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.
10 Ways To Avoid Financial Stress
If financial difficulties are keeping you awake at night, take action and tackle your problems head on otherwise they are likely to get worse. The ability to pay for rent, mortgages, bills, and food are fundamental to our quality of life.
It is important to plan for future financial hardship by making saving a goal and budgeting carefully. It’s impossible to predict what will happen in the future, so to cushion any financial hardship, it’s worth putting a little money aside each month.
Developing a savings plan now will enable you to get on with living your life stress-free!
Reduce monthly bills
List all your current outgoings and look to see if you can make any savings. Often it’s tempting to keep the same standing order from the same insurance company for year upon year. You are likely to be paying too much for your premiums and it’s worth shopping around and switching.
Look at the amount of interest you are paying on loans, mortgages and credit cards, you could be able to secure a better deal. One thing to remember is to check your credit score if it is poor lenders won’t give you the best interest rate.
It is possible to repair your credit score by using the expertise of a credit repair company.
Utility bills can be reduced by switching utility providers. Use an online comparison site to secure the best deal. Switching is easy as most of the work is completed for you by your new supplier.
To budget carefully you need to be in control of your spending and to be in control you need to be aware of your income and outgoings. List every necessary outgoing that must be met on a monthly basis and you will be left with an amount which will have been spent on miscellaneous items such as eating out.
You can then design a budget plan so that you can put a certain amount into a savings account. You will probably be surprised at how much your morning coffee costs when added up over the month.
Cut it down to once or twice a week and you will make significant savings.
Make savings work to your advantage
Savings (if you have them!) can work to your financial advantage. Ensure you choose the best financial products that give the maximum return on your savings. Financial products change rapidly to factor in a financial audit of your savings every couple of years to check savings are in the best account.
You could also consider investing your savings property or financial shares. This has the potential to be lucrative but is not without risk. Consider hiring a professional and independent financial advisor for advice.
Ideally, you should set apart some of your salaries each month in order to build up an emergency fund. Life can be unpredictable and without savings to fall back on, your car breaking down or your roof leaking could plunge you into more debt as you borrow to rectify the situation.
Savings will cushion the blow of any financial hardship.
Stop Paying Extra Bank or Late Fees
Late fees are not helping you. They add up over time – fees can even accrue fees!
If you are the kind of person who always forgets to pay their bills on time, you can get around this by automating your finances so that the money automatically goes out of your account.
You should also avoid making any extra charges on your credit card unless you are sure that you are able to pay it off in full at the end of the month.
Don’t Pay Full Price!
Paying full price is a really common financial mistake that a ton of people make.
In today’s world, you can find a sale on just about any item. If you see something you need at the store, take a few moments to shop for it online and you’ll probably be able to save 10-20%
Not only does this method stop you from overpaying, it also gives you a moment to think and decide whether or not what you were thinking of buying is actually a worthwhile investment.
Create a Financial Defense Plan
All of us need to not only earn our living and grow our finances if we’re to live a comfortable and happy life, but we must also defend them.
That means ensuring you stay rational, sensible and forward-thinking in all matters related to your financial health.
There are a few considerations you can take care of in order to make this so, and generate a cognitive and systemic financial defense to keep your money yours, and flowing in the direction you most want.
Here are the keys to defending your financial interests
Know Good Lawyers
The most important thing is to have good counsel and good advice. So, hire the best attorneys that you can afford. From real estate to contracts to brand protection, you need someone behind you making sure you aren’t making any major missteps.
The world practically runs in the courtroom now, unfortunately. So, with good attorneys on your side, it will keep you out of the courtroom and focused on running your business.
Have A Contingency Plan
It’s always best to have a fail-safe.
This might mean never tying up all your investments in one basket. It might mean diversifying your investments .
Or, it could mean allowing only one or two financial handlers to have any kind of insight into your money matters in the first place.
The key is to be able to have a solid plan but also be able to pivot to something else should the first plan fail.
