A guest blog by Stacey Aarssen
It’s funny, the reaction I get when people ask me what I do for a living. When I say I’m a financial consultant and advisor, most will say, oh, and change the subject, likely because they don’t want to be asked about their personal finances. First they don’t want to feel like they will be sold on something they don’t feel they need and second they don’t want to admit they don’t know where they are, financially, or where they want to go.
I read an article many years ago that stated Oprah’s greatest fear was running out of money. To think that someone with her financial stability could be filled with fear and uncertainty caught my attention. Clearly people’s finances and money are emotional subjects and that can make them very hard to talk about.
Financial literacy is the cornerstone to my existence as a financial advisor. It refers to a set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finances. It is my goal to educate and empower people to take charge of their finances and knowledge is the key to making informed decisions. It all begins by building your foundation, just like you’re building a house you must begin with a solid base.
Budgeting lies at the foundation of every financial plan. It doesn’t matter if you’re living paycheck to paycheck or earning six-figures a year, you need to know where your money is coming from and going if you want to have a handle on your finances. Unlike what you might believe, budgeting isn’t all about restricting what you spend money on and cutting out all the fun in your life. It’s really about understanding how much money you have, where it goes, and then planning how to best allocate those funds.
Allocating those funds should begin with protecting your biggest asset which is your ability to earn an income. A 38-year-old earning $120,000 a year has the potential to earn $4.2 million over his or her working lifetime. Having insurance protection, a will and power of attorney and proper savings are important factors that are often overlooked. People tell themselves, “It will never happen to me” or “as soon as I’m finished redoing my house or go on vacation I’ll start my financial planning”. Understanding all the options is crucial, as every single person’s plan is unique, just like your DNA. My goals and dreams are different than yours and so are your financial strategies and objectives.
Regardless of your stage in life or income, a financial plan can help you set objectives and prioritize your goals. The most important factors behind any savings strategy are spending less than you make and investing early to take advantage of time.
“Compound Interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t…. pays it,” said Albert Einstein.
Compound interest and/or compound investment returns arise when profits from an investment are added to the principal, so that from that moment on, the profit that has been added also has the potential to earn additional profits. This addition of profit to the principal is called compounding and it can be an important consideration when choosing how to invest your savings.
Compound interest can work against you as well. When you incur debt, you pay interest and principal to the lender until the loan is paid off. If you fail to pay off any part or all of the principal, the level of debt you will carry has the potential to increase until it is nearly impossible to pay off the loan. For example, if you have credit card debt charging 20 per cent interest and you fail to make payments, your debt will double in 3.6 years. If you continue to avoid making payments, your debt would double again in another 3.6 years and so on.
Money and finances are the hottest topics today, and I believe the majority of the people I meet do not understand all the options they have. We are so bombarded with advertising of products that we are afraid to ask what the proper solution is for us. By educating ourselves about the options we have, we can make informed educated decisions about our financial futures.
Although some things we cannot change, like death and taxes, there are ways to protect our loved ones, reduce the amount of taxes we pay and increase our wealth and it all starts with a proper plan.