One Thing Everyone Agrees on About Money
Personal finance is like food : it seems that the experts in the field cannot agree on anything, whether it is creating an emergency fund or early repayment of a mortgage . Yet despite all the opposing opinions, most people agree on at least five basic principles.
Money management can seem daunting due to the conflicting, ever-changing advice we hear (save 10% of your income! No, save 15%! Pay with your high interest credit cards first! No, pay the smallest balance!), But personal finance are actually pretty simple. After reading (or rereading) some of the most popular personal finance books and other classic money expert advice, I realized that they really only argue about the details – how much to spend or save and where (use my plan! No, use mine !), but their advice usually boils down to this: use money to achieve financial independence, know where your money is going, avoid costly debt, and harness the power of compound interest.
Money is just an instrument of financial freedom
Let’s start with what we can all agree, but maybe not so much talk about it: money is really just a tool.
You might not think about it in all the books and articles with titles like Instant Millionaires: Secrets to Instant Success , which seem to encourage you to accumulate as much money as possible as quickly as possible, like Smaug sitting on a golden mountain. However, if you look at what the personal finance experts are actually selling, then this is not getting rich for the sake of getting rich – this is financial freedom . Freedom from crippling debt, freedom from constant worry about money, and the freedom to provide your basic needs and comforts for yourself and your family. This is why we do it. Money is simply a tool to help you achieve this.
Dave Ramsey’s mantra (from Lifehacker readers’ favorite personal finance book , The Total Money Makeover ) is: “If you live like no one else, you can later live like no one else.” That is: opt for hard money now to get financial freedom later. Ramit Sethi from ” I’ll teach you to be rich ,” says that most people do not care to “7 bond types,” or the way work personal finances – they just want to keep everything under control and not to worry about money, maybe even indulge from time to time. And one of the basic premises of your money or your life is that money is actually your “life energy”: you exchange your energy and time for money, so you have to manage your money wisely.
We simply go off track financially when our money has no purpose and we forget to effectively use that tool to achieve our goals.
The only way to get rich: spend less than you earn
Most money experts agree on the most obvious truth about money: you have to spend less than you earn in order to accumulate wealth. Some people change their direction to focus more on the other side of the equation, which brings income: earning more than spending (for example, instead of searching for discounts, find new opportunities to generate income). But in any case, they are the same thing. The only way to improve your finances, or even stick to a budget , is to create as much of the gap between your income and expenses as possible . In other words, live within your means (and then use that surplus to pay off debt or save for the future).
This is not exactly groundbreaking advice (and not very useful as advice for those who find it difficult to make ends meet), but it is a financial truth or a principle that everyone agrees on – and one that people of all income levels should strive to follow, but usually don’t. t. As The Millionaire Next Door notes, there are even high-income people who spend more than they earn. But having a high income is not the same as having a lot of wealth. People who become millionaires are oblivious to the breakup.
Widening this gap is the only thing we can create in an emergency fund, build up equity capital , pay off debt, save on your kids’ college tuition, or even afford an enjoyable vacation. Therefore, if you are buying a book that promises to teach you everything about money and does not include this principle, you should ask for your money back.
You will find more specific advice on how to save more and spend less from a variety of personal finance sources, including I Will Teach You Be Rich , which offers scenarios for lowering your bills, and Mr. Money Mustache , which offers great examples of humble living . They may not always agree on the best tactic, but the end goal is always the same: spend less than you earn.
If you don’t know where your money is going, you are most likely wasting it.
If it’s that easy, spend less than you earn! – why can’t most of us do it? At the beginning of my financial journey, I was one of those, “yes, the budget is great, but I will do it later.” It wasn’t until I started tracking my spending ( as a business , in fact) that I realized how bad spending can be compared to a shortfall in income. It’s like managing your weight: you have to step on the scale and be aware of what you eat every day if you want to make any improvement. Many of us don’t track our weight or our expenses.
Experts are still ambivalent about whether budgeting works for most people, but nearly every book on personal finance fundamentals advises us to at least start with a financial snapshot of our spending. Where does the money actually go? Step 1 of the I will teach you how to get rich program is to find out what you are spending your money on . Likewise, Sue Orman tracks your spending first on her Get a Grip financial checklist. Y our Money or Your Life also asks you to track your spending, not like some torturous penny counting exercise, but in order to be able to map out your relationship with money and record your progress. Tools like Mint make things easy by automatically keeping track of everything for you .
Avoid the Costly Debt Trap
Personal finance experts regularly preach against going into or staying in debt – sometimes any kind of debt (like Dave Ramsey, who makes an exception for home mortgages only), sometimes just debt with high interest rates, like credit card companies with an interest rate of 14% and above. accusation. Either way, roughly zero people think debt is good.
One of the most poignant stories in The Richest Man of Babylon is about a guy named Dabasir who led an extravagant lifestyle, lived beyond his means and accumulated debts, and was eventually sold into slavery. His path to recovery (after escaping slavery) was to develop a plan with each of his creditors and pay them 20% of his income, while saving 10% for retirement and living at 70%. It took determination. The book was published in 1926, but we are still talking about this strategy decades later in the form of a 20 percent payment plan .
If you have high interest debt, paying it off is the best financial return on your investment that you can get ( other than company retirement benefits ). The experts only differ in which order you have to pay off the debt – lowest balance first (Ramsey), highest interest rate first (Orman) – and whether you need to pay off the debt before putting money into your savings. Experts also disagree with this, but take into account which debt is good and which is bad, and the interest rate on it .
Compound interest is the most powerful force in the universe
Interest may seem tiny – after all, in most cases it is measured in just a few percentage points – but it is actually an extremely important element of personal finance . It can help or hurt you a lot. This is why everyone agrees that we do not have to carry expensive debts, and why almost every financial expert advises to invest our money.
Take credit cards, for example: Having a balance sheet can quickly plunge yourself into a financial hole. Sethi notes:
It can be incredibly convenient to swipe your card from every merchant, but if you don’t pay the bill in the same month, you end up owing a lot more than you think. Take the iPod, for example. It looks like it costs $ 250, but if you buy it with a credit card with an average annual rate of 14% and a minimum payment of 4%, and then only pay the minimum each month, you will lose almost 20 percent more in total.
On the other hand, when you deposit money into interest-bearing accounts (or better yet, investments ), the power of compounding turns your money into a lot more money. A dollar saved at age 20 is equal to ten dollars saved at age 50 (at an average annual rate of 8% on investments over 30 years). This is the best way to make your money “work for you.”
This is why almost everyone, including Warren Buffett , recommends saving as early as possible and ” pay yourself first .” From a general money conversion:
[A] Note to all of you under forty: we are all over forty collectively shouting, “INVEST NOW!”
Baby Step Four is not about getting rich quick. The investments you make systematically and consistently will make you rich over time. If you play with it, jumping and popping, always finding something more important than investing, you are doomed to be one of those 54 out of 100 sixty-five-year-olds who still work because you have to work. Systematic, consistent investing is the turtle that beats the hare in the race. As you continue, the investment material expands and explodes.
(Explodes well.)
All of the above are very simple, simple principles about money, so almost everyone agrees with them. While the advice on money is generally the same, it doesn’t detract from the value of continuing to read about personal finance. You will enjoy the way a piece of advice is given more than the advice of another expert, and one plan or strategy may work better for you than others. Remember that financial success is not only math, but also a way of thinking . This is what most people know about money, but may not think about it very often.