When it comes to improving our quality of life, getting the most happiness out of every day,  and reaching our goals, it helps to have some type of plan in mind. Giving some thought to what you want, and how to get there, is generally more effective the operating randomly without a plan.

To me, when it comes to those aforementioned aspirations, my framework is to focus on relationships, health, and wealth. As I wrote in one of this blog’s foundational articles, the role of money in our lives is of course personal, but for me it does encompass those 3 aspects I just mentioned.  Relationships, health, and wealth can all influence one another.  To the extent that we are strong in one area, we can potentially help ourselves in the others – with the opposite holding true as well.

So clearly, while money isn’t the most important thing by a long shot, it’s realistic to say that it can help improve the quality of our lives. To that end, tying back to the opening paragraph, it behooves us to have a plan for how to manage our money and grow our net worth.

With that in mind, I’ve come up with these 15 ways to protect and grow net worth:

1. Get a good formal education.  I’m starting with this one since there has been much chatter in the blogosphere in the last few years about the value of a college degree, and whether or not it’s really worth it. This topic was addressed here in a discussion on the choice between college or entrepreneurship. Well, I do think that where one goes to school and how much it costs can greatly impact the ultimate value proposition of a particular investment. However, that doesn’t change the reality that a college education is important and does matter. Plenty of data out there indicates that those who avoid higher education will face a lifetime of lower earnings. Again, just be extremely careful when making your decision on where to spend tuition dollars. Also remember, you can always be an entrepreneur and a college graduate!
2. Embrace continual learning.  Keeping up on the education theme, it’s important to keep in mind that what we learn in our formal education gives us a good foundation and an essential piece of paper, but the learning doesn’t stop there. I think that the ability to continually grow through experience, along with the trait of intellectual curiosity, are important factors in determining personal and career advancement. We can always learn something new everyday, and add this experience to our toolbox.
3. Focus on your career.  Your experience, and the value you can add to someone who will pay you for your services, is what will make you a big share of your money.  Unless you’ve inherited big money, where else – realistically – are you going to be able to generate the income for your food, shelter, transportation, etc? Basically, my idea is this, as I’ve expressed before: you have to make money before having anything to save.
4. Generate multiple sources of income.  While your career will likely be your biggest source of income for a good part of your life, you don’t want to put all your eggs into one basket. Jobs can be lost, career tracks can be altered, and a whole host of so-called unexpected events can happen. For safety, it’s a good idea to work on alternate sources of income that can be done on the side. Plus, aside from safety, these efforts can provide additional income and maybe an opportunity to do something entirely different someday!
5. Discern wants from needs. What do we need? I had put together a personal finance hierarchy of needs that I think provides a framework for thinking about certain priorities. Along those lines, it’s essential to be able to decide upon what we presently need, and what we simply want. For example, if given an option of a older, dated 3 bedroom house or a brand new, sparkling 4 bedroom McMansion, choosing the older home over the newer home is looking at needs vs wants. Nobody needs a brand new house.
6. Maximize the income minus expense gap. Once we earn money, as noted above in #3 and #4 – and figure out needs vs. wants, as noted in #5 - we can work on saving. This is the bottom line, where income and expenses intersect to result in savings. It’s kind of like a company that reports profits -  income minus expenses equal how well they did. I mean, unless we focus on this gap and actually save, our net worth will have difficulty growing.
7. Practice effective asset allocation.  Put your savings to work for you. If you have an immediate need for funds, you may want them in safer investments (like cash). If your investment timeline is longer, you may want to increase the percentage of funds in stocks. There are many approaches people take to asset allocation, and it’s vital to utilize one that matches your situation.
8. Put money in your employer 401(k) plan.  The employer match is a great deal for employees. The rate of return that you can earn on such allocations can be significant. For example, if you drop in $3,000 – and your employer matches it dollar for dollar with another $3,000 – that’s pretty good!
9. Manage Risks.  Not all risks are bad. It’s good to keep in mind that risk and potential reward often go hand in hand, which is factored into our decisions in #7 above. Additionally though, there are risks in which we need to protect the downside.  When it comes to assets, the the Buffet’s Rule #1 on losing money is one to keep in mind when it comes to making up losses. In a different context, avoid big losses, and get proper insurance for your home, health, and vehicle. Additionally, proper estate planning falls into this category as well.
10. Eliminate Debt.  If you owe someone money, you’re essentially a servant to them. If you needed to take out a mortgage loan to buy your home, then you’re effectively a servant to your lender. If you don’t pay your lender, you’ll be out of your home. That puts things in perspective, right? Plus, by paying high interest, you can really dig yourself in deep. Best to avoid debt if you can, and pay off what you do have as soon as possible
11. Think long-term. While living in the moment is important and a source of joy, we also have to spend some time also thinking of the future too. Taking a long-term time horizon, and remembering that we ultimately need to retire, is fundamental to growing and protecting net worth.  Personally, I like to think that I’m working for the me of today, as well as the me of 35 years from now, who might not be able to work. That’s my biggest financial motivator right now – making sure I’m not old and broke. The opposite would be old and financially prosperous, which is preferred!
12. Be relentless and persistent.  My own observations are that the times where I’ve truly wanted something badly enough, and really, really worked hard for it – are the times when I’ve achieved the most success.  I’ve observed this in others too, where some people who are determined and tenacious may achieve things that others who are seemingly brighter and more talented – yet less persistent – may not.  The more I’m around, the more it seems like once you pass that threshold of being “smart enough” to do something, the next real differentiator between success and lack of it is hard work.
13. Be resilient.  For most people, life is not a straight, linear path to some type of nirvana. While we hope that the majority of days are spectacular, there will be a few speed bumps along the way. More than that, there might be times where truly “unexpected” setbacks occur. Job loss, health issues, divorce, accidents, and the like come to mind. It may not be easy, but try to be mentally tough and prepared, as the odds are that at least one of those less than exciting events will happen to most of us.
14. Nourish positive relationships.  So, we’re back to what I said up front – how wealth is tied in some way to relationships and health. In terms of relationships, this can take on many forms. First of all, people that are married tend to have a higher net worth than those who are single, on average. At the same time, divorce can damage finances severely.  So, that’s one way relationships matter! However, this applies to many other relationships. If you get along with your boss, for example, you’ll be better off than if you were at odds. If you network well, you’ll learn more from others and might have more professional and business opportunities than if you were more isolated. To the extent that you enjoy people, are interested in others, and are able to get along with others effectively (and smartly), it seems like you’ll be in a better position to succeed.
15. Stay healthy. Most importantly, of course, being healthy means that you can enjoy life and be there for family and friends. However, it also matters for your net worth. First of all, if you’re not healthy and incur significant medical bills, that be money out the door that you could have saved. Second, and actually this might be more important, if you’re not healthy, you’ll have trouble working. Which means, you’ll have trouble earning an income.  That’s yet another motivator to eat well, get plenty of exercise, and manage stress. Even sleep can impact wealth, so it’s important to get enough!

