I didn’t know much about money when I was in my 20’s.
I knew how to work, I knew how to buy stuff, and I was smart enough not to run up my credit cards.
Other than that, I didn’t really know much. The fact is money and finance is a subject which you either love or you hate.
Most of us try to avoid the subject of finance because most of our parents avoided the subject.
However, I believe now that it’s something every parent should teach their children and it’s a subject every adult should be interested in.
If I could go back in time and teach myself a few things when I turned 20, here’s what it would be.
Time Value of Money
The time value of money is a concept which states money in your pocket today is worth more than that same money in the future. Another way of looking at it is that if you have $10 in your pocket today, tomorrow it will be worth less than it was today.
That’s because money can be invested and multiplied. So, $10 today could be $11 next year if you invested it. So, getting $10 next is worth less than getting $10 today because of your ability to invest.
This applies to all of your money, including debts. So, paying off a debt today is worth more than paying it off next year.
If I understood how much my student loans would accumulate (because I deferred them) over my years of college, I would have worked harder to pay them down before leaving college. Or, at the minimum, I would have paid the interest every year.
Inflation is closely related to the time value of money. It is another reason that every day your money is worth less.
50 years ago, $10 was worth a lot, however, these days it can barely buy you anything at all. Inflation is an important thing to consider because you will need to think about your future.
If you are saving a retirement fund for yourself, you may need to save a lot more due to the increasing costs of goods as time goes on.
So, not only is investing early important to make your money worth more, you need to pay attention to inflation so it isn’t worth less!
I did learn about this in college, so I can’t say that I’d have taught myself something I actually was taught. But, it was so important that I want to reiterate it.
A sunk cost is any money you’ve spent that you can’t get back. The idea is that sunk costs should not influence future behavior.
Do you sit and finish it since you already paid?
The answer is no. You can use those 2 hours to do something more fun. There is no reason to suffer through the rest because those sunk costs should not influence your behavior.
Asset allocation simply means how you allocate your investments. Traditionally, it is suggested to spread your investments out across different investments. The idea is to lower your risk of losing the money you put into it.
But on the flip size, the more diverse you are, the lower your potential returns. That’s because the more investments you have, the more likely one of them will be a failure.
Think about it this way, if you invest in one thing, it could be a crazy success or a total failure. If it’s a huge success you make a ton of money.
But, if you got it wrong, you could lose your investment.
Diversifying makes it so you’ll probably get one or two awesome investments but you’ll also get one or two failures. So, you’re potential returns go down, but your potential losses decrease as well.
Net worth is something I only started tracking in the last couple years.
Your net worth is the total value of your assets minus all of your obligations.
Net worth is important because it represents how well you are financially. If your net worth goes down, you are making some bad decisions while if it continually goes up, you are making good decisions.
It’s important to track this, even at a young age. Every month look to see if you go up or down in value and make adjustments accordingly.
The only thing more important than your net worth is your cash flow.
Every investment you make should create some sort of cash flow (unless you earn so much that your income just doesn’t matter anymore).
In theory, it doesn’t matter what the investment is worth, as long as it provides the cash flow you need to support yourself.
So, if all of my properties lost half of their value, as long as the cash flow is the same then I’m happy.
Here are a bunch of ways to create $10,000 per month in cash flow.
Five C’s of credit
When a lender evaluates you for a loan they will look at several different factors: character, capacity, collateral, capital, and conditions. All of these are the parameters which you will be measured against for a loan.
You can also think about your credit rating and whether you are deemed financially stable enough to take on a large sum of money and pay it back on time.
Bad credit can be very smashing to your future and you can change it by using a bad credit loan to prove you are trustworthy enough to take on a new loan.
DIY: How To Improve Your Personal Finances
Even if you’re not looking for a property this exact second, you always want to be improving your position.
So, focus on the downtime to improve your finances, get your debt squared away, and put yourself in a better position when you are ready to buy!
It’s important to be sure of your financial position before you buy a property because you might find it’s harder to get that property than you would have originally thought.
Here are a few ways to quickly improve your finances to help you save more, pay down more debt, and qualify for better loans.
One of the most common reasons that people struggle financially is because they simply don’t pay attention to what is going on in their own financial life. If you are not paying attention, you can’t hope to know what is going on and therefore know how to improve matters.
So, the first item on your list is to start paying attention to your finances!
When I’m working on a project, I’m laser-focused on the budget, the details, the costs, etc. But, sometimes in my personal life, I let this slide.
The reality is, when we do have a budget and focus on sticking to it, our bank account balances grow so much faster than when we aren’t using one.
I love to eat out, and my wife loves to buy small things around the house. One day, we looked back over the previous year of spending and found we each averaged over $1,000 per month on our hobbies!
By pulling back a little in each area, we were able to save over $1,000 per month but still do the things we enjoyed.
So, start by having a budget!
Even if you are financially well off and can afford most of what you want, by budgeting for the items and spreading the costs out over several months, you’ll find that you buy less, spend less, and save more.
Also, if you budget to pay down certain debts faster, you’ll see those balances dramatically drop!
So, do not overlook the importance of a family budget.
Save On Other Purchases
There might be a number of other big purchases you need to make before you get hold of your next property, and it is a good idea to make sure that you are only spending as much on those as absolutely necessary.
For any big ticket items, we actually start searching for them months or even a year in advance. For example, let’s consider kitchen appliances.
As you know, a full set of appliances can easily cost $5,000-$10,000 if you are getting high-end products. It includes a fridge, double oven, gas cooktop, microwave/fan, and dishwasher.
