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Four Fundamentals Of Financial Success

14 December 2010 6 Comments

There are lots of things you can do to improve your finances.  It’s pretty much common sense.  However, let’s look at the big ones – what I call the four fundamentals of financial success.  Read my ideas and let me know where you differ.

#1 – Zero Debt

In a world drowning in debt, you must have none of it, if you want a high degree of financial success.  I’m actually going to throw in mortgage debt with this as well, since it’s such a common trend for people to live in giant houses they can’t afford.  Zero debt, including no mortgage is a major milestone you should work towards and consider a major fundamental of your future financial success.

#2 – Putting Money Away, Generating SOME Return

Some people get way too caught up with maximizing their return, and while return is important, the more important aspect is that you’re putting large chunks of money away towards SOMETHING.  Generate what return you can, but the key is to be putting massive amounts of money into savings and other assets.

Again, this is something almost all people DON’T do.  The most that most people do is automatically transfer small amounts into a 401(k) or something.

#3 – Mitigating Risk

This is a tricky one because most people think that they are mitigating risk when in fact, they aren’t at all.  Most people assume because you spread your stocks over a range of sectors like tech and consumer staples that you’re good to go.  Absolutely not.

You need to mitigate way more risk than cyclical risk versus defensive sectors.  You need to hedge against the stock market, currency risk, inflation risk, deflation risk, macroeconomic risk, income loss risk, etc.

You should have a range of assets: cash, stocks, maybe some bonds, precious metals, alternative assets, real estate, businesses, etc.

#4 – Steadily Increasing Income

Lastly, a steadily increasing income is a key to financial success.  It’s simply too hard to get ahead with a stagnant salary or paycheck.  It can be done, but requires serious sacrifice that most people aren’t willing to do.

Instead, you need to work on increasing your income with your career and more importantly, your own business or income stream.  Going into business for yourself in some fashion is a common way to get a significant jump in income.

By increasing your income, you increase your investing, your saving, your ability to allocate capital into various assets and areas.

So, what do you think?  Where am I off?

6 Comments »

  • Danielhendr said:

    What happened to your previous article of reasons not to pay your mortgage off. 1 reason to protect yourself from inflation. I see your argument of people buying too much but if you buy too much of a house you pretty much have more of your income going to a mortgage payment so you go in more credit card debt, etc and can't put large chunks of money into investments. The big mistake people make is buy too much house because of the old rule of no more than 30% of your income should go to the mortgage. My wife and I have a 700 dollar mortgage total on a combined salary of 150,000 and see no need to move up. Yes, the suburbs would be nice but I like driving my beater to work and not having to deal with the traffic in the suburbs.

  • Tom said:

    Great post. I think the points are spot on. It's interesting though how much the recession seems to be coloring the ideas in this post though. I wonder how long before peoples' risk appetite changes so much that they no longer agree with the points above. My guess is… probably not too long.

  • EXADMAN said:

    Your views are considered by many to be un-american, un-Christian – certainly – and defeatist. When Americans quit spending their paychecks to the nub, habits buoyed by faith in unlimited Growth and Prosperity due by divine right to all righteous Caucasians born north of Houston….the terrorists win. Sorry – I'm a former professional brainwasher who once soul-lessly spewed advertising for, among other things, alcohol, oil and the joy of credit card spending (for Capital One Finance). What I learned while conducting focus-group research of midwestern consumers in this country back in 1999-2002 literally spooked the living cr*p out of me and my team. Did you know God put oil in the ground 3000 years ago? About half of Kansas believe that. And it gets more bizarre from there. Keep up the good work. Enjoy your young site, and the SA posts!

  • Monica said:

    I'm intrigued Exadman – Why un-Christian? And did you guys from any conclusions about where these priorities/ beliefs came from? (media, church, family, etc)

  • david said:

    Number 5 should be own as many appreciating assets as possible and as few depreciating ones. Following this rule, in my 20’s and 30’s I drove older used cars (paid cash of course), and saved the enough to buy investment property. It’s amazing how much you can save over the years on interest, and insurance by following this rule

  • Sherise Furna said:

    In this grand design of things you receive a B- just for effort. Where you actually lost everybody ended up being in all the particulars. As people say, the devil is in the details… And that could not be much more correct right here. Having said that, allow me reveal to you exactly what did work. The writing is definitely pretty convincing which is possibly why I am taking an effort in order to opine. I do not make it a regular habit of doing that. 2nd, despite the fact that I can easily notice the jumps in reason you come up with, I am definitely not sure of exactly how you seem to unite the points which inturn produce the actual final result. For now I will, no doubt yield to your position but wish in the near future you actually link the dots much better.