When I was a kid, my family was quite poor. My parents had seven kids and one, meager salary. My father ran his own construction business and worked really hard at it. He started with nothing and worked his way towards something.
But, every time that he began to approach financial stability or the point where he could begin accumulating wealth, something catastrophic and completely out of his control would derail his efforts.
Growing up poor had a significant impact on me. It made me really care about money. It made me think about every penny I spent. To this day, it can be quite stress-inducing for me to make even simple purchases.
Because of my background, I have become intentional about my financial situation.
All this concern about money has given me a perspective on finances that I’ve always felt is unique from the perspective of others. Whether I’m actually unique or not, I’m not sure, but I’ve made some financial decisions, which at the time I was strongly encouraged not to make, that have helped me get further with my finances than I would have, had I listened to my detractors.
Now, I understand that finances are a tough topic, because everyone is in a different financial position with different assets, debts, and incomes. I also know that all of our own personal goals strongly affect the way we think about and use our money.
But, I believe that the principles I’m about to share are applicable to almost everyone. For those of you who are looking for ways to be live more intentionally when it comes to your money, hopefully, this is helpful.
As a disclaimer, I am not a financial planner or advisor, nor do I claim to be the definitive source of financial information.
The Long Road
For most people, accumulating wealth is not something that will happen today, or tomorrow, or in the next ten years. The path to financial success is a long road.
Like anything that takes a long time to achieve, there will be detours and doubts. There will be setbacks and surprises.
How do we keep our wits about us for the long haul? Discipline and re-indoctrination.
Setting goals and laying out our plan to achieve those goals is the first step. The second step is to keep at it, don’t panic when markets go up and down, and they will, remember that you’re playing the long game.
Anything you want to continue to believe and practice (eg., religion, healthy eating, child-rearing strategies) requires constant re-indoctrination.
What I mean by this, is that you need to keep telling yourself why you’re doing something. We can make ourselves believe anything we want, as long as we keep at it.
So, talk about your financial plans with your spouse or partner, review your progress, read financial books and blogs, and stay on top of your learning. Remind yourself why you’re doing what you’re doing, and don’t give up.
The Standard Finance Answers
Before I dive into the principle that really guides my financial perspective, I wanted to share a few of the more traditional pieces of financial advice that are often given – after all, we should be indoctrinating ourselves, right?
- Buy low, sell high: This one is so simple that it is often looked over entirely. The truth is that you will almost never make a good return on something that you bought at the wrong price. A common saying in the real estate industry is, “You make money when you buy, not when you sell.” This idea rings true in the stock market as well. The worst time to buy a stock is when the price is going up, but that’s when people get excited about it and can’t resist. This is why Bitcoin is super risky right now.
- Don’t take one step forward, then another step back: What do I mean by this? Well, how often do people get their tax refund, then use it for a large purchase, or as the down payment on something they’ve financed. It is so tempting, when we get a raise or an inheritance, to take that money and use it to get into more debt or spend it on something that won’t return any value. When you have an increase in cash, either from your job or another event, don’t squander it by spending it today.
- Compound Earnings: The idea of compound earnings or compound interest is fairly ubiquitous. It means that growth on your investment does not just come from the money you put in, but also from the money that you’ve made in previous periods. Take advantage of this mechanism as much as possible. If your employer offers a 401(k) match, then max it out. If they don’t then you should still be putting money into an investment tool that will provide you with the potential for compounding interest.
My Guiding Principle
Alright, now for the number one guiding principle in my financial decisions making. Everything that you and I purchase is either going to make money or evaporate money.
Every purchase is either an investment or an expense.
An investment is something that has the potential to make money for you. It is something that has the potential for holding its value and creating additional income for you.
Investments include a 401(k) or IRA, mutual funds, annuities, real estate and business investments, side projects that produce income, businesses we found, and potentially even life insurance.
These are the places we should be putting our money, if we’re intent on creating financial wealth. Of course, diversification is wise, so don’t put all of your eggs in one financial basket. Find wise investments where you can have some level of assurance that your money will come back to you with a surplus.
If you are unsure of where to start or are uncertain about the risk vs. reward factor of an investment, seek our professional help.
Expenses include anything that will cost you money, will not hold its value, and will never produce any income. Expenses make money evaporate. Once your money is spent on an expense, it will never be back. So, spend wisely.
Examples of expenses include homes (when not bought properly), cars (always), clothing, groceries and household goods, furniture, boats, RVs, etc…
Now, as you can obviously tell, many of these expenses are necessities of life. We can’t avoid expenses entirely. I believe that some expenses, such as family vacations, are not financial investments but investments in our health, happiness, and relationships.
Investments vs Expenses
I’m always flabbergasted when I speak with someone, who seems so willing to spend money on an expense, but gets cold sweats when I mention investments.
For some reason, people feel more comfortable financing a car, which will never be anything more than a money pit, than they do buying a rental property.
A rental property has the potential to hold its value and provide monthly cash flows. In a few years, you may even be able to sell it for a significant gain.
Buying real estate can be daunting to some, especially if your income won’t allow it today. Not to worry, even if you can only invest $25 a month, there are investment tools that are accessible to you, such as an index fund.
Whatever your financial position, simply thinking of the things you put your money into as either investments or expenses, will help you make more informed decisions.
The financial principles I’ve shared here have helped me in my life, and I hope they help you as well. Remember, it is a long game, so figure out a plan and stick with it.
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Pacific Swells is a collection of short stories and helpful articles about finding happiness through intentional living.