, try this. At the very least you want to have three months worth of rent in savings, and enough credit card headroom to last for three to six months should you need it. That will be much easier to achieve.
Retirement savings may seem totally and absolutely irrelevant to you right now, especially if you are under 30 years of age. The next article will attempt to convince you otherwise. Please read it, and read it with an open mind.
The book entitled "The Wealthy Barber" spends an entire chapter talking about wills. They are incredibly important if you happen to die, because without one your estate gets locked in court. This is fairly harmless if you are young and single without many assets, but if you are married this can be a disaster for your spouse. If you do nothing else, purchase will software or a will kit by mail and use that. Or you can spend something on the order of $200 for a local lawyer to create a simple will for you.
See the article on life insurance for more information on this topic.
In light of all of these facts, you may wish to recreate or modify your list of financial priorities and your expenses. You may need to add a savings component for a safety net, or add an expense to cover life insurance premiums.
As you are revising your financial plan, it may seem a little like you have been cheated. Here you've been living a life thinking you were pretty much under control, but once you start to factor in things like credit card debt repayment, life insurance costs and retirement savings, you may find you aren't making nearly enough money any more. There is not a lot you can do about it in the short term. Assume a mature attitude and put things in order. Once you have lived with these new realities for a month or two they won't seem so bad, and you will have the distinct pleasure of knowing that you are really covering all of the bases.
In the following articles, a variety of new topics are discussed. These topics include retirement planning, investing strategies, life insurance and so on. With these new tools in hand, you will possess the essential ingredients of stable financial life.