Saturday, 11 January 2014

New Year Resolution: Stop Over-Thinking Your Money!

Happy New Year everyone.  

I have to admit I’m not a big one for large New Year’s resolutions since without the proper plan to achieve them, quite often, they are doomed to failure.   A plan to me would be made up of major goals and getting to them via evolutionary changes (e.g. small changes/targets).   This is a technique I use daily in my non-blogger job where I communicate a long term vision for a specific project to people and then get them focused on the short term.  A big part of this is determining what is important and continually adjusting priorities as circumstances change.

I just finished reading a personal finance book that fits perfectly into this type of thinking and has a lot of great information you can use for a personal finance plan for the coming year. 

The book is called “Stop Over-Thinking Your Money! The five simple rules of financial success” by Preet Banerjee.  You may remember I mentioned Preet in a previous posting “Buying cars on credit… what does it cost you?” after I saw him speak at the Financial Literacy Educators Summit put on by the Investor Education Fund.  He did a great presentation on that occasion and now has used some these skills in this book to explain some key financial planning principles in a very straight forward way.  Don’t let the title mislead you.  There is thinking involved.  The main aim of the book is get people to take immediate steps to improve their financial health and avoid getting overwhelmed by all the financial and investing information out there.  You may have heard some people refer this as avoiding “analysis paralysis”.  Preet equates our level of planning to school grades and assesses most of us as near a C- and suggests if you follow the rules in this book, you can get to an easy A.   After reading the book, I have to agree.

The book is roughly divided in half with the first talking about five key rules and the second half giving some more advanced information.  Let’s look at the five rules first:

Rule1: Disaster-proof your life.  Good information here about life/disability insurance, wills, power of attorneys and emergency funds.  I’m sure I’m like a lot of people in thinking talking about this is a bit of a snooze and not nearly as sexy as discussing investing.  Before you jump over this chapter though try answering the following questions.  If you can’t give specific enough answers to prevent “keeping yourself up at night” thinking about it, choke it down and read it through.  You won’t be sorry.
  • If I was not able to work for the next 3-6 months, how would my family and I pay for our living expenses?
  • If I died tomorrow, how would my family survive financially?
  • If I’m too sick to make decisions or I die, who can legally make decisions on my behalf and will my money/assets be handled like I want?

Rule2: Spend less than you earn.  Great information on savings and budgeting and one of the pillars of all personal finance.  One of the key themes I like (rephrasing in my own words) is: If you have no savings, why are you wasting your time worrying about how your investments are doing?  I’ve met quite a few people who like to discuss how certain investments are doing but never mention their savings.  

Rule3: Aggressively pay down high-interest debt.  Some good strategies on lowering and eliminating credit card debt.  This is a major problem for many people and could be a priority in many people’s plan for this year.

Rule4: Read the fine print.  Some good advice here on knowing the details on what you are signing.  I’ll admit reading the fine print is always a painful one for me.  Sort of like taking Buckley’s cough syrup.  You know it’s good for you but want to avoid it.

Rule5: Delay consumption.   Many people suffer from “consumption-itis” and this rule talks about some of the underlying causes and strategies for improving your situation.  This is an ongoing teaching point with my children on waiting until you have the money to pay for something and differences between needs vs. wants.   

  The second half of the book has more advanced information on Investing, Financial Advisors and Insurance.  There are two parts I particularly liked here:
  • Financial Advisors.  Many people would benefit from a financial advisor but end up with one not fitting their needs.  My first financial advisor seemed more interested in making money from me and not advising.  I was much more careful, years ago, when I found my second one and did use many of the techniques mentioned in this section.  I ended up interviewing him for an hour and a half using the similar questions mentioned in this chapter.  If you’re asking yourself why I would talk to him for so long and/or want to avoid other pitfalls, the section is for you.

  • Insurance.  This section in particularly good at explaining the principles and types of insurance.  Makes it easy to understand for those without much background and a good refresher for others.

After reading these rules, you could end up with a large “to-do” list.  The big question is where to start?  I’d recommend making the list, putting priorities next to each and start from there.  There is lots of good information on helping you decide on priorities in the book.  Still overwhelmed because you have too many high priorities?  Break them up into smaller pieces and go through the same exercise as again.

After reading this book, here is what I have on my plan for the coming year:
  • Review my life and disability insurance coverage.  I know I have some of both but it’s been years still my wife and I have looked at it and life is always changing so maybe this doesn’t fit any more. 

  • Review my regular savings plan.   I do have regular automatic monthly saving with periodic top-ups during the year but again haven’t really looked hard at the amounts for a couple of years.  I suspect I’m not saving enough.

During a future posting, I'll discuss my review of my insurance coverage.  If have any questions or comments on any of the above or have ideas for a future topic, please feel free to post a comment (anonymously if you’d like).     

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