Personal Finance 101
by David Berky
The subject of personal finance is very broad, but as a
beginning, I would like to discuss what I consider the
foundations of personal finance: Security, Stability, Growth and
Protection & Management.
Security to me means that I am prepared for the "hit by a bus"
I have life insurance to provide for my wife and children.
Health, disability, auto and home insurance policies also
provide me additional protection in their respective areas. I
also have a list of where these policies are, who my agents are,
phone numbers and basic policy information (#s, amounts, costs,
etc.) I keep this information both in a file at my house and in
a safety deposit box at the bank (a friends home will also work
- think: "house burns down" scenario). Also my wife and my
brother and sister-in-law who live nearby also know where these
I also try to maintain an emergency fund of cash in a bank
account or money market account (with checks) so that I am
prepared for a financial disaster, layoff, or natural disaster.
It took several years to build up this cash fund. I started with
a goal to have enough cash for 6 months of my normal financial
needs (mortgage, food, insurance, transportation, etc.). Now I
am trying for 12 months' worth. I do this by saving a little
each month, and "investing" a portion of all "found" money
(gifts, inheritances, tax returns, anything unexpected).
I have a will and update it each year around New Year's to
reflect any changes in my life during the past year (new
children, new home or business, etc.). Most people don't need an
extensive will, the forms you buy at your office supply store
will do. But in some states if you die without one, watch out.
What happens to your money and even your children could be
entirely up to some state or court appointed official.
The next level of personal finance is stability.
Stability to me means that first of all I live within my means.
I don't spend more than I earn. Otherwise I am spending my
savings, investments, emergency money, or getting into debt. I
have a lot of debt, but most of it is real estate which is
producing some income. I try to avoid credit card debt and
purchase everything with money I already have. I don't buy
things expecting that next month I will have more money or I
will get a big raise or promotion. You can't sell me a car based
on a monthly payment amount; I want to know the final price!
In order to make sure that I am living within my means, I
created a simple budget and I track my expenses using Simple
Joe's Expense Tracker. I can tell how much I have spent in each
budget category and I know when to keep a closer eye on certain
types of expenses, or when and where I can cut expenses and what
I can live without in order to stay within my budget. Counting
pennies is pretty tedious, but tracking where the dollars go can
Another aspect of stability is avoiding or eliminating debt.
Debt in itself is a form of stability; you always have to make
those payments until it is all paid off.
Some recent reports show that the average American is $7,000 -
$20,000 in debt. Most of it is consumer debt: credit cards,
store accounts, rent-to-own, auto loans, etc. And those types of
consumer debt usually charge a higher interest rate than any
savings account, CD, or money market account; even more than
most high-flying risky investments.
This means that $1,000 in debt at 18% is costing you 9 times
what your $1,000 savings account at 2% is producing. Consumer
debt is a dangerous spiral that is very hard to get out of.
The first problem is, as mentioned before, living within your
means. Don't get further into debt to support an extravagant
lifestyle. Or even if you are frugal, if you are using credit
cards and debt to finance your purchases, you either need to
stop purchasing luxury items or find a way to increase your
income to support these purchases/payments.
You may even have to lower your standard-of-living because you
have racked up considerable debt and need to free up some money
to pay it down. But don't wait to start. Those minimum payments
are often designed to keep you paying 18% interest for 40 years!
That's longer than most home loans. You could even end up paying
more than 10 times the original cost of the item just in
interest payments. Is that new stereo really worth that much?
To help people get themselves out of debt we created the "Pay
Off My Debts" tool in Simple Joe's Money Tools. It is also
available as a stand-alone product called Simple Joe's Debt
Eraser. These tools help you create a Rapid Debt Reduction Plan
which shows you how much to pay on each debt each month in order
to save as much on interest charges as possible and pay off your
debts as soon as possible.
These tools can help you systematically eliminate your debts
whether you owe $1,000 or $100,000. The key is to start living
below your means and start focusing on paying off your debt.
It doesn't make much sense to be worried about whether or not
your 401k earns 8 or 9% this year, if you are paying 21% on your
credit card debt.
A third aspect that starts in the stability category and
transcends to the next personal finance level, growth, is the
concept of investing in yourself. By this I mean spending time
to educate yourself in personal finance matters, as you are
doing right now and spending time gaining more knowledge and
improving your skills or even developing new ones.
As an employee, this can have a direct relation to who gets laid
off during the next round of cutbacks. If you have some skills
or have demonstrated some abilities that are not possessed by
your co-workers and these skills make you a more valuable
employee, you are less likely to get the pink-slip.
Also while you are making yourself more valuable to your current
employer, you are also making yourself worth more to future
employers. It is much easier to land a job if you have some
special skills that are in high demand or even if you bring some
special knowledge or experience that you fellow job-seekers may
have overlooked or failed to invest in.
Being in the computer industry, I have to spend hours each week
reading trade magazines, exploring web sites, and reading
emailed newsletters to keep abreast of what is new in my field.
If I stopped learning just five years ago, I would have missed
out on the Internet revolution, email, web sites and the
majority of the income I now enjoy.
