Good incomes often get eaten up in the course of decades of reckless spending. This leaves many people, once their prime earning years end, in a financial mess they never escape. Sometimes people are in a financial mess even in the middle of their prime earning years.
Some people with high incomes can and have ended up filing for bankruptcy or living out their last years in a reduced lifestyle.
By contrast, many people of modest incomes who learn personal finance defence at an early age can end up financially independent. That's despite never having a great income.
How? They were able to save and invest on a regular basis thanks to their commonsense spending and saving practices.
Therefore, they were able to use the compounding effect to their benefit over long periods. The compounding effect is when credit or debit balances get big enough that interest starts to generate interest. Below listed are 5 ways you can enhance your personal finance.
1.UNDERSTANDING CREDIT CARDS
If you have credit cards, and almost everyone does today, decide if you are a credit card master or a credit card slave.
A credit card slave is what card companies' love. A slave is someone who runs up big balances and then only makes minimum payments. He or she is a person who has no idea what the interest payment is each month or how long it will take to pay off the bill.
And worse, the slave cardholder lives by the ignorance is bliss principle.
So this poor soul doesn't want to know what he pays in monthly interest payments!
A Master of Plastic
A credit card master is a brilliant person who has learned about thrift, how one manages one's economic life, from experience. He understands that "economy is not a natural instinct, but the growth of experience, example, and forethought. The credit card master gets the most out of his or her money. He also has learned how to use other people's money. He demands and gets zero fee cards by virtue of a sterling credit record.
That's because this person pays off the credit card balance every month without fail. Then he demands, and usually gets, the best deals from credit card companies.
What's the Rate? I'll Pay Zero
In effect, he is forcing the credit company to extend him an interest free loan. He knows how to use the grace period to his advantage. This is not the credit card industry's favorite kind of customer.
In fact, those companies that have too many of these smart customers end up going out of business.
Total Debt Owed
A high percentage of debt will cause a lender to shy away from a potential borrower. If a borrower tends to use the majority of his or her available credit, the borrower appears to be spending much more than one's current income can afford. That is not a good sign.
It is best to keep the usage of all credit accounts at or below 40% of income. If the usage amount is higher, we should work on paying them down as quickly as is possible.
Financial advisers say invest in stocks or stock mutual funds because stocks tend to be the best bet over the long term.
Stocks usually beat inflation and most other kinds of investments such as bonds over 10 and 20 year holding periods. But the market's performance within these periods is often erratic.
Say one gets nine percent a year over 20 years. That doesn't mean one gets nine percent every year. Some years in those two decades, one made 20 percent. Some years one was down 10 or 15 percent.
But over the long run, you generally average about nine percent. It could be a rough ride to make a decent return. Still, some investors just can't take the downs, which are the price of getting the ups as we have seen in recent years.
3.IMPORTANCE OF NOT KEEPING ALL EGGS IN ONE BASKET
Investing in stocks and bonds, not just stocks or just bonds, one can lower risk levels. One can also use others kinds of assets to reduce risk further.
There must be some kind of financial self-defence for investors.
The idea is that diversifying will temper, or smooth, the rough edges of investment returns. This can reduce how much one makes in bull markets but it can also reduce how much one loses in bear markets.
4. HOW TO TAKE CHARGE OF YOUR INDIVIDUAL HEALTH INSURANCE
Many people are spooked by the idea of obtaining their own health insurance. That's because for most of their work lives their employer has provided it. They weren't obligated to make any decisions. Now things have changed.
For some reason, such as their company ending the benefit or because a worker has become an independent contractor, numerous workers have to find an individual health insurance.
But like many seemingly daunting tasks, the problem of finding an individual health insurance policy isn't as difficult as it may seem. Why? More insurance companies understand that there are more individuals who need customized health insurance coverage.
Who are these new buyers of health insurance policies?
They can be people who own a business or people who have just graduated from college or employees of very small companies that can't afford to offer coverage. They can also be people who have retired a little early or people between jobs.
Whatever the reason, few people want to face life without health insurance. That's because the potential problem is huge: One can face myriad medical bills without someone to help defray the costs. So let's consider how one goes about finding individual coverage and how health insurance works.
5. RETIREMENT OPTIONS
One doesn't know how many years one is planning for owing to a lack of perfect knowledge about destiny. Other x-factors also enter into the retirement planning question. What will be the inflation rate? What rate of return does one expect to get on investments? How much more of Social Security payments will be taxed and could the whole Social Security system end up being means tested?
That would mean some people with good incomes and who paid into the system for 40 years or so would get nothing.
Indeed, someone with significant private resources might end up getting little or nothing in payments to keep the Social Security system afloat. I'm not predicting that. It is merely something that must be considered.
A Conservative Rule
Given these built-in uncertainties, I believe retirement planning should have an overriding rule: Whatever you determine you need, better put aside 10 percent more than you think you need.
If you're too conservative and end up with much more than required, then you'll have some fabulous last years. Better that then the opposite: running out of money in your 70s, 80s or 90.