Growth

The next level of personal finance, as I alluded to before, is growth.

Once you are secure and stable, you can begin to think about building your wealth. Not that you have to figure out how to become next Bill Gates or Warren Buffet. But you have to start building "nest-egg" that you will rely on when you retire.

And don't think that Social Security has you covered, or that your 401k will grow back to what it was a couple years ago. Or that your current employer is going to re-institute generous pension plans of yesteryear. 401ks are much cheaper to administer and you, employee, take hit when market goes down, not employer.

My father is nearing retirement age and I think he has a good plan. He has done some research and estimated what his expenses are going to be when he is retired. He then took a look at his potential sources of income during his retirement.

He figured that Social Security would cover about a third of what he wanted to live on. Only a third! And he has worked his entire life. Would you like to instantly have to live on only one third of what you currently make? Retirement is suppose to be golden years, so where's gold?

Luckily throughout his career, my father has worked for companies that have had pension plans and he had worked long enough at each company to be eligible for some pension money. This is rare these days because today average worker will change jobs and companies at least five times during his/her career. Also, as I mentioned before, companies are switching to lower cost 401k plans that do not guarantee you any fixed payments.

In my father's situation, his pension money would cover another third of retirement income he wanted. So now he had to either figure out where last third was going to come from, or start cutting out expenses during retirement, like not visiting his children so much. None of us liked sound of that.

So my father started learning about stock market and investing in stocks and mutual funds. He made a plan for growing his wealth and then educated himself as to how he could accomplish his plan.

I wish I could say that he is doing better than he is, but luckily he has some time still to put his plan into action and ride out any market downturns. (He can do this because he has security of insurance and emergency money, and stability of little debt and a strong set of skills.)

By learning about how stocks, bonds, mutual funds, index funds, options, futures, commodities, real estate and other financial tools work you lay foundation for growing your wealth. You may start with just $100 in a bank CD, but as you learn more and become more sophisticated, you can invest in more and more opportunities.

You will learn about how risk and reward are related, that as risk increases so does size of potential reward. Just like at race track, you'll make more on long shot, but odds are against it. Also you can learn how to tilt odds in your favor and protect yourself against risk.

For those who are just starting out in growth phase or who want to dabble a bit before completing other levels of personal finance, my suggestion would be to look into index mutual funds. Especially no-load index funds (no initial/sales fee).

These funds are made up of same stocks that make up popular market indexes like Dow Jones, S&P and NASDAQ100. The costs are low because management is simple and as a mutual fund you can invest a little at a time. Also they are easy to follow since you see them on all news shows and in newspaper.

Protection and Management

The final level of personal finance is protection and management of your wealth. Most people never develop wealth enough to need this level. But some of concepts can be applied to any amount of wealth you possess, $10,000 to $10,000,000.

Part of protection harks back to your will as we discussed on first personal finance level: security.

With any significant wealth or valuable asset (your home, car, heirlooms, 401k, IRA, business, etc.) you will want some way of disposing of that asset upon your death. Whether it is go to go your family, favorite charity, or local church, if no one knows about it, "it ain't gonna happen".

As you start to accumulate wealth in excess of $350,000, you may want to consult an attorney about creating a trust. A trust is an entity that can own property and pass that property to anyone you name in your will. Usually trust is designed to provide income to children from assets that are placed in trust.

The trust can survive you so that your assets and income may be passed on to your children or next-of-kin without excessive taxation and legal entanglements. Some states will take up to 55% of your assets as taxes when you pass away.

Protection also relates back to insurance. Now it may be time to look at a multi-million dollar umbrella policy that will protect you from lawsuits designed to part you and your wealth. You may now be a bigger target, so purchase a suit of armor.

The management aspect comes into play where you may start to concern yourself with taxation, ownership, distribution of income and possibly endowments to charities or other non-profit institutions.

You may hire a person or company to manage your wealth, or you may choose to do it yourself. Most people who have earned their wealth through "sweat of their brow" have already become adept at managing their assets. Some continue to personally manage their wealth because of enjoyment or challenge it gives them.

Others are ready to turn it over to a trustworthy manager (who only gets paid a percentage of your increase) and travel world, or sit on a beach and count waves.

Whatever your dreams for retirement (and why wait until you are 65), understanding different levels of personal finance and spending time and resources to educate yourself will pay off whether you live next to Bill Gates or Homer Simpson.

A good rule of thumb for saving is to try to save enough each year to supply you with one month's income. This means you are saving 1/12 or 8.3% of your monthly income.

This will allow you to build your emergency fund by one month every year. After only six years you will have a six-month supply of emergency cash. Then you can continue to extend your "coverage-period" or you can divert monthly payment into other savings or investments.

Most people find that "billing" themselves for savings and investments is a good way to put your savings on auto-pilot. If an amount is taken automatically from your bank account each month, it is easier to handle than if you wait until end of month and try to save from what you have left over. (How often do you have anything left over?)

So where is best place to keep your emergency fund? Probably not a place where you can have easy access to it - too tempting. Definitely not as cash in cookie jar - too unsafe (and no interest). And probably not in 5 year CDs - too restrictive. You may want to avoid CDs altogether so that you are not charged an early withdrawal penalty when you can least afford it.

Savings accounts are OK, but usually pay very little interest. If a savings account is your choice, open one at a bank that you don't regularly use. Also don't get a checking account to avoid temptation to spend "just a little" bit here and there.

Or look for a money market account that pays a reasonable interest rate. You may want to consider a money market account that only invests in tax-free securities. This way you won't have to worry about paying taxes on your interest.

Then set up an auto-withdrawal from your regular checking account or direct deposit amount from your pay check right into this new account. Adjust your budget to accommodate having less money each month and forget about it.

You can also give your emergency fund a boost now and then by putting "windfall" money into to it. You know "free-money"; birthday gifts, inheritances, insurance settlements, escrow overages, rebates, tax refunds, etc.

Your emergency fund becomes your own financial insurance policy. And if you never use it you will have that much more money to play with when you retire. Or even retire early with extra money you have saved.