Perhaps it is the time of the year but, lately, I have been thinking about my school days a lot and the time immediately after graduation when things were so new and shiny about working life and every piece of advice given was gobbled up like cotton candy by children at a county fair. It may be a reflection of the fact that my work day is so long- not in length per se but in spirit- and I find myself imparting those great pieces of advice of yesteryear as opposed to getting them. Such is the movement of years one supposes…
I had to replace a suit recently and it got me thinking about one of those new and shiny pieces of advice I got when I first graduated. If you are going to work in an office environment, the first three suits you buy are in order: (i) a dark one; (ii) a grey one and (iii) a blue one. You are not attending the NBA draft so stay away from the four-button yellow suit, lest they call you Big Bird at work behind your back. The point being don’t wear anything you may see a Hollywood star or athlete wear to a movie opening- that’s probably their 25th suit and they are rich, they don’t care what you think. Stick to the fundamentals and you’ll be solid middle management material kiddo.
This got me to think what would be the personal finance equivalent of the dark suit, grey suit and blue suit: building blocks of wealth building and financial security required before buying all those new exotic products being sold out there. We are attracted to the shiny objects but the dull ones get us further. Here are my picks:
Black Suit = Manage Your Debt. Unless you are a trust fund kid, 99% of us under the age of 50 are probably in debt in one form or another whether it is a mortgage, line of credit, student loan, car loan etc. With credit still so easy to obtain, one of the easier self-inflicted wounds of personal finance is not being able to manage your debt. If the carrying costs of your debt is more than 43% of your gross income, you generally have a small margin of error. Anything over 50% and most experts believe you are in trouble. Thus, manage your debt. Pay down the highest debt to carry first (usually a credit card). Use excess cash to pay down debt. Don’t get too many credit cards.
Grey Suit = Learn to save money. I do consider debt management more important than saving money. Compound interest is a double-edged sword. If you are earning it, you are in a great position. If you are paying it off on a loan with interest compounded (and what isn’t now a days?), it can be a run-away train unless you keep on top of your payments. Once you manage your debt, start saving money. 10% of take-home has been the standard for ages as a good savings benchmark. If your bible of personal finance is the Millionaire Next Door, the book suggests a savings rate of 20% and over will result, over time, in financial independence.
Here’s an interesting question- is there such a thing as too high of a savings rate? Its a topic of a future post but anyone have any thoughts?
Blue Suit = Asset Allocation. Asset allocation is fancy talk for don’t put all your eggs in one basket. I do not remotely pretend to be an expert in this topic other than the fact I peg my asset allocation at 15% cash, 25% fixed income and 60% equity (I am not a big believer in being fully invested so my ideal allocation has a higher than recommended cash position but, truth be told, I am always closer to 10% cash; its more of a mind trick I play on myself to not always buy something by having a higher ideal cash allocation). Everyone has a different ideal allocation based on age, risk tolerance and life situation so consult an expert or search around the blogshere for information. One of the more astute commentators on asset allocation is Canadian Financial DIY. I suggest you read through his articles.
… I am a big advocate of passive income, building wealth through owing businesses, buying the proper insurance etc. but, fundamentally, I believe you can’t do that without managing your debt, saving money and allocating your savings properly.
Anyone have a different order for black suit, grey suit and blue suit of personal finance?
August 27th, 2008 at 12:52 pm
Seems like millions of people would have over 50% of their gross incomes in debt. Even a couple earning $200,000 combined could easily have a $120,000 mortgage. If there’s additional debt in the form of student loans or cars, they would be well over 50%. Or are you referring to debt expenses? At any rate, I’m sure society in general is overly indebted. Just looking at the housing crisis in the USA is indicative of that.
I guess as one’s finances improve, they can add more suits. Estate planning, tax planning, etc. but your three suits are a nice place to begin for someone just starting out, as you mention.
Too high a savings rate? Good question. I have a friend who lives in a low-end home. He’s early forties, unmarried, no kids. His net worth is high, his income is increasingly huge. I urge him to upgrade his standard of living, but he is very frugal (so am I). He doesn’t have a significant other to encourage him to spend money to improve his situation (I do).
August 27th, 2008 at 2:03 pm
Same commetn as Gene’s regarding debt. If mortgage is included in that then, we are in deep trouble. I think debt levels are better measured against assets, rather than against income.
August 27th, 2008 at 3:25 pm
Sorry, I have edited the post to say if your carrying costs is more than 43% of gross. Sorry for the confusion.
August 28th, 2008 at 10:04 pm
[...] Being an engineer (we really take Dilbert’s maxim that “a well-dressed engineer has no credibility to heart”), I’ve never heard the expression “dark suit, grey suit and blue suit”. Thicken my Wallet applies it to personal finance. [...]