Money 203: What To Do With Your Freed-Up Money

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Money 202: Tricks To Shave Down Costs

Don’t make the most common mistake

  • Scaling up your lifestyle will require you to pay for it, which removes any chance of building wealth
  • You’ll strain your long-term budget if you gift yourself what others can give you

Creating wealth requires carrying out a rough variation of the following seven stages

1. Make an emergency fund (takes ~2-4 months)

It should be $500-1000

Never touch it for purchases

Only use it if it satisfies all three of the following:

  1. It’s unexpected
  2. It’s fully necessary
  3. It’s urgent

An emergency fund is vital to give you and your spouse (if you’re married) the security to pursue better financial goals

  • Without an emergency fund, you run the risk of falling right back into the debt you want to climb out of

The emergency fund isn’t an investment

  • An emergency fund is a personally funded insurance policy
  • Keep it in a savings account or mutual fund company’s money market account

Don’t refinance an asset to get an emergency fund

  • You don’t go into debt for emergencies

While you’re saving for the emergency fund, you can still help others in worse situations than you

2. Pay off your debt (takes ~15-18 months)

Save the emergency fund first, since paying off debt is not saving

Don’t borrow any more money

Learn to save money

  • It’s natural at this stage to eat out more and pay debts less

Try to renegotiate the interest rate on your loans as soon as you can

  1. Set aside time to negotiate rates
  2. Ask for a higher-up when you call the credit card company
  3. If you have good credit, you will be eligible for an adjustment

If it helps, use a debt snowball

  1. List all of the debts in order from smallest to largest
    • Starting with the highest interest rate instead of the lowest amount may make it harder to stay committed
  2. Pay off the smallest debt first while making minimum payments on the rest
  3. After you’ve paid off the smallest debt, put that dedicated amount into the next lowest debt
  4. Keep a log of everything paid off as a reminder
  5. Repeat until debt-free

When paying off student loans, educate yourself on the various repayment plans

  • Make every payment on time, since a missed payment might completely rearrange the whole payment arrangement and create an excessive financial burden
  • Proactively communicate with the loan servicer

For credit cards, try a balance transfer to a 0% interest account

  • Ignore the credit limit, since the card will be paid off
  • Cut the card up or stick it in a drawer to avoid ever using it
  • The end of the 0% rate should be a deadline to pay it off

When you’ve finally paid off a credit card, close it after it has been $0 for a few months

  • Watch for fear tactics (e.g., your FICO score will be adversely affected, losing rewards points)
  • Be prepared to decline promotional additions like extra miles or fee waivers
  • They may hesitate to close the account
    • Keep track of who you speak to and when with confirmation numbers

As tempting as it may be, don’t invest until you’ve paid off your debt

  • The interest rate you pay on most debt is significantly higher than the interest rate on some of the best investment returns
  • Investing returns are not guaranteed, but debt is
    • Don’t get a second house until you’ve paid off the first one
    • invest in securities only after you’ve paid off your debts
  • Being in debt takes the focus away from the time and effort necessary for wise investing

If the housing market is decent and you still have a mortgage, sell your house and downsize

  • If you have too many possessions, a smaller house will be a good reason to sell some of them

At this stage, you can start helping others in distinct ways like prayer shoe boxes and giving small items to the less fortunate

3. Save up 3-8 months of regular living expenses (takes ~12-15 months)

Many things can ravage your sense of security from not saving

  • Unemployment
  • Underemployment
  • Medical emergencies

Saving 3-6 months guarantees you can handle any single large event that would typically bring you into debt

At this stage, you should be able to give small gifts to those around you and sacrifice more towards others’ well-being

4. Invest at least 15% of your household income into your retirement (varies based on lifestyle decisions)

Do not invest before paying off your debt

  • Debt is guaranteed, but investing has very little certainty

When you get here, your giving should start providing for others’ more prominent expenses and needs

5. Save for your children’s college fund (varies based on expected education)

Save for your children only after you’ve accumulated enough to survive through your retirement

  • You should be able to live off of the growth of your assets without having to dip into the principal you’ve invested
  • It may seem unfair to your children, but you will burden them far more by requiring them to support you
  • College doesn’t guarantee success (more on this later), but expecting them to take care of you increases their chances of failure

Never use insurance, savings bonds or prepaid tuition to save for your child’s college

Start helping others to build their own lives and make substantial investments of time and money into them

6. Pay off your home (takes ~10 years)

As you slowly develop wealth-accumulating habits, you’ll eventually be able to start overpaying your mortgage

By this point, you should have a good idea on how to significantly transform others’ lives

7. Devote most of your extra income to giving to others (takes the rest of your life)

Giving money provides much more happiness and satisfaction than using it yourself

You can give to many places where it’ll do the most good

Treating others to quality-time events together

Generous gratuities and tips to service workers

Churches

Homeless shelters

Non-profits

Family and friends who need it

  • It’s very likely that some of your money will take care of your parents near the end of their life

To cause the most good, avoid giving to the wrong places

Some of the large non-profits you’ve seen commercials for

  • Most of that money goes to “administrative expenses” or “consulting fees” and never makes its way to the recipients
  • Do your research, since prior-year tax filings are public access

Expensive charity fund-raising events

Politicians or political movements

Beggars on the street

  • Pathetic-looking people make a living looking miserable, but often make more money than working a job
  • It’s better to give to homeless shelters, soup kitchens and job training non-profit centers instead

Family members who don’t need money or who consistently make terrible life decisions

  • Never, ever loan a relative money
    • Either don’t expect a return or don’t give it
  • Don’t be afraid to lay out the truth to them
    • Your relationship with them can only exist with truth
  • If you do send them money and have reason to distrust, set reasonable guidelines with clear and enforced consequences
  • Never let a family member use guilt to get what they want
Next: Money 204: Making A Little Extra Money