There are two types of “rich” in this world. There is wealth, which can be passed on to the next generation which helps create more money.There is new rich which allows you luxuries today, that can go away overnight. As self made entrepreneurs, we usually start with the new rich and end up wealthy if we work hard enough. When I think back of my earlier days of being rich, I think of some of the mistakes that I made and some of the successes that I had that can maybe help some of you get to the wealthy stage faster.
I believe that we all have a sense of understanding towards money, but not always as to how to spend it. We are often tempted early in our childhood to own things and keep them forever despite not needing them. This desire of ownership and past family values dictate how much control we have over our money. As we become more important in society and our pay grade continues to rise, we often over expose ourselves quickly to a better lifestyle instead of going for the gold. Here is a simple example of this: You make $50,000 a year at your current job, but now suddenly get a raise to $80,000, this $30,000 increase is usually immediately allocated into a lifestyle change such as a bigger home, nicer car, better furniture, despite the lack of a need for any of these items. Since you will not receive the $30,000 at once but rather gradually in the form of bi-weekly pay, you will only receive $800 more per pay, which is great except for the fact that in order for you to buy the nicer car, you now need to take on loan for $500 a month which is fine, BUT don’t forget that you now are in debt $30,000, not $500 a month. In other words you grew 0% despite a $30,000 a year increase that most would die for.
You forfeit everything you grew before even growing 1%. The reasonable approach to this would have been to attend to needs first by creating a savings cushion and then attend to your wants with what’s left. Allow what you have been awarded to actually become yours and then decided if you really want to spend it on a car. Think about how long it takes you to save $30,000 and then honestly tell me that you would spend $30,000 on a car if it took you two years to get that money or would you rather spend $15,000 and keep the other half in your account. It’s easier to part with others money that you have not earned than it is your own. This is why credit card companies make billions off of greed.
The path to financial freedom is quite simpler than you think:
Hold no debt: Debt is the number one reason people fail their financial goals and draw so much pressure on themselves. Short term debt (less than 12 mo) can be healthy if necessary, long term debts that are needs based, like a home, offer many tax advantages and are necessary to your credit health. Buying a car for $50,000 instead of $30,000 when you don’t have a penny in your savings acct is awful debt and poison to your financial balance sheet.
Buy on credit what you can afford in cash: Buying on credit as described above can have many advantages and can make good business sense but you must remember to not take on more than you can afford. A good rule to follow is having at least 50% of your purchase allocated in cash in your savings. In other words, if you want that $50,000 car and want to finance it in full, do so knowing you have $25,000 sitting in your acct.
Prioritize “needs” over “wants”: Visualize what you want for yourself in 5 years and how much of a dollar investment it will take in yourself, allocate that money, don’t touch it, along with the money for your daily necessary needs, like foods and insurance. Once you accounted your immediate needs, future outcomes and future precaution needs, use the rest of the money on your wants. This shouldn’t leave you much but as you grow your income, this will grow as well but within proportion .
Know how much you need to grow: Knowing where you are headed is only half the battle in your journey but is very important as without a map you would be lost. Each map has checkpoints; points in this case are growth goals you assign yourself and push to reach. By setting your expectations for yourself, you can adjust your wants to attend to your needs first and therefore continue to grow.