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.
The Main Benefits of Being Financially Independent
Being financially independent means different things to different people.
To some, it means retiring and traveling the world, relaxing at home, or doing whatever you love.
For others, it means having the financial stability to have at your back, while you continue your career or business.
In general, financial independence is defined as when your passive income is higher than your living expenses. Here’s the issue though…
It can be a moving target.
You need different levels of income at different points in your life. Let me explain
How Much Money Do I Need?
If you are 18 years old and have no debts, are healthy, and can get by with little, the amount of income you actually need to get by is very low.
Eventually, you might get married, have a family, a dog, etc. So, the income you need to sustain this is a lot higher.
Then, the kids move out and you downsize. You need a lot less again.
Then you start to get older and you find your health failing you. Your costs will go up once again.
So, at a minimum, I’ve already outlined 4 different points in your life where your “financial independence number” will go up or down.
Regardless of the difficulty in calculating exactly how much you’ll need, there still are a lot of benefits to strive for financial independence. Let’s take a look at those.
Freedom of Choice
I already alluded to it a bit, but the biggest benefit to financial independence is freedom.
As soon as your passive income is higher than your wages, you’ll find that you don’t need that job. You can continue to work, but you don’t have to. So, all the stress is gone.
Same goes if you’re a business owner. You can continue to grow your business if you want, but you don’t need to.
You could opt to walk away from it and do something else entirely. It allows you could leave the high paying job and find a job that is more rewarding.
Whatever you choose to do, it’s because you’ve achieved Financial Independence.
You’ll Be Able to Make More Money
You can never unlock your true potential as long as you are a slave to your job or business. It’s hard to pursue other opportunities when you can’t afford to leave your job.
As an employee, you can earn money by working more, getting a raise, or getting better positions. But, you are actually very limited because most of your time is dedicated to the job.
And that brings us to the heart of financial independence – time. The most valuable commodity is time, and if your time is spent working for someone else, it isn’t spent finding new opportunities for growth.
By growing your passive income to the point where you don’t have to work anymore, you can unlock that time and harness all of your intelligence and creative power to pursue more valuable endeavors.
You’ll Actually Get to Retire
If you haven’t realized it yet, Social Security is going to go broke, pensions can disappear overnight, and even state or municipal government benefits can be slashed to pennies on the dollar.
While some people will be able to retire with these, we should not depend on them entirely. Doing so will make it far less likely that you’ll have the security you need or want in retirement.
But, retirement isn’t something many of us worry about until it’s far too late. We don’t save or prepare, then find ourselves unable to retire.
So many people work until they are no longer able to work and they are forced to retire. By then, they have no way to actually enjoy any of their ‘retirement.’
If you are financially independent at a young age, you are kind of already retired. Additionally, you can continue to work and just save everything to get to a point where you are truly prepared for retirement.
You might even be able to afford to retire early and enjoy your later years to their full potential.
Passive Income is Like Unemployment Insurance
Unemployment insurance covers only a portion of your lost wages. But, if your passive income is already at or above your wages, then it’s like a really good insurance policy.
The fact is that many industries are changing and advancing, which is leaving its older workers behind. Having financial independence means that you’ve got something to fall back on and can take your time to find new work without worrying.
You Can Plan
A lot of people never plan ahead. While they might plan their next vacation, wedding, or Black Friday shopping spree, most people aren’t planning for their finances next month let alone 20 years from now.
A lot of that comes from the belief that it’s impossible to get ahead, be successful, wealthy, and secure. Planning ahead would just be depressing.
But, if you work to attain financial independence, planning for the future becomes fun. Who doesn’t want to think about the future when the world is your oyster?
You’ll Be Less Stressed
Money is one of the leading causes of worry and stress in our society and in most households.
Having more passive income can help with your finances, allowing you to enjoy the company of your spouse and children. It can allow your family to actually enjoy each other rather than always being stressed over paying bills.
Why Aren’t You Chasing F.I.?
What is holding you back from pursuing financial independence? Comment below.
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5 Money Mistakes That Millennials Are Making In Their Prime Investing Years
Millennials are often accused of making serious money mistakes. In fact, according to a recent study, 80% of Millennials don’t invest—and one out of five expect to die in debt.
Naturally, these financial blunders have a significant impact on their ability to save money, accumulate wealth, and build emergency savings.
Here are five major money mistakes millennials are making in their prime.
1. Millennials are risk-averse
Millennials had to watch their parents lose their retirement savings, pension benefits, and 401ks to the recession, and it didn’t go down well with them.
According to research, most of the millennials are likely to pass on long-term investments—such as stocks—to avoid risk. However, this also limits their ability to create wealth in the long run. A big no-no for those planning to retire in Belize!
2. Inflated lifestyle is the new norm
Do you feel the pressure of matching your peers when it comes to spending? Apparently, most of the millennials do, and it has resulted in inflated lifestyles. Millennials spend an average of $838 on non-essentials, such as cocktails, cabs, and clothing.
The TD Ameritrade survey also finds the leading reasons for millennial credit card debt as paying for necessities, dining out, and shopping.
3. Putting retirement savings for later
When you have over three decades to save for retirement, what’s the rush? That’s precisely exactly how millennials are planning (or NOT planning!) their retirement savings.
Not only is delaying savings economically catastrophic. You also lose out on the magical benefits of compound interest.
(And if you haven’t heard of compound interest, just peep this story about how a $14K/year UPS worker retired with $70M just from saving a few bucks a month…)
4. Saving nothing for emergencies
A survey from Harris Poll reveals over 20% of millennials would require help from family and friends to pay for an emergency bill of $500.
Emergencies are a part of life, and you never know when you’re caught up in one.
The best strategy to survive financial crises is to set apart a portion of your income as emergency savings.
5. Not taking student debt seriously
America has a SERIOUS student debt problem. And millennials are right at the center of it.
How bad? Well, here goes.
Nearly 45% of millennials have student debt, with net US student debt exceeding $1.5 trillion.
Needless to say, student debt can hamper the millennials’ ability to generate long-term wealth or retirement savings.
The Bottom Line
There’s no doubt millennials face a unique set of financial challenges. Goes without saying. Still, careful financial planning, a little bit of fiscal restraint, and financial discipline can help them redefine their financial freedom.
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