The Five Most Important Financial Decisions You Can Make

Wealth tends to be very digital.  A very small number of people have wealth, while most everyone else has little or no wealth.  Not including the house, you tend to find a few people who have maybe $5M to $10M in investments, vacation homes, and rental real estate, while everyone else maybe has a couple of hundred thousand dollars at retirement.  With the current generation of retirees, we’re even seeing a lot of people going into retirement still owing a lot on their homes.

The strange thing about this is that there is such a wide array of incomes.  There is probably a nearly continuous spectrum of incomes from $15,000 per year all the way up to $250,000 per year.  Above that there are probably more jumps, maybe from $1M to $8 or $10 M, but it is all fairly continuous at the lower income levels.  You would think that the amount of accumulated wealth would also be fairly continuously distributed, since it would be if people all tended to save about the save percentage of their wealth.

But they don’t.  Most people, in fact, will spend up to their income.  If they have $12,000 per year after they have paid for housing and food, they will spend $12,000.  If they have $120,000, they will  spend $120,000.  Each day people slowly take on more commitments and more payments until their outflow of cash equals their inflow.

There are a few, however, who end up wealthy.  Very wealthy, by most people’s standards, although most of them would not tell you they feel wealthy, just comfortable.  What is the difference between them and the rest of society?  Not really as much as you may think.  Most of them take vacations, drive cars, eat well, and never really feel like they are lacking.

It can all come down to a few decisions that they make.  Here are the five most important decisions you make, and how many of the people who become wealthy make them:

  1. College:  Obviously the wealthy only go to Ivy League schools and make those important connections that lead to high salary jobs, right?  The truth is, there are very few professions where going to an elite private school will give you a lasting advantage over those who went to State U.  If you want to work at an elite law firm in New York City, you might need a Harvard Law Degree.  But if you want to be an engineer or a botanist or an elementary school teacher, your grades will open more doors than your college.  Not going to a private college can easily save you $100,000 or more, before you tack on student loan debt interest.  Even if you pay for it all, that’s $100,000 more to put towards a home, cars, and other necessities that would go on loans or credit cards.
  2. Career:  People who become wealthy tend to spend extra time working on their vocation, rather than doing things around the house that they could hire out.  For example, they might spend a few extra hours at the office instead of cutting the lawn or fixing the drier.  Not only can you earn more by working a Saturday in your chosen profession than spending a full day doing something that someone with the experience and right tools can do in an hour, you are also likely to do better in your career if you spend more hours working on it.  This only works, however, if you choose a profession where you can earn more for more work.  Many wealthy individuals own their own business.  Others may do something where they can take on more work and charge hourly, such as consulting or contract work.  Something where you can spend time once and then sell it many times, like writing a book or recording an album, can allow you to multiply your time.
  3. How They Buy a Car:  People who buy new cars every few years end up spending a million dollars or more in depreciation and lost investment return over their working lifetimes.  People who become and stay wealthy tend to buy 2-4 year-old used cars to save money on the depreciation.  They let someone else get the new car smell and lose thousands during the first few years.  They get a reliable car with a lot of life left and pay far less.  They can even throw in a $100 detailing each year and still come out way ahead.  The best part is that by saving on the interest and depreciation, they always have cash for the next new car.
  4. How They Buy a House:  Normal people buy all of the home they can afford, figuring they’ll make money on the appreciation.  They don’t think about the extra expenses for maintenance, insurance, and property taxes.  They don’t also appreciate the risk they are taking, should a decline in home values occur, or the large amount extra they’ll spend on interest over the life of the loan.  People who become and stay wealthy buy a modest house in a well established neighborhood with a track record of increases in home values.  They buy only what they really need, that which they can put at least 20% down on (much more if possible) to avoid mortgage insurance, and that which they can easily put on a 15 year fixed loan.  Not only do they save a lot on interest, they will have their home paid off before their kids are ready to go to college.
  5. They Control their Cash Flow:  Probably the biggest factor is that people who become and stay wealthy control their cash flow.  They budget so they know where every dollar is going.  They avoid spending their money on extraneous junk and make sure money is going into investments, emergency funds, and accounts for future expenses like college and the next car.  They increase their incomes by increasing their assets – investments that are paying them money each month.  They also avoid taking out loans because they know they don’t want to waste money paying interest.

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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.

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