Tom O’Malley, Founding Editor-in-Chief of American Newzine®, is an entrepreneur, writer, speaker, husband, father, and grandfather. A registered independent voter since 1992, he is a proud citizen of the USA and dedicated to the rule of law under her Constitution. He is passionate about politics and religion as two of the most noble topics upon which to have a great conversation.
Late last month, those of us who are interested in the stories of rising political and business leaders were stunned and saddened to hear of former Virginia governor Bob McDonnell’s troubles. He isn’t alone, his wife is also enmeshed in the very disturbing situation.
To quote the Washington Post, “authorities allege that for nearly two years, the McDonnells repeatedly asked executive Jonnie R. Williams Sr. for loans and gifts of money, clothes, golf fees and equipment, trips, and private plane rides. The gifts and loans totaled at least $165,000.”
Also according to the WaPo article, the “story line of largess … depicts an elected official in financial trouble who sought help from a businessman with something to gain.”
Regardless of how the investigation turns out, one thing is abundantly clear. The McDonnells apparently lived well beyond their means, and if the charges hold up, will ruin a promising career, and even result in imprisonment.
This tragic situation has played out time and time again in politics, business, and elsewhere. Until the Second Coming, it’s not likely to be the last time.
What can be done? The simple truth is that most people, even some people in leadership positions, are not as financially independent as they could be. And with student debt loads burdening many young people today, and home mortgages at high levels, it’s increasingly common to encounter someone who is virtually enslaved by their debts. These are tragedies in the making. While many people don’t fall out of favor with the law over their finances, being in financial dire straits can exact a huge toll.
Happily, financial savviness—and financial independence—is within reach of nearly everyone. It’s especially important for those of us who are in leadership positions apply sound financial principles and practices in our personal and professional lives if for no other reason than to set a good example for others.
The choices we make each and every day can either bring us closer to or further away from financial independence. The choices is ours to make, and the benefits ours to enjoy. It’s in this spirit that I share my observations and experiences on the topic.
The financially independent people I admire are from virtually all walks of life. Indeed, some of them have become financially independent without a six-figure income, an inheritance, or a winning lottery ticket. While their career paths, family histories, education, and intelligence vary greatly, they generally adhere to financial principles.
Below are some of the most common ones I’ve observed. Consider them the ABCs of being a financially savvy person.
Always live within your means. The McDonnells may have thought this advice was old-fashioned. Not so. While writing and following a detailed budget may not be practical or desirable, a good working knowledge of your income and expenses is essential especially if your income fluctuates. Even without a formal budget, you can avoid situations in which you find yourself compulsively buying things you don’t really need. If your income fluctuates, make sure your fixed expenses and deposits into savings and retirement accounts are based on the minimum income that is reasonable expected. You can figure out what to do with any surplus while avoiding any nightmares that accompany being hit with a shortfall. If you follow just this basic step, establishing realistic financial goals should become much easier and your chances of success should be improved.
Be debt-free. Popular radio and TV personality, Dave Ramsey, says there are 7 characteristics of debt-free people. You read this and much more from this charismatic sage here. From my observations, it boils down to this: Pay cash for nearly everything. If do use a credit card, be sure you can pay the full balance due at the end of each month. When you do choose to go into debt, to buy a house for instance, put at least 50% down so that if market conditions deteriorate or you need to sell quickly you can do so. By living debt-free you can help avoid the very common dilemma of your ‘stuff’ owning you! This almost always means you will have to exercise more patience and self-discipline, but these are good character traits. You should help yourself avoid having to go into debt if you plan and fund for maintenance and replacement of such things as vehicles, clothing, electronic devices, etc. In most cases, you may need to rent a home until you are debt-free or buy a smaller or less valuable home to get started. You will be happy you made the sacrifices as you are able to pay for things out your own accounts while watching others go deeper into debt. While student loans represent a special challenge today, if you have yet to begin planning for college, consider that options that would allow you to remain as debt-free as possible.