Keeping myself informed and up to date takes time and resources,
but it helps me protect my current income and expand my skills
to help me earn income in other areas. This increases my
stability by allowing me to not have to rely on one client,
employer or source of income. A chair with four legs will always
be more stable than a stool with only three.
The next level of personal finance, as I alluded to before, is
Once you are secure and stable, you can begin to think about
building your wealth. Not that you have to figure out how to
become the next Bill Gates or Warren Buffet. But you have to
start building the "nest-egg" that you will rely on when you
And don't think that Social Security has you covered, or that
your 401k will grow back to what it was a couple years ago. Or
that your current employer is going to re-institute the generous
pension plans of yesteryear. 401ks are much cheaper to
administer and you, the employee, take the hit when the market
goes down, not the employer.
My father is nearing retirement age and I think he has a good
plan. He has done some research and estimated what his expenses
are going to be when he is retired. He then took a look at his
potential sources of income during his retirement.
He figured that Social Security would cover about a third of
what he wanted to live on. Only a third! And he has worked his
entire life. Would you like to instantly have to live on only
one third of what you currently make? Retirement is suppose to
be the golden years, so where's the gold?
Luckily throughout his career, my father has worked for
companies that have had pension plans and he had worked long
enough at each company to be eligible for some pension money.
This is rare these days because today the average worker will
change jobs and companies at least five times during his/her
career. Also, as I mentioned before, companies are switching to
lower cost 401k plans that do not guarantee you any fixed
In my father's situation, his pension money would cover another
third of the retirement income he wanted. So now he had to
either figure out where the last third was going to come from,
or start cutting out expenses during retirement, like not
visiting his children so much. None of us liked the sound of
So my father started learning about the stock market and
investing in stocks and mutual funds. He made a plan for growing
his wealth and then educated himself as to how he could
accomplish his plan. I wish I could say that he is doing better
than he is, but luckily he has some time still to put his plan
into action and ride out any market downturns. (He can do this
because he has the security of insurance and emergency money,
and the stability of little debt and a strong set of skills.)
By learning about how stocks, bonds, mutual funds, index funds,
options, futures, commodities, real estate and other financial
tools work you lay the foundation for growing your wealth. You
may start with just $100 in a bank CD, but as you learn more and
become more sophisticated, you can invest in more and more
You will learn about how risk and reward are related, that as
the risk increases so does the size of the potential reward.
Just like at the race track, you'll make more on the long shot,
but the odds are against it. Also you can learn how to tilt the
odds in your favor and protect yourself against risk.
For those who are just starting out in the growth phase or who
want to dabble a bit before completing the other levels of
personal finance, my suggestion would be to look into index
mutual funds. Especially no-load index funds (no initial/sales
These funds are made up of the same stocks that make up the
popular market indexes like the Dow Jones, S&P and NASDAQ100.
The costs are low because management is simple and as a mutual
fund you can invest a little at a time. Also they are easy to
follow since you see them on all the news shows and in the
Protection and Management
The final level of personal finance is the protection and
management of your wealth. Most people never develop wealth
enough to need this level. But some of the concepts can be
applied to any amount of wealth you possess, $10,000 to
Part of the protection harks back to your will as we discussed
on the first personal finance level: security.
With any significant wealth or valuable asset (your home, car,
heirlooms, 401k, IRA, business, etc.) you will want some way of
disposing of that asset upon your death. Whether it is go to go
your family, favorite charity, or local church, if no one knows
about it, "it ain't gonna happen".
As you start to accumulate wealth in excess of $350,000, you may
want to consult an attorney about creating a trust. A trust is
an entity that can own property and pass that property to anyone
you name in your will. Usually the trust is designed to provide
income to children from the assets that are placed in the trust.
The trust can survive you so that your assets and income may be
passed on to your children or next-of-kin without excessive
taxation and legal entanglements. Some states will take up to
55% of your assets as taxes when you pass away.
Protection also relates back to insurance. Now it may be time to
look at a multi-million dollar umbrella policy that will protect
you from lawsuits designed to part you and your wealth. You may
now be a bigger target, so purchase a suit of armor.
The management aspect comes into play where you may start to
concern yourself with taxation, ownership, distribution of
income and possibly endowments to charities or other non-profit
You may hire a person or company to manage your wealth, or you
may choose to do it yourself. Most people who have earned their
wealth through the "sweat of their brow" have already become
adept at managing their assets. Some continue to personally
manage their wealth because of the enjoyment or challenge it
Others are ready to turn it over to a trustworthy manager (who
only gets paid a percentage of your increase) and travel the
world, or sit on a beach and count the waves.
Whatever your dreams for retirement (and why wait until you are
65), understanding the different levels of personal finance and
spending the time and resources to educate yourself will pay off
whether you live next to Bill Gates or Homer Simpson.
© Simple Joe, Inc.
David Berky is president of Simple Joe,
Inc. a marketing company that sells simple software under the
brand name of Simple Joe. One of Simple Joe's best selling
Joe's Money Tools - a collection of 14 personal finance and
investment calculators. This article may be freely
distributed so long as the copyright, author's information and
an active link (where possible) are included.