The title for this post was shamelessly stolen from Dave Ramsey, but that doesn’t make it any less true. In your quest to become financially independent, there will be all kinds of people offering their advice. Before you take any of it, start asking yourself how the person giving the advice has done. If he/she is living in a McMansion and driving an expensive leased sports car, run away as fast as you can. If he has a modest house he paid off in his thirties, drives a nice paid-for car, and never seems to worry about money, stick around.
Broke people – who make up the vast majority of the population – have all kinds of advice to give. They’ll tell you to buy expensive clothes and shoes to “dress the part.” They’ll tell you to get into a timeshare or take out a home equity loan to pay for a vacation. They’ll tell you there is no way you can ever not have a car payment. They’ll tell you to keep your home mortgage as long as possible to keep the tax write-off. “Fake it until you make it,” they’ll say.
Here are some common “broke people” myths:
1. You’ll always have a car payment. If you buy an eight-year old car, it will cost about 1/4th as much as a new car. This means you can get a $20,000 car for about $5,000. Pay cash and drive it for four years, and you’ll be able to sell it can pay cash for a 4-year old car for $8,000-$10,000. Keep paying cash and driving these for four years and you’ll be saving about $4000 per year in car payments. That’s enough to fund an IRA account well.
2. You should buy as big a house as you can make the payment for. Those who took this advice in 2004-2007 are now sitting in homes that are $200,000 underwater and unable to move. Real estate can go down from time to time and by taking out a huge mortgage you’re putting your freedom at stake. Buy as small a house as will meet your needs. Save up a 20% down payment and keep the payment to less than 25% of your take-home pay.
3. It takes money to make money. It is true it is far easier to make the second million than it is to make the first million. You can make a fortune even with modest incomes if you are willing to put money away regularly. The power of compound interest is amazing. For example, if you start with 1 penny and double it each day for 30 days, you’ll have over a million dollars. Put away $2000 per year and double it every seven years in the stock market, and you’ll retire a multi-millionaire.
4. The little guy can’t get ahead anymore because the game is rigged. Tell that to the immigrants from Iran, India, and eastern Europe who come with the shirts on their backs and become multi-millionaires within 20 years. To make money requires hard work, sacrifice, and a dedication to meet the needs of others. Stop making excuses and get to work.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Maggie Molloy, Website http://www.maggiemolloy.com