Choose to be a saver. Your lifestyle choices can also help or hinder your ability to achieve your financial goals. At a minimum, you should work toward having 6 months of monthly expenses in an emergency savings account. Regularly max out all allowed contributions to tax-deferred qualified retirement plans such as an IRA or 401k. If you doubt the wisdom of this, look at what compound interest can do for you by taking a minute and using the free Compound Interest Calculator from BankRate.com. Enter into the calculator whatever monthly amount you could comfortably save over the long term (20-40 years depending on your age) and use 7% as a reasonable long-term Rate of Return. This tool shows you how regular deposits in compound interest can help your nest egg grow. Pretty soon, your money starts working for you as interest or returns are generated on previous interest and returns. To jump-start the use of these accounts, consider using auto-deposits from your paycheck into your retirement and savings accounts. However, while life insurance is a prudent purchase for many people, do not use a life insurance policy as a savings vehicle until you are on track to have your retirement accounts fully funded. This is because the tax benefit of qualified retirement accounts such as an IRA and 401k is a significant financial advantage.
Donate to worthy causes. Not only is this a religious principle for some people, but it’s one of the best ways to ensure you are happy and fulfilled. Consider 10% of your income as a minimum. Use the likes of CharityNavigator.org and Guidestar.org to help determine if the charity or non-profit is a good steward of the donations it receives. In most mature organizations, at least 80% of income should go directly to the work they do instead of paying administrative salaries and fund-raising activities.
Everything is negotiable, so just do it. The price and terms of nearly everything can be negotiated, or at least be subject to rigorous comparison shopping. This can include your pay and benefits. With internet access to various sources, comparing essential and non-essential features and benefits is easier than ever. While you may not always succeed in lowering your cost, or getting a well-deserved raise, etc., for the times that you do succeed, the increased income and reduced costs can be huge over the long-term.
Fun times are essential! This seems like a no-brainer, but it is very easy to get trapped into doing things that are not worthy of your time, talent, and money, or are more hassle than they’re worth. Order your entire life in such a way that you have the time and resources to do what best suits you, that which is most worthy of your time, talent, and money, and you will likely be happy and fulfilled. In this way you will not miss out on what the writer C.S. Lewis referred to as the serious business of heaven: joy!
Get where you want to go with a good plan. Stephen Covey’s timeless advice still applies today, 25 years after he wrote his best selling book, The 7 Habits of Highly Effective People, in which he urged young and old alike to “Begin with the end in mind.” Covey was referring to life in general, but the principle applies in every important aspect of life, including managing our financial affairs. Setting written goals and being action and results-oriented can help you make sure you get the most important things done first. It’s like using a map or GPS when traveling. A well-balanced personal plan will cover the spiritual, familial, physical, emotional, financial, and other important aspects of your life. Once you have your plan established, no matter how concise or lengthy it is, be sure to review your progress regularly. Also be sure to give estate planning its due. Nearly everyone needs a Will and Healthcare Directive. Many people also need a Living Trust. Consider reviewing your legal and financial needs in tandem, and with the help of competent professionals. Don’t forget to comparison shop for these services and negotiate favorable terms and costs. Lastly on the topic of having a good plan, make sure you use a long term planning horizon. Self-inflicted myopia can inflict great harm, as it is doing to our country. Last May I explained why I believe this is the case. You can read that essay here.
Have a backup plan. Even the best plans become obsolete sooner than later. Moreover, something can go wrong that was totally unexpected. This is why it is a good idea during the planning process to think about what could go wrong and then what can done about it, either in advance or at the time. For instance, if you lost your job, what next? If you were injured or became seriously ill, what then? So called contingency planning should not dominate your thoughts, or cause anxiety. Simply view life as a roller coaster ride, and plan your affairs accordingly.
Insure the big risks, self-insure the little ones. Always use insurance wisely. Consider buying insurance or using low deductibles only when you cannot comfortably pay the estimated loss from your emergency savings account. On the other hand, use insurance to protect against a loss that is beyond your ability to pay with readily available funds. For instance, extended warranty plans can be a good value in some cases, but may also cover a risk that can be easily self-insured. With regard to life, health, property, and liability insurance, consider comparison shopping for alternatives every 3-5 years, and require your current insurance agent(s) to provide a comprehensive summary of existing coverage. Ask your agent to do this routinely every year. The summary is a handy reference tool, and also helps you when comparison shopping.
Embracing these basic financial principles is a good start. However, leadership, and life in general, is a journey during which the truly savvy person will continue to study and learn. Still, everyone experiences setbacks along the way. Don’t get discouraged, but grow in your resolve to take control of your financial affairs. By doing so, you can help avoid situations like the ones in which the McDonnells find themselves. You may also find that being in control of your financial affairs leaves you more time for the rest of your life.
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