My Questions for You

What are your thoughts on this list? Are there any here you especially agree with?

Which of these approaches do you feel like you do best and worst?

Do you have any more suggestions on general tips to grow and protect net worth.

Why not you? If others can achieve their financial dreams, you can too!

Flipping that around, I’ve had some of those “why not me” thoughts of late. Extending those thoughts to everyone reading this, I ask the same thing regarding you and your ability to reach your financial goals and have your wishes come true.  We can’t that be you?

Well, I’d like to think that we can achieve our financial dreams, and make them happen. Just think about it – there are plenty of people out there, probably hundreds of thousands at the minimum, that are absolutely getting it done. While their aspirations may vary, they’re accomplishing what they want to do without settling for “good enough” or partially meeting goals. Additionally, some of them are achieving tremendous success probably beyond their wildest dreams.

Are these people all exceptionally brilliant? Maybe some are, but then again probably most of them are not. Are they lucky? Sure, I’ll bet luck plays a part in a lot of success (or lack of it), but it’s not necessarily a driving factor? Did all these people have built in advantages? Well, maybe some did, but again I doubt that most of them did.

Really, I’ll bet that many people are able to achieve lofty goals by being goal oriented, on task, disciplined, and persistent. They want it badly enough, and are willing to strategically make the right sacrifices to have it happen.   Think about it – there have been instances in life for all of us where we have wanted something badly enough that we managed to make it happen.  Why not make it happen on a bigger stage, so to speak, with our higher financial aspirations?

I’m talking about getting things done now in order to make longer term dreams happen. Since Rome wasn’t built in a day, using a classic saying, that might mean taking longer-term aspirations and working on your goals for the year as necessary steps.  Some of these goals could be things such as:

• Paying off all credit card debt
• Paying down 2 years worth of mortgage payments in 1 year
• Getting a great performance review at work
• Doubling the % of income saved vs. the prior year
• Finishing a degree
• Buying a home at below market value
• Building a profitable online business
• Finding a new job making more money

Whatever the case is, it’s achieving these smaller goals that can help us achieve our bigger picture dreams, whatever they might be.  Kind of like steps to take along the path to success.

While it shouldn’t necessarily take a New Year to get us moving, the really New Year is here now so we might as well embrace this as a time to step it up and really commit to making measurable progress toward our goals. Think of how great it will feel to achieve success this year, even more than what you’ve done in the past. I figure if others are making their longer-term financial aspirations happen, why can’t I. Why can’t you, either?

