Right up there with our annual promise to exercise more or lose weight is our pledge to master our money, but how well do we keep that oath?
For five years at the Philadelphia Inquirer I wrote a personal finance column. I spent another four years at The Wall Street Journal. What I enjoyed most was talking with everyday people who, through disciplined saving and investing, had managed to accumulate real wealth.
Here are five things they had in common:
They mastered the basics: Nothing else matters if you won’t live within your means. That means managing (or eliminating) credit card debt. It means protecting your credit score. It means getting the most out of your employee benefits – maxing out your 401(k) retirement plan, if you can, and using medical savings accounts, etc. Most important, it means living on less than you earn and being willing to save or invest the difference. It has become cliché, but you really do have to pay yourself first.
They had budgets: Sure it sounds boring, but nothing is more vital to smart money management than having a budget, and not just vague figures rolling around in our head. Your budget should be written down and referenced often. Trying to establish a financial plan without a budget is like trying to drive to a distant city you’ve never visited without a road map (or GPS). A budget’s primary function is to keep you on track and show you where your cash is going, and once you know that, it’s easier to find areas where you can save or make adjustments.
They set SMART goals: It’s not enough to simply say you want to save money or establish wealth. How much wealth, and how quickly? If you say you want to have $1 million in assets by age 40, that represents a SMART (specific, measurable, attainable, relevant and time-bound) goal. Once you have set your target, you can better determine how much you will need to accumulate each year, month, week or day to arrive at your destination. Reaching those intermediate milestones also keeps you encouraged.
They used time wisely: Unless you’re lucky enough to win the lottery or come into some other unexpected windfall, you probably won’t get rich overnight. Those who grow wealth understand that time is an ally. They start early in life saving and investing, and they allow the magic of compounding (or dividend reinvesting) to work to their advantage.
They understood financial markets: This doesn’t mean you must become Warren Buffett, but it does mean that you should acquire a basic understanding of stocks, bonds and money markets, and by extension the various types of mutual funds that invest in those instruments. It’s amazing how some people who are competent in other areas of their lives suddenly become childlike when it comes to money management. The basic principles are not difficult. Start with a good book. The Wall Street Journal publishes a series of guides that focus on personal finance. Two of my favorites are “The Wall Street Journal Guide to Understanding Personal Finance” and “The Wall Street Journal Lifetime Guide to Money.” Find copies online for as little as $5.