I am sure you would agree to the fact that money is not often discussed in our classrooms. We go through school and learn about things that we will likely never actually apply in real life, yet when it comes to the subject of money – something we will all use – there is silence. Why is that? How is it possible for such an important topic to be overlooked when there is a universal need to understand it?
This vacuum of knowledge leaves many people guessing and relying on their mistakes or frantically using Google searches to make important financial decisions. It is a serious problem for us as a society and is why I am writing this today to communicate what I believe every millennial should know about money.
First of all, you should know what money is. I know this sounds elementary but trust me, there is more to money than simply a piece of paper with reflective colors. Money, specifically the dollar, is a fiat currency, which means it is nothing more than a piece of paper that the government controls the value. Up until 1972 this was not the case. Before the government changed our currency, the dollar was actually backed by gold. That meant for every dollar in circulation there was a dollar worth of gold in our government reserves. The piece of paper simply served as a certificate of value.
You may ask why the dollar was debased from gold and the answer is simple…the government overspends. They didn’t have enough gold to support the spending so they debased it and printed more to literally create more money. Today we see a government that is so out of control that they have printed themselves into $20,000,000,000,000 in debt. The biggest reason for this level of spending is to pay for entitlements and the government promising things to our citizens and foreign interests that we have no business promising and it is leading us into bankruptcy.
Second, you should know how money works. I think most people understand that if you have a dollar in your hand it can be used to purchase things. It is a means of getting something you want or need but there is more to it than this. There is a need to create money in order to be able to use it. So, it is important to understand how you can acquire money for yourself:
- You can work and earn the money through your efforts either through a business or through employment. You work and earn a paycheck or sell a product or service to gain a profit. Either way, it’s your effort that creates the money.
- You can invest the money in a passive income producing investment to have the money create more money. You may find an online business, limited partnership or real estate opportunity that when the entity performs its function it creates income for you. There are many opportunities like this out there you just have to research and find them.
Third thing to know about money is that it comes in and out of your life quickly. Money is super easy to spend and can vanish quickly regardless of how much of it you have. You hear about it all the time, a pro athlete or lottery winner ends up bankrupt and out of money. It can be confusing to understand how this is even possible?
Living below your means and keeping track of your spending is essential to building wealth and avoid being a statistic. Keep an annual written out budget that shows every expense for the entire year and break that annual budget down into monthly installments. The reason for this is because there are many things you will spend money on through out the year that may not be reoccurring. So, simply having a monthly budget will not work.
Another critical part to avoiding debt and running out of money is to know what up coming big-ticket expenses are around the corner. New vehicles, appliances, home improvements etc can put a major strain on your cashflow. Knowing what these things are, how much they will cost and when you will need the money are all broken down into a line item on your monthly budget. Know what you need and when you will need it. If you need $6000 in 3 years, you need to save $166 for 36 months.
Another thing you need to know about money is that having access and control is much more important than a tax deduction. A common bit of advice you may receive is to fund your 401k or company retirement program. On the surface this may sound like a good idea, your saving for your retirement and getting a current tax deduction but there are problems with this advice.
- Once you deposit money into these types of accounts you have locked it up until your 60 years old. If an opportunity or need arises you cannot access the money without jumping through hoops for a loan, which can put added strain on your cash flow.
- You defer your tax liability to some point in the future when you have no idea what the tax rates will be. The rates could be higher in the future than they are now.
- Your employer picks what investment options you have and they seldom have a broad enough selection of all asset classes. Your limited to what you can invest in.
The bottom line with this is that you are giving up control. So, when thinking about how to save money, think in terms of access, control and wealth creation. Here is how to break it all down on a monthly basis.
- Have a general checking account where your income is deposited. Use this account to pay bills and support your household.
- Have an emergency fund where you transfer 15% of your income each month from your general checking account. Do this until you have reached 3-6 months of your household expenses.
- Once you have reached your emergency funds targeted balance, establish a wealth creation account and direct 15% of your income into this account. The money in this account will be used for investment opportunities and other banking needs. I will not get into what this account should be at this time but suffice it to say that you need to have one.
If you cannot save 15% then start with what you can and increase the amount as you pay debts off or get pay increases. There is much more to learn but following these steps will get you heading in the right direction.
If you have any questions let me know!
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. Kalos Capital, Inc. does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.