Of course, we can do it if we put our minds to it. I’m probably a bit fired up now, but I’m really excited about making this year a very successful one, and looking forward to your success as well. Let’s make it happen!

What motivates you to save money?

This question probably brings out a big variety of answers. We all have different life experiences, family situations, quality of health, etc. Additionally, no two people are exactly alike in terms of personal values and dreams. Sure, there are probably some similarities, including some close ones. But our unique lives lead us to some different financial motivators.

What truly drives one person to save money might be different than what impacts the next person.  That is, if that person is motivated to save at all. Clearly, looking at our personal savings rates here in the US (and Canada, for that matter) compared to global savings rates, this might not apply to all of us!

Anyway, being in the camp of people who thinks saving is important, I do have a variety of motivators.  Some aspirational, others more practical. But there’s one motivator that especially drives me:

I don’t want to be old and broke

Simply put, I don’t want to grow old and worry about how to pay bills and how to get by. Deep down, underneath all my other motivations surrounding making money, this one is the one that lights the fire within to get things done. I saw an older person working at a restaurant recently, and she looked like a tired grandma. She clearly wasn’t the owner of the place. I felt really bad for her, almost wanted to help her do her job.  Also, I just didn’t want to end up like her.

Surprising? Well, I know that there are people who don’t share this motivator.

I had a conversation about this in the last year, where I was told that one can’t live life in fear, and should think positively and not worry about it.  In other words, have some goals but realize that you can really enjoy your money when you’re younger – when you’re mobile, can travel, have younger kids, etc.  The idea with this way of thinking is that being motivated by things or experiences that money can buy is a better way of approaching it. Why bother worrying, when you focus energies on enjoying your money, is how the line of thinking goes.

It’s easy for me to see the point, and I do share some of those values. Life is to enjoy, and we simply can’t delay gratification forever. Every single day is to be enjoyed, and sometimes this enjoyment does involve spending some hard-earned money on wants as opposed to needs. A life focused strictly on needs would be a boring life.

However, while holding that view to some degree and fully believing in enjoying each day, I just can’t shake that under the surface fear factor when it comes to money and age. Visualization is key here.  To me, the visualization of being old and having far less energy than a younger person – yet needing to work hard to stay afloat financially – sounds atrocious.  You never know what your health will be, even if you eat healthy, exercise regularly, manage stress, etc.  Sure, you can put the odds in your favor by making good decisions, and I’m all about that these days. But who the heck knows what the future actually holds? None of us has a crystal ball.

Not sure about you, but being old and broke sounds terrible. The way to take personal responsibility for that is to save money when younger, allow compounding to work it’s magic, and invest intelligently.

The way I see it, we are working not only for our lives today, but we’re also working for the lives of a senior citizen. We’re working for two people, and both of those people are actually ourselves! You’re working for the you of today, and the you of old age.

Saving for old age is a need, not a want.  When considering the financial hierarchy of needs, it’s not as important as taking care of daily needs for now, but it’s still important. I’m not expecting social security to be around.

Don’t get me wrong, I think that people have the potential to do a lot as they get older. Heck, there was a story recently about a 100 year old man who finished a marathon in Toronto. The guy apparently didn’t take up running until age 89.  Incredible! So, there are people that can succeed in business or their career, even later in life. So much is about attitude.

But I don’t want to count on a miracle comeback late in the 4th quarter of life. Better to have some peace of mind by preparing for the future while repsonsibly enjoying every day as much as possible! Doing both, rather than one or the other, sounds good to me.

My Questions for You

What motivates you to save?

Are your true motivations aspirational, or defensive?

Do you think about money needs in old age, even if that’s far off for you?

The Pareto principle, sometimes known as the 80/20 rule, is a concept that has many applications.  The main idea is that 80% of the effects are resultant from 20% of the causes. Or put another way, 80% of the results come from 20% of the effort.  Lately, I’ve been giving some thought to how this way of thinking can be applied to our lives in terms of money.

The Pareto Principle and Business

The Pareto principle is often included in many business decisions. When working on selling a particular product, it’s generally not a good idea to try to be everything to everybody. In other words, your product will a good fit for some people, and not as good of a fit for others. Plus, there might be some potential customers that can be influenced to buy your product, and some that will be resistant to buying it.  Thus, it’s important to target sales efforts for a product (or service) effectively, so that your resources are used wisely. It’s often cost prohibitive to mass market most products.

The result: we might see that a large percentage of our sales come from a small concentration of customers. To apply the Pareto principle, we would say that 80% of sales come from 20% of customers.

