This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
Sometimes when people talk about finances, they get too caught up in the numbers. I have a tendency to do the same, since I am a numbers person. After all, what can be more objective than a spreadsheet that calculates how much you need to save, or what percentage of your income you should be spending in each budget category? Left to our own device, we can justify just about anything (“I’ll start saving next year,” or “I’ll charge it to the credit card since I have a low introductory rate.”). That is why we need objective advice. But that is all it is, advice. In most cases we all need objective advice when dealing with our finances, but we are not objects. We are people and we need some subjective, personal direction as well.
Know What You Want Out of Life
I could tell you that you should save 10% of what you earn towards retirement, and I may be exactly right. But what I don’t know, without asking you first, is what your retirement plans are. If you make $50,000 per year and you are 25 years old and you want to retire by age 45, then saving 10% of your income might not be enough. On the other hand, if you are 30 years old, have already saved $150,000, you are making $80,000 per year and you don’t plan to retire until age 70, maybe you could actually save a little less in your retirement account and do something more with your current income. The point is you have to first decide what you want for your life.
That is why I emphasized the concept of planning earlier in this book. Once you have decided on a plan, only then you can decide how you want to reach it. There is nothing wrong with constantly revising your plan; as long as you know what your current starting point is when you do. This goes way beyond retirement. It covers all aspects of your finances such as how much of your income you should spend on your housing needs or whether it really is more important for you to purchase that new sports car now and defer some of your savings until later. I am not giving you the go-ahead to justify any and every decision, just make sure you know what the consequences of each decision are, and what your long and short-term goals are and you will be able to make the decisions that are in your best interest.
Along the way you are going to hear advice from many of the experts (‘Pay off your highest interest rate loans first’), your family (‘Buy the biggest house you can afford’), your friends (‘I have this great stock tip that will beat the market’) and of course sales people (‘If you lease instead of purchase, you can get a better car for the same monthly payments’). What you have to be able to do is figure out when they are giving you sound advice, and when you need to tune them out.
Are you a low-risk or high-risk person? If you like to take risks, you will probably gravitate towards being a spender and borrowing for your current needs or putting your money into hot stocks or trying your hand at leveraged real estate. If you avoid risks at all costs you will probably shy away from borrowing, but will also keep your money in a local bank account that earns less interest than inflation.
Don’t Get Scammed
People who are high–risk and desperate are much more likely to fall for get rich quick scams. Scams come in all shapes and sizes. If someone wants to give you money, but asks that you first give them money, you can pretty much bet it is a scam. If someone from Nigeria, or some other foreign country, wants to use your bank account to transfer millions of dollars, and give you a percentage, you are being scammed. If you are being guaranteed returns in double-digits (such as 10% or more), you are being scammed. Remember, if it sounds too good to be true, it is. People do not just give money away for nothing.
If you just send $5 to five people and each of them sends $5 to five people, what you will get is ripped off by $25 dollars and you will have committed mail fraud. In many sales organizations, one of your goals is to recruit other people so you can earn overrides on their commissions. Whenever the recruitment is where you make all of your money, and not on the sale of products, that is where you have a pyramid scheme, as opposed to legitimate multi-level marketing. If somebody on the Internet wants to show you how to become a millionaire with little or no effort by sending them $39.95, then what they mean by “show you how to become a millionaire” is, “you can watch as they become a millionaire” by ripping people like you off for just $39.95 at a time.
Here is a prime example of a pyramid scheme. You will get a letter or email from a lawyer or some other “trusted” professional so you know it is “real and legitimate”. The letter will tell you to send money to a number of people, and those people will get a number of people to send money to you, and they get money sent to them, etc. Usually there will be some type of recruitment fee involved. If the recruitment fee involved is where your source of income comes from, and not from a legitimate product (such as cookware), you are probably getting scammed. Just because a friend is already hooked, doesn’t make it any less illegal or less of a scam. In fact, in some scams, it is better for them to get friends and family to recruit each other because of the level of trust. Remember, don’t let your emotions rip you off.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com or www.TheGraduatesGuide.com.