Maybe you’re from a family that has never been good at handling money. Most families aren’t. Or maybe your family does handle money well, but none of that knowledge has been passed to you. The truth is, the two things parents rarely talk to their children about are money and sex, leaving their children to figure both out for themselves.
In reality, handling money really isn’t all that hard. It can be boiled down to just a few fundamental ideas. The rest is all details that have a minor effect compared to the fundamentals. Get those fundamental ideas right and you’ll be set for a comfortable, worry-free life. Here are five secrets to gaining and handling money:
1. Make yourself valuable in your career. The amount of money you can earn is directly related to how much value you produce for your employer, or more accurately, her customers. Going to college is just a way to learn things to become more valuable. It isn’t the piece of paper that earns you the higher income. It is what you can learn and provide to customers from going to college. This is why an engineering degree can lead to $70,000 jobs right out of college, while a French Art History major may have trouble earning more than they could have right out of high school. Going to trade schools and just learning in general also makes you more valuable, and there are a lot of plumbers who make as much as Ph.D’s. Also, showing up on time ready to work and being productive all day makes you more valuable, and thereby earns you a higher salary.
2. Spend less than you make. To have financial security, you need to store up some of the money you’ve made so that it is available for when you are without a job or, eventually, retired. People who do well are those who prepare a budget, limit their spending so that they can save 10-20% of their earnings each year, and put that money away. This may seem like a simple concept, but few people do it.
3. Use the power of compounding to work for you. Albert Einstein wondered at the power of compound interest, and for good reason. A small sum invested and allowed to compound grows exponentially, meaning faster and faster as time passes. The larger it is, the faster it grows! Once you’ve saved the money, you need to invest it where it will grow without any other effort on your part.
4. Don’t buy things you can’t afford. While compound interest is great when it’s working for you, it will work against you just as well when you are the one paying the interest. The payment on a small loan may seem perfectly manageable, but add a few of those small loans together with interest begetting interest and you’ll soon find yourself in way over your head. If you don’t have the money to pay cash, you shouldn’t just whip out the credit cards. People who do well financially save up and pay cash. Better yet, they save up and then let that money earn the interest needed to make the purchase. Then they have the stuff and still have the cash.
5. Invest where you can get the maximum rate-of-return. Compound interest doesn’t improve just a little when you increase the interest rate a little bit. It increases a lot. Saving at 1% interest will result in your money doubling every 72 years. Invest at 2% and your money will double every 36 years. This means you’ll have four times as much money after any given period of time investing at 2% instead of 1%. Invest at 4% and you’ll have eight times as much money as you will investing at 1%. Over long periods of time, the best place to be invested is in equities, meaning mutual fund that invest in stocks and the stocks themselves. With stocks you are protected against inflation because the price of the shares will increase as prices of other things go up. The companies just charge more money to account for increases in their costs. Furthermore, the value of a basket of stocks will grow with time as the companies grow and sell more products. When you invest in stocks, you put some of the best entrepreneurs and business men to work for you. And that’s a good thing.
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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.