If you have read this blog for any length of time, you can most likely tell which way I lean on most personal finance and money related topics. Typically, I do not try to preach too much of my own personal finance philosophies or credos on Money Q&A. But, there comes a time when I just cannot stand the poor personal finance advice that permeates throughout the internet.
Like many people say, if you do not stand for something, you don’t stand for anything. I wanted to share with you these few universal truths that you can see woven throughout this website. These are a list of money and investing philosophies that lead every money decision that I typically make. These shape my writing on this and other websites. I was inspired to write my money philosophies here much like the Dividend Ninja has done on his site. These are convictions that you will not see waver on this site.
Personal Finance Philosophies And Convictions
- Term life insurance is the only type of life insurance you need.
- 90% of your investments need to be in index funds.
- It is okay to risk a very small percentage of your overall investing portfolio.
- It is imperative that you spend less than you make.
- You have to have a monthly written budget…period.
- You must have three to six months saved in an emergency fund.
- There are no real ways to get rich quick.
- The American Dream is not dead.
- Fixed rate mortgages are the only way to buy homes.
- You should be very cautious who you accept financial advice from.
Term Life Insurance Is The Only Type You Need
Term life insurance is the only type of life insurance that you need to purchase to protect your family from the premature loss of your income should you die early. The only people who profit from whole life insurance or cash value life insurance policies are those who sell it. Everyone else is being taken advantage of when people try to sell or promote the product to you. Whole life insurance is an expensive form of life insurance because there is a cash value or investment portion associated with the insurance policy. The extra cost, almost five times as much in some cases, is used for the mediocre investment returns that are promised to customers. There are many other investments and better financial products on the market to help you save and invest your money instead of having to buy whole life or cash value life insurance. Life insurance is not an investment and should not be used as such. You can do better than a life insurance company when it comes to investing your money. you can invest that difference between term life insurance and whole life insurance policy. What would you do with an extra $100 per month? I’m sure that you can think of better uses for that money and better investments than an investment company. Even investing in an index fund would be a better option than buying a whole life insurance policy. Those who try to tell you different are either uninformed, delusional, biased, profiteers, or all of the above.
Your Investments Should Be Index Funds
The best way to have your investments grow over the long term is to mirror the overall stock market which has a historical long-term rate of return of over 8% annually. The only way to mirror the stock market is to invest in index funds. Actively traded mutual funds do not provide you with the most cost efficient means to beat the market. In fact, you and your mutual fund manager cannot beat the market over the long haul. If you cannot beat it, then you should join the market. Many people say that you cannot possibly follow stocks close enough to make a consistent profit out of it. We all have real day jobs and not enough time to devote to following individual companies. So many people say that they choose to hire professional money managers and their legions of stock analysts to do this for them instead. While this is a great idea in theory, it brings up an even greater question. If you cannot spend enough time picking stocks that beat the stock market, what makes you think that you are a better mutual fund manager picker? Investing in index funds is the one axiom that I fought more than any other until I heard someone ask how I pick mutual fund managers. That is when it clicked for me that I could not pick them any better than I could pick individual stocks.
Risk A Small Percentage Of Your Investments
Not all of your investments should be in index funds that mirror the overall stock markets. Most of your investments should be but not all of them. The other very small percentage of your investment portfolio should be something like a slush fund. With this small portion, 10% or less, you could further diversify your investments. This is the portion of your money that should be used to invest in DRIPs, peer-to-peer lending sites like Lending Club, real estate investment trusts (REITs), gold and precious metal mutual funds, and the like. Using only a small portion of your total investment portfolio for these types of investments allow you to diversify your portfolio, goose your investment returns, and keep you engaged with following your investments.
Spend Less Than You Earn
This is the universal financial truth that we all know. We should and do all strive to spend less than we earn. It is akin to finance’s cornerstone. The idea of spending less than you earn is the one attribute that holds everything else together. This is the true secret to financial success. Those who earn more than they spend each month are blessed, and it does not happen by accident. Only through careful planning and budgeting can you be certain that you will have a surplus each month. When you spend less than you have coming in every month, you have far more options open before you. You can begin to invest in other areas such as rental real estate, small businesses, and many other options.
