Personal Finance Tips
This is a great time of year to review your personal finances and consider some best money management practices. I keep a close check on my finances monthly, quarterly and annually.
So I decided to brainstorm a list of as many personal finance tips as I could think of. And put them all in one place. Each one of these personal finance tips represents an activity I engage in periodically.
THE IMPORTANCE OF PERSONAL FINANCE ADVICE
Why is personal finance advice important? To build your wealth of course. That’s what we are all about here at Dividends Diversify. “Building Wealth One Dividend At A Time”. Dividends are great, but true wealth building is more than just about dividends. And I can’t believe I just said that!
Putting this article together was a good refresher for me. And hopefully, it will be a good checklist for you too. We are all a little different. Maybe you will go through this list of personal finance tips and say “I’ve got all this down pat”. Or maybe there are just a few personal finance tips where you need to focus your efforts. Because we all have our strengths and weaknesses.
PERSONAL FINANCE TIPS
So let’s get on with our personal finance tips.
I’m a big believer in playing offense as it relates to this discussion of personal finance tips. You can only cut expenses so low. Not that expense management is unimportant. But income has no limits. And your income is the gas for your wealth building engine. So focus like a laser to increase income from your work.
If you are working for “THE MAN” or “THE WOMAN”, whatever the case may be, get ready for that performance review. Make sure you are ready to discuss your accomplishments and plans for the coming year.
Didn’t get the raise you were looking for? Then set clear expectations with the boss for what it takes to get what you want. Still do not like the answer? Then dust off that resume and test the market. In my career, I stayed too long at one employer where small raises were the norm. So I got out of there and earned what I deserved. It was better late than never.
Unemployment is at generational lows and the labor market is tight. There may never be a better time to take advantage of changing employers to get a better job and make more money.
Related: The 4 pillars of wealth creation
MAXIMIZE YOUR RETIREMENT PLAN CONTRIBUTIONS
While we are on the subject of your employer, be sure to double check your retirement plan contributions. A list of personal finance tips would not be complete without advising you to maximize your retirement plan contributions.
Whether it be a 401k or another countries equivalent, it is hard to beat the tax advantages that these investment vehicles offer. And it is forced savings. If the money doesn’t hit your checking account with your direct deposit, it is much harder for you to spend it.
PERSONAL FINANCE TIPS – PERSONAL BUDGETING BASICS
It has been pretty well documented, that even wealthy people set and operate against a monthly budget. It is one of many personal finance tips the wealthy live by.
There are different ways to go about it, but I like to keep it simple. We personally use one cash back credit card for almost all our expenses. I can see what we spent and where we spent it by logging into our account. From this data and few other expenses like utilities and property taxes that hit our checking account directly, I set a rough monthly budget by spending category.
Now that we have covered budgeting personal finances, let’s not forget about saving money. Maybe we can beat our budget and have more cash left over at the end of the month. Our discussion of personal finance tips wouldn’t be complete without thinking seriously about saving money.
REDUCE EXPENSES – THE BASIC SPEND ITEMS
Hey, we can all spend a little less money if we put our mind to it. Here are a few reminders.
Cut back on the daily $5 cup of coffee from your local shop. I drink coffee every morning, but I brew it at home for pennies a cup.
Need to lose a few pounds? Couldn’t we all? But do you really need the monthly health club membership. I get some exercise almost every day by walking or jogging in my neighborhood. And stretching, doing planks and free weights in my basement.
Do you really need to buy that item you are looking at? Check out 2nd hand stores and garage sales. I needed a few prints and pictures for my home office and did just that. Or maybe just wait a few days and the desire to spend will subside.
REDUCE EXPENSES-THE BIG SPEND ITEMS
Transportation is a big cost. So see if you can get a little more time and mileage out of your vehicles. Keep them well maintained and hang on to them as long as practical. Mrs. DD and I drive a 13 year old Toyota Corolla and 10 year old Toyota Camry, respectively. Yeah. I know we are pretty cool sporting around in those fancy wheels. NOT!
Are you in the market for a new home? Whether you are a first time buyer, looking to trade up or need to relocate, be smart about it. Houses are expensive and can increase debt.
And it’s not just about the purchase price and mortgage interest costs. Property taxes, insurance, maintenance, surprise repairs and renovations can all add up fast. So make sure you know what you are getting into, especially if you are buying your first home. Do you really need all that square footage?
We have learned this first hand. Time pressured to relocate for Mrs. DD’s new job a couple years ago, we doubled our house size and improved our location considerably. Our housing costs are now more than 3 times what they used to be. OUCH!
And while we are on the topic of homes and cars, don’t forget about insurance costs.
Here is a true story. I used to insure through one of the big US insurance carriers that sells direct to customers. Every year my insurance bills went up. Finally, I went to an independent broker and had him bid out our policies to multiple carriers. We received similar coverages for about a third less in cost. My former insurance company was just gouging us.
And while you are talking to that insurance broker, make sure you have the right coverages in place. Has the value of your home changed? Maybe you can self insure a little by increasing deductibles.
