I just finished reading a great book called “The Psychology of Money” by Morgan Housel (linked at the bottom of this blog post.) Published in September of 2020 this book has already sold over 500,000 copies and I’m confident this book will gain even more steam. The author has a very “different” outlook on personal finance and the book takes a much more practical approach to the psychology of how we think about money than any financial advisor would tell you about “returns on your investments.” The author has a background and career in finance but chooses to go against a lot of the fundamental principles he has learned throughout his career and I’ll tell you why.
Finance is simple – spend less, save more, pay your bills on time and live below your means, but it’s not that easy… or is it?
Personal finance is a skill that we are not taught in school. We’re not taught how to save money. We do not learn how the stock market works. We don’t receive any knowledge from our teachers about the power of compounding interest. The public school curriculum certainly doesn’t include how to utilize credit and debt, or the overwhelming yearly task of doing our personal taxes and how we can use tax efficient strategies to stretch our money further. These are the reasons many Americans are either in a massive amount of debt or living paycheck to paycheck. Are you one of these people? If you are drowning in credit card debt or living paycheck to paycheck please schedule a free call here so I can give you a swift kick in the butt!
The average net worth for a 30 year old in America as of 2021 is only $7,000 and this is mainly due to student loan debt, rising home prices, and below average job market.
SAVINGS VS. SPENDING
There are numerous financial coaches and successful investors that we can all learn something from and a lot of these people are smart. So why aren’t we taking advice from all of these people? Why aren’t we doing what they are doing? – well it’s not that easy. Creating financial freedom takes time and hard work but utilize a few strategies and your wealth or lack of wealth will be inevitable.
“Noone wants to get rich slow.” – Warren Buffet
So if you are reading this and currently have a net worth of a million dollars or more meaning you are a millionaire there is a good chance that you earned it and you’re smart. Many of us have a good chance of becoming a millionaire too and it starts with our saving and spending habits.
Good spending habits:
- Pay yourself first – put 10-20% of your income into an IRA or 401k account every single month.
- Make sure your housing expenses (rent, mortgage, utilities, etc) is under 40% of your monthly income.
- Pay your credit cards on time.
- Have 4-6 months of monthly expenses saved in a savings account that you NEVER touch.
If you’d like to listen to some audio on healthy personal financial habits I have two great podcasts that go into more detail. I recorded a podcast with a financial coach and we discussed the foundation for a strong financial plan that includes 6 months of bills put away, cost efficient housing expenses, and putting money in a retirement account – you can watch and listen to it here : Mandyy Thomas.
I also did my own spin off on how to properly manage your money and its linked here: E53 – Money Management with Zach Rance
My personal finance mistakes… take the good with the bad
Interest rates are at an all time low and more people are buying houses (borrowing money from the bank) and refinancing their houses than ever before. This is an amazing opportunity to borrow money and utilize debt with historically low rates to leverage your assets or income to create more wealth, if that’s what you want to do. I have spoken to multiple financial advisors, watched hundreds of hours of YouTube videos on finance and have learned the hard way in some aspects of life to make my own decision on what to do with these low rates. So what did I do? I went completely against the popular opinion and instead of refinancing my house or purchasing more property with debt, I chose to pay off my primary residence for “peace of mind” and a “sense of security” which to me is way more valuable than my “return on investment.”
A financial advisor would rarely tell me to pay off my house and I know because they told me it was stupid, however if you asked Dave Ramsey if what I did was a smart choice he would say it absolutely was. This is why creating wealth is so confusing. People have different theories and ideologies on how to build wealth… but its not always about money. Sometimes its about safety, security and peace of mind.
Could I have made a better choice?
Well yes I could have made a better choice but the grass is always greener on the other side and I know what I value most. However, if instead of using the money to pay off my house I chose to invest it in the stock market, let’s say the S&P500 (group of the 500 largest publicly traded companies, and a pretty accurate barometer of the overall health and current state of the US Stock market.), the upside would have been greater and I would be able to build more wealth but only under the assumption the overvalued market doesn’t crash, or have a huge correction, and the real estate market stays strong…? See where I’m going with this?
If you’re wondering…
The average return of the S&P500 over the last 10 years is 13.6% and has a historic annualized return of around 10% (not accounting for inflation.)
Evaluating where you are at right now is the first thing you need to do. A lot of what I just mentioned above are simply numbers, but you are not a number you are a human and this is what Housel talks about in his book “Psychology of Money.” Sometimes your return on your investment is not as important as your peace of mind.
Tips and tricks to optimizing personal finance:
- Spend less money by cooking more food at home.
- Write down future expenses and things you want to purchase in the future.
- Anything over $75 that you want to buy wait 48 hours before you make the purchase.
- Print out your credit card statement every month and go through your spending.
- Start investing money in mutual funds and the stock market TODAY and put in a comfortable amount every month (even if it’s just $50) and don’t take it out EVER (or until you reach legal retirement age of 59 and a half years old).
To order “The Psychology of Money”