Friday, September 14, 2012

12 levels of personal finance black belt. Which level are you?

Many financial guides are a list of tasks or achievements: Make a budget, get out of debt, save for retirement, save for college, buy your first home, get life insurance, etc. Those guides are a prescriptive list of things that you should do and those list are great. But they rarely give you any guideline as to when you should apply and start those tasks and if there is any order to those tasks. Everything seems important and should be done right now. I think these guides are helpful but I often feel conflicted and confused because they are pulling me in so many directions at once.

This list, hopefully, is a different kind of list for personal finance. I'm attempting to offer a descriptive order of skills sets and knowledge that you must master to achieve financial control and wealth management. Each level requires complete mastery before you can move on to the next, I think going out of order would be inefficient and a waste of time and money. These skills set are not based on individual's net worth or income level. It's a measure of the level of control and understanding of one's personal financial health.

With that quick introduction, here is the list. Each topic can be expanded with much greater detail and I'll do that for future blog entries.

1. Read some new personal finance or personal improvement books every year.
2. Carry credit cards or other revolving debts for only a short period of time (< 6 month)
3. Live within your means
4. Have 6 month or more of emergency funds
5. Saving at least 10% of pre-tax income
6. Clear (5 to 10 years) long term financial goals and allocation plan of your savings to the various long term goals. (saving for wedding, car, house, kids college, vacation, retirement, new business capital, pay off long term debt, etc)
7. Allocation plan of assets across real estate, equity (domestic, foreign, and emerging), bonds, and other asset classes.
8. Diversify your income streams through real estate, hobby, eBay, side consulting business, business ownership, bonds, CDs, etc.
9. Complete your own taxes until you understand the applicable tax laws.
10. Find or hire your financial control team: accountants, mortgage brokers, real estate brokers, personal advisers, mentors, attorney, etc.
11. Adequate protection for your long term financial interests through insurance, estate planning, and trusts.
12. Estate and tax planning to minimize tax liabilities.

Is there another level beyond 12? I don't know. I can't think that far. I'm still working on level 10 and 11 skill set and can't see beyond the next hill that I have to conquer. Since level 12 covers the end of one's life and beyond, it's hard to imagine there is another level of skill set for "personal" finance.

I'm working on level 10 and 11, but doesn't mean all the previous level are completed. Obviously each level still have many prescriptive list of tasks that needs to be accomplished. Saving for college and retirement are some of the tasks from level 6 and I'm still a long way off from completing them. But as a skill set, knowledge, and the degree of confidence that the situation is under control, I feel that I have mastered that level.

I think this is a different and unique way to learn and master personal finance. To any reader of the blog, i'm curious if you think this is a helpful model for you to gain better control and mastery of your personal finance.

So let me know; Which level are you?