Debit versus Credit

The Secret to Building Wealth

September 11, 2008 | Filed in: Finance 101 | 5 comments

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I’ve had many people ask me over the past several weeks what the secret is to building wealth.  Today I am going to share the answer with you.  Before I do though, I want to tell you what it’s not.  It’s not a great investing tip.  It’s not a can’t-lose business idea.  It’s not even related to how much money you bring in or how you can bring in more.  It’s simply the idea that wealth building is a state of mind and cannot coexist with poor financial choices, especially those related to debt.

Let me explain.

Many of you may be aware that I currently work in banking.  I help anywhere from 10 - 50 people in any given day and quite often they are in some sort of financial distress.  Whether their situation is as extreme as the inability to make their loan payments or as simple as not having enough cash to pay for gas for their car, they all have one thing in common.  They don’t have any cash set aside for emergencies. The fact that they haven’t put any cash into an emergency fund tells me something else about them.  They aren’t building wealth. Quite the opposite in fact.  They’re living paycheck to paycheck always saying that next time they’ll save a little, but next time never comes.

It’s a sad situation really.  It’s a never ending cycle of all talk and no action.  Just as I said earlier, it’s a state of mind.

Let me throw out a blanket statement here (which as anything might have some rare exceptions).  If you can not manage your money well enough to save six months worth of expenses in an emergency fund and keep it there, you will never be wealthy.  The emergency fund is critical in any wealth building program because it accomplishes two important goals.

1. Building an emergency fund will help keep you out of debt.
2. Building an emergency fund will get you into the habit of saving.

A Credit Card Is Not An Emergency Fund

Many people use credit cards as an extension of their paycheck.  Do not do this.  If you can not afford to live with only your paycheck then you need to cut back on expenses.  Likewise do not think of a credit card as an emergency fund.  This type of thinking will get you into debt and take away from your financial well-being every single time.  Start building an emergency fund now so you don’t have to resort to using your credit card if something goes wrong.

Start Saving Now So You Can Save Your Future

The sooner you begin on building an emergency fund the sooner you will become financially independent.  All it takes are a few good habits and some emergency reserves to avoid unnecessary debt and you will be well on your way to riches.  Don’t talk yourself out of it with excuse after excuse.  Start small if you have to, but start saving right now.  If you don’t you’ll never reach your goals and you’ll never get to go on those vacations or buy those toys that you’ve always wanted.  By setting aside money today you’ll get yourself into the habit of saving and once you’ve built up your emergency funds then the real wealth building can begin.

For some further reading on wealth building check out My 33% Savings Plan and Starting On The Road To Wealth.

Tags: building wealth, Emergency Fund

The Automatic Millionaire: Chapter 5

June 27, 2008 | Filed in: Finance 101, Friday Book Club | No comment

Now that I’m finally back in the swing of things here at Debit versus Credit I’m ready to bring back a popular feature (and one which I enjoyed very much): Friday Book Club. I began Friday Book Club in November of 2007 with three goals.  First, to be able to share what I’m learning with all of you.  Secondly, to absorb the material that I’m reading more efficiently by reviewing it and summing it up in a matter of just a few paragraphs.  Then finally, to be able to apply what we’re learning to our personal financial lives and share with each other experiences that relate to the lessons and topics at hand.  These are my goals and I hope that you will share these common interests with me.  Now then, where were we?

Today’s Friday Book Club will feature chapter 5 of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  Chapter 5 is entitled Automate for a Rainy Day and is all about creating an emergency fund, or a rainy day fund, for protection.  I’m a big believer in this.  In fact, my wife and I are already well on our way to having a six-month emergency fund saved up.  We’re about halfway there right now and it has been one of the easiest things that we’ve ever done.  You see when we got married we decided that we didn’t want to be like some of our friends who got into financial troubles (even little ones sometimes) and didn’t have any way to cover these “emergencies.”  So we decided that before we did anything else with our money that we’d establish an automatic savings plan which would begin an emergency fund for us.  It’s paid off quite well for us and we have peace of mind now if anything bad were to happen.  On to David’s advice then…

The “Sleep Well at Night Factor”

“How can you provide yourself with some financial security today?” is the question that David asks within the first few paragraphs of this chapter.  Are you prepared if something were to happen?  Could you pay your bills if you lost your job and were unemployed for two months?  Things happen and as he says, “circumstances change.”  So what can you do to provide yourself with some insurance against this chance of risk?  Of course the answer is quite simple.  By setting aside cash as an emergency fund you can help protect yourself and your family from any financially devastating changes.  How well are you prepared to weather any storms that life might throw at you?  David asks just a few simple questions where you can easily figure out the answer to this question.  I’ll ask them as well.

• My monthly expenses currently total: $_______________
• I currently have $_______________ saved in a money market or checking account
• This equals _______ months’ worth of expenses

How’d you come out?  I’ll do it with you.  My monthly expenses currently total (roughly) $1,162 dollars.  This includes some items which I could drop if needed (such as the internet and my phone).  I currently have $3,299 dollars saved in an emergency money market.  This equals 2.84 months worth of expenses.  Not the six months that my wife and I are shooting for, but like I said it’s a good start. (more…)

Tags: Emergency Fund, Friday Book Club

Mutual Funds 101

May 29, 2008 | Filed in: Finance 101, Investing | No comment

I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in - you guessed it - income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com

Tags: diversification, diversified portfolio, funds, Investing, mutual funds, stocks, vanguard

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