Jean Jacques Borno is a financial advisor with Morgan Stanley in Washington, D.C. Contact him at firstname.lastname@example.org or 202/862-9085 for further information.
The old-fashioned common sense of our grandparents still stands as a reliable guide to money. Whether you are digging out of holiday debt or managing substantial assets, the principles are similar and are worth repeating.
Don’t keep up with the Joneses. Comparing and competing with others can lead to financial overextension. All your income disappears every month to support too much house, too many vehicles, and premium coffee. Many things that you see others enjoying are not paid for—those big spenders may be up to their ears in debt.
The advertising-driven consumerism of American society has lured millions of us into confusing our needs with our wants. Most new purchases trade potentially income-producing assets (money you can invest) for income-draining liabilities (new car, vacation home).
But possessions do not bring peace or financial independence. Enough really is enough. Pare down your lifestyle and clarify what you really value. If your spending expands as your income expands, you can miss many great opportunities to reduce debt and build wealth.
Get out and stay out of debt. Ben Franklin said, “He who has four but spends five has no need of a purse.” If you spend more than you earn, you are living in debt rather than building wealth.
Analyze your spending—are the culprits new clothes, dinners out? Do whatever it takes to control them—stay out of stores, eat at home, tighten your belt. Shred the credit card offers, choose one card to use carefully, cut up the others, and pay them off, the one with smallest balance first, until you are debt-free. Then pay your credit card bill in full every month—no excuses.
Never go into debt for holiday purchases. Use only cash, checks, or a debit card tied to your checking or brokerage account to buy gifts. Make a list and stick to it. Pat yourself on the back when you spend less than you budgeted.
On a budget but still need to buy gifts? Try being creative. If the gift is for a golfer or burgeoning gourmet, consider a subscription to Golf Digest or Gourmet magazine. Not only does it cost less than $25, but the recipient also will appreciate it—and you—all year long.
Live below your means. Spend less than you make. Everyone has enough to save. If your income were cut by 10 percent, you would find a way to adjust. So deposit 10 to 20 percent of every check into an automatic-deduction investment account (your company’s 401(k) or an account with a brokerage firm).
Don’t put all your eggs in one basket. Diversification is the key to preserving your invested assets. Picking just one or two stocks or funds is risky, as is parking money in multiple accounts at multiple firms. If your investments are the players on a team and you are the owner, you still need a coach. Find a good financial advisor and book a consultation.
Take care of yourself. Your goal is to achieve eventual financial independence, which occurs when your investment income meets or exceeds your monthly expenses. Achieving this takes time but pays off in psychological freedom. Forget shortcuts and trying to get rich quickly—the goal is a slow, gradual process built on the cumulative effects of your long-term choices.
Be a good steward. With wealth comes great responsibility; it requires education, attention, time, and effort, because even a fortune can be lost with poor management. Also with wealth comes great opportunity: the delightful experience of having sufficient surplus to give charitably, to provide for others. Ebenezer Scrooge still illustrates the misery of hoarding and the joy of giving.
Money is a powerful tool that can be frittered away, wasted on temporary satisfactions, or used wisely for a long-lasting legacy. Cultivate uncommon common sense in matters of finance to set your course on the ultimately more satisfying path.
• The American Bar Association Guide to Credit & Bankruptcy. 2006. PC # 2350044. Division for Public Education.