Why is There So Much Written About Personal Finance?

Why is there so much written about personal finance? This is a question I sometimes wonder about. You constantly see a new stream of personal finance articles coming out of every magazine, news source, blog and even entertainment reports. This isn’t all disappearing into the ether either. People are reading them. People seek them out. People are always looking for more information. That seems to answer this question, but does it really?

Yes, people look for it, so others produce it. Basic supply and demand. But the principles of personal finance are pretty simple. Most of the articles written contain no new information. They simply rehash stuff we already should know. So why can companies keep putting out so many articles about the exact same thing and people never stop reading it? So maybe the better question isn’t why is there so much written about personal finance, maybe the question should be why do we want to read so much about personal finance? Even when it’s the same information just repackaged.

Well, here’s the answer. It’s because we didn’t learn it the first time. The principles of personal finance are pretty simple. Improve your skills, make more money, spend less than you earn, then save/invest the difference. For the most part most adults know that this is what we need to do. How to do each of these steps is skill in its own right, but not nearly as complicated as the number of personal finance articles available would indicate.

So, we know what we need to do and we have an idea of what we need to do. So, why do we need more articles about it? I’ll use an example from a completely different field. Why do we have so many weight loss programs? We know that if we simply eat right and move a little we’d all be in great shape. We know this, but we don’t want to believe it. We like our processed food and added sugar. Science has shown over and over that all we have to do is eat a healthy diet. The kind of diet that humans have been eating for thousands of years. Instead of eating healthy, though, we continue to eat junk food. We keep looking for ways to lose weight without having to give up our junk food. We don’t try and solve the actual problem, we try and keep our vices and patch the symptoms.

It’s the same with money. We like our toys. We like our stuff right now. We aren’t willing to wait until we save up. We also aren’t willing to give up on things that we couldn’t otherwise afford. So we spend our money. We buy the big screen TV that we don’t need and can’t afford. We buy the big houses and become house poor. Then we look for other ways to solve our financial problems. Just like when we try and lose weight we don’t attack the actual problem, just the symptoms. When it comes to personal finance we don’t try and control our spending and maximize our income. We spend all we want then complain when we can’t afford what we want.

So why is there so much written about personal finance? It’s because we’re constantly looking for a magical solution that isn’t there. The magic healthy pill doesn’t exist. The magic money machine doesn’t exist. So we see a lot of things written. The truth and crazy ideas. We don’t want to hear the truth, but we still sometimes read it nodding our heads. We ignore the advice though because it might mean giving up our expensive habits. Then we read the crazy ideas, try them then fail. We blame the crazy idea not ourselves, even though we know better. So we go back and read more.

Though there are probably an infinite number of ways to make and spend money, the basic formula for everyone is the same. Whether you’re rich, poor or somewhere in between if you want to have a balanced and happy life you need to keep your finances in check.

What does that mean? It means make money doing what you can, invest in yourself to increase your skill set, control your spending to spend less than you make, save and invest the rest. That’s all you have to do. The rules for personal finance and even financial independence haven’t changed in hundreds of years. The details change constantly, but the basic rules haven’t. And it’s not the details that all the new articles are about. They’re about the basic rules.

How can you apply this to your own life? First accept that if you want to improve you’re going to have to make changes. Some of those changes will be difficult. Some of those changes will take a little while to get used to. Then follow the rules. Make money, increase your skills so that you can make more, control your spending, then save and invest the extra money.

Don’t worry about what other people think. Don’t try and live up to someone else’s ideas about what you should do. Think for yourself. Set your own goals and work towards them. If you need a better understanding of the basic rules you can read one of my favorite books on the subject. It came out about 90 years ago, and was put together from writings that had been around years before. It’s called The Richest Man in Babylon by George Clason. The book is a series of stories set in ancient Babylon that describe the core rules of personal finance. It’s entertaining, easy to read and full of useful information.

The bottom line? Do what you know you’re supposed to do. You already know how to be rich. You just have to do it. You just have to accept that you don’t need to have everything that other people have. Most of that stuff you probably don’t really want after the glitter wears off anyway. Instead focus on what is important. Live within your means and make room for the truly important things. Ignore the rest. And in the end you will be rich. Maybe even retire early.

Don’t Create a Budget Yet. Part 2 – Figure Out What To Budget.

This is the second of three posts getting you to a workable budget. The first post, Don’t Create a Budget Yet. Part 1 – Find Out Where It Goes., talked about tracking what you currently spend. This is important because it shows you how you spend your money. This leads to the next phase looking at all that data to figure out what you need to do.


Step 1: Review the data.

Look at the spreadsheets that you created. They show what you’ve actually been spending money on. If you followed Step 1 in the last post and agreed not to lie, then this will be a good place to build your budget from. Look over the data and see what you’ve been spending your money on. Are you spending it where you really want to spend it?

Step 2: Revise Your Categories.

