Before you start spelling ‘money,' the word to master is ‘budget' — a budget that works ‘in the real world,' as Liz Weston emphasises in The 10 Commandments of Money: Survive and thrive in the new economy ( www.landmarkonthenet.com ). In such a budget, aim to limit your ‘must-have' expenses to 50 per cent of the after-tax figure, she advises. ‘Must-haves,' for starters, include outlays for housing, utilities, transportation, food, insurance, child care, child support, tuition, and minimum loan payments. “If you can delay a purchase for a few months without serious consequences, it's not a must-have. If you're contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), then it is a must-have…”
Of the balance 50 per cent, the author caps your ‘wants' at 30 per cent, so that savings and debt repayment make up the final 20 per cent of your budget. Vacations, gifts, entertainment, clothes, eating out and other expenses are all ‘wants,' she explains. While basic phone service is a must-have, Internet access and pay television are two other expenditures that can feel like must-haves but are usually wants, clarifies Weston. “You may really love your broadband connection, for example, but if you had to live without it you could still access your email at the local library or coffee shop.”
‘Inflation' is a big risk
One other commandment in the book urges you to embrace risk sensibly. Reminding you that ‘inflation' is a big risk, the author cautions that in super-safe investments, which tend to have very low returns, you may end up losing ground over time, after factoring in taxes and inflation. “Even a moderate rate of inflation such as 3 per cent will cut the value of a dollar almost in half in twenty years. So if your investments aren't even keeping up with inflation, you'll have less buying power in the future.”
To those who tend to overdose on stocks, the author highlights some of the myths around them. One myth is that the risk of stocks goes away if you hold them long enough. “Even the most respected company can lose market share and value over time. There's no such thing as a risk-less stock or a risk-less portfolio.”
Save for retirement
A chapter devoted to retirement draws attention to the ‘rules' at different points in time. In the old economy, it was common to count on a good pension to get you through your golden years; and the ‘bubble economy rules' were that even if you do not save much, you can rely on stock market returns and rising home prices to fund your retirement. The ‘new rules,' however, are that you should start saving early for retirement, and that you must save as much as you can and should not stop.
The author alerts that even a modest retirement is likely to cost a small fortune; and that the only way most of us will get there is by getting time to work for us rather than against us. That means making retirement our top financial priority, she exhorts. “We need to start saving early and keep going, no matter what. Even a short gap of a few years in retirement contribution can shave 30 per cent or more from our ultimate nest egg.”
A book that you cannot delay reading.