For your own well-being, make wise decisions when choosing friends and acquaintances. Be especially  aware of how your personal beliefs affect others, and how their personal beliefs have the potential to affect you.

To illustrate this, I introduce you to three fictional people you may find familiar: Bob, Janet, and Susan.

Bob considers himself to be a realist and a no-nonsense person. He doesn’t spend any time thinking about whether life has “purpose or meaning”; he just lives it day to day as best he can. Bob’s circle of friends, in general, are very much like him.

Bob scoffs at the idea there might be such a thing as “cosmic purpose”, the theory that things are somehow slowly progressing from lesser value to greater value. Bob’s universe is “born” (the big bang), lasts a very long time, and eventually dies a physical death. People are born, live a much shorter life, and then die. For Bob, there is no discernible purpose or meaning in any of this.

Bob is a self-described atheist; he is neither proud nor ashamed of this. The idea that there might exist a being who is somehow “superior” to humans and has been, in some way, responsible for the fact that we’re here is nothing more than childish wishful thinking.

Bob is not a “bad” person – he has his own personal sense of morality. He believes the only moral responsibility he has relative to other people is to leave no one worse off than the way he found them.

Bob does not typically talk about his personal beliefs. And neither do his friends.

Note Bob chooses to hold his beliefs; no one forced them on him, he could have chosen other beliefs.

Janet is what Charlie Munger (Warren Buffett’s partner and lifelong friend) might have referred to as a “toxic” person, a person to be avoided. Toxic people are highly judgmental and convinced they are mostly, if not always, right, about everything.

Janet reads a lot, but unfortunately her reading is limited to web sites. She frequently latches onto the latest conspiracy theories, and is quick to form conclusions that may vary from week to week. She doesn’t think of herself as a “negative” person, but she is quick to focus on the negative attributes of individuals.

Janet is more than willing to talk about her beliefs whether or not she is asked.

Note Janet chooses to hold her beliefs; no one forced them on her, she could have chosen other beliefs.

Susan considers herself to be inquisitive and open-minded, but not so open-minded that her brains fall out.

Susan has always been interested in science. She tries to imagine herself “outside” our universe as an objective observer. She notes, as others have noted, that over billions of years the appearance of life, consciousness, reason, and moral awareness have followed in a seemingly logical order.  She wonders if this could be characterized as some sort of evolution applied not to living things, but to the physical universe itself. She has never heard the term “cosmic purpose” before.

Susan does not consider herself to be an atheist, an agnostic, or a believer. While mulling over the concept of cosmic purpose and human evolution, she does not believe a Creator is necessary for the existence of either one as there could be something intrinsic in both the universe and in our human existence that could be driving this progression. While she does not believe a Creator is necessary for this progression, she does not rule out the possibility entirely.

Because Susan allows for the possibility that humans may be part of an evolutionary process for living things and that the physical universe may be undergoing its own evolutionary process, she sometimes wonders whether she might play a role in all of this.

This causes her to examine her personal beliefs, her life, and her relationships with her family and friends. She considers whether she can make a positive contribution to this and, if so, what that contribution might be.

Susan is always willing to talk about her beliefs, but only when asked and with people she believes are sincerely interested in hearing them.

Note Susan chooses to hold her beliefs; no one forced them on her, she could have chosen other beliefs.

Now, given a choice, who would you choose to invite over for dinner – Bob, Janet, or Susan?

Like the rest of us, Susan has beliefs. She neither ignores them nor spends excessive amounts of effort dwelling on them. She is however acutely aware of how her personal beliefs can affect everyone she knows.

Susan’s beliefs and attitudes towards life are, for me, the essence of what is necessary to sustain and improve the human condition – hope, and curiosity. She carries those qualities with her everywhere she goes, willingly sharing them with everyone she meets.

Susan has an ongoing invitation for dinner because she’s a person I admire.

Best wishes for the new year.