Rewrite the information out in different ways. This part is up to you. Find out the best way to organize your data so that you can see what you need. For example, you may want to include a bunch of stuff like soap and paper towels, under household items. Or you may want to lump it together with groceries if you buy them all at the same place at the same time. If you aren’t concerned about your utilities you may want to group them. Or you may want to list them separately. The point is to organize the categories in a way that will be useful to you when you’re actually using your budget.

Step 3: Deal with the extra stuff.

You’re going to find that each month you had a few items that don’t really fit into any one particular category. I have a line item in my budget called Misc Expenses. Group your extra items under a category like that. This will help deal with the unexpected expenses each month.

Step 4: Look at the data again.

Summarize up the data into your categories and look at how much you spent on each of those categories each month that you were tracking your spending. Does that seem like a lot? Is it less than you expected? For most people it’s more than they expected. But this is your starting place for making your actual budget.


Now that you have your historical data and you have it grouped in a way that makes sense you can start on your actual budget. My next post will cover putting that budget together.


What are some things that you look at when you’re reviewing your spending?

How to Deal With Bills You Can’t Pay.

A lot of what I’m talking about on this site only works if you have more money coming in than going out. That’s really the only way finances can work successfully. Like I talk about in my post The Three Money Rules and How to Follow Them, you can’t become financially secure unless your income is more than what you’re spending. So what do you do when all of your bills for the month add up to more than what you make? Well, first there are some things that you shouldn’t do, then there are some things that you should do depending on how bad your situation is, finally there are some things you should do to dig yourself out of that hole forever.


This post is for when you’ve already canceled cable and other things you don’t need. This post is for when you’re trying to keep the lights on and food on the table.


What you shouldn’t do.

  1. You shouldn’t take out a payday loan.

This is one of the worst things you can do. Payday loans have ridiculously high interest rates. They really aren’t designed to be paid off. They’re designed to keep you in a cycle of paying more and more until you can’t afford to pay. Not all companies that offer payday loans are unscrupulous like that, but there are many that are.

  1. You shouldn’t charge more on your credit cards.

This can be difficult, but adding more to your pile won’t help you pay your bills in the long run. It might be a short term solution, but usually by this point that option has passed.

  1. Don’t pull money from your retirement accounts.

Many times people will pull money from retirement accounts to pay for debt. This can hurt you more in the long run than the bad credit from not paying your bills. The money in your retirement account will continue to grow. Money in your retirement account is usually untouchable by creditors even in bankruptcy. Make this a last resort.


What you should do.

  1. Look at your expenses.

Most likely by this point you’ve already done this, but it doesn’t hurt to repeat it. Cut out anything that is extra. You don’t need cable. You don’t need a gym membership. You need food to eat and a roof over your head.

  1. Pay the essentials first.

Pay the most important things first. Shelter and food. Always make your rent or mortgage payment if possible and put food on your table. It is very difficult to find new housing if you are evicted. And if you don’t eat you won’t be healthy enough to make things better. Being sick can also increase your costs.

  1. Prioritize your bills.

Some bills are more important than others. Look at your bills and determine what is most important. Make sure those get paid first. Pay the rest as you can. Here are a few suggestions to help you prioritize your bills. Pay for your needs, then your secured loans, then your unsecured loans with any money left over. Pay for your home first. Make sure you have money for food. Then make sure you can pay for utilities like electricity and water. Then pay for any secured loan on something you can’t live without. Secured loans are loans where the bank owns the item until you pay it off. This might include your home or a car. After that, pay your unsecured loans. These are the things like credit card bills, student loans and personal loans. The things where the creditor can’t take anything away from you for not paying.


If some of them are particularly old. For example, if you have a credit card loan that you haven’t paid on in several years. That should be put at the bottom of the list. Unpaid credit loans that haven’t been paid in 7 years are required to be removed from your credit report.

  1. Contact your creditors.

Creditors are businesses. They want to make back the money they loaned you. If you call them ahead of time and tell them that you can’t make the payments, but are willing to pay them back they may work with you. Most banks have departments dedicated to working with people that are having trouble paying their bills. When you call them tell them that you can’t pay the bill and tell them what you can pay and ask them what they can do. They may be willing to change the interest rate, change the payment schedule, temporarily suspend payments, or many other things to help you out. The key is to start talking to them early.

  1. Determine what’s not worth paying.

If you truly can’t pay all of your bills you may have to pick what you can give up on. Make sure you pay for things you can’t live without; home, car, food, utilities. Most anything else may hurt your credit, but won’t hurt you. Unsecured loans, like credit card debt, are easily the first to go. If you don’t pay them it will hurt your credit, but they can’t take your things away.

  1. Consider bankruptcy.

Bankruptcy can be a scary thought, but it can also solve a lot of problems. Bankruptcy can allow you to renegotiate payment schedules, adjust interest rates and even delete some debt. It is also cheaper and easier to do than most people think. You will need to talk to an attorney, but it can help you reorganize or completely eliminate much of your debt. It all depends on your situation.


How to dig yourself out.

  1. Create a budget.

The first step in digging yourself out and getting on the road to financial security is to set up a budget. No matter what brought you to this point, whether it was a job loss, medical emergency or some other event you will need to set up a new budget for your current situation.


