Financial Mindset

Personal Finance 101

Posted on by ums

Everything you need to know about Personal Finance

Spend less than you earn!

Acquire more assets.

An asset gives you money. (Job, business, dividends from stocks, rental property etc.)

A liability takes money from you. (Car, house, credit cards, phone)

The more assets you have, the less you have to worry about your liabilities.

Let your assets purchase your liabilities. (Your business can purchase a car)

Always save and invest a fixed percentage of your income every month. (At least 10%)

Life brings surprises so have an emergency fund equal to 3 – 6 months of your salary readily available.

Savings alone is not enough for retirement, you need investments.

The money you save decreases in value every year due to inflation. Good stocks increase in value.

How do I find a good stock? Pick companies that make more money than they spend.

Stocks are the best investments long term and are risky short-term. (You are taxed higher for holding a stock for less than 1yr)

 A bond

It is a loan given to the government or a company. It offers a fixed interest rate plus your initial amount at maturity of that bond. When interest rates rise, the bond price falls and when interest rates fall, the bond price rises. To explain this further, if you have a $1000 dollar bond at 5% interest, if interest rates rise, then your bond isn’t as attractive because others can get a similar bond paying more in interest. However, if you have a 5% rate and interest rates fall to say 4% then it makes sense to purchase your 5% bond because it is paying more in interest.

 Credit Cards

If you pay just the minimum balance on the card, you will have the debt for most of your life and pay shocking amounts of interest. Pay down all your debt starting first with high interest rate debt. Closing credit cards reduces your credit score.

 Good debt vs. Bad debt

You can write off the interest on good debt on your taxes. (House, school loan etc.) This cannot be done to bad debt.

If you have good debt (house loan), with a very low interest rate (3%) and it is long term (30 years), there is no need to pay off the debt quickly. Rather pay off your bad debt (that you cannot write off) because they usually have higher interest. If you are done paying off your bad debt, invest towards your retirement.


Benefits: Tax Deferment and Employee matching

Difficulties: Lack of much control, penalized for taking the money out earlier than retirement, management fees and 401K funds is taxed at retirement.


There are two kinds Roth IRA and traditional IRA

Roth – Is not tax deductible, but the money you place in your Roth IRA grows tax free and can be withdrawn during retirement without any taxes.

Traditional – It is tax deductible and is similar to a 401K plan, the difference is you are in control of what investments you place in your IRA. You can direct money from your pay check, tax free into your traditional IRA. During retirement though, you have to pay taxes when you take money out.

 Financial Planner

An individual that helps you manage your finances. Most financial planners are paid a commission, a fee or both.

Commission Only – They make a commission off what they sell.

Fee Only – You pay them for their financial advice, not for what they sell to you.

Commission+fee(fee-based) – They get paid for advice and they receive a commission on sold products.

Salary – They receive a salary from the company they work for.


An important financial instrument. People don’t know its value, till they have to use it.

Car Insurance – Liability insurance alone is risky. Try to have your vehicle fully insured.

Medical Insurance – It is cheaper through your employer.

Home insurance – You are responsible for anything that happens to your home.

Life Insurance – This is recommended if you have children. If you pass away, they will have no source of income if you don’t have life insurance.

Types of life insurance:

Whole Life – Whole life insurance has an investment portion attached to it. The insurance company can invest with a portion of your premium and promise a return. (Return is not guaranteed) Whole life insurance is usually more expensive with higher commissions. However, whole life covers you up to age 100 and the money matures. Meaning the money is received if the person hasn’t passed away by age 100. If you cancel you whole life insurance you are entitled to receive the cash value. You can also borrow against the cash value of your whole life insurance.

Term – This is cheaper than whole life. The policy you sign up for is the amount received if you pass away. It usually has a fixed term of 10, 15 or 30 years after which you have to renew to be still covered.


Business owners / self-employed are taxed after they spend. (They write off their expenditures, and then pay taxes on what is left at the end of the year)

Employees are taxed before they spend. (Before the paycheck is received)

Your Income Tax Bracket for 2012: According to Forbes

Tax Bracket                         Married Filing Jointly                                         Single

10% Bracket                       $0 – $17,400                                                 $0 – $8,700

15% Bracket                       $17,400 – $70,700                                        $8,700 – $35,350

25% Bracket                       $70,700 – $142,700                                      $35,350 – $85,650

28% Bracket                       $142,700 – $217,450                                    $85,650 – $178,650

33% Bracket                       $217,450 – $388,350                                    $178,650 – $388,350

35% Bracket                          Over $388,350                                             Over $388,350


  • The standard deduction for married filing jointly will rise to $11,900
  • The standard deduction for singles will rise to $5,950

( The standard deduction reduces your taxable income )

Estate Planning

If you are successful during life, and you don’t plan, you pay for it at death.

Will – Shows how you want your assets distributed if you pass away. This involves paperwork and court appearances. The court and lawyer fees are paid from the will.

Trust – Is another way to pass your assets to your heirs, without having to go through the court to pay fees and spend time proving a will is valid. A trust allows you to name a beneficiary that automatically inherits your properties upon death


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Disclosure: The information contained in this article is not meant to be financial advice, rather a source of information.