The first thing we did was go to the store and decide on two or three brands, styles and product lines we wanted. It’s hard to compare prices unless you are looking at similar products between stores.
Then, for months we’ll watch these items and their prices. Occasionally there will be sales and by tracking the pricing all year, we know which sales are worth getting or not. When we feel we are getting the best price, we’ll buy.
And by doing that, we can easily save $500-$1,000 or even more.
We did something similar with our TV, computer monitors, etc. Basically, anything that is currently working that we want to upgrade. Over the course of a year, we are saving thousands of dollars.
You might also use a money saving app to help.
Saving money in all these places will make an enormous difference when it comes to saving for your next down-payment
Pay Down Debt
With all the money you are saving by budgeting and by planning out major purchases, you might want to use some of it to pay down debt.
You’ll have to decide if it’s better to pay down debt or have a larger down payment because both will hold you back on your next purchase.
But, generally, paying down $1/month in debt is worth about $3/month in income. At least, as far as loans are concerned.
If you do decide to work on paying down your debt, I fully detail a unique debt pay down method to get you into your next rental property faster.
Increase Your Income
Most people just focus on debt, but the reality is you can only cut your expenses so much.
Income, on the other hand, has unlimited potential. So, why not focus on growing your income?
Increasing your monthly income can be done in a number of passive and active ways, and it is worth looking into as many of these as you can to find the right one for you. I outline a number of ways to increase your income in this article on how to earn $10,000 per month.
While earning $10,000 per month in side-income might seem a long way off, it’s important to start! Even if you can earn an extra $500 month now, and grow it slowly over time, it’s worth it!.
Don’t Focus on Just One Thing
As I mentioned already, focusing on just budgeting, or debt paydown can be detrimental to your overall financial goals. It’s important to combine a number of different things into an overall strategy, which includes budgeting, debt paydown, and increasing your income.
5 Questions With Financial Expert Kara Stevens: Building The Right Money Mindset
Believe it or not, becoming a millionaire doesn’t take much capital. It mainly a mindset shift as it pertains to money.
In order to unpack how to do just that, we spoke to financial expert, journalist and author Kara Stevens from TheFrugalFeminista.com.
In this Q&A, we discuss money management, the emotional aspect of money, and why you must heal your relationship with it first before you can learn to have more of it.
Let’s just talk about it out the gate. What’s the biggest money challenge you see in the people you work with?
I see so many things when it comes to money challenges—from fear of looking at bills to avoiding having important yet difficult conversations with their family members about money. I’d say the underlying challenge is an ambivalent relationship at best and a harmful relationship at worst with money.
We walk around usually unaware of our thoughts about money so our decisions are on autopilot and unexamined. This becomes a problem when you have goals of wealth but your actions and thoughts work in opposition to those goals.
You mentioned “financial dysfunction” and bad money habits being passed down from generation to generation. What are some that you see and how do you break them? (feel free to incorporate own experiences here)
Some of the habits that I see include living beyond one’s means and using credit cards and payday loans to subsidize lifestyles.
That’s a tricky one.
I also see the other side. People who hoard money in fear of being poor and who ironically keep their money in a low-yield savings account that will eventually erode its purchasing power.
Or inflation, which literally eats your money alive. So how do you break the money dysfunction?
Breaking free of money dysfunction begins with awareness. You have to acknowledge that you have a problem and commit to change. Even when there are setbacks.
I think the next step is seeking help whether through reading and educating yourself if you’re a self-starter or seeking support from a professional or a mentor that can guide you through your goals and offer feedback and accountability.
And finally, I think creating simple plans and goals that can be easily achieved and tracked helps you stay committed and motivated to improve your relationship with money.
You talk about “the link between self-worth and net worth.” What do you mean by that?
Usually when people hear that, they think I mean that more money makes you better or feel better. That’s not what I mean. When I say there’s a link between self-worth and net worth with respect to how we treat money. In other words, when you realize that you are enough, so you don’t have to overspend anymore or hoard money because you’ve reached a level of financial security.
Almost like being at peace with who you are financially?
Yes. How you manage your money—meaning what decisions you make around spending, saving, giving, and investing. This message is specifically those of us with money management issues and not income issues. Money management is for those of us that have enough to meet our needs, but our spending decisions keep us from making progress in our finances.
In other words, building wealth.
Right. Income issues and issues around generating wealth stem from structural inequalities. For instance, gender-based pay gap, race-based pay gap, predatory lending and so on. There is definitely an overlap when the discussion is that they don’t have enough income to manage.
Your book is called Heal Your Relationship With Money. What is it that people need to heal and why 28 days?
I think people mostly need to heal their past financial trauma from childhood, across the board. Whether you lived in poverty or privilege, there may have been beliefs passed down to you that make it hard for you to overcome financial self-sabotage.
This comes in so many forms from buying the cheapest foods because you don’t want to spend the extra money, to believing that the opposite sex is your best financial plan.
Healing can happen in a short period of time—like 28 days—when there are actionable steps and accountability. The book offers the space to engage in deep metacognition—meaning thinking about your thinking—while simultaneously offering bite-sized and tangible action steps.
What’s the biggest piece of money advice you can give someone who’s starting from scratch and doesn’t know where to go?
I think the first place to begin is to take inventory of your money mindset. Assess and examine your thoughts and subsequent decisions that stem from that train of thinking.
In doing so, you’ll be able to cultivate financial self-awareness which you’ll need to replace those thoughts and actions with ones that align with your financial goals.
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