Category Archives: Personal Finance

Five Financial Planning Basics To Remember

I went to business school more than ten years ago and unfortunately even in this environment the very basics of financial planning were simply not taught. You learn everything under the sun about cash flow, business ethics, and accounting but personal financial planning was mostly overlooked.

It’s no wonder that so many college graduates get out of school in deep debt and with little plan for the future. If you can’t teach those skills in a business curriculum how are you going to instill those skills in any other degree program?

Expect the unexpected

For me I exited college thinking I knew it all. I thought I had a great grasp on my financial future and I was convinced that I could dictate my path forward. Unfortunately the world doesn’t work that way. The first thing I ever really learned about basic financial planning is that you can’t plan for the unforeseen. You have to expect the unexpected and build your financial budgets around unknown factors.

Not a decade past after my graduation before the financial implosion rolled across the US and subsequently the rest of the world. With this jobs were lost, education made little difference, and job mobility became very tight. Not only that but equities lost an enormous amount of value in a very short time.

Get Insurance !

When you are just starting to plan for your financial future you have to expect things to not go as planned. Hope for the best but stay defensive. Insurance is a great representation of defensive positioning. You never know if you’ll need life or disability insurance but if you need it and you don’t have it your life can be in ruin in a very short time span.

In addition to expecting the occasional tough time in life and staying insured at all times it’s incredibly important to emphasize liquid savings in one’s personal portfolio.

Build Emergency Cash Fund

It’s true that non-liquid investments tend to produce the healthiest returns over the long haul but having cash on hand at all times gives you flexibility beyond your imagination. You may not be able to fully quantify the value of having liquid reserves because without cash on hand you can’t identify or measure missed opportunities along your journey. These missed opportunities are essentially lost return that you can never get back. You may have the opportunity to buy an asset that will return your investment many times over. By not having the cash on hand to purchase the asset though you will have missed out on 100% of the return.

For me this third basic rule was a cloud to me. I never had cash on hand. I always thought that I didn’t need it. If only I had been taught this early on I would be in a far better financial position today.

Pay yourself first

The fourth basic principal of financial planning is among the most commonly stated principal of them all. You need to pay yourself first in all situations. If you never pay yourself then you will never build your savings, you never experience the fruits of your labor, and you are always living on the edge.

It may be difficult to see how you can pay yourself first in all situations but if you don’t figure out a way to do so then why would you ever expect anyone else to pay you any more than you pay yourself. By paying yourself first in terms of savings and investments you practically force yourself to live on a smaller share of your income. This means you are living below your means and not going into pointless debt.

Avoid Debt

This of course leads into the rule that brings some people to financial ruin, short sighted accumulation of revolving debt. This should be avoided like the plague. There are only a very small number of circumstances where accumulating revolving debt is appropriate so it’s best to always err on the side of causation. Yes, you can use credit cards for the points but make sure you are paying them off every month. If you miss even a single month then the benefits of points are typically offset by the costs of revolving interest rates.

You should never look at debt as a bad thing, it’s a tool that helps us get what we want or need but it’s a counterproductive tool if we use it to accelerate our spending. Yes, immediately you’ll experience faster consumption and a better quality of life but this can easily snowball into an anchor that holds you back.

Investment debt such as student loans and mortgages are perfectly fine but there is no reason why you should be financing a weekend trip to San Francisco. Pay for it in cash or don’t go. You may be a little sad about missing out on life today but in the long run you will be much happier and capable of doing anything you want at any time.

What Should You Do With Your Tax Refund 2013

First of all, congratulations on getting a tax refund. This means last year’s tax planning protected you.

For this article, I am assuming the tax refund is net of payments applied to the first quarter estimates and the tax planning for next year is complete. For most people, this will not be an issue, but if you are starting to pay Uncle Sam when filing your taxes, consult a tax professional, they can help you with tax planning.

The next assumption is the tax refund is net of spiritual obligations. All the major religions in the world have some form of tithe or obligation that is paid. Each person’s situation is unique, so the tax refund amounts are assumed to be after the spiritual obligations are addressed.

Another assumption is your retirement account has been taken care of. For most wage earners, the contribution made from your paycheck into your 401K or pension plan will take care of this. If you are self employed, you should be taking care of this as part of managing your business. If you do not have or have not funded your retirement account, the refund should be used for that purpose first.

What you should do with your tax refund will depend on the size of the refund, what your current economic situation is and if you have already made plans for the refund.

The following are just guidelines and should be modified to fit your situation.

The Small Refund

If your refund is small, say $100 or less, then spend it on something fun. You have worked hard all year, treat yourself and your loved ones to dinner out, go bowling, buy a computer game for the kids. Sometimes having an unexpected treat can be therapy for the whole family.

The Medium Refund

The size of this refund is probably the most difficult to deal with. It is not big enough to have a major impact on a bill or purchase, but still big enough to make a difference.

The size will vary depending on your income level. For a single mom, $300 would be a lot of money, while someone who is making $80,000 a year, $300 would be on the smaller side. What is important is that it can make a difference even if it is small.

I suggest you split the refund into thirds and do the following:

The first third should be set aside for “fun”. (You can see a theme developing here.) You should use this to treat yourself and family. This should be done guilt free as you used Uncle Sam’s Bank as your savings account. Celebrate having saved some money!

The next third should go into savings. Unless you have six months of cash available to you, saving some of the refund in an “emergency” fund will help give you some peace of mind. This should be in a place that you can quickly get to.

You should not feel guilty about using it in an emergency or when an unexpected expense arises. A good example would be getting a flat tire. Instead of putting the cost of the tire on a charge card, you could use the emergency savings to pay for it. Having cash available for unexpected expenses can be liberating.

The final third of the tax refund needs to do one of two things. Service debt or add to investing assets.

