Southern Man

Tuesday, October 17, 2006

The Only Financial Advice You'll Ever Need

Southern Man caught this on the web the other day; it's Dilbert's 9-point 129-word guide to everything you need to know about finances. It's pretty good. However, everyman's favorite geek didn't get it quite right, so here for your reading pleasure is Southern Man's Annotated Guide to Financial Health & Happiness. It only plagiarizes Dilbert's plan a little, so hopefully Scott Adams won't sue me for it.

(1) Learn to live on 80% of your average monthly income.

This is a tough one for most people because they don't realize that a Starbucks frappuccino every morning and eating out five times a week and cable TV are luxuries, not necessities. Cut out what you must and learn to live within that eighty percent. You may find that you don't have to eat out and drink overpriced coffee all the time to be happy.

Can't manage to live on 80%? Then try 90%. Or 95%. Even that beats the hell out of living on 100% - or 105% - of your monthly income.

Now here's what you do with that unspent twenty percent (or however much you're able to put back), plus whatever extra income you pick up on the side:

(2) Pay off your credit cards.

Do whatever it takes to pay them off and then don't use them except within your budget as convenient or for emergencies. If you use them regularly, pay them off in full every month. Then that card is working for you, not for them; you're not paying interest or fees and as a bonus you're cashing in on whatever rewards program you have associated with your card. On the other hand, that frap can taste pretty bitter when you have to pull out a high-balance credit card to pay for it.

(3) If your employer provides a 401k or 403b plan, fund it to the max every year.

At the time we separated about four months ago, our net worth was a cool quarter million - not bad for a couple of schoolteachers. Southern Man's 403b and strict adherence to this rule was the main reason. That 7% employer matching is easy, easy money; only a fool would turn it down.

(4) Fund your Roth IRA to the max every year.

No, you don't get to deduct it like you do a conventional IRA. But it's only four thousand or so at most per year (at least for those of us that are already "participants" in other plans) and the interest earned is tax free. Tax-free growth: that's potent stuff, there. As a bonus, you can also borrow against the principle without paying a penalty. The younger you are, the more important this one is. If you're just starting out but can still budget a Roth IRA every year you will see quite a substantial boost to your retirement income thirty or forty years from now - not to mention a nest egg from which you can borrow at will and pay yourself the interest. Think about that next time you make a car payment that pays interest to some bank or credit union or (God forbid) car dealership or finance company.

(5) Keep two or three month's net income in your savings account.

And don't touch it unless it's an emergency or an unexpected opportunity, like the $500 deductible on that fender-bender or the upcoming Journey / Def Leppard concert at $100 per ticket. Use this money wisely and enjoy it - and when you dip into this fund, pay it back pronto.

The above five rules are for everyone. No exceptions. This means you. Disregard them at your peril.

And as a reward, when you've arrived at Step Five Southern Man will allow you to relax on that 80% rule every now and then 'cause you've got no big credit card payments to worry about and plenty of money tucked away for emergencies and budgeted for retirement. You won't believe how much better that frappuccino will taste when you know you've got money in the bank and it's a well-earned and well-deserved treat.

Now, the following two rules are optional but still worthy of serious consideration.

(6) Buy a house.

The rest of our net worth was in houses and land. We sold our first house for about twice what we paid for it; the net result was that we got back nearly everything we'd paid in (including interest) over all the years we lived there. Southern Man may be stuck in a crappy rental duplex for now but he's already looking at houses and hopes to buy an undervalued fixer-upper this spring or summer and build up some serious equity in not too many years. And he's keeping that land, too - his plan to turn that equity into a retirement home out there one fine day remains in full force.

(7) If you must play the stock market, put two-thirds into a stock index fund and one-third into a bond index fund and then ignore them until you retire.

Picking individual stocks and chasing hot tips are losing propositions even for most professionals, and face it, reader, you ain't one. Buy index funds and hold them, and don't fret about short-term market fluctuations. I usually only look at my 403b balances four times a year, and then only because they insist on sending me quarterly statements. If you don't like my suggestion, find a different lazy portfolio and go with that instead. But you'll find that they're all based on index funds, just like mine. Now, Southern Man doesn't invest directly in the stock market yet (he's got kind of a cash flow problem at the moment) but if and when he does this will be the way he does it.

Well, there it is - the only financial advice you'll ever need. And only seven steps, too; that's 22% leaner than competing nine-step programs. Use it and let me know how it goes. Southern Man's plan got derailed to some extent by the divorce (Step Two in particular is going to need some work) but he hopes to be back to Step Five or Six within a year. If this blog is still going then he'll let you know.


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