Have you built some wealth? Perhaps you need an umbrella policy to provide extra liability coverage. After all, if you have some money socked away, you don’t want an accident and a lawsuit to rob you of your hard earned savings.
Are you taking advantage of all possible tax deductions? Taxes are so complicated. I am a CPA and still struggle with it all. Consider using a tax professional. Maybe they can save you some money. I personally use tax software and do our taxes myself. It is a good way for me to save a few bucks.
Make sure your tax withholdings are as accurate as possible. Did you get a large refund this year? Don’t let that happen. You are just giving the government an interest free loan. Keep that money and put it in a high interest savings account and you will be money ahead.
Conversely, make sure your withholdings are adequate to cover your tax liability. No need to pay a penalty for not paying enough tax throughout the year.
PLAN FOR EVERY EXTRA DOLLAR
Okay. Now that we have discussed maximizing our income and minimizing expenses including income taxes, hopefully this has created some excess cash. As a former corporate financial officer, I call it free cash flow. It is like the blood running through your veins breathing life into all of these personal finance tips.
So make a plan for every extra dollar of free cash flow that you create. Here is the pecking order of what to do with that cash.
Top off your emergency fund. Make sure you have 3-6 months of living expenses on hand in a high interest savings account.
Payoff debt. Start with the highest cost debt. This is normally credit card debt. It is virtually impossible to build wealth while engaging in credit card debt. Then move on to auto loans, student loans and maybe your mortgage.
Having an emergency fund and debt payoff set the foundation. However, invest your money wisely and you can take your wealth to the next level.
Invest in yourself through mentoring, training and on the job development. And invest in real estate and/or financial assets. I’m not much of a real estate investor having focused on financial assets most of my life.
Invest for the long term. Markets and asset prices go through up and down cycles. However, over the long run, you stand a better chance of earning positive returns on your investments.
Check your asset allocation. Asset allocation is the mix of assets you hold. Cash, bonds, stocks, commodities and real estate are some of the major asset classes. And asset allocation is one of the primary drivers of investment returns. One rule of thumb is to subtract your age from 100 and put that percentage in stocks. Put your 3-6 month of expenses for emergencies in a high yield savings account. And put everything else in bonds.
Diversify your holdings in each asset class. If you hold stocks, bonds or real estate, don’t just own one company or property. Own a portfolio of several, or invest through a diversified fund that holds many. Also, consider international investments.
With diversification, if one investment goes bad, it won’t take your entire investment portfolio down with it. And of course, investing in dividend stocks is a great way to go.
Invest on a regular basis. This strategy is known as dollar cost averaging. It reduces your risk of putting all your money into an investment at its peak price.
DIVIDENDS AND COSTS
Reinvest all dividends. If you do not need to spend your dividends, reinvest them. Dividend reinvestment plans (DRIP’s) are one method where the dividend is automatically reinvested back into the security that paid it.
Another method is to let the dividends accumulate in cash and reinvest them in a lump sum into an investment of your choosing. If you choose the accumulation method, make sure you are disciplined. Don’t spend those dividends, reinvest them. This is how you compound your returns.
Minimize investment costs. Focus on low cost funds or individual securities. Furthermore, keep trading to a minimum to avoid transaction fees.
PLAN FOR RETIREMENT
Start assessing your retirement readiness. There are a few basic rules you can use.
80% of earnings rule. This retirement formula says you need 80% of your pre-retirement income. Why 80%? Because some of your expenses will go away in retirement. For example, expenses for commuting, work clothes, college tuition bills all should be done. In addition, you won’t have to save for retirement.
The 4% rule. Research shows that 4% can be drawn from a diversified investment portfolio without depleting it. And, the 4% withdrawal can be increased for inflation each year. This rule is a classic. It has been back tested over many years and under many different market conditions. However, there are no guarantees.
Passive income rule. It simply states, you need a passive income stream to cover at least 100% of your annual expenses. The definition of passive income can be debated. Probably included are income streams from dividends, interest and real estate rentals. This retirement rule of thumb is my personal favorite.
And don’t forget to think about what you will do when you no longer are working. Do you want to travel, exercise and spend more time with family and friends? Maybe even take on a part time job or start an encore career.
Just because you have the personal finance aspects figured out, doesn’t mean you will be happy in retirement. You need a meaningful way to spend your time.
Take care of your health and your loved ones. It’s no fun having money and financial freedom if you are not healthy or do not have anyone to spend your time and money with.
And continue learning. Learn about everything that interests you. An active brain is a healthy brain.
But for learning, we will stick to just personal finance tips here. How about reading a new investing book or personal finance blog. I may be a little old school, but I still like to pick up a personal finance magazine now then. I like to go to the library and read different personal finance and business news publications to get new and different perspectives.
Related: 46 habits of self-made millionaires
PERSONAL FINANCE TIPS – WRAP UP
Here is a quick bullet point summary of the personal finance tips I just covered:
- Increase your earnings from your job
- Maximize your retirement plan contributions
- Set a monthly expense budget
- Reduce expenses
- Have a plan for every dollar of free cash flow
- Invest wisely
- Plan for retirement
- Take care of your health and loved ones
- Continue learning