Depending on your situation, servicing debt could be the most prudent course of action. Reducing credit card debt should be the first priority for everyone. The current interest rates on credit cards is horrendous. Paying an extra 10% to 23% on a purchase every month eats away at your cash flow and limits options. By far, the first priority should be to eliminate any credit card debt.

If you are meeting your monthly obligations out of normal cash flow and credit card debt is gone or at a minimal level, the other option is to start or add to your investing account.

What is an investing account? It is an account you start with the idea of building capital to purchase or invest in income producing assets. This is where you eventually purchase assets that pay you instead of the asset losing value. This is the key to financial wealth.

The Big Refund

The big refund can be a game changer for some and can be a signal tax planning is needed for others. What you don’t want is to have a large refund every year. That means you are overpaying your taxes. By reducing your payments to Uncle Sam, you can use the extra cash flow to reduce debt or increase your investing account.

The first thing you do with the big refund is to have some “fun”. As before, spend some of it on you and your family. Depending on the size of the refund, you may even want to use it for a vacation. For some families, that is what the tax refund is for. It funds some or all of the summer vacation.

The next item to spend at least half of the big refund on is to reduce debt. Target credit cards first then look to see if an auto, boat or personal loan can be reduced or eliminated. Having one less bill to pay every month can be liberating.

Next look to see if you need to fund an emergency savings account. You may only need to have $500 or $1000 set aside.

Finally, with the rest of the monies, start or continue to fund your investment account. After a few years your investment account may be ready to purchase an income producing asset. With a big refund, it may push you over the top an you can start investing in mutual funds or have enough cash to start a stock portfolio.

To summarize, there are many ways to use your tax refund. First, treat yourself and family. Then reduce debt and start funding your investment account. Only you can make the right decision.

Five Must Know Personal Finance Basics

What are the primary financial basics everyone needs to know? Below is a list of some key concepts that will help to build a solid foundation.


Of all the financial basics, budgeting is the most critical skill to master. Knowing how much money is coming in and how much is going out is basic.

Most people know where their income is generated from. Most people have a job and the paycheck is the major or only income source. Having to live from paycheck to paycheck makes a lot of people keenly aware of how much money is coming in.

What most people don’t realize is where their money goes to. We now live in a society where you can buy most anything 24 hours a day. Coupled with the rampant materialism, keeping track of where you spend your money can be a difficult task.

Actually, setting up a budget is fairly simple. The hard part is developing the habit of tracking income and expenditures on a weekly or monthly basis. The exercise of recording transactions will help clarify where the money comes from and goes to.

For the individual, you have the flexibility and freedom to “work” your budget. You can make adjustments and reap the benefits and consequences in the privacy of your own mind.

When you are married or have someone else you are sharing your life with, budgeting becomes complicated and stressful. Key to making the process as easy as possible is to:

  1. agree on goals
  2. be honest with each other
  3. be flexible
  4. be gentle with each other
  5. set a time (weekly or monthly) to work on the budget together

Budgeting provides the information to help make decisions. It provides a road map to help make daily decisions.


Developing the habit of saving a portion of your income consistently can be key habit that provides security in old age. Savings will also provide options and opportunities in the future. In the US, the habit of “saving for a rainy day” has been lost. For 2013 the United States is projected to rank 18th out of 26 of the most industrialized nations in the world. Only Hungry Korea, Canada, Japan, New Zealand, Finland, Estonia and Denmark rank behind us.

Having savings provides an asset that can help in a multitude of ways. If you develop enough savings, you can invest in income producing assets. Wealth builds on wealth.

One of the shortcomings of the US educational system is the lack of financial training. Fortunately the internet has an abundance of information about saving, investing and managing finances. The bedrock of all financial success is the habit of saving.

Compound Interest

Gaining an understanding of how compound interest works and its power over time is a key concept. Learning about the impact of compound interest early in life will allow a few savings “seeds” to grow into “trees”.

An example is putting $1,000.00 into savings. After 20 years it will grow to:

At 2% interest – $1,485.95

At 3% interest – $1,806.11

At 4% interest – $2,191.12

At 5% interest – $2,653.30

If you add $1,000.00 each year for 20 years the results would be:

At 2% interest – $26,269.26

At 3% interest – $29,482.60

At 4% interest – $33,160.32

At 5% interest – $37,372.55

As you can see, over 20 years the compounding effect can be tremendous. The earlier you start, the more impact compounding has.


Understanding and using insurance is another basic skill to have. We all know insurance is required if you own an automobile. New legislation is requiring all US citizens to have medical coverage as of January 1, 2014.

So, what is the big deal about insurance? In a nutshell, it helps to moderate risk. This is the risk of loss due to injury, accident or death.

What type of insurance coverage do you need. How much coverage do you need of each type. And, how much should you be paying for it. The answers to these questions change over an individual’s lifetime. They must be assessed periodically. Grasping the concepts and knowing where to go to get correct and relevant information is key for everyone.


This concept not usually on everyone’s must know list, but I feel it is an important concept to grasp and apply.

The ability to protect yourself from risk by putting your assets in different investments is the most common application. However, you need to understand income sources need to be diversified.

Relying on one job for your income can be very dangerous. Long gone are the days when you started with a company and 30 or 40 years later you retired with a pension. In today’s world, you are the “Chief Executive Officer” of your life. You can specialize in a profession, but you need to be flexible in your skills set to be able to change jobs, move into a different career or move to a different area of the country.

There are no guarantees in life and you have to acquire, nurture and develop skill sets and income sources to protect yourself and your family.

Spend time exploring this concept. The more diverse your skills are and the people you know, the better off you will be.

The above are what I feel are must knows for everyone. If you develop an understanding of the above concepts, you will have a sound basis for developing and growing a viable financial future.