Build wealth on a budget

Get rich by leveraging what you know and using what you’ve got. I have read hundreds of articles, books, and journals about money and finance. The common theme is to become an expert in one subject area and use this expertise to create cash flow by selling your skills and knowledge.

This is a glimpse of what I have learned…yesterday. That’s right, yesterday! There is a plethora of information out there on finances. For example, there are numerous mobile apps you can use to earn extra money and one just for locking your Android smartphone! You literally just slide your screen to unlock your phone and make a profit. There are also various budget apps you can use for free or a small fee to track your spending (no more excel spreadsheets) and let technology do all the work for you.

Even after over eight years of learning about money; I still learn new things about finances.  For instance, the following is just an inkling of what I have learned over the years:

  1. Money can help you make better decisions because often times it’s the lack of money that can lead to bad decisions.
  2. Money cannot buy happiness.
  3. Money is the number one reason couples divorce.

Find ways to not only live below your means, but to expand them as well.

If you are good at writing, use this skill to build additional income as a freelance writer. Like to cook. Earn money on the side selling baked goods. Know your way around the city. Become a driver. Like being a homeowner and dream of being a landlord. Start by buying one home and renting it out.

These are just a few things you can do to earn income. The goal is to expand your means. Increase the distance from the amount you earn and spend.

For example, if you earn (that’s right because you don’t make money you earn it) $4000 a month and have expenses of $2500 a month, then invest the difference of $1500. The goal is to earn enough passive income to be able to live off it for the rest of your life. Once you hit your target number your working days are over.

In order to achieve this, you must limit debt and borrowing. Too much can have a negative impact on your savings goals. If I had to put debt in order of importance for payoff, it would look like this:

  • Payday Loans
  • Credit cards
  • Personal Loans
  • Auto Loans
  • Student Loans
  • Mortgage Loans

The first two come with high interest rates and fees. I have had the unpleasant experience of both types of debt.  I decided to get serious about debt repayment and once I got my tax refund I paid off the payday and auto loans. I used a zero percent credit card to pay off my personal loan. From there I used the savings from paying off my other debts to pay down and off my credit cards. I am not so worried about the student loans and the mortgage because at least I can deduct the interest from my taxes on my tax return. However, this is not a time to rest on my laurels. The goal is to get out of all debt ASAP to be able to save.

Emergency fund. My suggestion would be to have a savings account that is just for emergencies. The ultimate goal is to have at least one year of expenses saved. However, just to start and have some funds in case small emergencies happen, i.e., leaky faucet, car repair or medical bill you could have $500 to $800 readily available. This will alleviate some stress as opposed to having no savings.

Simple Math can lead to Riches.

Savings Tracker

Amount per month         Year One             Year Five              Year Ten

$100                                      $1,200                  $6,000                   $12,000

$500                                      $6,000                 $30,000                $60,000

$1,000                                  $12,000                $60,000                $120,000

Looking at the numbers above, you can see that after five years in any scenario you could use the amount as the down payment on a home. After 10 years of saving, you could buy a car outright or pay off part of a mortgage depending on what you owe or even start a business. However, savings like this don’t come easy. You must be disciplined enough to pay off debt so that you can maximize saving. But just look at the possibilities. They are endless!

This is my motto; Cash is King. Leads to prosperity. Debt leads to poverty and can cause degradation of character. Just choose cash.

A car and nothing more

Outside of a home, one of the biggest expenses for most people is a car. A car can help you get to work to provide for your family, allow you travel long distances at your leisure, and give you a sense of freedom. However, spending too much on cars can lead to debt accumulation and this could negatively impact your net worth.

I call those who would rather drive the fancy car and have no emergency saving – Autoholics.  My definition is the buying of automobiles that are more than you can reasonably afford which results in problems.

I have known people whom both would lease and buy expensive vehicles. To most of their chagrin, the price of that freedom on four wheels was not worth it.

