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.
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.