Or, you could discover the following:

• 80% of sales come from 20% of marketing channels
• 80% of advertising-sourced revenue comes from 20% of your advertisements
• 80% of your customer complaints come from 20% of your products
• 80% of your productivity comes from 20% of your employees
• 80% of your referrals come from 20% of your customers

If you’re a blogger, to take another example, you might find that a significant percentage of your referrals come from a small percentage of referring sites.

The Pareto Principle and Personal Finance

While the Pareto principle has been oft-discussed in terms of business, I think it might be underutilized in personal finance.

In terms of how we spend our time with respect to improving our financial situation, and working toward our money-related goals, there are different ways to go about it.  A common theme I see throughout the blogosphere, as well hear in conversations, is the use of money saving strategies. People come up with all kinds of ways to save a few bucks, and will frequently take interesting measures to do so.

For example, you just know there are people that would drive an extra 10 minutes each way – 20 minutes round trip – to buy gas at place that’s 5 cents per gallon cheaper. They just can’t stand the thought of intentionally paying more for gas when a cheaper alternative is available nearby. The thought of spending 20 minutes to save maybe 75 cents is quickly rationalized, if thought about in the first place.

Don’t get me wrong, I’ve engaged in some unique practices too. My idea of picking up pennies at the drive-thru might be a bit extreme , though at least I donated what I found .  Additionally, as I’ve shown in the Squirreling Gone Wild series, there are plenty of interesting things people do to save money. There’s no shortage of wacky schemes out there!

Those schemes are often harmless and fun. Ok, admittedly (and obviously) and I get a huge kick out them:)

However, it’s when people invest a lot time into saving a few pennies or even dollars, I wonder if that’s the best use of time in terms of meeting money goals.  Now, of course saving is great, and is vital to personal finance success. You can make all you want, but if you don’t save anything, you have nothing to show for your accomplishments.  But in order to save, don’t we have to make money too? It’s all a balance.

This is where I’m going to start thinking a bit more about what’s the most impactful use of my time:

If I’m spending 20 minutes going to a certain store to save money, how much is that really yielding?

If I’m spending an hour looking for an online bank that pays $0.001% more in interest, how much extra is that really getting me?

If I’m spending all day at work trying to get a routine task perfected, how far is that getting me? Could I do a visible, value-added special project instead?

What I’m getting at is that I suspect that many of us spend a lot of time doing things that ultimately don’t yield big results.  Even when aggregated, the little wins don’t always equal the big wins. Should we be focusing on getting better ROI on our time, spending it where we can truly get results?

In other words, maybe we should apply the Pareto principle (80/20 rule) to our efforts to grow our savings and net worth.  Focus our efforts where results will happen, instead spending time on low-yield activities.

Now, I’m not saying that I’m going to let making money guide my life, or choose daily activities in this way. I’m only talking about time that’s actually spent in the pursuit of money, one way or another.  Admittedly, after some reflection, I could probably improve in this area quite a bit.

My Questions for You:

What do you think of this concept of the 80/20 rule?

Do you ever think about this in your own life?

Do you have any additional examples of the Pareto principle to share?

Many of us are big proponents of living within one’s means, and saving for retirement and other life needs. In order to do that, we often try to save as much as feasible based on our current income level.  This makes sense, and is a cornerstone of growing one’s wealth.

To this end, saving money almost becomes a sport to some people. Check that – it IS a sport to many, who spend big chunks of time looking for deals, cutting coupons, reading about ways to save money, and so on. Some people, like me, even write about ways to save money! As any regular reader knows from the Squirreling Gone Wild series, I personally enjoy observing and hearing about people who go to extremes to save a few bucks. And yes, sometimes I take part in the fun too.  I truly enjoy saving, both in terms of finding ways to cut costs and in getting deals. Some people get so caught up in squirreling away money any which way they can, that they cross lines of fairness, which clearly isn’t cool.

When saving becomes an obsession, it’s easy to forget about making money. I shared my thoughts about this in the post Saving is Great, but Don’t Forget to Make Money Too.  When consumed by saving, income growth – or worse, income preservation – is often forgotten.

I thought about his some more, and am considering the ROI of time invested in both saving and income growth. Here’s my question:

Is it more productive in the long run to increase time on income preservation and growth, while reducing time spent on saving?

To some degree, we’ve explored part of this topic in a few prior posts.  Clearly, spending time on saving is important. It’s just that when we take it a step further and analyze it, there are diminishing returns to our time.

Meet Jane

Let’s take an example of a random person – let’s call her Jane – who makes $4,000 per month after taxes. Jane’s expenses are $3,600 per month, netting her $400 in savings per month.  Jane is saving 10% of her income. Let’s also assume that she does so without giving it much thought.

