When it comes to personal finances - especially being in a position to make the best, most informed financial decisions for your family - you are at a distinct disadvantage.
They don't teach money basics in school. What you do "know" you learned from your parents or life in general - not necessarily the best or most qualified teachers. Your brain isn't wired to make good financial choices ... and the media and financial services industry have huge incentives to provide bad information and/or focus your attention on the wrong things.
I do my best, but I am one lone voice speaking out against very deep pockets with an overwhelmingly loud megaphone so if this resonates at all, please share.
Business Insider published an article on 4 Personal Finance Questions Everyone Should Be Able To Answer last week. At first, I thought this was great. It was short and simple and it warned against product sales and conflicts of interest.
But the four questions were ALL about investments and investing advice. There was nothing about cash flow, improving income sources, goals, planning or protecting what you already have. This was a list of investing questions, not personal finance questions.
There ARE only a few personal finance questions that every person should be able to answer, but those questions are, it seems, a secret ... and there was nothing this article did to shed a light on them.
So here are my Five Questions That Everyone Should Be Able to Answer. Tell me how you do on these:
Q1 - WHERE AM I?
In order to do anything about your personal financial situation, you must understand what you already have. What tools do you have at your disposal (Income potential, bank accounts, debts, etc.)? How are those tools working right now? Is cash flow positive or negative? By how much?
You don't need to know all these numbers off the top of your head, but it is important to have some kind of tool or reference where you can get this information quickly. Think of yout car's dashboard showing fuel, speed, engine, brakes, turn signals and GPS. You don't need to know the science of how the engine works, but what type it is (gas, electric, hydbrid) and generally how much it can handle (acceleration, payload, etc.) is critical.
Q2 - WHERE DO I WANT TO BE?
Odds are that no matter how good (or bad) things are today, they could be better. If you could have everything just the way you want it, what would that look like? What are your goals? aspirations? dreams?
Essentially, where is it that you want your financial "car" to take you. Flesh these out as completely as possible. The clearer you are about where you are headed, the more likely you will be to get there as opposed to someplace else.
Q3 - WHAT'S MY STRATEGY?
How are you going to get from Where You Are to Where You Want to Be?
There are plenty of paths you can follow to get to your destination. Some are better than others. In general, you want to take advantage of opportunities and avoid the threats. Work with your strengths as much as possible and let others cover for your weaknesses.
Q4 - WHAT'S MY NEXT STEP?
Having a long range strategy is important, but of even greater importance is to be crystal clear about your very next step in that plan. When it comes to personal finances, you are the one who gets to make all the day-to-day decisions. Nobody else can tell you what to do. It wouldn't be feasible and you wouldn't like it if they tried.
The journey of a thousand miles begins with a single step. Is what you're doing right now helping you get where you want to go? or is it working against your goals. It's also a lot easier to be fully engaged on a short-term task than it is on something that will hopefully happen in the far-flung future. There is energy and motivation in being able to check something smaller off your list today than combining it with dozens of other things that have to be done over the next several months or years.
Q5 - WHO ELSE IS INVOLVED?
Don't go it alone. You will use outside advice.
There should be an expert on taxes, a lawyer addressing legal issues (like your estate plan), an insurance expert and a personal finance coach to help design the plan and provide accountability and resources as you work your way through each step. These professionals should all be paid for their time and expertise just as you would pay a good mechanic to keep your car operating in tip top shape.
They each also come with their own incentives and built in conflicts of interest. It is important to know about and understand these variables. The good advisor will offer you a transparent means by which you can monitor for and identify any issues before they become a major problem. The ones to avoid are the ones who act as if those conflicts don't exist.
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