This week we are looking at income. We kicked off the post series with my thoughts on making money and how you need to change your mindset in order to utilize your 9-5 paycheck better and how to get you setup to make additional disposable income. In yesterday’s post, we took a look at additional ways, off the top of my head, in which you could be earning additional income on the side considering you work a full or even part-time job. Today I want to look at how you should be handling that money.
Now that you have a high level understanding of what your mindset should be when it comes to making money, earning extra income and how you can do so, lets run through a few pointers regarding what you should be doing with your money. These are in no particular order and again, I am no “financial adviser” (whatever that may be) however with this post I just want to get your mind working around what you could be (should be) doing with your money.
1. Delay gratification
This is a huge one for many of us. We always want new and better and faster and fancier, however investing in a long-term goal is much more important than satisfying your current wants and needs. You have a phone that works, no? Why the next generation? Wait a year or two before you upgrade. It’ll make a significant difference in your financial portfolio. This point I cant emphasize enough – you need to learn to switch the mindset of when you get your paycheck from buying first and saving later, to saving first and buying later. If you spend first and try to save what is left later, afterwards you will often find that nothing is leftover, no?
Let me put in numbers for you. If you took a simple €100 euros and put that aside for your future retirement each and every month than, making the assumption you have a rate of return of around 5% on that, at the end of a 20 year period you would have roughly €40,000 euros! (Taking compound interest, etc into account). So if you took those initial €100 and simple spent them, you would be missing out on roughly €15,000 in earnings. That’s huge no? And trust me, you’ll thank yourself in 20 years from now, if you have that additional sum because things don’t get easier when you age.
On the other side of the coin I fully understand not everyone may have that extra disposable income after all bills are paid to put that money aside. If your current needs need to be funded in some fashion, than you’ll just have to do it, the difference being that it is a “need” (replacing a broken fridge) rather than a “want” (latest iPhone).
2. Strategically use credit when needed
A study by the U.S. Trust found that two in three high net worth investors (folks with assets of more than $3M) said they would consider utilizing credit to build wealth. I find that it is perfectly fine as well depending on usage. There is nothing wrong with credit. Its a matter of how you go about it, the terms and conditions and what you eventually get as a return. The rich of the rich utilize credit to finance their businesses despite having millions of euros (dollars – whichever way you want to look at it).
The important thing to note about credit is that it is risky and can be costly! What are ways we can look at credit?
A. Pay down any mortages or student loans you may have on a schedule. Meaning month over month (assuming low rate, fixed loans) and utilize that extra money for your retirement funds (whether that’s savings or investing into other areas to broaden your portfolio).
B. Utilize rewards cards – best example here is a credit card from the miles and more program. Unfortunately in Spain they don’t run the program as the banking system utilizes Visa, Mastercard, etc as debit and credit, however in most countries you can sign up for a credit card, earn miles for each euro you spend and not only make purchases but get rewarded for something (in this case the aforementioned miles) for doing so. In the end, whether you spend on your debit in purchasing groceries or defer payment to the end of the month and rack up miles while doing so, which one would you rather go for?
C. Utilize credit to make money – if the conditions are worthy why not take a loan from a bank to fund your money making plans. Whether that’s starting a business or say purchasing a vacation rental, fixing it up and ensuring your return on investment is higher that of the conditions of your loan. In the end it means you are utilizing money that someone else gave you to fund your retirement. Yes you need to make monthly payments, but its a matter of how your making money with that money.
There are just a few thoughts on credit.
3. Long term investments
The same U.S. Trust study found that most high net worth individuals invest in long term assets. We are not talking about penny stocks here (which by the way is also a very valid, but high risk way of making money), rather investing in long term buy and hold strategies – buying something, like stocks and holding on to them many years – considering their growth potential and actually attaining that. Most investors like stocks and bonds.
Warren Buffet is someone just about everyone knows. If not, Google him. Earlier this year he appeared on CNBC’s “On the money” and when asked about market fluctuations he replied “I would tell them don’t watch the market closely … the money is made in investments by investing … and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.” This holds true for many investments. You need to do your homework, understand the game and you just might come out on top. If you would have bought Facebook stock in 2012 at anywhere between $20 – $30 and kept that stock until today you would be at just over $120 per stock. Thats a time frame of roughly 4 years.
Example in numbers: If you would have invested $1000 in FB stock at the time that means you would have had 40 stocks at a rough median price of $25. Assuming you needed to sell them today for personal reasons at $120, you would have $4,800. That is a huge difference (taking taxes, and fees out of the account). You made money by letting it sit somewhere! That’s the mindset you got to get into.
4. Tax conscious investments
Owning a home is not just owning a home. You’ll have to pay taxes on your property. You need to makes choices that reflect that taxes of where you live or are investing in. Because in the end the only thing that matters is how much you are netting (net pay) after you have paid taxes. Bad management of these, can really eat away at your finances in all senses of the word. I wont dive into a how or what as that is a very specific topic, but I want you to educate yourself on the topic. Read material and learn the best ways, not to avoid taxes, but to ensure that your return on investments are noteworthy and worthwhile so that you can stash away cash for the future.
5. Tangible assets
Back to owning your own home example. Many high net worth individuals own several properties or farms or land because they can produce income and hopefully the value of those properties will grow over time. You have probably heard that investing into real estate is always a good and secure way to ensure cash flow somewhere down the road. While this is true, its also another one of those things you need to really do your homework on. What’s important is location, location, location. If you purchase a home in a community that looks like an up and comer than 15 years down the road you may have a return on your investment by any % point (usually somewhere around 30%), but if something happens, like crime rates go up or the economy plunges and people lose their homes due to not being able to make payments and your community begins deteriorating, well than you know the rest…
Look into tangible assets, whatever they may be and make sure you make wise decisions. For more thoughts read yesterdays post on how to make additional income.
That being said, the above points are just to spur your thought on what you should be doing with your money. Investing, investing, investing and ensuring that the return on investment will finance the future you – whether its for your retirement, a child’s education or something completely different, having money later in life is something many people don’t realize is important. We tend to gratify our needs in our 20’s and 30’s thinking that we have plenty of time for everything, but the earlier you start learning these principles the better and more thankful you will be down the road when you hit the 50 mark. That doesn’t mean “don’t have fun in life” – you don’t need to flip every cent, but that doesn’t mean burn through you cash either. Be smart and play the game right and you’ll be able to relax and enjoy life at all times.