Next, let’s say Jane decides that she wants to look for ways to save more. Let’s say she starts looking for coupons, spending an hour a week searching and cutting/printing. Let’s say she goes an hour out of her way each week to go to different places that can save her money on regular purchases – groceries, gas, cleaners, etc.  How about we also assume that Jane spends another 2 hours per week online reading about ways to save money, talking about shopping, or thinking about saving on good deals. Maybe another hour tracking her spending in great detail, recording all transactions and filing away all receipts. Total weekly time spent focusing on saving is maybe 5 hours, and let’s say that projects to 20 hours per month.

How much can she save? Well, it depends on her situation, but let’s say that she can cut her expenses from $3,600 per month to $3200. That’s $400 in savings for 20 hours of her time. $20 per hour isn’t bad!

After a while, however, Jane can only cut so far.  The next month, if she spends 20 hours of time focused on savings-related activities, how much could she save? She already took care of the low-hanging fruit, so now it takes more work. Maybe now she’s identified the opportunity to save another $200. So, based on 20 hours, that comes out to $10 per hour. The third month maybe she’ll cut another $100 from her expenses, making her payoff $5 per hour.

Eventually, there’s only she could save, and her ROI in terms of time starts to diminish.

What about time spent on income?

First off, if Jane is working, she’s already spending the better part of the day generating income. Hopefully, she’s positioning herself to continue earning income and maybe make more. But what if she invested some of that time on income – let’s say 12 out of those 20 hours?

She could spend those 12 hours researching different side businesses. Or, she could spend time pursuing an advanced degree part-time. Perhaps she could learn about investments. Maybe should devote that extra time to her current job, and really make herself invaluable or even promotable.  Or she could spend some of the time working, and the rest networking, meeting other professionals and learning about opportunities.

What would her ROI on that time be?

It might be low. It might be wasted time. Or, it might be well worth it and pay massive dividends down the road. If she really invests her time right, she could work toward growing that income much higher. Who knows, maybe she could double her income, increasing it $50,000 to $100,000? Or more?

If she spent all her time obsessed with saving, she couldn’t gain $50,000 back in reduced expenses. There’s a limit to what can be gained that way.

By investing some time in income growth, there ROI could range from zero on the low end, to an upside that could be quite high.

If in the end, saving or growing income is all about having more money. Thus, it pays to think about ROI on time, and consider balancing time between saving and income growth. There’s a combination there that’s right for each of us, based on our own individual needs.

And the portion of wealth creation that’s spent on saving…if it’s an exhilarating sport to you, enjoy it! I know I do:)

Having a million dollars would be great, wouldn’t it?

Yes, of course it would be! For most of us, it’s not likely that we’re making that annually, but it’s possible that we might eventually save that much. Financial independence would be ours!

Or not.

It’s always interesting to me how we read about the amount of money one could have, if you just saved X amount per year and earned Y percent rate of return. I do these calculations too, and have included such analyses here on Squirrelers as well.

The catch – which I regularly point out – is the time value of money. Why is it that we don’t read more about this? In my MBA program, it was one of the more basic, useful concepts that I learned early on. A dollar today is worth more than a dollar tomorrow, except when there’s deflation – which we don’t want of course.

Example:

Let’s say that someone is saving for a goal of becoming a millionaire in the next 5 years.  If this is a realistic goal for you, that’s fantastic. Assuming 3% inflation, that million dollars in 5 years will equal  $862,608 in today’s dollars.  So, that original million dollars will be able to buy about $862,608 of goods based on today’s prices.

Calculation: $1,000,000 / (1.03) ^5

Fair enough.

The thing is, the further your time horizon, the lower the purchasing power of that future $1 million becomes.  Expanding the timeframe further, and keeping the same 3% discount rate, we can see this illustrated more clearly:

Present Value today of $1 million in 10 years = $744,094

Present Value today of $1 million in 20 years = $553,676

Present Value today of $1 million in 30 years = $411,987

All nice sums of money, but not the $1 million windfall that would meet the eye without discounting back these sums at 3%.

I really think that the concept of purchasing power, and how it erodes over time, is a basic fundamental of personal finance and planning for the future. People need to plan accordingly in terms of income, savings, and rates of return, in order to be able to plan for the future.  My perception is that the average person out there does not think about this concept when planning for the future.

Of course, many people do absolutely no planning for the future in the first place, which is not good. We know better, being personal finance enthusiasts, whether we’re bloggers or not.

Questions for You:

At what point did the light bulb go on for you, when you realized the need to base future retirement funds on the purchasing power of the time at which you plan to retire?

Do you think that this is something that the average citizen out there really even considers?

It’s cool when readers make comments that prompt you to create a post on a certain point, no matter how brief. Recently, on my post 5 Rules for Achieving Debt-Free Living, a simple yet valuable point was made in one of the comments:

“Look at what you want and figure out how many hours (post-tax!) you will have to work to earn it. Do you want it badly enough to buy it?”

