HonestyApril 3, 2019
Learn & ImproveApril 3, 2019
We make wise money decisions. We tally our resources before building a tower. We budget – no matter our net worth. We control our expenses, income, and investments.
Finance, one of my all-time favorite subjects!!
Let’s start with the basics otherwise, this would turn into a six-day event.
Budget. It is that simple. Budget.
A budget is telling your money where it is going to go, it is not a record of what happened. A record of what happened is called an expense report.
If you make $1,000 a month. Write $1,000 at the top of a piece of paper and then start writing down what you will spend that $1,000 on every month. Rank them in order of importance. Tithe, rent, food, water and electric all come before video game purchases.
Knowing how much you make and then deciding how much you will let yourself spend is critical if you want to be a good dad. A dad is supposed to take care of his family, while we don’t have to physically hunt, kill, plow, and sow anymore, we do need to bring some dollars in for our family to live on.
The goal is to have extra money at the end of every single month. The more you can cut back from expenses the more extra cash you will have at the end of the month.
With that extra money, we build our savings account and emergency funds, save for big purchases or for investments.
Reconciling is another huge necessity it seems nobody does anymore. You need to have a record of your deposits and expenses. Then compare these records to your bank account. That way you know everything is correct. If something does not match up you can dig into what happened. This keeps you from getting surprised with a check that gets deposited two years after you wrote it. It also helps you stay on top of those subscriptions you meant to cancel. The amount of friends I have that don’t reconcile blows my mind and the scary part is they don’t even think it’s important! A good dad knows where his money is and where it is going.
Don’t borrow money. Like ever. No loans, no credit cards, no car payments, no payments on anything.
If you want to get ahead financially you will stop signing yourself up for payments. Payments are a drain on budgets. If you don’t have payments you could save up the cash and actually buy the things you want outright. Instead of getting a $300-a-month car payment for three years, pay yourself $300 a month for two years and go buy yourself a car with cash. You get a better deal when paying cash. You don’t spend as much money, because when it’s about payments you’ll buy yourself a $20,000 car with 10% premium factoring interest. When it’s about cash you don’t want to part with $20,000 so you are happy to settle for the $10,000 car and get a 10% discount for paying cash.
If you have been struggling with finances, once you get to a cash mentality your whole outlook will change. When you have been living paycheck to paycheck for years and finally build up $1,000, $2,000, $5,000, $10,000. The reality is you’re going to want to hang onto that cash. It feels good to have it. It makes you feel successful and warm and toasty inside. So instead of buying all the stuff you used to buy, you just prefer to see the big bank account and not have the stuff!
Now, once you get to a healthier lifestyle there are arguments to be made that financing and payments enable you to keep more money invested and thereby make yourself money. Instead of unplugging money from investments and buying something big for cash.
There is some sense to that and it has worked well for some. I won’t do it and if the economy tanks for a couple of years I’ll be fine and those people will be struggling. It is also important to note that most people living their life with everything on payments don’t have investments. They are not unplugging from a hot stock market to buy a sofa.
Let’s recap. Know exactly where every single penny of your money is going to go by doing a budget. Stay out of debt. Pay off any existing debt. No payments of any kind. Control your expenses so you have extra money every month. Save and invest that extra money. If you decide to invest $500 a month into retirement instead of having a car payment you are going to retire very, very, very rich, and that is much nicer than driving a slightly nicer car.
You are 25 years old. $0 saved for retirement. You decide to invest $458.33 (max amount for ROTH) every single month into a mutual fund inside of a ROTH IRA instead of having a car payment. At age 67 with an 8% average annual return, you will retire with 1.57 million dollars in just that one ROTH IRA account. Keep in mind that ROTH means that is all tax-free. You can take 1.57 million dollars out in cash and not pay a dime in taxes. It’s all yours.
One step further.
8% is low. If you select a mutual fund that mirrors the S&P 500 that averages 12% over its entire history. That exact same $458.33 month turns into $5.7 million dollars in cash that you can take out and not pay a penny in taxes. But I don’t want to get you too excited. Let’s assume 8% and be happily surprised with 12%.
Sure beats a car payment where you end up broke at 67.
Looking to the future is important, but knowing what’s happening now is just as important.
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I am Townsend Russell with 100% DAD.
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