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July 13, 2017 Written by
Published in Assurity Blog

Essential Financial Habits

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Essential Financial Habits for Every Young Professional

If you have dwelt upon the idea of obtaining wealth and how great life would be if you had more money, you are definitely not alone. However, creating real wealth happens in a systematic way that is the byproduct of planning, discipline, and knowledge. Rare are the cases of individuals who create wealth overnight, and even then most would say luck and timing were a significant contributing factor.

For those of us who aren’t about to invent something or discover some unknown breakthrough, wealth will be created by those of us who can develop some basic, yet valuable, financial habits. Creating wealth should be somewhat boring; an acquired taste, if you will. So read the list below and try to make these habits as automatic as putting on a car seat belt.

  1. Define wealth – it will be extremely difficult to attain any goal unless it is clearly defined. The best definition of wealth I’ve heard is ‘survivability on a go-forward basis’. What it is meant to imply is that true wealth is defined by the answer to the following question: If you could not earn another dollar from working, how long would your money last?

 

Only those that are truly wealthy can honestly respond; “Forever.” Acquiring enough income producing assets to pay for your expenses represents true wealth; the point where your money (assets) generates enough of a ‘return’ to pay for all of your needs and wants and not shrink the income producing asset.

 

  1. Know an asset from a liability – simply put, an asset represents something of value and a liability represents something that costs you money.

 

There are income producing assets; owning them allows the owner to enjoy cash flow from the asset. Dividend stocks, CD’s, and real estate are a few of the most common income producing assets.

 

Appreciating assets are things that increase in value over the amount of time the owner possesses the asset. Gold and other precious metals, artwork, rarities, and objects that have a high collector’s value typify common appreciating assets. A great find is an appreciating income producing asset; real estate investing is extremely popular in this regard.

 

There are also depreciating assets; while they definitely have their place in our financial lives, too many young professionals place the value of perceived status by ownership, over sound assets-versus-liabilities judgement. The most frequent example of a depreciating asset is an automobile. Most of us need a form of transportation, that’s understandable, but too many young professionals fall into the trap of car payments, specifically overpaying for transportation; sometimes for life.

 

Whenever possible: Buy what appreciates (appreciating assets), rent or lease what depreciates (depreciating assets).

 

  1. Learn, continuously – your assets are a treasured commodity that are constantly under assault from seen and unseen forces; in this case, unseen equals unknown. Learn as much as you can about where you place and invest your assets and the associated forces working against your quest for wealth.

 

Risk management is definitely the most important skill one develops over their lifetime. There is nothing wrong with taking risks with your assets as long as you understand the negative outcomes possible. Doing nothing subjects your assets to inflation risks; market risk translates basically to risk-of-loss; health risk, credit risk, driving risk; the list goes on.

 

Taxes are a massive assault on your assets if you are not educated about such things. Before moving on to the next habits, try and learn as much as possible about where your money is and the associated forces trying to shrink what you have worked hard to acquire.

 

Learn about tax deferral, compounding, dividend reinvestment; become adept at identifying value, especially something when it is undervalued. Insurance, real estate, the stock market; whatever holds your interest; if you want to put your money there, learn it. If you can’t afford the time to learn yourself, you’d be wise to hire expertise.

 

  1. Pay the unknown first - One of personal finance's oft-repeated mantras is "pay yourself first." That comes later in my opinion as it is more important to pay for the unknown crisis you can’t imagine. Nothing will destroy a well-made plan for wealth faster than an unplanned financial crisis; the loss of a job, an accident, or a relative in need. Whatever the cause, you want to have an emergency cash reserve to draw from.

Establishing good financial habits and building your wealth is something that can be crafted to work on autopilot. As long as your income continues you can set up automatic debiting and crediting of financial accounts to move your money anywhere you would like; set it and forget it. To insure this remains the case, it is wise to have a fund equal to 3 – 6 months of your monthly expenses. The length of time to plan on a reserve is pretty much related to how easily and quickly replaceable your lost job is; or at least how high of a demand there is for your skillset.

If you are married or have children, insurance, which can be an asset, is a good area to learn about to care for your family in terms of a devastating disruption to their lives.

Once you have defined your goals, educated yourself, and set aside sufficient assets to weather an unknown financial crisis; you are ready to make your plan.

  1. Decide who to pay second – this is a fork in the road of your financial life. Who will you pay second; state and federal taxing authorities, or yourself? This is not a simple question, although most forces make it seem as though the only sane answer is to respond with not paying taxes, if possible, that is not always the best answer.

 

There are other, long-game/longer-term strategies that can be learned and employed if real tax minimization, over your lifetime, is a part of the plan you craft. Once again, understanding the types of assets available will be key; tax free, tax deferred, tax exempt, realized income, and recognized income are examples of terms to understand.

 

Many people chose to pay themselves before paying taxes, and with good reason. Many employers offer retirement funding plans that allow their employees to put away money for retirement before the money is taxed; automatically via payroll depositing. This is a common, easy way to begin acquiring assets for the long term. Even better is if their employer offers a matching provision; basically giving you free money based on a percentage of what you are willing to contribute to their 401k (retirement) plan.