Look at how much money you’re making. Then list all of your expenses. Write down how much each one is per month. If they aren’t the same each month then estimate what you think it will be. I recommend estimating high just in case. I also recommend having a line item for “Other” to cover all those little things that just come up. And be sure to add a line item for “Savings”.

  1. Develop a plan.

When setting up your budget start developing a plan to pay your bills and put money into savings. The savings will help prevent this type of situation in the future because it will give you a cushion. Look at things like how long it will take to pay off the debt with what you pay each month. As part of your plan, adjust the numbers in your budget to find something that works.

  1. Bring in more money.

There are a lot of ways that you can bring in more money. If a job loss caused the problem with paying the bills then a new job may be the priority. Until then there are a number of other ways you can start to bring in more money. Either temporarily or as a permanent side gig. Things like a second job, side work, or even doing online surveys can help. See my list Way Too Many Ways to Make More Money for some ideas.


Not being able to pay all of your bills in a month can be very stressful. It can be easy to let it get the best of you. It’s important to try and take a step back and look at your situation. Find comfort in education and planning. If you develop a plan then you can get the important bills paid and have a way to deal with the things that won’t get paid. Good luck.


Anything I missed? What other things are important when you can’t pay all of your bills?

Five and a Half Accounts You Need and When You Need Them.

To be successful with money in this day and age you need to have some accounts. These accounts make it easier to buy things, get loans and even get a job. Exactly which account you need depends on where you are in your financial journey and what you want to accomplish.


First I would recommend that parents get their kids a savings account. It helps kids learn to save. It also helps keep money from burning a hole in their pocket since some of it will be sitting safely in a savings account they can’t access without their parents help.


A few things to keep in mind with these accounts. Don’t pay fees. Bank accounts don’t have to have fees. There will always be rules to get out of the fees. Ask about them before you open the account. Go to a different bank if you need to. All of these accounts can be opened without having to pay fees. You just may need to look around a little.


  1. A savings account.

I recommend everyone get a savings account. This is where all your extra money goes at first. Anything you don’t need day to day and month to month. This will make it harder to waste the money on little things throughout your day. Your bank will pay you a little bit of interest when you have money in your savings account. It’s better to collect interest than pay interest. You can also access the money easily, though most banks will limit the number of withdrawals each month to between 3 and 6. When you have a job, put a little bit in there every month. While you’re just starting your financial journey you should build this up to about $1000. That’s enough to cover a minor emergency if you have one. So it will give you some cushion.

  1. A Checking account.

Get one of these with your first paycheck. Having a checking account starts to build your record with the bank. It also gives you a safe place to store your money and services like check writing, ATMs, money transfers, and debit cards. Always track how much you have in your checking account. You can do it manually or use a service like Intuit’s mint.com. Never pull out more money than you have in the account. This is called an overdraft. Banks charge high fees when you do that. It also makes it harder to get a loan if you have too many overdrafts.

  1. Certificate of Deposit.

Certificates of deposit or CDs are similar to savings accounts. You put money in and the bank pays you interest. CDs, though, are for a set time period. They pay a little bit more in interest than a savings account, but you generally can’t access the money during that time period without losing some of the interest. For example if you by a 1 year CD you might get 1% interest. If you don’t touch that money for the full year you will get the full interest. If you pull the money out early you may lose some of that interest in an early withdrawal fee. So the trade-off is higher interest, but less access to your money.

I recommend get a CD after you have you savings account fully funded and you have extra money that you want to save. Or if you want to save money for a purchase and want to make more in interest before buying.

  1. Credit Cards.

Credit cards are very powerful. They can be very dangerous if you don’t use them properly, but they can also make buying things cheaper. They also can build your credit. This means that if you use them responsibly they can make it easier to get a loan later. That loan may be cheaper if you show that you have a track record of paying you bills on time.

I recommend that you not get a credit card until you don’t need one. Your finances are under control and you don’t spend more than you make. Then use the credit card for expenses and pay it off every month. This way you can earn cash back points that will actually be valuable. Remember, cash back on a credit card isn’t valuable unless you pay the credit card off in full at the end of each month. Credit cards can also make purchase online easier and safer. Another benefit of credit cards is that they typically come with buyer protection.

The exception is true emergencies. Getting a card for emergencies can be wise, but only if you don’t use it for anything else. If you have a tendency to buy things you don’t need on a credit card that you can’t afford to pay off at the end of the month then you shouldn’t get a credit card. If you feel you need one for true emergencies, like breaking down in the middle of nowhere on vacation, then make sure you can’t use it when you don’t need it. For example, put it in a block of ice in the freezer until you’re going on that road trip.

  1. Brokerage Account.

This is a more advanced topic. A brokerage account will allow you to buy stocks and mutual funds. This can be a great way to store and gain wealth. It can also be a great way to lose everything. Before starting investing learn to research companies and investments.

I recommend opening a brokerage account when you have a fully funded emergency fund. Also, be ready and willing to read financial plans and prospectuses. You’ll want to understand what you’re investing in and how they will make you money before risking your own hard earned dollars.

