Spend less than what you earn (and do something intelligent with what is left)

In my last post, I discussed the foundation of ‘Spend less than what you earn.’  I got lots of questions about the second part of the foundation, I thought I should elaborate.

I often get asked questions like, is it better for me to pay off debt or invest?  Is it better for me to invest in XYZ or ABC?  Is it better for me to do this or do that??

In some situations, both choices are good and the question really is, which of these good choices are best for me?  In other situations, it is like asking “Should I continue to throw money away or should I save it?”  The answer to the second set of questions is obviously much easier.  Unfortunately, the financial media and “the guy next door” can make these situations confusing.

If you are not clear about what you are trying to accomplish financially, there can be lots of financial distractions.  If you know what you are trying to accomplish, the best answer to your question is generally some education about the options you are considering.  Once people understand their options, they are able to make decisions with more confidence.

Your individual circumstances are different than everyone else’s and it would be best for you to discuss these ideas with your friendly, fee-only financial planner.  If you don’t have a friendly, fee-only financial planner, let’s start a conversation.  Until then, here are some general guidelines…

Intelligent Ideas:

1.       Saving money – Having more in savings is rarely a bad idea.

2.       Paying off debt – The sooner you are out of debt, the better off you will be.

3.       Investing and building wealth – (please be respectful of your own risk tolerance and don’t invest in something you don’t understand)

a.       Roth IRA (if you are eligible)

b.      Employer sponsored retirement plan savings is rarely a bad idea.  This is especially true if your employer is going to pay you to save through a matching contribution.  Please take their money.

c.       Taxable investment account with mutual funds, stocks/bonds, ETF’s

d.      529 plans – there are worse ideas, but you really should talk with a planner before you use one of these

A few of many Less Than Intelligent Ideas:

1.       Buying the newest gadget/gizmo, outfit, etc. that is not in your spending plan.  If it is important for you, you should be able to save up for it, or put it in your spending plan and review it in your Monthly Money Meeting.

2.       Going on an extra vacation even though you are not saving appropriately for your goals and you have not planned for it.

3.       Buying things that will decrease in value.   If in 6 months, the thing you are considering buying will be worth less to you than what you are paying for it now, consider doing something else with your money.

Additional thought:  If you find yourself with an Intelligent Idea you like and someone tries to talk you into doing something else, remember that it is your money and you are the one who has to deal with your decisions.  Some other idea might make more “financial sense,” but if you have a good idea and you can put your motivation and energy behind it, you might be better off.

A motivated person with a good idea can accomplish a lot!

Next time we will talk about the second Foundation of Financial Fitness – Protect what you can’t afford to lose.

*I am not recommending anyone buy or sell anything specific.  Please talk with your financial planner to obtain specific financial planning advice.  There are risks involved with everything.  Do not invest in anything you do not understand.  Refer to investment prospectus’ etc. for details on specific investments.