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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Mastering Money: 5 Personal Finance Fundamentals You Should Know



In this informative episode, Bridget Sullivan Mermel and John Scherer discuss the foundational aspects of personal finance, known as the five fundamentals of financial fitness. They outline the critical steps you need to follow to stay financially healthy throughout your life, discussing saving habits, emergency funds, retirement planning, smart credit card use, house buying tips, and investing in yourself. Stay tuned as they provide expert advice to help you navigate your financial journey with confidence. Whether you're just starting out or looking to solidify your financial strategy, these tips are crucial for building a stable, long-term financial future.


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John's firm website: https://www.trinfin.com



TRANSCRIPT:


Bridget: Hey, John. So often when people come to me with financial planning issues, I see underlying problems with them not understanding the basics, what we call the five fundamentals of financial fitness. And on today's episode, we're going to talk about the five things that you want to get right at all stages of your life. Hi, I'm. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into the five fundamentals, though, I want to remind everybody to hit that subscribe button. That helps other people find this content on YouTube. And with that, let's dig in. I was smiling as you were saying that, Bridget, you know, very alliterative. The five fundamentals of fiscal fitness. I always giggle. I don't know why that tickles my funny bone. But it's true. As you said, these are the basics. And when I talk with clients, I like to say that's the cake and the stuff that I do is the frosting. Cake without frosting. You can eat it, but it's not as awesome, so I help make it awesome. But if you don't have cake, a whole bunch of frosting just doesn't have anything to build on. So this is really critical stuff.


Bridget: Yeah. It's interesting, too. When I first started my ACP training, some 15 years ago, I was working with a trainer, Kelly Adams, and she asked, “What are the five fundamentals?” And I was like, “Huh?” And she said, “You should memorize them.” And I thought, “All right, I'll memorize them.” And she was right. One of the many times Kelly Adams was right. The first of the five fundamentals to save 10% of your income. That seems very repetitive. And like, all the financial planners say it, but that is the first fundamental.


John: Yeah. And you know, when we say that, it does sound so basic, but I think it's important to remember some things. We're not talking about how kids save. My kids are eleven and twelve now, and they get an allowance. And they have to save money, but they're saving so that they can buy their next new football, gum they take to school, or whatever things they do with it. But we're talking about saving 10%.


It's not like saying, “Oh, I'm saving for my vacation later this year,” or “I'm saving because I know I'm going to need new tires on the car, so I'm saving for that.” When we talk about saving 10%, it's long-term permanent savings. Building up an emergency fund that's going to be there as my cushion basically forever, and then putting money into things like retirement plans, tax advantaged investing, long-term permanent savings. And it's different, so I think that's a really important component.


Bridget: Exactly. I agree. And the other thing about saving 10% is if you think about our framework, you still save 10% even when you're retired. But it's a little bit of a different thinking about it. It's more like, okay, all your income are dividends, you could actually spend x, but you spend 90% of x, not the whole amount.


John: Yeah. In retirement, it's more like not spending all you can as opposed to literally saving it.


Bridget: Right, exactly. And so that's number one. And number two is, okay, so what do you do with this? And the first thing you do with this is—and you can kind of start these two at the same time—build up your emergency fund. And an emergency fund is something that I really didn't understand how important it was. Even when I had my tax practice, I'd see clients who had a nice emergency fund and think, “Huh, wow, what's that?” because I actually just live on the edge, and put all my money into investing instead of having just a nice little cushion so that if something came up, I wasn't freaked out about it, I wasn't searching for money. So one is an emergency fund, and I say have at least 10% of your annual income in it, up to 30% if you like it, or say if you are self-employed.


John: Right.


Bridget: And there should be interest accruing on that money, so you should be earning some money too. So that's the basics of the emergency fund.


John: Right. I'll just bring up something that came up recently in a client meeting. We had somebody that didn't have very much in their liquid savings, their emergency fund. And this was not the first time we were working with them, and I said, “Well, we need to build it up.” And they agreed, but they had some things happen in life and things got in the way. They had to spend some money they weren't expecting to, so it sucked it down. And then they had to take out a home equity loan to pay for some home repairs that came up, so we want to get that built up.


And they didn't quite have the triple whammy, but certainly a double whammy. And having that emergency fund would have been really helpful. And we talked about it in the meeting, saying, “Yeah, we really need to get back to operating from a position of power.” Not that they couldn't get money from other places. They could take out a home equity loan in this case. But when you've got that big sort of war chest of money, as some people will call it, or that stockpile in the pantry sort of idea, it’s like operating from a position of power, which leaves us with such a different feeling inside. It's financial, but it's also such a behavioral and personal thing that makes a big difference.


Bridget: Yeah. And I've seen research talking about how much your happiness goes up when you just have an emergency fund. And just a basic emergency fund gives a happiness bump. But then when you have more of a cushion, there’s even another happiness bump. So we like emergency funds. And it's interesting, because I went from personally not really having much of an emergency fund to now really loving an emergency fund.