It’s something I have thought about before. These days, I think in terms of maximizing the income minus expense gap, investing intelligently, and the concept of time is money.  This approach is one I actively thought about as a teenager, when I realized that for me to spend $9 to see a 2.5 hour movie and enjoy popcorn and a soda, it would take me that long at work just to do that. It got me thinking about how maybe I didn’t need to get the popcorn and soda, and maybe should just get one or the other:)

But as adults, it helps to remember that calculation from back in the day. I had a few friends who, upon getting their first jobs out of undergrad studies, purchased new cars. Not just new cars, but nice new cars. This was a while ago, and these people were buying $25,000 cars. Keep in mind, their salaries were in the range of $25,000 as well. Pre-tax.

These guys spent a lot of time working just for a car.

So, let’s do the math.

1. $25,000 salary, divided by 250 working days, = $100 per day.
2. $100 per day, divided by 8 hours, = $12.50 per hour.
3. $12.50 per hour, multiplied by 75% - to account for tax – = $9.38 per hour post-tax
4. $25,000 car, divided by $9.38 hourly rate, = 2,665 hours.

They worked 2,665 hours for those cars. When you consider that the calculation above assumes 2,000 working hours per year (when you consider #1 and #2 above), this comes out to 1.33 years of their life that they worked just to pay off a car.

If they just would have purchased a decent used car for much less, it would have made a lot more sense, though it wouldn’t have been “cool”.

The good news is that many years later, both guys are now savers who try to put a way a solid percentage of their income. I have only talked to one about the cars he bought when younger, and he acknowledges that it was totally nuts for him to do that.

Maybe he started to do this type of math exercise and figured it out later!

Question for You: Do you ever think of things in this way, figuring out how much you would have to work in order to pay for something you wish to purchase? This can apply to any big purchases, not just cars.

One of the enjoyable parts about having a personal finance blog is the aspect of continued learning and refinement of your own financial philosophies.  Some of it involves learning from other bloggers, reading great content and considering different points of view. A lot of it also comes from just thinking more about the subject in general, and considering it in the context of your own life.

As I’ve been doing this, it’s become clear to me that for people to set themselves up for a strong and healthy financial life, there are key elements that can serve as the foundation for future success.

Here are my top 12 key success factors for personal financial health:

