In essence there are 3 different intents which can be used to accomplish happiness in your life goals. You can intent to borrow to buy a house, you can save to buy a house or you can invest to buy a house. Most people prefer to start with debt(30 year mortgage). While by definition this is not the worst option, having increased level of debt but no savings or investments could make it the worst option. This is why if you are planning to take out mortgage debt it might be best that you clear all your other debts beforehand. Then you can start saving for the downpayment and invest to cover monthly contributions. In this article we focus on the importance of getting our of debt, not accumulating extra debt for unnecessary expenses , so that we can start investing towards our life goal(s).
Most people are preventing themselves from reaching happiness and achieving their life goals by spending all their savings on things which are not important daily or even worse , they borrow money to buy these non essential items. While that feels on the day with each passing day these people are taking themselves further away from their life goals. Lets say in 5 years you wanted to buy a new house , you don’t have the money in 5 years , so you decide to buy a TV, car, new fridge for your old house. This often leaves people with regret because in impulsive purchases makes you feel good in the moment , but in reality become a major obstacle to achieving overall well being , happiness and success.
This is the same as being overweight and wanting to loose some weight. Have you noticed how many people go on diet for 3 days and on the 4th they decide to have a hamburger which then turns into hamburger with fries and a coke. Most people either try to save too aggressively ending up spending all their money or do not even have the mental discipline to start a diet and instead have a hamburger , a coke and fries everyday. The same can be said about debt. Because they realize they are too far away from their goal, they decide to buy a new phone, new laptop to make themselves feel good in the short run which causes them to drift even further away from their life goals, just in the same way as eating a hamburger each day will not help you loose weight.
If you are already in debt and you have started to realize this , here are some useful tips to getting out of debt.
Getting out of debt
In our current time the surrounding environment tempt us to have more and more importantly to spend more. The younger people (including myself) are constantly blasted with commercials for new cars, phones and more “handy” things that can boost ones’ self-confidence, but in most cases these purchases will do more harm than actually satisfying your hunger to be on top of the trend, so you can be the “cool kid in the block”. Usually once you’ve stepped into this world another, even more dangerous event will occur – you will discover Credit cards and Bank Credit.
You will say – “Well what is the fuss all about? I need a new car, but I don’t have the cash, so the Bank will lend me money.”
That is fair, but credit (card) debt is great, but it is definitely not for you. The only ones that are benefiting from credit (cards) debt are the lenders. Taking on credit and credit cards can be very attractive, because it creates a mirage that we are rich – you can afford almost everything(car,vacation,bigger home etc.). In most cases once you start using it the bank will allow you to make suspiciously low monthly payments. You will never be asked to pay off your debt fully. In other words, you will constantly will be in debt and your obligations will start to accumulate little by little, until one day you receive the notification that you borrowed too much and that you interest rates have increased. Somehow you’ve been played without even realizing it – in one moment you have money that are going to you, but after the unfortunate turn of events, you have to start giving more money to the bank. The situation has switched from being in debt to being in trouble! Therefore, never, never, never use credit card debt.
After we’ve cleared the debt topic and how we shouldn’t be even close to the thought to acquire debt, I will show you how everything that will help you achieve your life goals starts with saving.
Most people will say that saving is hard, but it all comes down to a simple rule – Reduce you expenses well below your income and voila – you are all set up. We’ve heard the stories about someone that comes from a financially modest family that at some point inherits a million dollars. The reason for that is his/her relatives were SAVERS – they lived a modest life, but with proper money management they enjoyed life and in the same tame left a fortune for the future generations.
The story can go both ways of course. A man with a million dollars’ income is constantly running out of money, so he kept going back to his parents trust fund for more. The reason for the is his lavish lifestyle and uncontrolled spending habits – private jets, several large homes, expensive purchases and the list can go on and on.
Saving is good for us – it can stop us from having huge regrets later in life and also there is this satisfaction and comfort that comes with the whole process of saving. By having money saved we have more freedom of choice now and in the near future. Saving shouldn’t be brought to extreme levels. Your goal is not to deprive yourself, you are aiming to save so you can use your money over and over again. The real goal of saving is to put your priorities in check and to make you feel better and better about life and that every day you are making choices that are good for you.
You will ask me – “When to start saving?”
Well the answer to that question is pretty simple – start as early as you can. The reason for starting as early as possible (as Albert Einstein called it “the most powerful force in the universe”) is compound interest. The idea behind compound interest is that you earn return not only on your original savings, but also on the accumulated interest that you have earned on your past investment of your saving.
But why the great Albert Einstein called it the most powerful force in the universe? Let’s take an example from the U.S. Stock Market. Most stock are rewarding the investors with ~10% return each year. If you start with $100 investment, at the end of the first year you will have $110 – $100 from the initial investment and $10 earned from your stock investment. If you reinvest your $10 earned from the first year, you start your second year with $110 and by the end of it you will earn $11 – making your balance go up to $121. In your third year you will earn $12.1 and your account is now worth 133.10. If you continue on the same path and leave the compound interest do to its magic at the end of year 10 you will have $260 – $60 more than you would have earned in simple interested.
To fully unlock the power of compound interest you have to understand the Rule of 72.
