Changing gears

The table turned out to be a 200-year-old masterpiece by John Seymour and Sons of Boston and was sold at a recent Sotheby’s auction for a staggering US$541,500!

You don’t have to rely on finding a valuable antique at a garage sale to realise your financial dreams. You just need to know how to make the most of what you’ve got.

Here are a few basic principles of “Smart Money Management” that you can employ:

GIVE YOURSELF

AN ALLOWANCE.

To get off the spending treadmill, one effective approach is to put yourself and your spouse on a weekly allowance as part of your spending plan. When you’ve spent your allowance for the week, wait until the next week’s stipend before spending more. And you can save some of your allowance week to week in anticipation of larger future purchases.

MAINTAIN A

“RAINY DAY” FUND

Without a special surplus set aside and easily accessible, an unexpected financial need could derail your other long term plans. An Emergency Fund — an amount included in your fixed living expenses — will help you prepare for unforeseen financial needs and cushion you from the sudden jolt of an economic emergency.

SAVINGS AND

INVESTING PLAN.

The easiest way to do this is with an Automated Monthly Investment Plan that deducts a predetermined amount from your checking account and invests it for you. Ideally, you will save at least 10% of your income. If that seems daunting, try starting with 5% now and adding another percentage point each year until you reach 10%.

WORK TO

REDUCE DEBT.

Every dollar you pay in interest on debt is one less that you have to invest.

A common trap that people fall into is buying a home so expensive that their mortgage payments leave them strapped. A big mortgage may reduce your taxes, but it also can lead to “financial bondage.” Buying a more modest home will enable you to invest more of your income to help you realise your future goals.

PAY AS LITTLE AS

POSSIBLE IN TAXES.

The average household pays 11.6% of its income in Government taxes. But you can pay even less by employing a few tax smart strategies. One effective strategy is to max out contributions to tax deferred retirement plans, such as an individual retirement annuity.

WORK WITH A FINANCIAL PROFESSIONAL.

An experienced financial advisor can help you draw up a financial plan, provide options on investment strategies and help you make sure your portfolio is properly diversified. Incorporating a few sound financial principles into a saving and investment programme can help you get the most mileage out of your money.

(That was an edited version of an article by Waddell and Reed’s financial newsletter.)