 

When someone is willing to give you something of value, with a few acceptable ‘strings’ attached, it is probably wise to accept. Whenever possible, max-out what you can contribute to your employers 401k in order to at least get the match (the free stuff).

 

Whatever you do, don’t pay yourself first and then not pay your taxes. This is a terrible cycle to get caught up in. The amount of delinquent taxes, penalties and interest continues to grow until the balances are paid. If you are already having problems with troublesome debt, whether taxes or otherwise, there are tax debt relief programs to consider; a debt settlement could possibly wipe the slate clean and allow for a new beginning for your finances and financial habits.

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  1. Satisfied needs do not motivate – when our cupboards are full of food, we are not in a state of heightened alert wondering where our next meal will come from; the need is satisfied and we can focus on other higher priorities. It is when our cupboards are bare that we focus nearly all attention on finding food; this is because only the unsatisfied need motivates.

When it comes to your assets and the pursuit of wealth you have to chart a path and then put all of the necessary elements in place to achieve the outcome you seek. If you have successfully imagined ‘the end’ you have in mind, and convince your mind that you ‘need it’, you can envision what has to happen along the way, and can measure your progress. If you are on track, that’s great; the need is satisfied. If you are not on track you heighten your awareness and seek solutions; you adjust.

Few people are really successful at setting big, long-term goals; especially young people who see a long line of years in front of them; it is harder to get the young started. Everything else there is to experience in life as a young adult is competing for the young adults’ disposable assets and willingness to extend themselves with credit. You are wise to find balance and remember this adage; in life, the easy things get harder, and the hard things get easier. By starting young and maintaining self-discipline with your assets (good habits), over time, growing wealth actually gets easier.

  1. Who gets paid third? (Or, when do I get paid?) -  This is a great question. Once you have set aside your emergency fund, paid your taxes, and made your monthly contribution to a long term asset accumulation plan, who gets the lion’s share of what remains?

 

Rent or mortgages, car payments and insurance, health care costs, groceries, clothing; all take a bite out of what remains of your post-tax income. Safety, shelter, food, transportation, and wellness all need to be satisfied, but come at a cost. You get paid with what is left over after paying the cost of a basic standard of living; which for many young professionals puts them last in line to be paid, if at all.

 

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  1. Bank on yourself – One of the key financial habits for a young professional amassing wealth is to not give away any of your assets whenever possible. Understanding how a bank makes money, and employing a similar strategy with your own assets enables you to acquire the use of depreciating assets, like a car, and pay yourself back.

 

Once you’ve paid your money to a third party creditor it has basically disappeared from you forever. The use of insurance or 401K loans is the key to unlocking a bank on yourself strategy. At the end of the loan, you have the asset (the car), which may or may not be worth anything, but you will also have the sum of all the payments returned as well (at times with interest).

 

The more you can borrow from yourself, and pay back, directly equates to how large a preservation of assets can become. If you fail, you default only on yourself.

 

  1. Your credit score owns you – your credit score will have a hand in determinations for job opportunities, insurance, the cost of borrowing money, perhaps even how attractive you are to prospective partners. Nowadays your credit score is far more than a number.

 

Your creditworthiness is deemed a measure of behavior and self-management; because of this reality, your credit score can be an asset (an intangible asset), or it can be a liability. With some basic knowledge and understanding of how credit scoring works and the factors used, you can maintain an excellent credit score automatically.

The length of your credit history, available credit, credit utilization, payment history and other factors are tracked. Knowing what the basic guidelines of credit use are and keeping them favorably represented on your record is another key to asset preservation. The lower the credit score, the more expensive access to insurance or borrowed funds will become; the net result is less for you and more premium or interest payment to them.

 

Credit cards are a convenient, useful financial tool; if used wisely. The use of credit cards without fully understanding the ramifications of the promises and guarantees you made when signing their complex credit agreement, is foolish and unwise. There is only one prevention that will keep you out of the arms of the debt settlement industry.

 

  1. Create a budget – Budgeting: taking your monthly income, subtract the living expenses; rent or mortgage, car payment, utility bills, medical bills, and other things you have to pay on a month-to-month basis. Observe where your money is going. When do you get paid; that is, what is left over for you?

Learning to set and adhere to a budget is in itself an art form. No other tool, or financial agreement you make with yourself, will force you to confront your urges and impulses on a regular basis like a budget. Many would argue that credit cards present the same challenges to our willpower. With a budget first, the credit cards remain the somewhat dormant tool they are supposed to be.

  1. Associate with like-minded people – this habit carries over to every aspect of a young professionals life, not just finance and wealth creation. Associate with people who are ‘going somewhere’, who share your same personal and financial values. Find others you can learn from and share ideas about what you’ve learned.

 

While it would be nice to associate with other modest individuals who are prioritizing according to a plan and living within their means, like you; that may not always be possible. However, every young professional should quickly pick up and employ the habit of evaluating and insuring any potential long term partner, like a potential spouse for a marriage, shares the same goals and values about money, assets, and wealth accumulation as you.


The list above is intended to help you gain a new perspective on the future of your finances. Even if you haven’t begun, it is never too late to begin improving your financial habits. If you have found yourself in the midst of financial problems, sometimes credit card debt settlement, tax debt settlement or a tax relief solution is the answer. Whatever it takes, make decisions that move you in the direction of your goals.

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