1. Health.  For personal financial health, one needs to be physically and mentally healthy. If health isn’t there, it’s tough to generate cash flow. Think about it – if you have trouble working, or can’t give it 100% on the job, your future earning capacity will be limited. For most people, at least in the wealth-building years, income is generated from work.  It’s imperative to keep your health and keep the odds in your favor. Having more energy to focus, and work more effectively and efficiently, will help you succeed on the job. Bad health can impair your ability to work. Good health can help put you in a position to work and create wealth, while allowing you to keep your focused on your goals.
2. Hustle.  Sitting on the sofa, surfing online, playing games, shopping, etc – those are all fun things to do. But will they make you money? I have seen in my years working that it’s the people that are willing to roll up their sleeves and actually work hard are the ones that will succeed. It’s the willingness to hustle, and move forward in a positive direction that can separate people who advance in their careers or succeed in their businesses, versus those who stay stuck in a spin cycle. Money doesn’t come to people who sit around, you have to want it and be willing to work hard for it.
3. Education.  I’m a big believer in education.  Yes, I did a post on how Stanford quarterback Andrew Luck should have dropped out school, and taken the big money that was sure to come his way. However, don’t let that distract you from my thoughts that education is critical to one’s success in life.  Personally, I ended up getting an MBA, going full-time, and felt that it was a great investment. Others I know with doctorates in different fields feel the same way about their choices. May not be for everyone, but regardless of whether you pursue an undergrad degree or go further in formal education – embrace education as being a lifelong venture. I’m beginning to think that a huge value of my grad school days was not necessarily the specific content, but rather in learning how to learn. More than that – embracing learning as something that’s fun and a necessary life skill that can be applied in day to day life, with intellectual curiosity.
4. Steady Income.  I wanted to put savings here, as I see that as being so important, but before you can save you must actually make some money first.  Making sure one has a steady income is critical to laying the groundwork for financial prosperity. Keeping aware of career and professional opportunities, networking, and doing great work are all a big part of generating income.  Make sure that you are adding value for your employer, are delivering more than what they’re paying you for, and try to make yourself truly needed. This is a baseline, with income growth the higher goal and accelerated path to wealth.
5. Control over Expenses.  This can also be looked as living within one’s means. But I’m talking about taking it step further, and not letting expenses get out of line as income increases. Sure, to some degree that’s probably natural, but in general it’s important to discern wants from needs.  Controlling those emotional urges to buy and focusing on what’s really needed as a first priority is a big hurdle for some, but is imperative for success in this element. Budgeting, comparison shopping, and frugality can be very helpful tools in this regard.
6. Saving.  Taking income and expenses into account, your net between the two is saving. Which isn’t rocket science obviously, you already knew that. But I think it’s important to have a savings mentality.  This is up for debate, and maybe my own biases are at work here, but I think that a save first, spend later approach works well. Pay yourself first and save for your emergency fund, health needs, and retirement. The latter is huge, and will get here sooner than you realize.  Nobody should want to be in a position where they have to work when old; rather, it would be great to not have pressure to work unless you want to. Big difference in terms of stress on the mind and tired old aching joints and muscles. Take care of yourself and your future, and save diligently.
7. Investing.  Saving money is crucial, but it isn’t enough. Stuffing money under the mattress is saving, and is better than nothing, but it will decline in value over time. Consider the time value of money and opportunity costs when deciding what to do with your savings.  As we should know, rate of return matters, and every percentage point counts.  A proper asset allocation strategy, based on your own life situation, should be employed. Cash, stocks, bonds, real estate, etc – are among the different buckets for your money. By investing, you’re letting your money work for you. Let time and compounding work their magic. But be careful not to turn investing into dignified gambling.
8. Purpose.  Having a sense of purpose is a way to guide your overall intentions and motivations. At the base level, we all have the instinct to survive. But beyond that, and bigger picture, what’s your sense of purpose? Connecting your overall life goals with your efforts to earn money can fuel your effectiveness to reach heights of success.
9. Risk Management.  This doesn’t necessarily mean being risk averse, but it means being aware of risks and avoiding making the big mistakes.  Examples: texting while driving then getting into an accident, not having the right homeowners insurance and then having a flood, having inadequate health insurance, etc. Whether it’s insurance coverage or decisions in day-to-day life, one needs to keep in mind the risks in given situations that could wreak havoc with your life, and manage them as best as possible.
10. Resilience.  Change is inevitable, so we should try to accept it and embrace it. This one is not easy for me, and I’m not naturally attuned to this. However, it is what it is, and I realize that I must get with the program here. So, I’m working hard on that.  We must be able to realize that despite our greatest work and plans, we can’t control everything and other people either.  Stuff happens, it just does – and we have to deal with it. Best to be internally strong with a sound perspective, and survive the tough times while thriving in better times.
11. Relationships.  It’s hard to be a lone ranger.  Whether at work, for your business, or in your personal life, relationships matter. I’m a believer that to the extent you have strong relationships, your health and wealth can only be better. Discussed this in the Role of Money post.
12. Generosity.  This one is fun.  It took me a while to figure this out, but it’s important to put yourself in the shoes of other people. We’re all human, and we all have our own needs. When some people aren’t able to have basic needs met, or are in poor health, it can make all the difference in the world to show them generosity.  Also, even just in day-to-day life, doesn’t it feel good to help others? What’s great is doing it without any ulterior motive. It’s fun, and the reality is that in some way something good will come back to help you. Karma is real. 

I’m actively working on all of these. 

Now that you’ve read my longest post to date, I ask you: 

Which of these elements do you see as being most important to you? Are there any you would add (or take out)?

It seems as though a new year brings new hope for many people. This is truly a great thing, as rejuvenation, renewed energy, and a strong sense of direction can go a long way toward improving the quality of our lives. This includes the realm of personal finance, as it fits within our lives.

While setting goals for a new year, and getting ready to charge ahead, it’s often important to take some time to reflect on what we have learned. After all, it’s better to move forward with a more informed perspective that captures what we have learned from past experiences, isn’t it?

Along those lines, I have been thinking about my perspectives gained 2010, specifically as they relate to personal finance. Much of this I had crystallized a few months back, and shared on Yakezie. That said, this seems like a good time to take stock and think about these insights that can help 2011 be an even better year.

