Friday, September 10, 2004

Financial Preparation

Financial Preparation is often lumped into financial education or ignored completely. But there are some things that aren't really talked about and I will try to bring them up here.

If the Husband is the primary breadwinner, the wife should have a life insurance policy on him that she pays through her own account so she unequivocally owns it and can get the money faster that way.

Each spouse should have a bank account with a 3 months supply of cash in case the other dies or is incapacitated so they have easy-to-get-to money, the legal system can end up tying up bank accounts for some time. This supply should be enough to cover your bills and other standard fixed expenses to keep and keep up your home, it doesn't have to be 3 months salary. Together this will be a half years' supply, the other half should be in some other hard asset form such as gold bullion coins, or junk silver coins. During World War II people often traded gold jewelry to farmers for food and other necessities.

First you have to know where you are. You need to create a few reports. Create an income statement by listing all your assets and sources of income:
Interest from any interest bearing accounts like savings accounts and money market accounts.
Income from other sources like hibbies, rental properties and the like.

Now list your liabilities or expenses:
First your fixed expenses: these are periodic and predicable.
Tithes and offerings
Mortgage or rent
These next items are often ones you can reduce by shopping around:
Insurance: Home/Renters, Health, Auto, Dental, Optical, etc.

Now your variable expenses: These are things you have control over. Try to reduce these as best you can.
Eating out

Now list your debts: all your credit cards from smallest to largest.

To pay off these debts, take the money saved from your variable expenses and any reductions from phone, internet cable/satellite and food and insurance bill adjustments and start paying off the smallest one. Once that is paid off, celebrate with a banana split or other small but nice thing. Save the big celebration for the last credit card. Then get to work on the mortgage.

Now that you have gotten rid of all you bad debt you can start doing some important things: Building a Year's Supply and Investing for you children's education fund, and your retirement fund.

There are really only five simple rules for handling money:
1. Spend less then you earn. Save ten percent of your income. In 10 years you'll have one years salary put away.
2. Invest that money wisely. Start by using some of it for educating yourself about investing and business.
3. Search for good financial advice and use it. Find people who do it and are successful at it, whatever "it" is. If you don't know what is going on, you are just gambling, not investing.
4. Invest only in businesses you know about. Don't forget to keep learning new things.
5. Don't be tempted by a deal that look too good to be true. Remember, your profit comes when you buy not when you sell.

As in everything there is good debt and bad debt. You don't want any bad debt, which is generally called consumer debt, things like credit card debt. Generally it doesn't do anything for you. Good debt is debt you take on to leverage (or multiply) your money to acquire an asset that will produce money for you. For example, using some of your home equity to buy a rental property that will generate a passive cash flow to you. Don't be like the guy who buys a rental that costs him $100 more a month then he gets in rent, hoping to make the money when he sells it to some greater fool.

Ideally you want a passive income, income that comes from sources that you don't have to constantly work on (like interest, rents or royalties), that covers your basic expenses (mortgage, utilities, food) so that your family is supported even if something bad happens to you.

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