“Common sense is not so common,” is a quote attributed to the French philosopher Voltaire. In today’s economic crisis, it appears that financial common sense has also gone out the window. How could Bernie Madoff carry out a $60 billion ponzi scheme for over thirteen years? How could AIG executives have the gall to pay themselves $165 million in performance bonuses, while in the last six months the government has given the firm $170 billion to keep the company afloat? How can thousands of families find themselves on the street, while their homes are in foreclosure and they potentially face the perils of bankruptcy? What is financial common sense and how can families get back on seemingly solid ground?
Don’t Spend More…
“Don’t spend more than you earn” sounds like basic financial common sense. However, with the explosion of credit cards, it is relatively easy to spend more than you earn. Unfortunately, spending more that you earn comes with the price of 18-26 percent interest on the unpaid balance and associated late fees and penalties if not paid on time.
How do you know if you are spending more or less than you earn? There are two basic ways to answer the question. You can pay all of your bills and expenses by cash or check and not use any credit. Or you could track your income and expenses on a monthly basis using either a ledger or spreadsheet and see if you have a surplus or deficit at the end of the month. Understanding and managing your cash flow is basic financial common sense.
A Penny Saved…
“A penny saved is a penny earned” is as true today as it was in the 1700’s when Benjamin Franklin said it. Saving for a rainy day or to fund future financial goals, such as retirement, education or a major purchase makes good financial sense. One of the most effective ways to start a savings program is to put it on automatic pilot, either through payroll deduction or automatic checking account withdrawal. It is difficult to spend money that you don’t see.
The first savings priority should be the creation of an emergency fund. The purpose of the emergency fund is to pay for financial emergencies that inevitably arise, such as auto/home repairs, illness and job loss. The fund should be the equivalent of 3-6 months expenses and placed in a liquid account, such as a savings account or money market fund.
The next priority is to develop a regular saving and investment program. Consider a monthly savings amount equivalent to 10-20 percent of your gross income. This would include 401K and similar contributory retirement plans and other investments such as mutual funds, bonds and real estate. Finally, “don’t put all of your eggs in one basket” by placing your investments in several different investment areas. Saving and prudently managing your investments is basic financial common sense.
If it Sounds too Good…
Watch out, because “if it sounds too good to be true, then it probably is.” There are hoards of financial charlatans with get rich quick schemes actively working to separate the next sucker from his or her money. Look at some of the schemes being portrayed on late night cable TV advertorials, the internet and even by some so called friends. High-pressure salesmen are working overtime to entice you into a trap that will line their pockets and fleece yours. If you don’t understand something, don’t sign it and always take an extra day to make a major financial decision. Making sound financial decisions that are aligned with your long term goals is basic financial common sense.
The Longest Journey…
“The longest journey begins with the first step” is an ancient Chinese proverb that exhorts the reader to take action now. Achieving financial success requires action, perseverance and common sense. But remember, “the journey is just important as reaching the destination.”
Michael G. Shinn, CFP, Registered Representative and Investment Adviser Representative of and securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or to send your comments or questions to shinnm@financialnetwork.com. © Michael G. Shinn 2009.