And A Half. Savings Account 2.

I recommend having a second savings account. Work to get to one month’s worth of expenses saved up in the first one. So if you spend $2000 a month on housing, utilities, food, transportation, etc then save up until you have $2000 in your first savings account. Then open a second savings account. I recommend using an online bank for the second one. They usually pay higher interest and it’s a little harder to access the money. This second savings account will be your emergency fund. Put whatever helps you sleep at night here. Most financial experts recommend you have enough money to cover 3 to 6 months’ worth of expenses. Some recommend enough to cover a year or more. This is the money you’ll use if you lose your job and can’t find one for a few months. So make sure it has enough to cover however long you think it’ll take you to find another job if yours disappeared unexpectedly. Between my first savings account and my second one I like to have 6 months of expenses saved up. That way if I lost my job I would have 6 months to find a new one. Most likely I could find a new one within six months. As we saw during the 2008 recession sometimes it takes longer.

You may consider opening other savings accounts for different goals. Maybe a savings account just for vacation. Or one to pay for gifts. That way you can save up for these things instead of putting them on a credit card and paying interest.


Are there other accounts that you would consider key accounts? How do you see these accounts?

Creating Value for Others.

In my post From Zero to Millionaire I talked about 5 phases that you work through to go from nothing to having financial freedom. The exact order varies from person to person and the amount of time each person spends in each phase varies. The phases also overlap. But anyone that reaches financial security will pass through each one. The five phases are Make More Money, Save It, Pay Off the Debt, Invest, and Create. I talked a little about each of those, but there is a lot more. It would take books and books worth of information to truly cover each one well. Perhaps I’ll do that one day. Today I want to talk about the fifth one, creating value.


In a capitalist country creating value for others is probably the most common as well as the most respected way to make money. It is also the most common way to get rich. Creating value for others is a broad subject. While it can mean everything from teach kids a valuable skill to developing a lifesaving new medicine, for the sake of this post I’m going to talk about how creating value for others as a great way to earn money and develop a strong financial future.


Everyone has problems that they want to solve. Everyone wants to make their lives easier and more fun. People are willing to pay money to have their problems solved and to improve the quality of their lives. For example, people want to talk to their family and friends far away. So they pick up the phone. Someone designed and marketed that phone. They made money by selling that phone. Solving problems like this and developing solutions and options are how you can create value and make money doing it.


Most millionaires in the US are self-made. That’s because most millionaires in the US used their skills, time or money to create solutions to other people’s problems and then market those solutions. So how do you do that? There are two ways to approach this.


Look for problems to solve.

This is sometimes the most difficult, but usually the fastest way to make money. Here you look at problems that people have. Or problems that you yourself have. Then find a solution. Develop the solution and offer to sell that solution to help others. People will pay a fair price to solve their problems.


The most common way this is seen in the real world is when someone puts up a help wanted sign. They need someone to help them in their business. This can be a great way to start making money, but will rarely make you a fortune. A better long term solution is to find a problem a lot of people have and then find a way to solve it. This might be by developing a widget that you can sell to people, like the phone example above. Or it could mean finding a way to teach people how to do something better that will save them time or money, like when people write how-to books. This could also mean going in and fixing the problem for them like when you take a car to a mechanic.


Usually it is easier to start with something that already exists instead of trying to create something totally new. Look for a process that is inefficient, or a product that you think you can make better. Then develop your solution. Then market it to the people that are having the problem. As long as you charge a reasonable fee for your solution people will be glad to pay you to solve their problem.


Look at your skills.

This is usually the easiest to start with, but may be difficult to make money from. That’s because you have to find someone willing to bay for your skills. For this look at your skill set. Are you good at doing something like fixing cars? Or do you know a lot about a subject that others would be interested in? Or do you have access to a product that others might want to buy.


Look at what you already have and find people that have a problem that you can solve. If you’re good at fixing cars offer to fix your friends and family’s cars. Ask them to recommend you to people they know. Or if you know a lot about something offer to teach people that are just getting into the subject. This is one of the easiest ways to start making money from your hobbies. This could be continuing education classes, books, or one-on-one courses that you offer.


It doesn’t have to be serious.

Solving problems is the best way to make this work. People are always looking for ways to make their lives better. But you also don’t have to solve a specific problem that people are actively trying to fix. You can also develop something fun. Movies don’t generally solve problems, but they can make money. People want to be entertained. You can meet this by creating things that entertain or improve people’s lives in other ways. You could write a novel or even help people redecorate their homes. The point is that you don’t have to find a serious problem to fix. You can make money simply by finding a way to make people’s days a little better.


Why would people give you their money?

There are several reason people will be willing to part with their money for your solutions. Take these under consideration when you develop your solution. Knowing why people would pay for it can help you market to your customers.

Make it easier.

This is where most problem solving ideas go. Here you make things easier for your customer. This is one reason the microwave is so popular. It makes things much easier and faster to cook. It’s the idea behind products like the Swiffer and washing machines. They make it easier to do the things we already are doing. Do you have a product idea or a process that is easier than what people currently do?

