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Burning A Path To Financial Freedom

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Lessons Learned

Top 5 Ways to Avoid Financial Disaster

1. Make a realistic budget. Budgets are necessary because they are your guides to how, and what you will be spending your money on. When you go to work there is a plan for what you will be doing for the day, week, and future, so why not have one for your money? Spreadsheets should be your money’s best friend. They allow you get a quick glimpse of what you are spending before things sneak up on you. If you track your finances long enough they also afford you the ability to see how much your bills have increased, and if lifestyle creep is becoming a factor. This is part of the reason why that d@#n cable bill irritates me. The spreadsheet will allow you to keep a detail up-to-date record of your money.

2. Get rid of the Credit Card Balances.  In order to do this, you first need to know how many credit cards you have, their names and how much you owe. The interest alone on the cards will kill your finances. The average rate is 16% on most cards. Pay the cards off but do not cancel them. You don’t want to hurt your credit score due to a sharp increase in your credit utilization ratio. Keep in mind that, credit cards are not bad. If you use them correctly they can benefit you greatly with all the points, extended warranties, purchase protections, etc. that they afford.

3. Establish an emergency fund for when LIFE happens. The rule of thumb is that you should have enough cash to cover six months of expenses. I don’t necessarily agree with this…..have three months. As a last resort, you can use those credit cards that don’t have balances on them to cover you if you get in a bind. Remember, if you really fall on hard times, you should have a disaster plan together outlining which niceties you have become accustomed to can be eliminated.

4. Save for retirement. I am a pessimist (forgive me), but if you are reaching the traditional retirement age in the next 5 years, yes you can depend on Social Security, but if you are planning on retiring in 30 years I would error on the side of caution. It will be there for you, but probably in a diminished capacity. You will most likely need to have something else in conjunction with Social Security to maintain or enhance your standard of living .

5. Avoid buying big-ticket items that are out of your price range. Although the latte factor has become a popular strategy of demonstrating how redirecting your money from small things (like daily lattes) to savings can make you wealthier, the damage done by sinking money into a house, car, or some other large depreciating asset, can be far more detrimental to your financial health. These no payment, low introductory loan offers are lulling people into believing that they can afford more than what they actually can. So, my rule of thumb is yes you can afford to buy it, but can you afford to keep it up.

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