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 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.
7 Money Facts Every Millennial Should Know
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: Your 5-Step Financial Planning Guide
If you’re starting out to plan your financial future, it can get overwhelming. While many opt for a financial advisor to take care of the entire process, you can always handle your financial planning all by yourself (it’s simple, really) if you’ve got the right tools.
For starters, here’s what you need:
1. Set Goals!
Chalk out your goals—it can be short term, like paying off your card payment bills or long term, to meet expenses like retirement and your kids’ education.
Take a step back and do a reality check. Where do you stand now? How are your cash flows? How soon can you meet your expenses? Create a timeline to achieve these targets (and ensure you meet them!)
2. Do The Math
Calculate your total assets, after deducting the debts—and budget smart. Ditch your debt to stay away from piling on more to your list of financial risks. If you’ve got way too many debts to clear and it’s becoming increasingly difficult to keep track of them, here’s a great tool that comes in handy.
3. Build An Emergency Fund
Uncertainties can be hard, more so if they have a significant financial impact—be it an illness, job loss, or even global downturns.
To evade being stranded, ensure that you’ve built an emergency fund (a good start would be to keep aside six months’ worth of expenses), along with solid insurance coverage to back you up.
4. Hire The Right Agents
Apart from the general power of attorney, also ensure you lay out a directive in case a medical emergency comes up (if you’re incapacitated—we know, it’s not the best of thoughts to ponder over). To ensure you plan right, avail the services of an accountant, a real estate planning authority, and a medical power of attorney.
5. Earn Money On Your Money
The final step is to make sure you earn returns off your money. How’d you go about this? To start with, educate yourself. Read, read and read some more—research about what stocks, bonds, mutual funds, ETFs and other financial instruments do. Understand their risks, costs and how you can work on diversifying your investment.
It’s important to invest in something you understand.
Post this, set up your accounts to meet each of your goals—through monthly contribution plans, 401(k)s, low-cost index funds, IRAs or other savings plans. If all these details get you dizzy (or overwhelmingly hard), you’re better off with a financial planner who can do the research and investment planning for you.