Do it for them.

This is the idea behind pretty much the entire service industry. We need our cars fixed, our computers fixed, our mail shipped, our roads built, our houses cleaned, our bodies healed and countless other things. No one can do all of these things themselves. People pay others to do the things that they need done that they can’t do themselves. Even if they can do it themselves they may not want to or have the time to do it. This is a great place to come in. if you can do it for them you may be able to do it faster and cheaper for them than if they tried to do it themselves. For example, I can probably fix a plumbing leak in my house. However it would take me a long time and a lot of money on special tools and parts. Especially since I know I’d mess something up along the way. However, I can hire a plumber to come in and do it. The cost in the long run would probably be less and it would be much faster. If you have a skill that other people don’t have or don’t like doing you can offer your services to do it for them.

Do it better than the competition.

Most new businesses don’t start out doing something completely new or selling a completely new product. Many of the most successful ones start out doing the same things as their competitors they just do it better. An extreme example is when Henry Ford started making cars. Other people were making cars, but Henry Ford made them using an assembly line. That let him make many more cars at the same quality for much cheaper and much faster. Do you see a current business doing something that you could do better? Offer your better method.

Put them ahead of the joneses.

People want to improve. They want status. They want access to privileged information. They want to see and do things that others can’t. An extreme example of this is people that are willing to pay to get on a waiting list to go into space. Another example is someone that owns a ranch and charges people to go hunting on the ranch. Are you an expert at something that others want to know? Do you stay up to date on the latest information in a certain industry? Do you have access to something that other people would think is cool to check out? Share that access and give others some bragging rights.


Sometimes we don’t think of the things we have as special, but others do. For example, if you live on a lake you might not think it’s special to own a boat since most of the people around you have them. But tourists coming in might find that fun. You could charge for trips out on your boat. If you have access to information, locations or toys that others might not you may be able to charge people to have that access.


There are a lot of ways to solve problems. Solutions to these problems are valuable to people. Problems could be anything from a major medical condition to simply how to have an entertaining evening. Either way, if you have a solution you may be able to find someone that has a matching problem. You can use that connection to make a bit of money. If enough people have the same problem that you can solve then you could generate a lot of money.


What kinds of things to you see in your life that you can leverage to make money? Have you already, or are you planning to put a special skill to work to help you make more money?

Introduction to Investing.

In my post From Zero to Millionaire I talked about 5 phases that you work through to go from nothing to having financial freedom. The exact order varies from person to person and the amount of time each person spends in each phase varies. The phases also overlap. But anyone that reaches financial security will pass through each one. The five phases are Make More Money, Save It, Pay Off the Debt, Invest, and Create. I talked a little about each of those, but there is a lot more. It would take books and books worth of information to truly cover each one well. Perhaps I’ll do that one day. Today I want to talk about the fourth one, investing.


This is a very basic introduction to investing. The goal here is to get you thinking about what is involved and how it works. I don’t recommend opening an account after reading only this post. This post should just give you a starting place as you learn more about it.


What is investing?

Investing is putting your money to work with the idea that you will receive profit later. This could be using your money to pay for college on the idea that you’ll be able to get a higher paying job in the future, or maybe using your savings to start a business. In the context of this site. I’ll usually mean buying stocks in the stock market on the idea that company will share the profits through dividends and stock price growth so that later on you’ll have more money than what you invested. That’s the part I’m going to talk about today.


What are stocks?

I’ll start with an example. If you start a company, you own 100% of the company. Say your company needs money to grow, so you decide to bring in a friend that knows the business. You agree to give your friend 50% of the company for the money they invest. Now each of you own half the company. Another way to put it is that the ownership of the company is in two parts. One part owned by you and one part owned by your friend. Each of you has one of the two shares in the company. So each of you has the rights to one share of the future profits to the company. Each share of the company is stock in the company. In this example the company is divided up into 2 equal parts.


For large companies like Coca-Cola the company is divided up into millions of parts. Each part is sold as a stock. So when you buy a stock you are part owner in the company. The stock represents ownership in the company.


What is the stock market?

Some companies are publicly traded. This means that the stock in the company can be bought and sold by the general public through one of a few exchanges. The stock market is where you go to buy and sell shares in the publicly traded companies. Another term for it is stock exchange. Most industrialized countries have at least one stock exchange. Investopedia has a great article on what a stock market is. The US has several including the New York Stock Exchange and NASDAQ. The London Stock Exchange Group, The Japan Exchange Group and The Shanghai Stock Exchange round out the largest five in the world. At each of these exchanges you can buy and sell stocks in different companies as well as corporate and government bonds and other securities. Each exchange has different companies listed so you may have to look in different places to buy the specific stocks that you want.


Why would I want to buy stocks?

As part owner in the company you are entitled to a portion of the future earnings of the company. So theoretically when the company makes money you either get some of it or the value of what you own goes up. Sometimes both. Companies sometimes pay out a portion of the profits as a dividend. Usually the rest is reinvested back into the company to help it grow. So as part owner of the company you get a dividend check and the value of the share of stock that you own goes up as the company grows. For most well established companies it’s a little of both.


