5 Things I've Learned About Money
Like many kids growing up in the United States, I didn't receive much financial advice or training prior to my adult years. My parents instilled in me some of the traditional ideas of financial managements, such as avoiding unnecessary debt, saving money, etc. And I'm grateful for that!
I can still remember my dad telling me not to use credit cards unless you had the money in the bank to pay it off! So, that was a good foundation.
But as I have aged and started dealing with larger sums of money (house and vehicle purchases, 401k plans, etc.), I started to figure out how much I didn't know. And that's when I started trying to learn more.
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| Image generated by ChatGPT on 07 Oct 2024 |
That period of my life was about 15 years ago, shortly after my wife and I got married; and since then (thankfully), I've picked up a some habits that are worth sharing*.
1. Lifestyle & Spending Habits Matter!
Before I get into this, the assumption of this section is that you have some type of regular income. If you do not, then most of the rest is meaningless. So, if you don't have an income, the first priority is to get one!
Once you have an income, you (as an adult) get to decide how to use that. And everyone has an opinion about how you should spend your money. Usually, their opinion involves spending it in a way that benefits them or their business, of course.
Proverbs 21:20 (NKJV) says, "There is desirable treasure and oil in the dwelling of the wise, but a foolish man squanders it."
The principle from the verse above is that wise people will keep enough extra money (after their necessary expenses) to build wealth, while unwise people (regardless of their income) will spend it quickly. I don't believe the verse is saying that all wise people are wealthy! That's simply not true. And struggling financially does not make you a fool either! This verse, though, is illustrating a principle that consistently making wise financial decisions will usually lead to a better financial outcome.
The main point is that the major outcomes of your financial life will be determined by the daily decisions you make. As your income increases, be careful that you don't find new, more expensive things to buy.
This is known as "lifestyle creep." It's real and pretty dangerous.
Before you move on, please realize that the remaining tips are either not possible or irrelevant if you don't get #1 under control (assuming you don't have mega-rich friends or relatives who will just hand you large sums of money.)
2. Buy Quality Products & Assets
When you need or want to purchase something that you can justify as being worthwhile, go for high quality, durable products that will give you the greatest value. That's not super exciting or fashionable maybe, but value should trump trends if you want to get ahead.
I'm talking about everything from cars to clothes to appliances and headphones. You might buy the cheaper version of that product only to find out how poor it is, and then you're back on Amazon buying another one a few weeks later! Research and ask other people for input before making major purchases, because this can save you a lot of money in the long run!
I mentioned "assets," and this is really important to understand!
Assets are things that either increase in value inherently (e.g. certain collectibles), or give you the ability to save money or generate income with them (e.g. a car for an Uber driver). You may think this is only for business owners, but that's not true.
For example, if I purchase a lawn mower for $300 and use it for 10 years; I can call that an asset because the total cost of owning and operating it for 10 years ($300 purchase + $250/year in consumables & supplies) would be around $2,800. But if I had to hire a lawn service to mow my lawn, it could cost me $50/week for ~30 weeks/year, or $1,500 per year, which is $15,000 over 10 years. Purchasing the lawn mower allows me to save over $10,000 during those 10 years, so it's an asset.
I'm not saying you have to mow your own grass! That may not be possible for you. But I am saying that buying assets is better for you than buying liabilities, which are things that take away your money.
Bear in mind that nearly everything you can buy in a retail store is a liability. It's something that you either must purchase or want to purchase that will be worth $0 in some period of time. Toys, clothes, food, vehicles, computers, televisions, etc. All of it will be worthless pretty soon (very soon for food!), and if you don't have a plan to use it for income or money-saving, it's a liability.
You can't avoid liabilities completely, but you can be intentional about reducing them.
For example, we often purchase liability items second-hand on re-sale sites or at thrift stores. This allows us to pay very low prices for something, and sometimes we can turn around months or years later and sell it for nearly the same price that we paid for it! Yes, that means you used it for a long time (e.g. children's shoes or clothes), but then didn't lose money in the long run because you sold it.