The rule is pretty simple – X x Y = 72. That is, X (the number of years it takes to double your money) times Y (the percentage rate of return you earn on your money) equals 72.
Let’s give an example – what rate of return you will need to double your money in 10 years? The answer: 10 times Y = 72, so Y=7.2
Another way to use it is to calculate how many years it will take you to double your money. Let’s say your rate of return is 7 – how long it will take to double your money? The answer: 10 years and 3 months (72 divided by 7= 10.3).
If someone tells you that in the next 6 years your money will double, what rate of return should you expect? Answer: 12 percent (72 divided by 6 = 12).
If the Rule of 72 and compound interest looks attractive to you let me make it even better – If 10 percent rate of return will double your money in 7.2 years, it will double them again in 15 years and you will have four times your money – and sixteen times your money in 28.8 years.
So if you are in your early 20s and you start and investing your money you will be able to afford much more in the next 10-15 years. Or you can open an savings account for your newborn child and deposit $100 each month for the next 18 years – you will probably have around $55,000. By witnessing the power of compound everyone agrees that saving early in life and investing is good for you.
Like every rule the Rule of 72 also needs to be used wisely. There is nothing worst when it works against you. If we go back to the credit card problem – if you are using a credit card the “normal” interest rate that the banks are offering is usually around the 18 percent mark. With credit cards if you do not pay in time soon you will start paying interest on interest. At 18 percent, a debt doubles in just four years – and redoubles again in the next four years. That’s how banks use compounding is this is the reason why they’ve managed to distribute credit cards to people they have never met and probably will never meet, until it’s time to pay debt!
There is no right timing to start making investments – time itself is much more important than timing. Do not postpone your retirement planning for another year, month or even a day. Don’t let it happen to you. In order to get rich, you have to do it wisely – which means slowly, that’s why you have to own your time and start saving now.
Saving takes discipline. In order to be successful in saving, the whole process should be like a game in your head. Put yourself in control and make the correct choices even if you are surrounded with temptations daily. Savers adore the idea that they are in control of their finances and the fact that they are financially independent and they have bright future ahead.
Being rational when comes to saving is simple and yet so hard to achieve, because in our nature we are all humans and we are wired to be flawed as savers and investors.
Skipping impulse purchases is one way to go. Make a shopping list before you go to the store and always stick to your list. Going with the “list” approach will help you understand what are you doing with your money, where you are spending them and why you are doing it. By saving money you have extra resources that you can use to make your future better. It will help you achieve your goal: Get the most of what you really want out of your life.
Go over your expenditures – Make it a habit to go over expenditures including credit card charges, each or every other month. Once you take a look at them ask yourself this – did each expenditure give you equal value for money? Were all the purchases equally worthwhile to you. I am pretty sure that some of them will pop in your mind that were not one of your best choices. Now focus on the “not so good choices” and ask yourself again – “Could I have as much fun and good memories without one or two of them? Could I have picked an alternative that will give me the same satisfaction, but for less money?”
Talked into spending more than you meant – Do you find yourself in a situation where you are being convinced to spend more by friends or salespeople or advertisements? An easy test will determine if you are influenced by others to spend more: If you were the only person who would ever know about your purchase, would you spend the money? As I mentioned before temptations are everywhere and when you combine that with the need to be socially equal to your friends and family, it becomes quite the dangerous situation where you find your money thrown out the window for purchases that won’t be satisfying, but instead they will be irrational and will set you further away from financial independents and a better future.
Take a look at your expenditures and place them into three baskets – best value, good value and dubious value. Check and see what is not really important to you and remove it from your purchasing habits. Instead of making the purchase that gives you almost 0 value, put the money that you are willing to spend into a jar, or a bank, just place them somewhere that you will know that you won’t touch them and you will save them.
Smaller saving tips
Here is a fun way to save on a few “little things”, that will add up in the long run.
Instead of going out to the movies, just rent something that has been released recently on Netflix, make your own popcorn and drinks.
Switch your morning $5 latter for a simple cup of coffee
Keep a record on all of your expenditures
Buy Christmas cards on December 26 or 27 – for next year
Take all your small change from your pocket and put it in a piggy bank. You will be surprised when the amount adds up so you can pay your vacation with it.
Shop for low-cost auto insurance
Buy books – even the newest releases- second hand on Amazon.com
Next vacation choose a place that is out of season, but it is also fun to visit.
BIG tips to save
Buy affordable life insurance that is sold by local savings banks or available on the Internet.
Concentrate your investments with low-fee managers.
Buy a car a car that is going do its purpose – going from point A to point B. Spending too much on cars can cost you a lot of money, that you can use for something better
Cut your spending back to what you were spending two or three years ago.
Ask your boss if he can help you with your savings by deducing 5 percent or 10 percent of your weekly pay and add it to your tax-advantage investment account
Enroll in a “Save More Tomorrow” plan. Their idea is to commit you to save some part – and only part- of next year’s raise.
When you think about saving and you have doubts why you are doing it and “Why should I buy this expensive shoes or shirt” always remember – every dollar that you spend and not invested is a potential loss of the amount it could grow by the time you retire.
Warrant Buffet, famous for being one of the greatest investors of our generation, he is also very modest when it comes to spending money. For him $1 spent in his youth costs him $7, $8 or more – the amount the dollar would have become over time if he invested it.