The moment you drive a car off the lot it goes down in value. Therefore, if you brought the car back within 1 hour of purchase the car would be worth less than what you just paid. Because of this a car is a depreciating asset, and must be chosen carefully to avoid having consistent negative equity in a vehicle over the course of your entire driving career.

If people are not careful, you could easily spend anywhere from $50,000 to a couple hundred grand on cars in a lifespan.  Those numbers do not include maintenance. That’s right, just the sticker price!

I am not saying not to buy a car. What I am saying is to choose what cars you buy carefully as you do not want to have a car parked in your garage that you cannot afford to fix because the repairs cost $8,000. And that number is not a typo, I actually knew someone who owned a BMW and that was the repair cost.

I have seen people paying $300, $400, $500, or even $600 car notes for five or more years. I actually know someone who has had a car payment almost her entire adult life. If you added those amounts up, it would be some pretty big numbers.

If you were to invest $100,000 in the stock market, with a return of 8%, you would have a million dollars in 30 years.  Even a $10,000 investment would net you $100,000.

With the average price of a car, even used, being $10,000-$20,000 thousand dollars it is worth considering cheaper alternatives. When the goal is to build wealth and have financial independence, then instead of choosing an expensive car go for the one that is more practical but still looks pretty decent on a postcard.  But the best looking car is the one that’s paid for no matter what brand it is.

Money and Relationships…3, 2, 1

And here we go. Date the guy with the nice home instead of the nice car. That’s my advice.

Growing up, my father said my grandmother would say that a man should have a place to put his family. Simply put, if you want a family, then you should have a home for them. It doesn’t have to be a mini McMansion, but it can’t be a cracker jack box.

Will the real estate holder, please stand up? I have actually known some men to prefer a fancy set of wheels as opposed to owning their own piece of property. I get it. Cars mean freedom and to some that they had arrived at adulthood. However, from my experience it’s the guys with the homes that tend to stay in longer, better relationships. Maybe, being a home owner is something to aspire to.

Vanity hates loneliness.  I used to work with a guy that drove a pretty swanky BMW. The sticker price was between $40,000-$50,000. He lived in a one-bedroom apartment in a sketchy neighborhood. He was more concerned with looking good and cool gadgets than his net worth. The few relationships he had were terrible. However, he would be willing to stay in miserable relationships just not to be alone.

Well, one day he lost his job. The car payment was around $500 per month. And unemployment checks weren’t covering it. No savings to speak of. If he had a home, he could have tapped an equity line of credit until times got better or even rented out a room. But those were not options. So what did he do instead. He asked his mother to make his car payments for him.

Safe to say the woman he was seeing at the time didn’t stick around too much longer afterward. Last, I heard or saw of him he had paid off the car after about 7 years, was moving into a bigger apartment in another part of town, and his relationship status was single. And his hobby was…drumroll please…playing video games.

I did suggest to him to enroll in school or some other function that may help him increase his marketability in the employment world. Sadly, he declined.

Homes equal leverage.   A car is a depreciating asset. It usually does not retain its original value, and continues to steadily decrease as the years go by. In contrast, a home is an appreciating asset that increases in value over time. In a 7-year time period, you could build up equity and your home could appreciate in value at the same time.

Let’s say you build $20,000 of equity and your home appreciates 2% a year for a 14% increase in value. If your purchase price was $150,000, then your home is now worth $171,000. For a total equity of $41,000 that you can tap for home repairs, remodeling, etc. That is leverage. You can use this equity to your advantage. What do you get back from paying rent? Zero.

Rent check or car payment. Now that we know what to look for in a guy. Let’s see where the guy without a plan to acquire property could potentially end up without assets of any kind or of substantial worth.

Without his mother paying his car payment, the car may have been repossessed. This ruins your credit, you have no vehicle, can’t get to work, you may lose your job, cashes out retirement account to eat and live, and now you can’t buy a home because you have bad credit and no job.

You may end up living off the side of a freeway off ramp or at the ripe old age of 70 asking customers paper or plastic. Not that there is anything wrong with having a job, but if I have to utter this statement I want it to be my choice and not because I have to.