When I was younger, money was my master, not my servant. Maybe you identify with that. How does that happen, and how can it be changed?

Twenty something

In my twenties, money equaled food, gas for the car, rent, and not much else. After getting both a bachelor’s and a master’s degree I was unable to find a job in my chosen career. I looked all over the country; I did not believe this would change for the foreseeable future. When you are the only person in your family ever to go beyond high school the idea of career counseling never comes up. I learned there can be a big difference between “skills” and “marketable skills”.

Thirty something

In my thirties, I was married and starting a family. Money went to meeting family obligations and basic necessities. The idea of living below our means never occurred to us. But the concept could have been embraced by setting a low starting objective such as living on 98% of our means. This would have established a way of life and a way of thinking that could have been built on as the years went by. And they go by very quickly, as any grandparent will tell you.

Forty something

In my forties – just at the point when things seemed to be looking up – a divorce and all the associated financial and emotional challenges took a huge toll. I decided to start making modest contributions to a 401(k) at the very time when I could least afford to, reasoning that if I could do it under those circumstances I could continue to do it whatever the future might bring. That decision turned out to be a financial turning point in my life.

Fifty something

In my fifties I started wondering when we – my wife and I – could retire. We started saving every dollar we could towards the goal of retiring early. The ramifications of starting later rather than earlier became apparent as I became aware of the effects of compounding over time.

I began reading extensively on financial topics and realized that much of what was being made available to the public was either misleading, far too simplistic, not in the reader’s best interests, or factually wrong. So, I did my homework and waited until I was confident in my assumptions and calculations. We both retired early – ages 57 and 55 – and never looked back.

This was another turning point in my life as I started pondering more seriously the question “What really matters?” This set the stage for our sixties.

Sixty something

In my sixties we tried a variety of activities and pursued several interests because we now had the freedom to do so. We are nowhere near what most people would consider to be “rich”, but we are able to live comfortably and enjoy the freedom that results from good financial planning.  

Seventy something

In my seventies I hope to continue doing exactly what I’m doing right now: writing articles for this and helping people get the maximum out of their lives based on their personal objectives while convincing them that financial matters are neither unintelligible nor beyond their abilities and control.

At this point in my life I believe I have a better grasp on “what really matters”, and am committed to following the answers.

None of this would have been possible had I not recognized that we wanted to take control over our lives to make the best of them, and that getting control over our financial circumstances was an absolute necessity in making this happen. While in hindsight I wish this had happened earlier – it didn’t – but it did occur with enough time and determination to turn it into a reality.

Do we deserve any special credit for this? No. Are we unique for doing this? Again, no. But it’s something anyone can do, and it costs nothing.

The future

So, should you bother with financial planning? Yes, but only if you want a critical tool to allow you to take control of your life. Not everyone wants to do that. And that’s your choice to make.

Things I wish I had learned earlier in my life. But better late than never.

You are the boss. Decide whether you want life to happen to you or whether you want to make it happen for you.

Recognize that your choices of spouse, friends, and neighborhood will influence your attitudes and behaviors about money.

Give up the idea that you must make “perfect” financial decisions; learn to embrace failure and learn from it. Wildly successful people inside and outside of the financial industry all have spectacular failures in their pasts.

Spend less than you earn. Simple, but remarkably effective if you make it a way of life. The road to financial success and independence is not based on math, it’s based on mindset, attitudes, and behaviors.

Do not be influenced by the nonsense printed or spoken in the media that presents itself as financial wisdom. None of these people cares about your money more than you do. In fact, many of them wish to separate you from your money.

If you don’t have any idea as to your monthly expenditures, prepare a budget, and update it annually. You’re likely to be surprised at what you learn since your priorities in your life are typically revealed by what you spend money on.

Don’t underestimate the value of setting financial goals. If you don’t have any idea where you’re going, you’ll end up somewhere you don’t want to be. And you’ll make worse decisions along the way because you have little or no context in which to make them.