Different companies do have different plans. Different industries, business classifications and security types have different laws and customs on how this works. Some will pay higher dividends, but have little to no growth. Others focus on growth and may pay no dividend. For example, a local utility company may not be growing much since they serve a defined, limited area. So they will typically give a higher percentage of their profits back to the owners. On the other side is a brand new company in a new industry. Like Google when they first started. They have a lot of room to grow, so instead of giving the owners a dividend they put all of the profits back into helping the company grow in different ways. But that’s a subject for a different post.


The main reason to buy stock is because you can make significant money in the long term. Those gains can also be fairly safe. It is dependent on proper research to find good companies that are worth more than the price of the stock would suggest.


How much is a stock worth?

There are two answers to this question. The first is theoretical. The second is what happens in real life. Theoretically a stock is worth the value of the company divided up by the total number of shares of stock. Then an adjustment is made based on what is expected in the future. Some of these are easy to calculate. The value of the company tends to be all of the assets minus all of the liabilities. That number is called the liquidation value. That’s what you’d have if you sold everything the company had. Stocks aren’t priced based solely on the liquidation value since companies typically make money. So the price usually includes anticipated earnings. This part is harder to calculate. It also is a little different for different people. But in broad generalizations established companies tend to trade for about 20 times what they earn per year. So a company that makes 2 dollars for every share of stock the company has will tend to trade for about $40 per share. This, of course, varies by industry and many other factors.


In the real world stock pricing isn’t this straight forward. If it was then stock prices would be very stable and there would be very few stock market bubbles and busts. But real world stock prices are not stable. Sometimes they can be very volatile. And every few years we have booms and busts. In the real world stocks are still priced based on the value of the company and the anticipated future earnings. However, in the short term stock prices are also based on emotion. People get excited on an idea driving up the price of a stock to higher than the company could possibly make. Other times temporary bad news may cause people to sell driving the price down to below what the company is worth. The market is pretty self-correcting over the long term, though. So you can use the company value model to set an ideal price and buy when it goes below that price.


Why do people think the stock market is gambling?

The stock market is volatile. It goes up and down. Seemingly on a whim. The stock price of companies with great ideas fly high then drop suddenly. Then you hear about stock market crashes. All this can make it look like the stock market is just one big casino. With all these ups and downs it really does seem crazy to buy stocks.


The truth of it comes down to research, diversification and patience. Making an error in one of these can make buying stock more of a gamble. All companies that have the stock listed on the US stock exchanges have to publish their financial reports. In these reports you can see where their money is coming from and where it is going. By reading through these reports you can see if the company really is making money. You can also see if the amount of money they’re making justify the price of the stock. The dot com bubble from the early 2000s are an example of research error. What happened there is that the dot com companies were not making any money, but they had ideas that sounded great. People bought the stock driving up the price. When the companies never showed a profit they went bankrupt because they couldn’t pay their bills. The stock crashed. Make sure that the company you buy stock in is actually making money and has a workable plan to continue to make money.


The second error is diversification. Unfortunately you can’t know everything that is going to happen. Enron is a great example of this error. Enron seemed like a good company that was making money, however their financial reports were fraudulent. When it was discovered that they weren’t actually making money and couldn’t sustain the fraud any longer the company collapsed and its stock is now worthless. When buying stocks it’s a good idea to buy several different companies in several industries that make their money in different ways. This way if there is a problem with one company or industry then you don’t lose all of your money. This is a great reason to start your investing by investing in mutual funds. Especially index funds.


Patience is required in the stock market. Prices go up and down constantly. Usually based on the current emotions. In the long run though stock will be worth what the company is worth. Once you have found a good company you don’t want to sell the stock just because the stock takes a dip. Selling a stock when it goes down is how you lose money. For example, between December of 2007 and March of 2009 Coca-Cola stock went from being over $30 per share to under $20 per share. The company didn’t lose a third of its business. It still produced and sold Coke and its other brands all over the world making a nice profit. The price went down because all the other stocks went down and people were selling. The value of the company hadn’t change. Since then the stock has not only returned to $30 per share, but is at over $45 per share. It can be scary to see the value of your stock go down. If you’ve done your research and you know the company is solid then you just need to have the patience to wait until the market corrects itself.


So, what should I buy and when?

The short answer is to buy high value companies when their stock is on sale. I’ll cover this sort of thing in other posts, but you’ll want to estimate what you feel a company is worth. Then buy the stock when it is below that amount. This is easier said than done. It requires research. Read the financial reports of companies that you like. Make sure they are actually making money. Compare their reports to their competitors. Estimate what is a sustainable stock price. Then just watch and wait for the price to come down, if it’s higher than your estimate. Then buy the stock.