With the willingness to keep a backup plan, or a mode of operation to take when something fails or doesn’t go the way you expect, you at least won’t lose anything.
Keeping a solid contingency is also reliant on keeping solid discipline with your financial means – without this none of your decisions are likely to land effectively.
Pore Over Contracts
Whenever signing a contract, or forging a new one, you need to know exactly what terms are referring to.
You also need to read between the lines, and consider what situations a certain stipulation could affect in the future. Remember, even vaguely written terms in a contract do not fall there unexpectedly.
They are either there to make or defend a certain form of income, or persuade and dissuade a certain type of behavior. Every word counts.
Remember the first recommendation? Well, here’s where they come in. But, it’s important to know how to read and interpret the contracts yourself as well.
Study contract terminology and simply dedicate the time to observe and understand.
Look For Weak Spots
What are the weak spots in your defense system?
Could it be family members having access to your accounts? Do you think it could it be emotional family members asking for financial help, when this is not genuine?
Or perhaps it could it be the services you bank with.
Don’t forget about the way you log in to your accounts and store passwords.
To prevent your finances from being breached, keep up to date on modern security measures. From there, you should be settled.
To reduce your financial stress, the key is to lower your costs, increase your passive income, and protect your assets.
Debt Crisis 101: Hedge Fund Legend Ray Dalio’s Take On What Triggers Rising Debts
The 2008 financial crisis resulted in enormous failures for both individual and institutional investors. There were not many investors who were able to navigate through the crisis calmly and without great losses. Those who did knew the fundamental basics about how debt crises work.
Therefore, learning how to maneuver future debt crises is extremely critical for all investors, no matter how big or small their portfolio is. Economic changes are unavoidable, of course, so the only way out is to understand the primary cause-and-effect relationships and to learn to manage them, argues Ray Dalio in his new book, Big Debt Crises.
Cyclic nature of debt cycles
Debts essentially originate from credit. It is the credit or assumed ability to purchase which leads to debt. Therefore, debt is not always bad because it gives the economy purchasing power. It is when the debt is not used productively and does not get repaid in time that it becomes bad.
Excellent lending standards are a necessity. If they are too stringent, debt will be less, but so will be purchasing power, which will restrict economic development. On the other hand, if lending standards are too lenient, there will be more money and more growth, but high, unpaid debt becomes a threat to the overall economy.
Of course, when a person borrows money, it means he is purchasing something that he cannot afford at the time. It’s important to realize that he isn’t just borrowing from the lender, but also from his future self. There will be a time in the future when he will have to spend less than he earns so he can pay back the debt. He may again have to borrow money at that time to be able to pay back the old debt, which creates a cycle. This cycle applies to nations and individuals alike.
The effects of the debt cycle
Every debt cycle is caused by a lack of purchasing power and/ or buying more than one can afford. When the borrower is unable to meet his debt obligations, the lender is, in turn, unable to meet his own obligations to his creditors, and that obviously leads to a number of problems.
The most significant effect of debt cycles is that huge losses are incurred due to non-payment. The lender expects certain payment amounts every year, which either get reduced or written off entirely. As a result, losses get piled up on both lenders and creditors.
On the other hand, even when the debt cycle is balanced for a short period, the long-term implications are enormous. The businesses which borrowed or those that loaned money may become financially unstable for a long time. This affects the entire economy of a country.
Can debt crises be managed to avoid big problems?
If the policymakers of a country efficiently handle debt cycles, it is possible to control debt crises to a large extent. They can use their authority and knowledge to make policy changes so that debt crises do not drown the entire country.
Policymakers can start with the use of austerity, or spending less than what is brought in. They may also make certain debt defaults and restructuring. The central government can print more money and make more purchases to increase the amount of money in circulation. Another efficient method is to transfer money from those who have more to those who need it, which can be done in various ways.
Thus, debt cycles are integral and unavoidable parts of an economy’s system. However, they can be managed effectively to ensure they do not become vast crises.
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