Yet, to your point, I'm feeling more stressed right now, because we've talked before on this show about how we bought a house, and we still have our old house on the market. And so, in order to make this transaction go, we used a lot of our ready cash. And so now I'm living without much emergency fund. And I gotta say, it's stressful. It's adding stress. It's not the most horrible thing. I can keep it in perspective, but it's adding stress, and I don't like it. So I'm looking forward to having my emergency fund back.


John: Right.


Bridget: The next thing with the saving 10%, the other place to put it, is your tax advantage retirement fund. Again, this is long-term money, so put it in your retirement fund.


John: Yep.


Bridget: Companies sponsor these. HSAs are good, too, but again, it's got to be for long-term.


John: IRA. Roth IRA. All that stuff.


Bridget: Yeah. When people are starting out, if they want to build up their emergency fund, at least contribute enough to the 401(k) to get the match, and then put the rest in your emergency fund. Okay. Use credit cards. Don't have them use you. So pay off your credit cards every month.


John: Yep, yep. No consumer debt is what we call that. Don't carry a balance.


Bridget: Right.


John: That's such a big deal. And I look at the first one, 10% permanent savings, and then the credit card is number three. When we talk with people, those are the two most important things in my mind anyway. You can make some other mistakes in life, but if you don't get into credit card debt and you're always saving money long-term, you're going to be in good shape with things. And it sounds simple. When I explain this to new clients, oftentimes we'll talk with children of clients as they become adults, and when I go through this, people think, “Man, this is not complicated stuff.”


It's simple, but it's also not easy or else everybody would just do it. But when you talk about credit cards, people who don't have very high incomes can have high credit card balances. But we also have clients, I'm sure you do too, who have substantial incomes and still carry credit card balances. So it's not just like saying, “Oh geez, if I had more money, I wouldn't have this problem.” No, this is a behavioral thing and it's something that goes across people who are well into their careers, people just starting out, and everywhere in between.


Bridget: Absolutely. And sometimes if you ask, “How does that person afford this or that?” It can be credit cards. So it might not be that they're just spending their money on it. So you have to learn to handle that kind of noise. Our emotional systems are built to compare ourselves to others. And we always compare ourselves to others who are doing better, not all the people who are doing worse.


And then on top of that, we have another challenge, which is the Internet. All these companies know exactly how to get you to buy. And so, it's hard. It makes it really difficult for people. It can be really hard, and it's hard to turn it around if you fall into credit card debt. Okay, next, buy the right sized house. So don't spend too much on your house. That's a big thing. I like to tell people to spend two to two and a half times their annual income on their house. Sometimes it’s a little higher.


John: In today's environment, it can be really hard to stick to that, not to over buy. The prices going up with housing, what you think you can afford, what the bank tells you that you can afford versus what you should afford.


Bridget: Oh, yeah. The bank will give you a lot more than that.


John: Right.


Bridget: Yeah. So again, that can be hard. But I gotta say, I've lived both ways. I've lived with buying a house that we could afford, and I've lived with buying a house I couldn't afford. And it's so much better to live in a house that you can afford, because you just have enough cash. The other thing I will say is that sometimes people will write a very detailed budget when they're buying a house to try to figure out exactly what it's going to cost. And you're going to underestimate it.


John: Right.


Bridget: You're going to underestimate it, and then end up in that situation where you’re house poor. And that happened to me, and I just didn't like it. Again, there is more anxiety overhead than you need for something that I didn't even know that I was doing. I didn't make a conscious decision, saying, “Oh, I want to go camping for the next five years. I don't want to take a bigger vacation.” I don't mind camping. That was great. But I don't want that to be the case just because of financial constraints, because I can't afford to do anything else.


John: Right. That's huge. It's a big deal.


Bridget: And the last thing is: invest in yourself. So when you're young, this means college, continuing education. We get continuing, continuing education as professionals. And I also like therapists, because the happier you are, the more money you can make. And also, coaches. I’m a big proponent of all three of those. Because education is something that generally pays off. And so, the effort that you put into these things, it grows, it compounds just like the effort you put into putting money in savings. The fun part of that isn't at the beginning; it's 20 years later. So I would say the same for all these other things; the real benefit is later. You get some benefit immediately, but the real benefit is later.


John: Yeah, no, I think that's great. That’s probably a good place to wrap things up. Talking about the five fundamentals of fiscal fitness. Save 10% of your income. Use those company retirement plans and have enough liquidity. Make sure that you use credit cards; don't let them use you. Buy the right size house. And invest in yourself. As we talked at the beginning, if you do those five things, you're going to be successful in life financially speaking. With that, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.


Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients, but if you're interested in an advisor in your area, we belong to ACP or the Alliance of Comprehensive Planners, and you can look for an advisor in your area@acplanners.org.


John: And don't forget to hit that subscribe button.



At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

 




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