Now for a more realistic answer. I usually recommend people start with mutual funds. So if you’ve never owned a stock before and you want to get started I recommend buying a mutual fund. But not just any fund. Buy an index fund. Something like Vanguard’s S&P 500 index fund. Or Fidelity’s S&P 500 index fund. There are a lot of different versions of these with different brokerage firms. These funds invest in the 500 largest companies in the US. That gives you diversification of owning 500 different companies’ stocks as well as stability since these are the largest and most established companies. Some of which have been around for well over a hundred years. Buy it whenever you can and just leave it there to grow until you retire. The value will go up and down each day, but over the long term it will go up more than down.


That’s the basic information about stocks and the stock market. I’ll cover this and different parts in more detail eventually. Have you started investing in stocks yet? What would you like to know or wish you had been told?

Net Worth. What is it and Why is it Important?

If you google net worth the first thing that pops up is the Wikipedia article. It defines net worth as “the total assets minus total outside liabilities.” You can look at this for a business or for an individual. For you and me it basically means add up the value of everything you own and all your money then subtract all your debt, like your credit cards, car loans and mortgage.


So what does it mean?

Theoretically your net worth is what you would have if you sold everything you had and paid off all of your debt. This can be good to calculate since it can give you an overall picture of how healthy your financial situation is. Typically this number is positive. That means that if you sold everything you owned you could pay off all of your debt and have some left over. In some cases this might be negative. That would mean that you’d have debt left over after you sold everything you owned and used all that money to pay debt. This can be a difficult position. It’s unfortunately where a lot of people start their financial journey. This is where I started mine.


I calculated my net worth then and I still calculate it regularly. If you do it over time you can see how you change and how your finances are getting better. If they aren’t it can let you know early so you can make changes. You can use this number as a general guide. You can also use this number to set broad goals. For example, you could set a long term goal to have a million dollar net worth by the time you’re 60. Then set intermediate goals to help you get there.


How do you calculate net worth?

This is usually a simple process for most people. The more complex your finances the more complex it is to calculate. You’ll want to start by gathering all of your financial paperwork including bank statements, credit card bills, student loan records, appraisals, an another other paperwork that shows what you owe someone or what something you own is worth.

Calculate your assets.

First list all of your major assets. If you own your home include that. Include your cars. Include any other property you have.

Then list all of your bank accounts, including checking and savings, any brokerage accounts, your IRA, your 401k or any other money accounts that you have.

If you own any other major property list it also. Most people won’t include anything smaller than their car, but you can include everything you own. This might include business property, collections, your TV or any other valuable items that you own.

Then add up the value of all of your assets that you listed. This is your total asset value.

Calculate your liabilities.

Now list all of your debt. You only need to list the amount still owed. This includes major items like a mortgage, any car loans, any student loans, and all of your credit cards. Include smaller items too like store credit cards. List any other debt that you will have to pay someone back.

Add up all of the debt you listed and that is your total liabilities.

Calculate your net worth.

To calculate your net worth simply subtract your total liabilities from your total asset value. That’s your net worth. I recommend doing this at least yearly so that you can track your progress. The higher this number is the stronger your financial situation probably is. If the number is negative I recommend getting this number back to positive as fast as you can.


What to do about it.

This is your next step. Once you know your net worth you can begin looking at your liabilities and your assets and decide where to go. If you have a lot of liabilities then work to pay them down as fast as you can. Once those are low you can work to increase your assets.


How often do you calculate your net worth? What other methods do you use to track your progress?

What is Retirement Really?

I lot of times I talk about retirement. A lot of other sites talk about retiring early. Even in your 20s and 30s. What does this really mean? Does this mean that you retire at 30 and spend the next 50 years sitting in a recliner watching TV? That’s certainly the perception a lot of people have about retirement. That’s one of the questions I got when I started on my financial journey and started talking about retiring.


When I talk about retiring, and when many bloggers talk about retiring they aren’t talking about sitting in a chair in front of the TV. What they’re really talking about is financial independence. Retiring is just easier to say and people understand it means not working at a full time job the way most people do. So what is financial independence? Financial independence simply means that you don’t depend on a job to pay your bills. It means that you have enough passive income to pay your expenses so that you can work or not. It’s your choice. This might include investment income, royalties or anything else that provides them with enough money to last the rest of their years in the lifestyle they want. For many early retirees this means enough money that could theoretically support their lifestyle indefinitely.


Most people that retire early do continue to work. They just don’t work at a 9-5 job that they hate. They work when they want and have the freedom to choose the projects that they take on. Even if that project doesn’t pay them. Instead they work on jobs that they find interesting. This way they can help others or learn something new. Perhaps they’ve always wanted to try something out, like sailing around the world. Because they don’t have to worry about a regular job they have the freedom to do that.


That’s what money does. Once you reach financial independence you have the freedom to create value for the world without having to worry about how much you’re paid. Whether you create that value by working at a 9-5 job or by teaching kids in an after school program is up to you. You can certainly continue in your 9-5 job. If you love your job and love what you do financial independence can help you continue it. It can make it easier to do since you don’t have to worry about making ends meet. You only have to worry about doing a good job.