You Must Have A Monthly Written Budget
One thing that I have found true almost more than any other core personal finance to live by is that you have to have a written budget every month. You have to have every dollar of your income accounted for each and every month on your family’s budget. Like Dave Ramsey the author of The Total Money Makeover preaches, each dollar that you make has to be accounted for on paper and spent on paper with your budget before you ever receive the money in your bank account. You should have every dollar spent on your budget whether or not it is in a fixed or variable category each and every month. No matter how much money you earn each month, you have to write down all of your expenses no matter how small to know not only where your money is going but where it should go. A budget is a blueprint to help guide you along the way. Writing down all of your expenses from your budget will also include your investment and savings deposits that you make as well.
Three To Six Months Saved In An Emergency Fund
You need to have three to six months of living expenses saved in an emergency fund that is liquid and that you have access to should you need it. Of course, living expenses is not the same thing as total expenses. We are only talking about the most important necessary expenses that you have such as lodging, transportation, food, electric, and the like. This could reduce your requirement for your emergency fund but not by much. Also three months is the bare minimum amount that you should save. If you have a job that does not have a lot of job security then you need to extend your emergency fund savings until you have six months of living expenses saved. If you have a safe and steady job such as with the federal government, you can get away with saving less in your emergency fund and only keep three months saved there.
There Is No Real Way To Get Rich Quick
I don’t know why, but I’m continually blown away by how many people I know have grand ideas of making a boat load of money without doing much work. Just the other day, a friend of mine told me that he is trying his hand a day trading. This of course is just after he lost a lot of money investing in penny stocks. Others I know want to earn money online filling out surveys or being mystery shoppers for stores around town. There are tons of systems online that promise to make you rich if you use their system to buy and sell stocks or time the market. There are others who think that they can get rich with the lottery. These of course are not real viable options. Once again, the only people getting rich from these get rich schemes are the ones selling them to the public.
The American Dream Is Not Dead
The American Dream is not dead. It is still alive and well. Of course the real question is what you think the American Dream actually is. For most people, the American Dream is owning a home, retiring at a decent age, and making a better life for our children than the one we grew up with. If this is your idea of the dream, like it is for me, then the American Dream is certainly not dead and very much obtainable. This is a great ideal to live up to and a great goal to try to complete. There are many reasons that the American Dream is not dead and alive and well in America. Housing is making a comeback. The stock market is slowly recovering. Soon more and more jobs will be created across the country. There are many reasons to continue to be optimistic.
Fixed Rate Mortgages Are The Only Way To Buy Homes
Fixed rate home mortgages are the only way that you should purchase a home if you cannot buy it with cash which of course most people cannot do. I am blown away by the prevalence of adjustable rate mortgages (ARMs) that are still available on the market. One of my coworkers just last week was expounding on his ARM’s virtue thanks to interest rates continuing to be low. Interest rates and the prime rate will not continue to be at its current all time low rates for much longer. Eventually, rates will start to creep higher, and those with ARM home mortgages will be the first to pay the price. A 15 or 30 year fixed rate home mortgage loan is the only way to go when borrowing money to pay for a home.
Be Very Cautious Who You Accept Financial Advice From
There are very few people that I accept financial advice from. I do not listen to talk at the office water cooler, and I do not accept stock tips. That is one of the primary reasons that I do not talk about individual stocks here on Money Q&A. You should look for dependable, reliable people with not only experience but the educational background to provide you with financial advice. You should not simply take the financial advice of just anyone. The same is true for taking legal advice from people. You wouldn’t get a medical procedure from someone who hasn’t been to medical school. You shouldn’t put too much stock into people who do not have the requisite formal financial education.
The One Size Does Not Fit All Fallacy
There is a fallacy that is permeate throughout the personal finance blogosphere and money circles that you cannot use rules of thumb or rules to guide your financial lives. This is just a bunch of hogwash. It is a fallacy that you cannot use different rules of thumb like purchasing ten times your annual income in life insurance. They are rules because they are proven to work. There is a reason that so many people consider it a rule that you only withdraw 4% of your portfolio in retirement for income or to invest 15% of your income for retirement investing. They are tried and true methods with enough risk aversion built into the equations to be fairly safe.
The Personal Finance Is Personal Misnomer
Many financial experts and bloggers alike expound that personal finance is very personal. They overuse this statement to their own advantage. It is one thing that they say as a way to explain their poor, uneducated financial advice that they give on their sites. That is how people rationalize such poor advice like the incorrect belief that whole life insurance is good for some people while term life insurance is better for others. That is how some people also rationalize that some debt is actually good debt. While some debt is better than others, there is no such thing as good debt. Believing so is just being delusional.
These are the core financial philosophies that drive every article that is written and posted here on Money Q&A.