Working in your golden years to still put food on the table is not how I or anyone should have to spend their retirement. You always want to have the option not to have to work. Or worse yet, from the peanuts you are making, you may be only able to afford Alpo.

Pay on what you own. Paying the mortgage is better than paying for a car. Even though at the end of your loan terms you own an asset, the home can go up in value, house your family, and be used for leverage. Your car can only be used for the latter and for a minimal amount at best.

And so there you have it folks.  If you plan to date, find a partner that understands the value of money and doesn’t just know the price of everything. If you know how to spend, then you should also know how to save.

R-E-T-I-R-E oh yeah I ment for this to happen

Retirement the best laid plans. First, they tell you to go to school and get good grades. You won’t be able to get into college they say. Little do they know that there are many colleges willing to accept you because bottom-line is they want your money. So you get into college, you graduate, and get a job. Now you have to plan your exit strategy. Sounds daunting because it is.

Expert advice. All the experts say you have to start saving and investing early. Pretty much from the time you start your first job. They might as well say as soon as you can start walking and talking because it takes a while before your investments are self-sustaining from what is known as compound interest, which is interest calculated on the principal and also on the accumulated interest that grows money over time. In other words, if you invest $5 dollars and $1 dollar of interest grows on it, then interest will now start accruing on $6 dollars and so on. That’s how you build wealth. This happens even faster when you get out of debt because then you have more money to invest.

Most commonly known and used retirement plans

401k. This is a retirement plan where participants make a contribution from his or her paycheck that is usually done through pretax and/or post-tax deductions. Investments are chosen among the options provided under the plan. Pre-tax deductions grow tax deferred and are tax deductible.

IRA’s. Roth vs. traditional

A Traditional IRA is a retirement account that allows participants to direct pretax income into investments that grow tax deferred until the money is withdrawn.

A Roth Ira is similar to a traditional IRA, but contributions are from after-tax income, are not tax deductible but distributions are tax free.

I remember being in my twenties and finally landing a job that had a 401k. I thought it would never happen. Little did I know I now needed to manage paying the bills, picking investments, eating, bathing, juggling work and school on top of becoming a semi-professional financial expert to manage it. I just decided to do enough to get the match.

This was a time when I was not making a lot of money mind you. Less than $30k thank you very much but something is always better than nothing. So I had to work with what I got. My other coworkers laughed at me for contributing so little (we all made peanuts) and some even decided not to invest at all!

I ignored the naysayers. I continued to invest until I was laid off during the financial crisis. Since, I did not know much about 401k’s and rollovers at the time I left it alone and let it sit. It turned into about $5,500.

Later, I was informed that it went below the $5k mark needed for it to stay invested and I would have to cash it out. I learned that if your investments fall below this amount that it cannot stay with your old employer’s plan. However, to cash out any retirement plan before the age of 59 ½ means paying steep penalties such as 10% for early withdrawal and paying federal and state income tax. I was like no way!

I just held fast and waited to see what would happen. The only way that I was cashing in my golden ticket was if the tax man himself came to my house, tipped his hat, flipped over with his cane and said I have no choice or Uncle Sam, aka the government, would take my money away from me. Well, guess what, that never happened.

My investments ending up going up and down for a while teetering between $5k and $5500 but eventually settling down to the tune of over $8k. Not bad for someone who was laughed at and told that I did not make enough to invest.

I would go on to rollover that account and invest modestly over the next few years and that balance within 3 years became over $15k! I’m glad I stuck to my guns and decided to trust my gut instead of listening to others. Your instincts are usually the best advice you can take.

And after seeing what was endless possibilities thanks to compound interest I said to myself…this is just the beginning.

Getting back to cash only

I once heard the saying ‘cash is king’ and now after spending years in credit card debt, I can finally understand the meaning. If I used cash, there would be no debt. Debt can be debilitating. It can cause stress, anger, anxiety and limit upward mobility.