Here are 6 lessons that relate to personal finance that I have learned or had reinforced:

1. Expect the unexpected. Life doesn’t always move forward in a linear fashion. No matter how much we try to avoid them, most of us will have some ups and downs.  The “ups” can be fantastic, and the “downs” can be frustrating.  Many of us almost expect the positives, and the negatives don’t align with expectations and can ruin our “plans”.  To alleviate that, factor in the reality that the unexpected will happen. I have learned that it’s good to frame expectations that way, and realize that things will come out of left field and impact us. That way, you are prepared, even as you optimistically strive for the very best.
2. Think savings first, lifestyle second. This is an extension of the need to discern wants vs. needs. It’s of course important to enjoy life to its fullest every day, and it can be done within your means.  If you do it oustide your means, you’re adding stress that will show up either now or later when the proverbial bill is due. It’s so much better and peaceful to live within your means and save appropriately. Life can be rich either way.
3. Even before savings, think of earnings. You can cut as many coupons as you want, but it’s better to focus first on actually making the money that you ultimately want to save.  If a company had steady revenue but was not working toward growth prospects or protecting it’s earnings, this would be reflected in it’s stock price. Who would want to invest in such a stock? Let’s remember that we need to have positive cash flow before we can think of saving it.
4. Diversify your income potential. In the days of yesteryear, some people would stay with one company for 30 years and get a small pension and a nice parting gift, such as the classic “gold watch”. These days, for the most part, our future is self-directed.  You will buy your own gold watch, so to speak. To that end, hitching your wagon to one employer or source of income is shortsighted. Rather, keep your skills fresh and current, and continually build and maintain your network. Additionally, think like an entrepreneur and better yet, become one – even if on the side.
5. Enthusiastically pursue your goals. We all have our goals and dreams. To my way of thinking, as long as you’re not negatively impacting anyone else’s life, and are also being responsible, allow yourself to get fired up, have fun, and go for it!
6. Be a giver. Reward those that have been loyal to you. There are probably more people than each of us might suspect, at first glance, that have really done some nice things for us.  Let’s remember this. In addition, it’s important to selflessly give to others without strings attached. It feels great to help others, and it can be done without possessing great means, while responsibly being done within our means. Even though you don’t expect anything directly back, you will be rewarded in some way, whether immediately or somewhere down the line. 

These happen to be mine, but what about yours?

What lessons have you learned or had reinforced within the last year, that you can put to great use going forward?

When it comes to our finances, each of us has our own individual approach. Some of us are savers, some are spenders, and others are somewhere in between.   This continuum is a paradigm that our popular culture uses to frame differences in the way people approach money.

I believe that the way we approach our finances goes beyond that particular behavioral characteristic. In reality, I think our approach to finances can be viewed in more of a multi-dimensional setting, where money has a different role in each our lives. For some, money means survival, plain and simple. For others, money is something that is a part of their lives but rarely on their mind, regardless of the role it actually plays. For yet others, money is an obsession, as accumulation signifies achievement. Some people view money as analogous to insurance, or a defensive resource to protect against future setbacks. Some people want money to provide a good home….or to contribute to the ability to have certain hobbies….or to provide something to bequeath to future generations….and so on.  Sometimes the same person may view money differently in different situations. The bottom line is that we each have our own relationship with money, and our own conscious and subconscious needs for money, rooted in our value systems and cumulative life experiences.

This is an area of personal finance that has interested me for a while. Why do people behave the way they do with respect to their money? What’s driving this behavior?

Of course, a starting point for anybody is to consider how you personally view things. Taking an introspective approach, I have spent time figuring out my own take on money, and the role it plays in my life. What I have determined is that for me, it fits into a framework that includes the following elements: Health, Wealth, and Relationships. These are linked together as a part of a system.

Think about it: HWR – Health, Wealth, Relationships. They’re all connected, and to the extent one is strengthened, the others will be strengthened as well. If one is weakened, the others will be weakened as well.

For example, lets take 2 people: A and B.  They are twins. A has good health, average wealth, and good relationships. B has good health, average wealth, and poor relationships. Over time, all other things being equal, I think that A will end up having a better overall quality of life.  My reasoning is that A’s good relationships will be good for his happiness and will lower his stress levels compared to B, which will give A a chance to be healthier. As A is healthier, he will have a better chance to be wealthier, as he will be able to in better position to earn money while having lower health care expenses. And while he is healthier, he in turn will be in a better position to cultivate, keep, and grow relationships, leading to better chances to be wealthy, etc. Circular, perhaps…yet very symbiotic.

So to me, money is a part of the Wealth aspect of HWR. Beyond basic survival, money gives you the opportunity to live a healthier life, with the time and means to have more positive relationships. One thing I want to make clear is that I am not saying that money buys friends. Well, it could, but those aren’t true friends. What I am saying is that the more money you have, on balance, the less stressed you are about it, and the more time you have to do other things, such as cultivate true, genuine relationships that aren’t based on money. Money is but a component in the system.

Of course, there is no right or wrong framework, each of us has our own specific one, whether we have consciously thought about it or not. Yours might be entirely different than mine.

It would be interesting to get everyone’s perspectives on the role of money in our lives, in relation to other aspects. What do you think?

Note: I originally posted this piece very soon after Squirrelers was launched. Given the blog’s increased readership, I wanted to revise the post a bit and revisit this topic to get everyone’s thoughts