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Financial compass can help families travel the right road

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By Rick McKinstry – Dallas South News Contributor

Several years ago I wrote a poem for my young son titled “The Sun Rises in the East.” The opening segment of the poem read as follows:

When you wake in the morning
Turn to face the Sun
The Sun rises in the East
Of four key directions
This is but one
The one that confuses the least

The poem was an effort on my part to create in the mind of my son, a mental compass. It was my hope that should he ever lose his way and is without any of the modern day gadgets now available to us, he would have a compass in mind that could help him find his way.

In my financial planning practice, I have encountered many, who like my son, lack a compass.  Not the type designed to guide them geograhically, instead a financial compass to guide them financially. The purpose of this article is aide in establishing a mental financial compass.

In the opening lines of the poem, I suggest to my son when he wakes in the morning turn to face the sun, the sun rises in the East. This establishes in his mind an unchanging point of fact – an anchor point. Once the anchor point is established, now he needs to know where the other directions are relative to his anchor point. The anchor point of the directional compass is Earnings. For our discussion, Earnings are synonymous with income, pay, wages, salary, etc. Earnings are the anchor point for the financial compass because without Earnings, or a lump sum of money, the rest of the financial compass falls apart.

Naturally, with Earnings more, is far better than less. Education is the single greatest determining factor contributing the amount of money individuals Earn. Over a lifetime, a person with only a high school education on average Earns more than one who does not. A person with an undergraduate degree, on average, will Earn significantly more over a lifetime than one who possess only a high school diploma. This trend continues on with increased levels of academic achievement. Another very important benefit of higher learning is that the unemployment rate for those with undergraduate degrees or higher is far less than that of those without degrees.

As we move around the directional compass in a clockwise manner the next letter you will encounter is S for South. In the financial compass the S stands for Savings. The old cliché you should “Pay yourself first” is key to a sound financial plan. Paying yourself first means that before you do anything else with your earnings, you should take a portion of those earnings and Save them. Those Saved dollars should be used for multiple purposes including building an emergency fund to cover those unexpected expenses, to purchase high dollar items and limit use of credit, and lastly, you should Save money to fund your retirement.

Continuing around the directional compass is W for West. W in the financial compass stands for Wise Spending. This begins with living below your means, or put another way, spending less than you actually earn. Wise Spending will lead you to defer the purchase of certain items until you can pay cash. Wise Spending will cause you to make every effort to understand the total cost of major purchases, not just its upfront price. Wise Spending often requires the use of, dare I say it, a budget, which more than anything else will help you track where and how much money is being spent.

The last letter on the directional compass is N for North. N in the financial compass stands for iNvesting. iNvesting in securites including stocks, bonds, mutual funds, IRA’s etc., especially if done on a consistent basis for an extended period of time, offers the best opportunity to accumulate enough wealth to allow for a secure retirement. With the financial compass, iNvesting extends beyond securities to include iNvesting in your health and in your personal development, and most notably in your education.

If you need help developing your own personal financial compass, contact me, let’s get to work.

Rick McKinstry is Personal Financial Planner (PFP) and owner or RLM Financial. He has an MBA from Indiana University and can reached via email at rlmckin79@hotmail.com or at (972) 821-8948.

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  • John Cooper

    Rick, I like your article, I’m sending it to both of my daughters. I wish I had understood this years ago. These things need to be taught to our elementary school kids. I always knew about saving, but never knew anything about investing until I worked for IBM, and then really didn’t know enough to even be dangerous.

    Credit is big business and it eliminates discipline, planning, and sacrifice. People should be rewarded for saving, not pentalized. Just think if the government didn’t tax savings, I guess that would put most banks out of business.

  • D’Ainsley T. Smith

    Rick,

    Brilliant, Brilliant, Brilliant, I am totally thankful for this article because it is needed. Sometimes we think that achieving Financial Intelligence is so complicated, but this article was written in a manner that is so simplistic but yet effective that anyone that does desire to take thier finances to another level now has a format to follow.

    People understand that in order to get different results you must do different things. Doing the same things over and over again expecting different results is called Insanity, it is time to gather into a different mindset, that is the only way to achieve True Success.

    Rick, I applaud you, and I will be looking for more good financial mental notes.

    Best Regards

  • http://www.dallassouthnews.org/2009/09/financial-compass-part-ii-the-value-of-education/ Financial Compass Part II: The Value of Education | Dallas South News

    [...] month I introduced the concept of the Financial Compass.  Similar to a directional compass, the Financial Compass is comprised of four key components: [...]

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