In the 21st Century one of the most important items that a gentleman can master is complete control over his current financial situation. To borrow from one of the best advocates of astute Financial Planning today, Dave Ramsey, a good financial plan can “change your family tree”; you can save for your house, pay cash for the ring and wedding, and retire in comfort, quite literally, changing your family tree. In the Financial Planning courses that I teach I stress four important “musts” that we all should master.
One: Create and live by a budget. On paper, at the start of every month, track every dollar that you earn and spend. If it is not in the budget, do not spend it, include leisure spending, putting a bit aside for quarterly/annually recurring items like car maintenance, auto insurance, a bit for your new tires that you will need in a few thousand miles, clothing, (Fall is rapidly approaching, wand some of us need a new cashmere jacket, well I know I do), those vacations every quarter to Vegas and once a year to Cabo. Plan and save.
Two: Save/Pay off your debts. These can be two different items or in this low interest rate environment, combined. There is a handy little rule when it comes to the beauty or curse of “Compound Interest” called the “Rule of 72”. Basically it means that whatever interest rate you are earning or paying, take that rate, then divide 72 by that number and that result will tell you how long it will take your money to double. For example, if you are earning that hefty 1.25% on your savings at the Bank of Wells Citi, your $2,500 savings will double to $5,000 in roughly 72/1.25 = 57.6 years. Similarly if you have $2,500 on your Bank of Wells Citi Platinum Visa card at a rate of 15% you will owe them $5,000 in only, 72/15 = 4.8 years, and this amount will double at that rate for as long as you have the balance. So, by the time your savings are worth $5k, your credit card balance would have doubled almost twelve times! You would owe a whopping, $7.2 Million… (OK, I do exaggerate a bit for effect, I am not counting your minimum payments, etc, but I hope you see the point.) Pay off your debts!
I do have one caveat, before you pay off your debts, save and establish a stash of “Crisis Cash”. Your car will break down, your condo/house will need repairs, and lastly, in this day and age, you could lose your job. You should save up $2k to $5k in your stash as fast as you can, shift to debt reduction and then put on your “Big Boy” pants and bump that stash up to six to eight months of your normal expenses. Pay cash… even for your ride, CARMAX has some great deals, this Duke of Dollars has purchased an Acura, Infinity and Mercedes from them.
Two(B): Save for retirement. Once you have paid off your debts, (hey, if you can do the mortgage along with credit cards and your car, you are indeed a better man than I). IRAs, 401Ks and KEOGHs are all great vehicles and you can invest in a wide range of options. If your employer matches, that can be a doubling of your investment. The Duke knows that interest rates are low right now, but the “Rule of 72” can work in your favor as well. Despite the poor performance of the last 4 years, the Stock Market, on average has an historic return of 7%. So if you, as a 30 year old start saving 10% of your income for retirement every year, by the time you retire at 67, (a man needs fulfilling work), you will have $1.1M or more saved for retirement.
Three: Know, protect and maintain your credit score. “So Duke, my credit score is 745, how did they arrive at that number” the answer is, only the three rating agencies, (TransUnion, Equifax and Experian know for sure.) The actual number is a strange proprietary formula that is held in a vault along with the formula for Coca-Cola, the Colonel’s secret seven herbs and spices and the non-polluting internal combustion engine. What I can tell you is that you can improve or destroy that number by payment history, the number of credit cards you have, your balances, consumer loans, bankruptcies, basically all financial transactions you have made. Fewer cards, low balances, and on time payments equals a higher score, lots of cards, high balances, and 1late payments equals a lower score. In today’s world we do run on credit, even though the Duke hates credit. Your credit score impacts everything from the interest rate you will pay on a mortgage, because we are paying cash for our car, to your potential employment… yes a future employer will check those scores… Check your credit score at least annually, and freecreditscore.com is not the place, they are intrusive and it is not free. Instead go to www.annualcreditreport.com, or www.creditkarma.com , the first site is sponsored by the three credit bureaus and is indeed free once a year and credit Karma will be a bit intrusive in that they will recommend services from their advertisers based on your credit score… from ways to improve the score to deals on auto insurance, but they will give you some very good information as well.
Four: Protect your identity. Having your identity stolen is one of the most annoying and destructive things that can happen to you. I know, it has happened to me. According to Javelin Strategies, a prominent research firm that often reports on identity theft, incidences of the crime increased by 11% from 2008 to 2009 altering the lives of 11 million Americans, 1 out of every 10 Americans has been the victim of identity theft. Check your credit report, monitor all of your bank statements and credit card statements regularly, (Hey, another reason not to have credit card debt, less stuff to go through), only use reputable internet commerce sites, watch out for the sketchy ATMs, never keep your PIN near your debit card, change passwords frequently. We have all seen the ads for protective services, the horror stories are true, the benefits of their protection may or may not justify their cost.
There is so much more to cover to be a Master of your Financial Universe, but these four pillars will provide you with a great foundation. I strongly urge you to check out Dave Ramsey, Suze Orman, or Clark Howard on the radio, on TV or online, they all preach the same message with only slightly differing approaches. I have also found that the Consumer Education section of the Federal Reserve, and especially the Dallas Branch of the Fed have great teaching, budgeting and financial education tools. Good luck with your financial future, pay cash, save, retire your debt and then retire yourself.
Jeff Allen is the current controller of the Concert Touring Division of Production Resources Group, has over 25 years of senior level financial experience in the Music Industry and is also a faculty member and “Faculty Expert” at the University of Phoenix teaching Business, Economics, Finance and Personal Financial Planning.