- 1 1. Your Home Is An Asset
- 2 2. All Debt is Bad
- 3 3. Everyone Should Attend a Four-Year University
- 4 4. Credit Cards Are The Devil
- 5 5. I’m Young, I Don’t Need to Worry About Investing
- 6 Conclusion
~ 12 Minute Read
It seems like everyone has an opinion when it comes to money and how you should manage it. The sad truth is that most of those esposing this advice are either half-right or completely wrong. Even crazier is that many of these same people have gained big followings by selling simple to follow money management courses. While these are certainly helpful to many, they do not allow for people to develop a greater sense of how to handle money as their financial situation improves.
Today I’m going to give you five pieces of financial advice that I’ve heard more times than I can count, which are untrue. Some of these may be a hard pill to swallow, but be honest with yourself and consider how changing your opinion about certain financial beliefs could help you grow your wealth.
1. Your Home Is An Asset
Holy shit, talk about peer pressure. According to this douche, er, I mean realtor, I’m a sad sack for not wanting to lock down a 30-year mortgage and enjoy a life of being cash poor due to buying an expensive, but poorly built Mcmansion.
My Definition of An Asset
I will admit that I completely stole this idea from Rich Dad, Poor Dad, which is a popular book on building wealth. While I don’t agree with everything from this book, the author’s definition of an asset is absolutely on point. An asset is simply anything that pays YOU at the end of the month. If the item takes money out of your pocket each month, then that is a liability my friends.
In the case of your house, each month money is taken out of your pocket to pay for your mortgage. Your home is not paying you to live there. Only if your home is paid in full is this not true, something I don’t recommend in this economy unless you are of retirement age due to low interest rates. Even if you do own your home outright you’ll still be paying property taxes.
In my case, my family lives in a 1200 square foot home that was built in 1999. It is valued at about $145,000. I’m sure that banks are tripping over themselves to lend me many thousands of dollars to buy something bigger, but why do that when research shows a bigger home doesn’t make you happier?
When Real Estate Is An Asset
Real Estate is a great business to get into. A famous example of this is when Ray Kroc pronounced that McDonald’s is not in the hamburger business, but the real estate business.
To become a real estate investor you’ll want to become a landlord. That means buying up property and renting them out to residents. If you’ve got big money, you can do this on a commercial scale, renting out buildings to restaurants and other businesses.
Real estate acquisitions like these become assets because they pay you money at the end of the month through rental income.
2. All Debt is Bad
This is one of those myths that is based on a half-truth. It is true that many people spend way beyond their means thanks to credit cards and other bank loans. For those of you reading this that are in this situation please work to pay off this debt as quickly as possible. Debt like this enslaves you, it’s that simple.
Whether or not debt is bad depends on two things: your specific financial situation, and what you are obtaining through your debt. Let’s first look at how your financial situation impacts whether debt is good or bad by using a car loan as an example.
Your Financial Situation And Debt
We’ll make up two different people for this example, Jim and Brenda. Assume that both car loans have a 4% interest rate. Jim has $5,000 in his bank account and plans to use all of this money as a down payment to purchase a $30,000 car. Brenda has $80,000 in her bank account and plans to put $5,000 down on the same car and invest the rest of her assets in the stock market where her money will earn more than 4% over the long-term.
In the case of Jim and Brenda, Jim is utilizing the car loan to allow him to live beyond his means, keeping him from building wealth.
While I would advise Brenda to buy a cheaper vehicle with cash, she can afford the $30,000 car as she has the capital to pay off the car loan at anytime. Even better is that she is leveraging the bank’s money to allow her to invest more capital in the stock market where it will draw a better interest rate. Brenda is not living beyond her means.
What Are Your Purchasing With Debt?
In the example above, both Jim and Brenda are using loans to purchase a car. As a rule I like to purchase cheap vehicles that are reliable with cash. Currently, I drive a 2008 Ford Escape with 87,000 miles on it. It is in great shape and gets me from A to B. No need to make a statement about my status with the car I drive.
