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 mistake most people make

  • If you scale up your lifestyle, you will have to pay for it, which removes any chance of building wealth
    • Try not to gift yourself when others can give you that gift or the purchase will strain your budget in the long-term
  • Focus on the following goals to build more wealth

1. Make an emergency fund (will usually take 2-4 months)

  • If you are married, an emergency fund is absolutely vital to give your spouse and you the security to avoid money fights
    • It should be $500-1000
    • Never touch it for purchases and only use it if it satisfies all three of the following
      • It is unexpected
      • It is absolutely necessary
      • It is urgent
  • It is not an investment; it is a personally funded insurance policy
    • A good place to keep it is in a money market account from a mutual fund company
    • Without it, you run the risk of falling right back into the debts you were able to start climbing out of
    • Never consider a refinance of an asset as the emergency fund; you don’t go into debt for emergencies
  • While you’re saving for the emergency fund, you can still help someone in worse situations than you!

2. Pay off your debt (will usually take 15-18 months)

  • Don’t borrow any more money
  • Learn to save money; it is natural at this stage to start eating out more and paying debts less
  • Paying off debt is not saving money, so make sure you have the emergency fund saved up first!
  • 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, then you will be eligible for an adjustment
  • Use a debt snowball if it helps
    1. List all of the debts in order from smallest to largest
      • by starting with the highest interest rate instead of the lowest amount, it might be harder to stay committed
    2. Pay off the smallest debt first while making minimum payments on the rest
    3. After the smallest debt is paid, put that amount into the next smallest debt
    4. Keep a log of what has already been paid off as a reminder and repeat until debt-free
  • When paying off student loans, educate yourself on the various repayment plans
    • Make payments on time, every time, since a missed payment might make the whole payment arrangement an excessive financial burden
    • Be proactive in communicating with the loan servicer
  • For credit cards, it’s not a bad idea to do a balance transfer to a 0% interest account
    • Don’t even look at the credit limit, since you will only be paying off the card
    • Stick the card in a draw or cut it up to avoid ever using it
    • Make the end of the 0% rate a deadline to have it paid off
  • When you do finally pay off a credit card, close it after it has been $0 for a month or two
    • Watch for fear tactics like your FICO score being affected or losing rewards
    • Be ready to decline promotional additions like extra miles or fee waivers
    • Keep track of who you speak to and when with confirmation numbers, since they may hesitate to close the account
  • As tempting as it may be, don’t invest until your debt is paid off
    • 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 guaranteed!
      • Don’t buy a second house until the first one is paid off
      • Don’t invest in securities until all higher-interest-rate debts are paid
    • Being in debt takes the focus away from the time and effort that needs to be made for wise investing
  • Sell your house and downsize if you have a mortgage and the housing market is decent
    • 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, such as prayer shoe boxes and giving small items to the less fortunate

3. Save up 3-8 months of regular living expenses (will take 12-15 months)

  • There are many things that can ravage your sense of security by not saving:
    • Unemployment
    • Underemployment
    • Medical emergencies
  • Saving 3-6 months guarantees that you can handle literally any one thing that would normally bring you into indebtedness
  • At this stage, you should be able to give small gifts to those around you and sacrifice more finances towards others’ well-being

4. Invest at least 15% of your household income into your retirement

  • Do not invest before paying off your debt, since investing is not guaranteed and debt is
  • When you get here, your giving should start providing for others’ larger expenses and needs

5. Save for your children’s college fund

  • Only do this after you’ve accumulated enough to survive off of in retirement
    • You should be able to live off of the growth of your assets without having to dip into the principal amount you put into your savings
  • Never use insurance, savings bonds or prepaid tuition to save for your child’s college
  • Also start looking at enabling others to build their own lives, and invest more time and money into them as you are able

6. Pay off your home (will take around 10 years)

  • As you slowly develop wealth-accumulating habits, you’ll eventually be able to start overpaying on your mortgage payment
  • Once you’ve gotten to this point, you should have a good idea of how you want to drastically change others’ lives for the better

7. Devote most of your extra income to giving to others

  • Giving money gives more happiness and satisfaction than using it yourself
  • There are many places that you can give your money
    • Churches
    • Homeless shelters
    • Non-profits
    • Family and friends who need it
      • Given the state of the West right now, it’s very likely that some of your money and your siblings’ money will go to taking care of your parents as they grow old
    • Treating others to quality-time events together
    • Additional gratuities to service workers
  • There are also some places to not give your money to cause the most good
    • Some of the bigger non-profits that you’ve seen commercials for
      • Most of that money is soaked up in “administrative expenses” or “consulting fees”
      • Do your research, since the tax filings for prior years are public access
    • Expensive charity fundraising events
    • Politicians or political movements
    • Beggars on the street
      • At least in the USA, the pathetic-looking people on the corner have made a living looking miserable
      • Homeless shelters, soup kitchens and job training non-profits centers are better places to contribute
    • Family members who do not need money or who consistently make terrible life decisions
      • Never ever loan a relative money, either give it without expectation of a return or don’t give it
      • Don’t be afraid to lay out the truth to them, since the relationship with them is only real if the truth is underneath it
      • If you do give them money and have reason to distrust, set some reasonable guidelines and consequences for them not being followed
      • Never let a family member use guilt to get what they want
Next: Money 204: Making A Little Extra Money