My newest obsession has been learning about money. This is not something I learned growing up. Now that I’m 29 and have read several books on the subject, let me share with you the overall structure of how money is grown, in the most basic sense.
There are a few prerequisite to growing money. First, you need to have an income. Second, you need to establish an emergency savings account with 3 — 6 months living expenses in it, as a fall back in case anything terrible happens.
Third, you have to make paying off debt a top priority. Interest rates on debt are often high and paying them is a waste of money. Avoid debt at all costs, unless it is associated with a home or education, but even then, choose wisely.
Dave Ramsey’s book, Total Money Makeover, is a great resource for handling debt and establishing your emergency account. One of the most valuable lessons I learned from him was that you can’t become wealthy when you’re in debt. It doesn’t matter if you have $75k in savings if you also have $100k in debt. Getting rid of debt allows you to enter into the positive side of earnings, and gets you closer to being financially stable/wealthy.
There is a lot to be said about paying off debt, and I don’t mean to oversimplify the prerequisites, but I want to talk about growing money, so I’m going to move on.
Once you’ve met the prerequisites, the opportunity to grow money really begins. There are two main steps to growing money:
- Step one, reduce monthly expenses so to increase the amount of money you can save each month.
- Step two, invest that savings wisely. Investing wisely basically means using your savings to buy things that will appreciate in value.
The goal is to create an investment portfolio (savings + investing = investment portfolio) large enough that it generates its own income. This is called “passive income” because you are making money without working for it.This increases your overall monthly income, allowing you to invest even more into savings each month, which increases your portfolio. And thus a cycle is created. The more you put in, the more it grows; the more it grows, the more money it makes for you passively. If you could get this account high enough, you could live the rest of your life without needing traditional work.
In order to make this account value high, you have to invest the money you save. Saving money is just the first step, you have to invest it to generate passive income so that you can make more money then you earn from just working. There are two main ways to invest:
- Invest the money you saved into stocks. You either need to educate yourself in this area or work with someone educated in this area to make sure you are investing smartly. In Rich Dad, Poor Dad, the author says you have to take some risk in learning to invest money and that everyone will lose at times. However, it is part of learning the game. If you want to learn, start small in low risk situations while you are learning. Remember, this isn’t fast cash, this is a long term game. Overall, if you play wisely, this is an excellent way to grow the money you have saved.
- Invest the money you saved into properties. Learn to watch different markets and invest in a property when it is low because property usually appreciates over time. People who invest in property like to buy when housing markets are in a downturn and things are cheaper, with the hopes that the market will turn around and eventually the house will sell for much more.
People with investment properties also like to start small and work their way up. For example, they may start by purchasing one house and either rent it out or remodel it, and when they sell it, they roll that money immediately into another property, like a duplex, and then a small apartment complex, then a storage facility, and so forth. And all the way along they are making money from that property, either through rent or because it is appreciating in value. Also, if they roll their money into the next property within a few months of selling the previous property, they don’t have to pay taxes on the money they’ve earned as long as it stays invested.
3. There is also something about having a cooperation, which gives you big tax breaks — thus allowing you to have more money to invest each month. However, I don’t really understand it yet. More info to come.
So again, the goal is basically to save money so that you can invest it in assets (stocks, property) and grow your assets so that they make you passive income.
There are so many good books and ideas on how to reduce spending and save money. These are the biggest lessons I’m applying:
- Rule #1: Don’t over constrict yourself. No one likes to feel broke, and you don’t need to either. This isn’t about cutting off everything but necessities, this is about being pickier what you spend money on.
- Reduce overall expenses, especially related to housing. Housing and cars are often the largest monthly money suckers. Buying less then you can afford allows you to save more. Use biking/walking more.
- Advertisements and our consumer culture do not appreciate savings. You cannot have all the newest, coolest, most expensive stuff, and be saving properly too. There has to be more value placed in savings then placed in having all the things.
- You shouldn’t buy things that depreciate immediately. This includes new cars, really expensive clothes, new toys (boats, ski equipment), etc. Most things drop in value soon as you buy them. If it drops by $20, that’s one thing, but if it drops by $1000, that is a lot. In order to avoid this, buy a model or two older, or buy used in order to have the things you want and save money too.
- Realize saving is more fun than spending (most of the time.) Just imagine, you could be a financially wealthy person.
- Realize that when you aren’t constantly buying things, that you are actually doing the earth a favor. You are taking less environmental resources, producing less pollution, and less trash. If you stop and think about how much we throw away, and for no good reason, it is disguising.
- Find ways to go without or make do. I want a rice cooker, however, I don’t need a rice cooker, thus saving myself cabinet space, a trip to the store, and money.
- Appreciate minimalism and be very selective about what you bring into your house. When you like getting by with less, it makes saving much easier.
- Buy quality. When I buy boots they are expensive. But they also last several seasons and cut down on cost and consumption in the long term. Buy goods that are durable and timeless. Fad fashion passes quickly, quality staples can last a long time.
- Fix your quality items rather than replace them. Resole shoes, restring jewelry, darn holes, and get that strap of your favorite purse sewn back on.
Think of it this way, when you aren’t investing in disposable stuff that you don’t really care about, you are investing is something you care a lot about, a savings account. $$$$.
Create a budget:
I have learned through conversations with friends that I have an unusual way of budgeting. I will share it with you because it works for me and I love it. I used to work at Wells Fargo and while I was there I set up 7 different savings accounts. Each month at payday, I have a certain amount of money automatically transferred to each of these accounts. After a few months of saving, I have enough money saved to buy whatever I want, and it doesn’t affect my overall budget. This method requires occasional patience, but it is good because I don’t have to put things on a credit card. You may have different savings accounts based on your goals, but overall, these are for unusual but expected purchases.
Husband Savings: used to buy special gifts for my husband (basketball game tickets, new shoes, etc.)
Travel: used to buy plane tickets/Airbnb. $100 a month adds up over time.
House: used to buy special things for the house (like a new couch or area rug.)
Car: used when I need new tires, oil change, repairs, or registration.
Expensive Things: used to treat me to massages, facials, or the occasional expensive accessory.
Christmas: used as the budget for gifts each December.
Long-term: most of my savings it put here. It is used to transfer into the investment accounts.
Aside from the money I am delegating to each savings account, I transfer a set amount each week into my ‘spending’ account. This is what I use to pay for groceries, gas, and whatever else my little heart dreams up for the week. If it runs out… that is it. No more Starbucks, no more happy hours, until the next Friday, when my allowance gets transferred in again. This is a tricky one to balance… but after a while, you get used to it.
So all your savings + all your fixed bills + all your weekly allowances = your total income. As your income increases, increase your savings, not your spending.
And that is all. That is basically all that I’ve learned so far. There is still a lot to learn, but the foundation is being created. Here is to good financial luck and more education for us all. Cheers.