Allocate your time and effort to get the best return. Don’t spend hours fussing over how to save a few dollars on an item that costs $100, while spending 10 minutes choosing a new car that costs $50,000.

Never run up credit card debt unless you pay it off every month. Keep a few cards for establishing good credit scores and for emergencies. If you don’t have a credit score of at least 700 then work towards getting one.

Never buy an expensive car unless you have the cash to pay for it.

Never let a debt go to debt collectors, no matter how angry you are with a creditor. Find a way to fix the problem or you will have to deal with the downside consequences for years.

Never forget “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Keep some reserves (cash, savings, money market accounts, short term CDs) on hand in an emergency fund for meeting unanticipated emergencies.

Be prepared to face the possibility of losing your job along with the resulting financial ramifications at some point in your working life. Having backup plans for significant exposures in your life is always helpful.

Cover your insurable needs up to a rational point. If the death of a spouse with surviving children would be financially catastrophic, consider term life insurance. On the other hand, don’t pay auto or homeowner’s insurance with low deductibles if you can afford to take the financial hit with higher deductibles.  Never purchase more insurance than you need, and be very wary of insurance sales people working on commission with the “more is better” philosophy.

Maximize your retirement-related investment opportunities: 401k(s), 403b(s), SEPs, traditional IRAs, Roth IRAs.

Don’t withdraw retirement funds early. Don’t be seduced into thinking of this money as “your” money, think of it as belonging to the person you’re going to look like in 30 years.

Accept that there will be significant economic downturns in the future like there have been in the past, and that you will likely not escape the effects.

Add to investment assets whenever possible. Homes do not count as investment assets; they are not liquid, you will always need a place to live in, and contrary to the usual thinking they sometimes decrease in value. And don’t assume that it’s always smarter to buy than rent Rent or Buy?.

Never act on a “hot” tip from anyone. Including your broker, if you have one.

Never let a real estate agent talk you into buying a house you can’t afford.

Do not be in a rush to pay down a mortgage. There are alternatives to consider.

There is good debt and bad debt. Learn how to use debt to your advantage, and always be aware of your level of debt and how well you are managing it.

Get over your aversion to taxes – prepare your own returns. It’s the only way to develop an understanding of how to keep your money while the government strives to take it from you. The IRS is not your friend. And the elected representatives who spend your tax dollars are not your friends either.

Financial institutions are not your friends; they exist to make money, frequently at your expense.

Financial independence is incredibly liberating. Think about whether you want to get there. The earlier you start the easier it is.

Many people believe achieving financial security is beyond their abilities and means. Not so. You need to avoid the financial regrets many people have by developing helpful attitudes and behaviors and putting them into practice.

Some things to avoid:

Not having an emergency fund.

Spending that exceeds your income, resulting in building up unhealthy levels of credit card debt.

Failing to take into account the amount of student loans you take out relative to your future career possibilities and your ability to subsequently pay them back.

Paying too much in rent or buying a house that exceeds a reasonable percentage of your income, making it difficult or impossible to allocate your income in productive ways.

Waiting too long to begin saving for retirement, thinking you can make up for the shortfall later.

Some things you can do:

Create and fund an emergency fund.

Ignore most of what you may have read about how much such a fund ought to contain; that depends on factors such as your age, health, and job security. Think of this fund as an insurance policy that pays you when you need it.

Document what your potential exposures are: job loss, health expenses, car repairs or replacement, home maintenance expenses, etc. You want enough money in the fund to avoid catastrophic events such as getting evicted from your apartment, foreclosure on your house, losing your means of transportation, and being unable to pay unforeseen and unreimbursed medical expenses (including pet expenses), to name a few of the critical ones.

It may be helpful to divide your list into known ongoing or anticipated upcoming expenses, and possible unanticipated future expenses. You don’t have to cover every possible catastrophe – start with your biggest exposure and go from there. The point of an emergency fund is to allow you to get back to where you were prior to getting slammed with a catastrophe.

