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Financial Roadmap

Summer is not far away and many people are planning their annual vacations.  In planning a trip it helps to know where you are starting from, what you’ll spend for the trip, and having some extra money to handle unexpected events along the way.

The people I work with who have been successful in traveling through their working life to retirement use the same approach.  They have a list of all of their assets and debts (they know their starting point).  They track their expenses (they know what they spend to maintain their lifestyle).  They have an emergency fund (to handle life’s unexpected expenses).  

First, take stock of where you are at financially.  Make a list of all of your assets (bank accounts, brokerage accounts, retirement plans, home, rental property, etc.)  Then make a list of all of your debts such as student loans, home mortgage, car payments, credit card debt, etc.  Take the total value of your assets and subtract the total value of your debts.  This number is your net worth.  The goal for most is to increase their net worth over a lifetime of earning so that they can retire with dignity.  

Second, track every penny that you spend.  This is one of the most important money management habits for everyone.  Why?  How can you retire and maintain you lifestyle in retirement if you have no clue what your lifestyle costs?  If you don’t track your expenses, how can you determine what spending enhances your life and what is wasteful?  How can you live below your means (so that you have money to save and invest) if you don’t know where your money is going?  Tracking every penny that you spend is critical to financial independence!

Third, build an emergency fund that covers at least 6 months worth of spending.  By tracking your expenses, you’ll know the dollar amount of 6 months worth of spending.  Sensing a theme here?  Many surveys have shown that most Americans can’t go without a paycheck or two without taking on debt—they have little (less than $1000) or no savings.  Their emergency fund?  A credit card, payday loan, or help from family and friends.  

By putting into practice the three habits of knowing your net worth, tracking your expenses and building an emergency fund, you’ll greatly increase the odds of successfully reaching your retirement goal.

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