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Editor's Note: The following is a guest post by a friend of mine who wishes to remain anonymous. However, he wanted to contribute to this site some of the wisdom he hopes to pass along to his two daughters.
The Good Life
As parents, my wife and I want to provide our children with the tools to live La Dolce Vita - the good life.
What is the "The Good Life", you ask? Well, that is for them to decide.
We just have the goal to provide them the tools (through education) to make informed decisions on how they want to live their lives and derive happiness.
Now, for most people this is achieved through some combination of family relationships, friendships, career or job satisfaction, and leisure pursuits (from drinking coffee to travel to volunteering). After all, these are the things that give your life meaning, provide you satisfaction, and make you happy.
One area where we feel we can educate our children is personal finances. And namely the benefits of having a simple financial plan to guide them through life.
After all, if you have a financial plan, it makes it easier to save money and spend wisely. And stay out of debt. And , if they do all this with a simple plan, that means less time stressed about finances. And more time to focus on those things which will bring them happiness and satisfaction.
Teach Your Children Well
Here are the very simple personal financial management rules that we employed - and which allowed us to achieve financial independence at relatively young ages.
1. Invest In Yourself
Use your time well. Invest it self-improvement, people and passions. Not mindless entertainment.
Your education does not stop by attaining a degree. So make sure that your eduction includes how to become self-taught.
This way you will constantly improve yourself - making it easier for you to adapt and evolve in an ever-changing world. And it will help stand out from the crowd.
This will help make you more valuable - to your employers and to yourself.
Find Your Passions
Make sure you find time to invest in your passions and things that make you happy too.
Be there for your spouse, children and friends. For good times, and times of need. And be generous not just with your time, but your resources as well.
Be someone people want to be around. Be able to make interesting conversation and talk passionately about things people care about.
2. Keep Your Finances Simple.
These tips will help you save time and frustration, and let you focus on things that are really important.
Follow the 50/30/20 rule
Spend no more than 50% of your after-tax income on essentials like housing, utilities, and food.
Spend no more than 30% of your after-tax income on leisure, where it is vacations, electronics, books, etc. Try not to spend money on useless stuff. It will not make you any happier. And you do not win any contents by impressing your friends with all your toys.
And this way you can save the remaining 20% of your after-tax income.
Next, invest your savings!
Take your savings and invest in financial assets. Start early to take maximum advantage of the opportunities to earn compound interest.
And don't be intimated.
But your investments are a way to create financial assets, not a get rich quick scheme.
Invest your savings in a a diversified portfolio of stocks and bonds. ETFs allow you to do this both cheaply and tax efficiently.
Have an investment plan
Create an investment plan based to automate your investments. And make sure it is designed around your financial goals and risk tolerance.
Take advantage of tax-advantaged accounts
Max out your 401K at least up to the employer matching amount. Then invest in a Roth IRA or any other tax-deferred or tax-advantaged account available to you.
Minimize your costs
Your investment dollars will reap greater rewards if you keep costs low and minimize tax drag.
So don't become a frequent trader. Taking at least moderately long-term perspective (at least 12 months plus), and never paying for high fee investment accounts and managers.
If you do need help with your investments, never pay more than 0.5% per year.
Keep your accounts simple & your financial life more manageable
Limit the number of bank accounts and credit cards you use. And use a personal finance app to track your finances so you can stay on top of your income, spending and investments.
Then, automate your finances. Use auto pay. Implement and adhere to your investment plan
3. Stay Out of Debt
Sometimes you need to finance a big investment. But interest costs add up over time, especially if you have student loans, a mortgage, car payments, and credit card debt all competing for your dollars.
Start by paying off your credit card every single month. Don't finance useless stuff.
Do not take on more student debt than you need. If this means attending a state school or starting out at a community college, so be it.
Thinking of buying a home? It's not an investment. You need someplace to live, but not a place to bring quick riches. Instead, think of a home as a giant long-term expense. After all, there are mortgage payments, and maintenance costs, and real estate taxes.
If you are lucky, your home's value will keep up with inflation. Meanwhile, your down payment could have been better put to use investing in productive assets.
So don't buy more house than you need. And pay down your mortgage as quickly as possibly.
4. Do Something People Will Love You For Doing
Don’t do something you love. Instead, do something other people will love you for doing.
I know a lot of successful people who love their jobs because their customers value their work.
And I know a lot of people who invested in their passion, but were not able to make a living. Not enough people were willing to pay enough for those passion projects. And making your passion your work may just destroy that passion as a source of happiness.
So keep your passions as your hobbies. And invest time in developing skills that people need. And then go and work hard to meet those needs!
5. You Earn Money to Live
You earn money to live, not the other way around. Having a large house full of useless stuff is often confused with living. Do not fall into that trap.
That extra stuff will not make you happier. It will just put a strain on your budget. Which will just distract you from pursuing the things that bring you true happiness, satisfaction, and wealth (financial and personal!).