Money is a funny thing. Too few people really know much about it, and know even less about cash flow.
Money is something we use every day of our lives. At times we have plenty of it and other times not enough. It is something people often stress and worry about. People think about running out of it and want more of it. Money is a huge part of life.
Yet, there is little, if any, education or guidance on how to use it.
We are taught the need for it but there is no guidance on how to use it.
We are trained to earn it in one way or another but when it comes to knowing how to manage money, we are left to fend for ourselves. Schools don’t spend time on it and most families don’t discuss money. Without guidance and learning best practices, we are set up for failure before we begin our relationship with money.
What if everyone had an opportunity to learn some basic principles for how to effectively think about and manage money before getting started?
I think it would be great and I am going to share what I would consider core principles about managing money.
These are a few basic points about handling and thinking about money that I believe are the foundation for all other decisions you will ever need to make with money.
Think of these as core principles for navigating through the maze of decisions you will need to make.
Remember that managing money is about cash flow
There will be many things that seem important to you when it comes to money decisions, but there is nothing more important than cash flow.
Always keep this in the forefront of your mind.
The purpose for working is to have money flowing into you.
The entire purpose behind having a financial plan is to have money flowing toward you to live on and make purchases.
Everything should ultimately be about increasing and improving cash flow.
Always work to control the outcome
There will be many concepts that come along that sound like a good idea or an attractive investment opportunity.
Just keep in mind principle number one and protect yourself from having too many things out of your control.
You will want to move more things into your control.
Think in terms of having money available when you need it and knowing how you plan to use the money.
Pass up ideas if you are uncertain about how they will result in meeting your specific cash flow needs now or in the future.
This will help you to make decisions that are best suited for you. Position yourself to be more in control of the outcome.
Know that average rates of return are misleading
There are often high hopes when it comes to saving and investing money.
The idea of having money invested and receiving a return on that investment is enough to get most people motivated to invest.
In these situations, most often historical performance is used as a measuring stick for setting expectations about how much money you will have in the future.
However, this approach is not a good idea.
Historical averages of an investment’s performance do not always translate to dollars earned.
For example, if you invest $100 and lose 50% in the first year, and the second year you earn 100%, you had a 25% average, but are only back to your $100 investment.
So, when it comes to average rates of return, don’t be mislead.
Understand that the government is not your friend
When the government says, “We are here to help”, realize there may be more to the story.
The government is interested in increasing their revenue, which translates to them wanting to increase your taxes.
The use of any government program such as a 401k, 403b, 457, IRA plans all carry the perceived benefit of tax deferral.
This becomes a problem later in life if taxes happen to increase and your stuck paying a higher tax bill.
Keep in mind that a tax deferral is a postponement of taxes not a tax savings.
Remember principle number one and two: You want to control the outcome and improve cash flow.
If your tax liability is unknown, you have no control over the outcome, which can negatively impact your cash flow if taxes go up.
Realize that unicorns aren’t real.
It is not uncommon for people to think low fees, high rates of return and 100% liquidity are the criteria for finding a perfect investment.
Mix in safety, tax avoidance and a little popular opinion then you have a unicorn.
The problem is that this type of thing doesn’t exist.
Remember principle number one and two when you are thinking about how to manage money. Realize that no program is perfect.
You will always find something about everything that you don’t like.
The key to this is finding a mix of programs that deliver the best outcome for what you are looking for and do not expect perfection.
Follow the 80% rule when looking at a program. Don’t get hung up on thinking there is always something better.
Banks are not your friends
Often banks are viewed as a place to store money until you need it and a resource to borrow money when cash flow is short of meeting your needs or wants.
This is viewed as a favorable relationship with your local banker who provides these services.
However, banks are one of the biggest robbers of wealth.
It is sneaky but they pay little if anything on the money you store with them, leaving you to miss out on the opportunity to grow your money.
Meanwhile, they are charging you interest on loans and often controlling a significant portion of your cash flow through payments.
Avoid using banks if at all possible and learn more about other banking strategies.
Know that projections are made up
It is common for investors to use online calculators to project hypothetical future results for their investment.
Often this projection is based on an investments historical average rate of return to generate the results.
Remember principle three. An average does not translate into dollars. This makes projections unreliable.
Remember principle numbers two and three while striving to avoid misleading and meaningless data when planning your future.
Don’t be a consumer
As money is earned it is easy to fall into the mousetrap of increasing lifestyle with every pay increase.
The idea of a bigger house and nicer car is appealing to most everybody, but there is a fork in the road.
The road you choose to take can determine the rest of your life.
Turn one way, and you find that you never have enough money and are never satisfied with where you are in life.
Turn another way and you find that your wealth is growing along with your sense of financial independence.
Find a happy place in your lifestyle and commit to building wealth over consuming stuff.
Know the difference between leverage and debt
Too often I hear people say that they don’t want to owe anyone anything.
At its core, this is a solid principle to follow but there is an exception to this rule.
You see…debt to consume things such as cars, travel, TV’s and all depreciating items is always a bad idea.
Remember principle number eight. No wealth will ever come from consumption.
Leverage on the other hand, is a form debt that is used to grow your wealth.
For example, suppose you are looking for a way to create more income for yourself and choose to purchase a rental property.
You find a property for $100,000 and invest $40,000 of your money into the purchase and borrow the other $60,000 to complete the purchase.
The rental property you purchased has four units in the building each renting for $500 per month for a total of $2000 per month of gross income.
Assume the loan payment is $500 per month and $500 per month is set aside for repairs and real estate taxes. This leaves you with $1000 per month of positive cash flow.
So, your $40,000 investment is yielding $1,000 per month or 30%.
That is how leverage is different than debt.
So these are the key principles I feel are important to understand about managing money.
Following these nine basic principles will save you a lot of time and headaches when creating a plan for yourself.
Too often when we hear an idea or learn a new concept, we get caught up in the promise of whatever is being offered.
It also happens when we get too caught up in other people’s opinions or rules of thumb that I find are often misinterpreted.
Making decisions simply on what seems reasonable can at times have negative results. This is why you should keep these principles top of mind when making decisions.
With all that said, my team and I are here to help you feel more confident about your financial future.
That’s why we’ve created a community of people just like you who want to think differently about money, create their retirement mindset, and reach their goals.
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And if you have specific questions, or are looking for an advisor to help you through the maze of investing and financial planning strategies, reach out to us here.