Uncommon Cents

Looking at my pay stubs as my final paychecks of the year approaches, it’s hard for me to believe that I’ve made this much money this year. Despite the economic downturn, I’ll earn more money this year than ever before.

The unfortunate part is that when I look at my various accounts this year, it’s hard to believe that’s true. My investment accounts are all down considerably; my emergency fund was its fine and dandy usual self until I needed to pay for the truck repair.

Looking at the accounts makes me a bit uneasy; were things really okay for me financially when I have tens of thousands of dollars less in my net worth column than I did at this time last year?

The logic says yes, but the emotion doesn’t always agree.

One of the tricks of investing is to check your results less often rather than more often; that way day to day fluctuations don’t make you overly excited–or overly afraid. Unfortunately, this year, once a year was still once too many (that said, I’m still not making any changes!).

The last time we looked at “Basics”, I discussed the cash flow equation, which is:

income - expenses = cash flow

Now, once cash flow is positive (and the more positive, the better) the wealth equation is also simple:

(cash flow + sensible safeguards + wise investments) x time = wealth

Simple, but not necessarily easy. Once your cash flow is positive, it’s time to do some smart things with your money and let time do its thing.

What are these smart things?

Sensible safeguards: these are your emergency fund, term life insurance, long term care insurance, and disability insurance. You don’t want to toss money away, but you also don’t want to under insure. Keep a reasonable amount (many say a minimum of $1,000, others say six months of salary–personally, I split the difference and say three months of take home pay) in a money market account with check writing and an ATM card (Capital One Direct is the one I use). If you have dependents, get term life insurance; you may also want to consider disability and long term care insurance.

Wise investments: what we’ve been discussing on this blog forever. Passively managed, no load, low cost, tax efficient index funds and exchange traded funds. High quality bonds and bond funds. Traditional and Roth IRAs, 401(k)s, and their equivalents. Reasonable asset allocations. Investments made at regular intervals. Diversification, diversification, diversification.

Time: you know what this is, and the more you have the better.

Wealth: the dollars you end up with at the very end.

The one other thing that you need will be discipline. We’ll cover that later, but in the meantime, remember that formula. It’s a simple, get-rich-slowly, tried and true over time formula that will help you reach your goals–it’s helped me build a six figure portfolio in less than half a decade!