Personal Finance – Book Summary
Avoiding Common Money Mistakes
In your personal finance journey avoid the following mistakes.
1. Not planning
2. Overspending: savings is the difference between what you earn and what you spend. To increase your savings, you either have to work more, increase your earning power through education or job advancement, get to know a wealthy family who wants to leave its fortune to you, or spend less.
3. Falling prey to financial sales pitches
4. Not doing your homework: To get the best deal, shop around, read reviews, and get advice from objective third parties.
5. Making decisions based on emotion: You’re most vulnerable to making the wrong moves financially after a major life change (a job loss or divorce, for example) or when you feel pressure. Maybe your investments plunged in value.
6. Not separating the wheat from the chaff:In any field in which you’re not an expert, you run the danger of following the advice of someone you think is an expert but really isn’t.
7. Focusing too much on money: Placing too much emphasis on making and saving money can warp your perspective on what’s important in life. Money is not the first or even second priority in happy people’s lives. Your health, relationships with family and friends, career satisfaction, and fulfilling interests should be more important.
Your net worth is your financial assets minus your financial liabilities:
Consumer items — such as your car, clothing, stereo, and so forth — do not count as financial assets. I know that adding these things to your assets makes your assets look larger (and some financial software packages and publications encourage you to list these items as assets), but you can’t live off them unless you sell them.
Knowing The Difference Between Bad Debt And Good Debt
I coined the term bad debt to refer to debt incurred for consumption, because such debt is harmful to your long-term financial health.
Borrowing to pay for educational expenses can also make sense. Education is generally a good long-term investment, because it can increase your earning potential.
Bad debt is a higher-interest debt used to buy items that depreciate in value.
To calculate your bad debt danger ratio, divide your bad debt by your annual income.
Bad Debt divide by Annual Income = Bad Debt Danger Ratio
The financially healthy amount of bad debt is zero.
Personal finance 101: Carrying consumer debt amounting to 10 to 20 percent of your annual income is just fine.
Personal finance 101:When your bad debt danger ratio starts to push beyond 25 percent, it can spell real trouble. Such high levels of high-interest consumer debt on credit cards and auto loans grow like cancer. The growth of the debt can snowball and get out of control unless something significant intervenes. If you have consumer debt beyond 25 percent of your annual income find means to get out of debt.
How much good debt is acceptable? The answer varies. The key question is: Are you able to save sufficiently to accomplish your goals?
Borrow money only for investments (good debt) — for purchasing things that retain and hopefully increase in value over the long term, such as an education, real estate, or your own business. Don’t borrow money for consumption (bad debt) — for spending on things that decrease in value and eventually become financially worthless, such as cars, clothing, vacations, and so on. You can also learn more about personal finance in Managing Debt For Dummies.