I firmly believe that everyone should strive for financial independence. Whether you call it financial independence, retiring early or getting rich, it gives you the freedom to pursue the projects you want. It allows you to add value to the world that you might not be able to otherwise, and it greatly reduces your stress.


What would you do if you were financially independent? Would you work, play or something in between?

You Can Only Save So Much.

One of the most common bits of money advice is to save more. The idea is that you create a budget and cut all the fun stuff out. Then you save what you have left over. That all sounds great. Especially if you make $100,000 a year and have no kids. Yup, then you could cut your spending from $100,000 to $50,000 and save $50,000 per year. That’s a lot of money, but it’s still limited to what you make minus what you spend. It can never be higher than what you make.


Now, what about those of us who only make $50,000 a year and have a family to support. Turns out that that’s most of us. The average pay in the US is about $50,000 a year for a couple. And the couple has kids. You still need to eat. You still need to buy clothes for you kids. Even if you cut that down to the bare bone and spend nothing on luxuries you only have a few thousand per year to save. According to the Department of Labor the average household spends about $3000 on things like entertainment and gifts. The other roughly $47,000 is spent on essentials like food, shelter and medical expenses. Everybody’s situation is different, but this will definitely make it harder to save.


So what do we do? This is why rule number 2 of my Three Money Rules is so important. Maybe more important than the first rule. We need to start making more money. That’s easier said than done, though. Start small. Put a little bit of money is a savings account. That will earn a little bit of interest. I would recommend an online savings account since they pay much more interest than a regular bank. You can check a website like bankrate.com to see what different banks are paying.


That will help build a foundation, but it won’t make you rich. For that you’ll need to bring in more money. Get a second job, create a product to sell, volunteer for a service, or start your own business. The next thing is to put that savings to work. Since you can only save so much money you need to make sure that what you save is helping you generate more money. Again start with a savings account. After that start looking at other places to put your money. For example, buy things at a thrift shop to resell on eBay for more money. You can find valuable things there that are sold for pennies. Bonds can give you a better return than a savings account. Another option is to buy stocks. Dividend paying stocks of big companies like Coca-Cola and Johnson & Johnson can be a good option. Check out my growing post “Way too Many Ways to Make More Money” for ideas on how to increase your income.

If Money is Important then Make it a Priority.

There’s an old saying that I haven’t found the original source to. It goes something like this: “Show me a man’s calendar and his checkbook and I’ll tell you what his priorities are.” Though Gandhi may have said it easier when he said “action expresses priorities.” However you express it, you’re saying that it doesn’t matter what people say is important to them. People spend their money and their time on what actually is important to them.


So what does this have to do with money and retirement? Studies have found that more than 90% of people know that they should save more money for the future. Unfortunately most people don’t save much money. The average person in the US on saves about 5.20%. This means people are barely saving any money even though they all know better. So why is that? Priorities. If you want a secure future. If you want to pay off debts and eventually fund a retirement then you have to make it a priority. It doesn’t work if you just say saving is important then spend your money on things that aren’t important.


What’s stopping you from making savings a priority?

The most common reasons say people say that they can’t save is that they don’t have enough income, they have too many bills, and too many obligations. You do have certain things that you have to spend money on. You also are limited by the amount you make (not really, but that’s the subject of another post). You also have obligations to your kids and others. But are these things truly requirements or are they self-imposed? Look at them to see. If your future is a priority you can make it work.


What does it mean to have a priority?

At the simplest level, if something is a priority then you will make sure it happens. You will put that goal above other, less important things. If something is a priority you will sacrifice the unimportant things to make it happen. Once you have saving and your financial future as a priority you can use that to help make decisions about money.


How to set a priority or goal.

To set a priority you need to set a goal. These should be written down. So grab paper and start writing out your goals. For each goal write what you will accomplish, when you will do it, and how you will do it. For example, “Pay off my credit card within 2 years by putting an extra 200 per month to the bill each month and not charging more on the card.” Do this for anything that you want to accomplish. If you have more goals than time or money you may need to rank them. If you put them in order of importance now while you’re not faced with a question it can be easier to make a rational decision. Then when you’re faced with a situation you can look at your goals to help you decide if it’s worth it.


I recommend writing down any other priorities that you have. Writing down your goals helps make them real. Giving yourself a deadline helps keep you focused. Saying how you’ll do it will give you an actionable plan. Without these things it’s just a dream not a goal.


Make it a priority.

Make these goals a priority. Instead of buying something that you don’t really need, like going out to eat lunch when you could bring your lunch to work, think about your goal. Taking your lunch is cheaper and will make it easier to put the extra money towards your credit card. When faced with a decision like this consciously decide which is more important, your goal or what you’re about to do. You can do this with any decision that affects your goal. If what you’re about to do is more important to you then go ahead, but keep in mind you may be sacrificing your goal to do it.


If you want to have financial freedom, or even if you just want a little extra cash in your account at the end of the month you have to make that a priority. When faced with a decision look at the priorities and goals that you wrote down. Does the decision help you reach your goals or does it take you further away from them. Use that you help you make the right decisions.


Have you set financial goals? How are they work for you?