Tag: invest

Money principle #1

Pay yourself first…make sure that you have automatic payments set up to invest in yourself. Ideally, you want this set up going to a low fee index fund. Time and compound interest will be your best friends. The earlier you can start regularly contributing to this fund, the better off you’ll be. The best part about having it automatically set up is that you don’t have to remember to keep investing every month. If you want to invest more, you can. But here, it’s basically like a subscription model (set it and forget it).

If you’re saving up for a specific purchase like a vacation, a new car, a house, etc, set up a separate account and automatically transfer money to that account. Have it set up for every paycheck. If you don’t “see the money” in your regular checking account then you’ll be far less likely to spend it. This will help you actually hit your saving goals and then you won’t have to use credit to purchase your consumer goods.

Smart debt versus dumb debt

If you’re buying an asset that makes you more money (whether through appreciation, cash flow/dividends, or tax benefits) than it costs to borrow (paying down your principal and interest while more than keeping pace with inflation), you can make a legitimate argument to go into debt to invest in that asset.

If you’re going into debt to buy something that doesn’t make you money, you’re giving into your inner child.

Only borrow money to buy things that go up in value. Otherwise pay all cash for it or not at all.

Using cash or using debt?

Are you a “cash” only person (like Dave Ramsey) or do you prefer to utilize debt on your behalf?

Honestly, I see the pros and cons to both sides. Being more financially risk averse/conservative, I get the appeal of only using “cash” (or, even if I’m putting it on a debit/credit card, only buying what I can afford to pay at that very moment). It’s a safer position from the standpoint that you aren’t going to get yourself into massive debt. This strategy makes a ton of sense for those trying to minimize spending on things they don’t need (mostly consumer products that contribute to lifestyle creep).

But if you leverage debt to buy assets (like real estate), where someone else is paying the loan down for you, you can scale much more quickly.

Imagine wanting to buy a rental property. Let’s say you’re looking to buy a single family home for $120,000. If you have to pay cash for it, it will take you a long time to save up $120k. Even if you’re investing it, unless it’s in a self-directed IRA, when you pull your money out to purchase the property you’ll get hit with taxes. But if you only had to save up $30k (for a 25% down payment on an investment property) or even $4,200 (for a 3.5% FHA loan, where you have to live in the property for at least one year), you can get started much sooner.

Leverage works both ways. It can help propel you to success or drive you into the ground. But as long as you’re taking on appropriate risks (preferably starting small unless you have a ton of experience and expertise in what you’re investing in), you can build wealth at a greater pace by leveraging debt as opposed to paying all “cash” for everything.

What are your thoughts/how do you prefer to invest?

The sunk cost theory

Always keep the “sunk cost theory” in mind.

Are you doing something because it actually makes sense – because you want to do it or because it is providing some value to you or serving a purpose? Or are you doing it because you’ve already “invested” so much time, money, or energy doing it and you think about everything that would have been wasted if you quit now?

In reality, you can’t get back the time, money, or energy you’ve already spent. You can’t recoup that. So the question becomes, are you willing to waste more time, money, and energy now just to see the project through? Are you willing to “throw good money after bad?”

Take a step back and ask yourself this question… “If I didn’t have ANYTHING invested in this and I have all of the information that I have today, would I still invest in doing this task?” If the answer is no, then it’s probably best to let it go.

We only have a finite amount of these resources. When we say “yes” to making suboptimal choices, we are inherently saying “no” to making better choices. We can’t be in two places at once. Most people have to make either/or decisions when it comes to buying things because we don’t have unlimited money. And our energy waxes and wanes, but if we keep beating our heads against a wall and doing things that don’t serve us or energize us, we will feel depleted of energy long before we need to. Don’t continue to do something that doesn’t work just because you have a sunken cost – it will only cost you more time, money, and energy in the long run.

Pay yourself first

Just like with investing, you need to “pay yourself first” by making time for self-improvement. Everybody has the same amount of time in the day. Most of us fill up that time with work, housework, watching tv, or going on social media. But how many times have you heard people say that they are too busy to exercise or that there aren’t enough hours in the day?

Many people feel that they have a shortage of time. I understand this and feel that way too. But our problems often stem from poor time management and how we can rearrange our schedule to make it work optimally. For me, I like the idea of working on self-improvement first thing in the morning. My thought process is that just as you should automate paying the first 10% of your paycheck to yourself (saving/investing), you should also automate spending the first part of your day improving yourself. I like using the morning for working on myself because it’s quiet, the day hasn’t started (so there are no “fires to put out”), and my motivation is at its highest (I’m not tired from a long day of work). Not only that, but it feels good to start your day off right. It’s easier to keep the momentum going by starting right as opposed to starting and stopping throughout the day.

Although it can be daunting to feel like you have to do a lot in the morning before heading to work, you really don’t. Start with a little at a time. Read one page of a book you’ve been meaning to read. Do ten pushups. Stretch. Plan your day/set your intentions. Think about/write down what you’re grateful for. These are just a few examples. Just remember, every little bit counts. If you can improve yourself even fractionally each day, you’ll amaze yourself at how much that adds up over time. There is no greater return on investment than investing in yourself.