For example, let’s say that you have $15,000 in credit card debt at 15% interest. It could take about ten years with a payment of $242 a month and over $14,000 in interest before the debt would be repaid. You would have paid for your purchases twice! If instead, that money was invested in a Roth IRA, after ten years of contributing $242 per month at an 8 percent, your investment would be worth $74,452.

That’s a whole lot better than repaying debt! So how can we get back to cash. It’s simple. Just do a little less.

Instead of buying breakfast every morning, you could buy twice a week. Same goes for snacks and eating out. Just limit what you do. And use cash.

Start by using cash at the grocery store and gas station every week. Then on other regular purchases such as the hair salon or barber shop, tip with cash, eat out with cash. When you have to physically part with your hard earned money it hurts a lot more.

Let’s say you pay $1,000 monthly to repay your debt. If you were to save that same amount of money, you would have $12,000 in your bank account by the end of the year. Do this for three years and have $36,000. Five years will give you $60,000. And for eight years will give you a whopping $96,000!

You can’t afford not to save as the alternative is usually being in debt. When you have the cash to pay for whatever life throws your way, you are able to cope better with the challenges it will bring you. Just saving for a few years could provide you with financial freedom the likes of which you have never felt before.

All you have to do is a little less.

The “M” Word

Money. Just the word elicits so many emotions and reactions from people. I should know as I have had my own highs and lows in the quest for the almighty dollar. Simply put, life is expensive.

HOW EXPENSIVE…THIS EXPENSIVE

Groceries and a car. A trip to the grocery to feed a family of four can range in the hundreds of dollars. The price of buying a car can now be the cost of a down payment on a house. Car payments that run in the $300-500 range are the norm; which can take as long as 5 or 6 years to pay off (even the president is only in office for 4 years per term) because longer than four years, in my book, is just too long.

A house. Don’t even get me started on buying a home. A nice home, in a good school district can cost upwards of a quarter million dollars or more. That’s right. There was no typo. Depending on what part of the country you live in you could be paying a half a million dollars just to have a roof over your crumb snatchers heads.

Paying the mortgage. According to bankrate.com, the monthly payment on a $250,000 mortgage with no money down and a 5% fixed interest rate for 30 years would cost $1,342.05 per month. That does not include HOA, property taxes, maintenance, PMI, utilities or other costs associated with being a homeowner. Owning a home is great and a truly wonderful goal, but a big ticket item like this has to be planned for.

Get a job. However, to afford all the above-mentioned topics you have to have a good job and there are plenty of those all over the place right? Wrong. Typically, now to get a decent paying job you have to go to college. And college is one of the most expensive items of all next to a home.

Cost of college. Unless you have been living under a rock, you are fully aware that the cost of college has skyrocketed out of the stratosphere. What once was thought of as a way for upward mobility that could be obtained by working your way through school is becoming prohibitively more expensive.

Tuition. According to the College Board, the average cost of tuition for the 2015-2016 school year was $32,4055 at private colleges and $9,410 for public colleges. The latter price is for in-state residents! The average cost for out-of-state residents is $23,893. If you multiply those costs by four, the equivalent of four years of college, it is outrageous. And that’s for the students who finish in four years.

Student Loans. So this is what prompts students to take out student loans. Which can become like a cancer, if not taken out wisely, because the interest can start to compound and make loans bigger and bigger until they become almost impossible to repay. I have actually read some pretty awful stories about students who received college degrees that were essentially worthless or in low paying fields and could barely afford to pay rent let alone their loan payments. You have to educate yourself on student loans and know the risks. I am a huge advocate for educating yourself as college is vital. However, I believe firmly that a good education should also be an affordable one.

End the cycle. All this can lead to the proverbial rat race. Where people struggle for wealth, but are unable to break the financial cycle of living paycheck to paycheck. Although not easy, it can be done.

From blog to billion$. That is what this blog is all about. There is a way to reach the coveted title of having financial independence and freedom. You can reach this milestone. Keep reading and let this blog motivate you on your journey of wealth accumulation.

 

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