Don’t confuse your emergency fund with a sinking fund. A sinking fund is a special kind of savings fund dedicated to a specific short-term or long-term goal. Examples include a house down payment, a car, a vacation, and everything in between. Keeping this money separate from your emergency fund will help you resist the urge to dip into your emergency fund, use credit cards, or borrow from friends or family.

Determine what your goal is – define a dollar amount for it – and open a separate savings account for it. Online savings accounts are a good choice for this as they generally pay the best interest rates and offer the capability to have multiple accounts.

Live below your means and pay yourself the difference.

This requires separating wants and needs not once but on a continuing basis. If you live paycheck to paycheck you are never going to make any progress.

To make progress, you (and your spouse, if married) first need a quick assessment of where your money is going – what you’re spending it on. Track your spending for a month or two; that will give you a good idea as to what your priorities are as reflected in what you’re spending money on. Many people are surprised and even shocked to find out.

Take the time to make a budget. Pay attention to what constitutes fixed expenses in your budget and what expenses are controllable and discretionary.

Divert a percentage of your income automatically from every paycheck to a savings account. Note this should be considered in addition to creating a separate emergency fund.

Set some financial goals.

Only pick those that are relevant – have good reasons as to why you are choosing and setting each one.

Now put them in categories: short term, medium term, and long term. And then think about which are well-aligned (complementary), and which ones might conflict.

Finally, find a way to make them visible so you are reminded of them and review them periodically.

Budget some money for self-indulgence.

Some would argue this is just part of an emergency fund. I disagree. I think it should be totally separate, and should contain money you put aside to use any way you want, any time you want. This can give you a feeling of freedom that we all need and can help alleviate the ongoing burden of trying to be financially conscientious in every other way.

Do everything you can to avoid going into debt for assets that will do nothing other than depreciate.

Mortgage debt is “good debt” as housing usually, but not always, appreciates in value, although the expected appreciation will not be anywhere near what most people believe to be true.

Car debt is “bad” debt doubled down – you pay interest on the loan to the lender and you suffer instant and continuing depreciation on the asset.

Maybe you’re thinking you can’t possibly pay cash for a car – that idea is simply not realistic. Perhaps not, but you don’t have to succumb to these other behaviors: buying a car that is more expensive than your financial circumstances dictate, buying a car with a 7-year loan when you have every intention of trading it in before the loan period is up, buying a new car when you could buy one that’s 2-3 years old with low mileage at a price that is likely to be 35% lower in price than the same car’s price when new. Be smart and prepared about this, otherwise you are easy marks for salespeople at car dealerships.

Never charge anything that is not a true emergency on a credit card you know you cannot pay in full when the bill comes due.

Ignoring this means you’re investing in your credit card company without the benefit of owning their stock rather than investing in yourself. Would you rather pay a credit card company 24% interest or have an investment that pays you 24%?

Pace yourself – achieving financial security is like running a long-distance race.

Don’t try to implement all the above at the same time; tackle a piece at a time and build on your successes. Millions have succeeded and millions have failed. You only need to decide which group you want to belong to.

How do I know if I’m on track to be successful?

There are two simple but important ways: monitor your debt/income ratio, and keep track of what’s happening to your net worth.

Your debt/income ratio is the total of all your monthly payments divided by your pretax monthly income. It’s a measure, right now, of the role debt plays in your  achieving financial success. The lower the ratio the better: below 25% give yourself a pat on the back, over 36% you’ve got a long way to go.

Your net worth is the market value (current market value, not what you paid for it) of everything you own minus the total of everything you owe. Over time (every year), that number should go up. It may be small or even slightly negative when you are in your twenties, but over time it needs to go up. If that’s not happening, you need to examine your spending habits and overall debt. Think of rising net worth as a signpost on the road towards financial independence.