For most of us, we use debt to purchase consumer goods like cars, furniture, and other stuff you generally don’t need. This is not good debt. But let’s say you use a loan to purchase a rental property or a business, is that bad debt? Depending on your motivations and experience to make the business succeed I would say no.
As a general rule, if you are using debt to purchase a liability (other than your reasonably sized home) that is bad. When you are using debt to purchase assets it is good, within reason. You should be able to put down at least 25% when obtaining a loan for an asset. Even when it is “good” debt you do not want to overextend yourself.
Loans For Liabilities=Bad
Loans For Assets= Can Be Good or Bad
3. Everyone Should Attend a Four-Year University
Student Debt Crisis
It’s no secret that student debt is a full on crisis. To put it in perspective, new data suggests that we could see default rates on student loans rise to 40 freaking percent by 2023. That’s not a dumpster fire, that’s a dumpster explosion.
The old adage that getting a degree ensures a solid career no longer holds true. Many graduates struggle to obtain gainful employment that pays a salary that matches their skillset.
Treat College Like An Investment
My advice when it comes to attending college is to treat it like you would treat any other investment. That means you need to have a plan for what you want to study and your goals after graduation. If you don’t have a plan for how to make college pay off then you are boardline gambling with your future. Make sure to look at the statistics for job prospects specific to the major you are considering.
Learn a Trade
The educational system in the USA has been pushing four-year schools for decades. This has created a shortage of skilled tradespeople. If you are unsure about four-year college, go to your local community college and pick up a trade on the cheap.
What I love about trades is that they generally pay well, and once you’ve got your feet wet you can branch out on your own and start a small business based on your trade. Even better is the fact that most of your competition will be other tradespeople who do not have experience in running a business. If you are going to go the route of starting your own business in one of these fields be sure to take the time to learn business-related skills like bookkeeping, customer service, and marketing. These skills will set you apart from your competition.
For example, I hire a plumber who about a year ago broke free from his job to start his own plumbing business. This guy is nice, honest, and his fees are reasonable. I feel that I can trust him to get the job done no matter what. While there are other competent plumbers in the area I will always hire my guy because of his quality work and abilities in customer relations.
4. Credit Cards Are The Devil
However, for those who are financial savvy, credit cards are a great way to get awesome perks for making purchases you’d make whether you had the credit card or not.
My wife and I do this by using the Citi Double Cash Credit Card. With this card you get 1% cash back on purchases you make and 1% cash back when you pay off your balance. We make all our regular purchases including groceries, gas, cable, etc. with this credit card and pay off the balance each month. For using the card we get 2% cash back on everything we purchase! This adds up to over $600 a year.
In the end, if you have a little discipline credit cards can be your ticket to cash back and free airline miles.
Credit Card Rule:
Alway pay off the entire balance at the end of the month! If you can’t, you are simply living beyond your means.
5. I’m Young, I Don’t Need to Worry About Investing
When it comes to investing, the earlier you get started the better. This gives your investments more time to grow and allows your money to withstand the normal ups and downs of the stock market. You’ll also get the huge benefits of compound interest, which is just as important as the amount of money you initially invest.
To show compound interest in action, let’s say you have $10,000 to invest. In the first scenario, you invest the money at age 45 and don’t take it out for 20 years. In the second scenario, you invest the $10,000 at age 25 and take it out after 40 years.
How much do you think you’d have at the end of each investment term if we average a 10% return on our investment?
Using this compound interest calculator we find that for the first scenario we’d end up with $108,347. Not bad, but if you’d invested the money at age 25 your initial $10,000 investment would have grown to $728,904! Starting early makes all the difference.
A lot of financial advice is geared toward a certain audience that is struggling to get by. While this advice is helpful, once your financial situation changes you may not know how certain decisions you make should change as well.
What do you think of my list? Did I miss anything? Are there items that you disagree with? Let me know in the comments.
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