First off, if you’re reading this, I assume you’re interested in fixing or improving your personal finance. This is only the beginning of a month-long series that would help you to build a solid financial future. Of course, not everybody would be a millionaire at the end of the journey. But if you don’t start doing something now, it’s difficult to even come close to a hundred-thousandaire! My main focus for now would be in investing, which is a major part of personal finance. Other aspects such as saving and budgeting would naturally follow some time after.

$1.67 a day for your retirement, less than a latte!

And if you think you don’t have enough money right now to start investing, STOP and think if you can keep $50 per month to paint yourself a better future. That’s $1.67 per day, which is less than the 2/3 of the $4 Starbucks latte that you get! Investing involves risk, you CAN lose money, there’s no doubt about it. But if you understand how exactly investing works, you’d be taking calculate risks which would help you a good deal in the long run. If you want to at least retire comfortably when you’re age 65 (or earlier), you’d better have a good long-term investment plan in place, or earn so much money that you don’t even need your money to work for you (which is what investing is all about!).

So, I’ve been reading this book called “The Bogleheads’ Guide to Investing”, which contains a lot of useful ideas and advices on stuffs that you could start doing NOW to solidify your personal investment. However, before you even jump into investing, there are 3 things you need to do FIRST:

1)      Switch from paycheck mentality to net worth mentality – Investing is not about having a big fat paycheck (although it does help a lot). Investing is truly about how much you keep rather than how much you make. You can make $30,000 a year and save $4000, or you can make $60,000 and save only $2000. Obviously, your lifestyle should have been more luxurious if you’ve been spending more, but what matters in the end is how much you have to sustain your current lifestyle.

Therefore, you need to change your mindset from living paycheck to paycheck, to focusing on your true net worth. Basically, add up all the dollars that you own (or assets), and minus all the dollars that you owe (or liabilities). If you’re just starting out in your career, you probably only have things like bonds, stocks, mutual funds, savings, family heirloom as your assets. Liabilities, on the other hand, would include credit card debt, car loan, and educational loan.

Once you know your net worth, you will have a better idea of where you are in terms of reaching your financial goal.

2)      Pay off credit card and any high-interest loans – This is simple. Pay off all the loans that incur the highest interest first! For credit card loan, don’t just pay the minimum monthly payment, strive to pay off all the balances on your cards. In a way, they’re the best investment you could ever make in your life because you’re practically “earning” more than 15% returns (interest in fact) on dollars that you would have otherwise owed to the credit card companies. I don’t think any investment vehicle could provide that much of returns in such a short period of time. So, pay off the balances!

3)      Build an emergency fund – Protection. You want to be covered in case you lose your job, divorce, etc. It’s always a good idea to have enough cash easily accessible when you put the rest of them into work (investing!). If you have to constantly tap into your investment to pay your bills, it’s difficult to pull off a good and sound long-term investment plan. A heuristic approach to establishing an emergency fund would be to assess how much you’d need per month to live IF you didn’t have the paycheck coming. The amount is your monthly living expenses. Multiply that by 3 to 12, depending how stable you think your income would be. As a general rule of thumb, 3 – 6 months of living expenses should be adequate for most people. This gives you the peace of mind, so you won’t have to sleep on the street if something goes wrong (company going bankrupt, layoffs, unexpected medical bill not covered by insurance).

Step 1 would be the easiest step to take, and you can do it now. Then, spend time over the next few months to complete Step 2 and 3. If you’ve already done these steps, congratulations! I will blog about the next step you can take to put your money to work in my next post, and I promise it will be simple. Stay tuned till then!

(Picture created by AMagill from Flickr, Thanks!)

Popularity: 9% [?]