Cash Management: Prioritizing your Life
It is often said of some individuals that they are "asset rich and cash poor". How can this be? It really is a simply not having enough readily available cash on hand to address your immediate short-term needs. Despite an impressive portfolio of stocks, bonds and real estate investments, many wealthy individuals, as well as those of moderate means, continually run up their credit cards to the limit simply because they haven't adequately addressed the basic issue of how to handle cash.
When evaluating or re-evaluating your current financial condition, forget for a moment all the sophisticated or esoteric investments which you may have been exposed to and focus on the basics: how am I going to afford to live day-to-day and how do I manage my income and expenses?
A much more effective approach is to maintain a monthly budget and monitor spending habits. Although "budgeting" isn't very attractive as a general concept, if you are serious about getting control of your finances and preparing for the future, it is the only route to take.
When establishing your budget, make sure that you "pay yourself first". A general rule of thumb is to attempt to save 10% of your monthly income, if possible. If this is too drastic of an initial step, use a percentage or "stair-step" method by beginning to save 4% the first month and then increase it by 1% every month until you reach your goal of 10% Once you begin to condition yourself and your family to follow this formula, saving becomes more of a routine than a burden.
Next, if you haven't established a permanent cash reserve to be used in the event of an emergency, do so. This money should only be used in the event of an unexpected emergency; unusual investment opportunity or other unforseen event. It should be kept in a highly liquid investment, such as a money market account, which has check writing privileges. Depending upon your effective tax bracket, you may wish to consider a tax- free money market account which may avoid both federal and state taxes. The amount to be maintained in such an account should equal the equivalent of 4 to 6 month's household expenses and should be replenished once the account balance falls below this level.
Only after these first steps have been accomplished should longer-term investments such as stocks and bonds be considered.
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