All of this aligns with Warren Buffet's Rule #1: Don't lose money!
And if you're not familiar, his Rule #2 is, "Never forget Rule #1."
Check out Rich Dad, Poor Dad by Robert T. Kiyosaki.
3. Murder Your Debt(s)
Sorry for the violent language, but I want to convey a sense of urgency and even anger toward the debt that is holding you back/down.
Proverbs 22:7 says, "The rich rules over the poor, and the borrower is servant to the lender."
This is not advocating that this situation is good or wholesome. It's just a fact. And it's also not saying that being a servant is good or bad. It's just stating a factual relationship between debt and freedom. Debt reduces freedom and drastically limits your options.
In the book, The Psychology of Money, by Morgan Housel, which I highly recommend, he explains that one of the greatest "things" money can get a person is freedom.
It seems that some people love the idea of debt and think of it as a way of creating "tax-free money." Perhaps they've found a way to successfully do that, but my experiences have been that getting out of debt is liberating and exciting. It opens up new feelings of independence and confidence that cannot be attained by taking out a loan.
Am I completely out of debt? No. But it is an objective I hope to achieve in the next few years. Our mortgage is our only debt, and we're shooting at it pretty hard.
4. Learn About Investing (and Do It)
I was once that person that said, "I don't want to learn all that money stuff." I thought that was for finance gurus and accountants. I thought I could just put my money in the bank and be set. Well, I was wrong.
Investing is the only way to stay ahead of inflation; and since inflation is now an integral part of our global financial system (on purpose by the way), you don't have much of a choice.
If you're not following, let's use an example. Let's say you save $5,000 in cash every year for the next 30 years, which is pretty good for most Americans. You put it in the bank and keep it, making maybe 0.2% interest on it. At the end of 30 years, you go to your bank account to enjoy your hard-earned money, only to find around $160,000. That's great, except that $160k in 30 years will be worth about $70k in terms of buying power. The money literally becomes less valuable over time.
The democratization of investing has arrived, and you can open a brokerage account just as easily as opening a checking account. Not sure how? Just Google "how to open a personal brokerage account," and you'll learn in 10 minutes.
In addition to stock market investing, there are many other ways to invest; so I'm not telling you how to invest. That's a huge topic that you need to work through personally based on your interests and risk tolerance.
Book recommendations on this topic:
5. Leverage the Money You Have
Leveraging something means you use it to generate more force that you could without it. Hammers give you leverage for inserting or removing nails. And money gives you leverage to get things for less money. It's counterintuitive, but it is how the world works.If you can control your lifestyle, make wise purchasing decisions, save money (emergency fund), invest money, and get out of debt, you'll be in a great position to leverage your assets.
For example, instead of taking out a small business loan to start a business, you can use your 401k savings to perform a rollover for business start-ups (ROBS) to get it off the ground. This can dramatically reduce your costs by not having to pay as much or any interest to banks.
Another example is having a large enough emergency fund so that you can reduce your auto and home insurance deductibles. If you can afford a $5k or $10k deductible, it will reduce your monthly payments and save you money. That money can be funneled into investments and put you in a better position.
Lastly, there are many instances when paying for something in-full provides significant cost savings over making the monthly payments. For example, I purchased a new HVAC system this year, and they company gave me an instant 5% off the total price because I offered to pay in-full. That was about an $800 savings, simply because I had the money in the bank. You can do this with cars, boats, ATVs, and virtually anything else.
Use it as a negotiating tactic too! It's fun.
Outro
The importance of financial security is getting more visibility in American culture today, especially over the past few years as inflation has become a major issue. The advice in this article is only scratching the surface, but it should provide a reasonable starting point for those who may be starting out without much guidance--like I did.
As always, if you want to discuss these topics more, let's connect online (see 'Connect' section on left sidebar).
*Devine View is not a financial advisory service; so, these suggestions are here for your consideration. However, you should not make any financial decisions based only on what you read here.
