Managing money is an important and critical skill that everyone needs to learn and yet money is not being taught in school. This is why it is so important to learn everything about personal finance. Having been exposed to individuals with different lifestyles and financial assets intrigued me to learn how people manage their money. We all have that colleague that has a good stable income but struggles financially, that friend who just relies on one income source, or that family member who knows how to save and return gets to live life comfortably.
If you are in your 20s, great that you want to become financially independent. Should you be older and seeking financial freedom, please read the following with an open mind and rewire how you think about money.
1) Divide your money
This is the easiest and the first thing you need to do if you don’t want to loose money. Divide the money you have into different “accounts of purposes”, as T. Harv Eker, author of Secrets of the Millionaire Mind advices. Have at least 5 separate bank accounts:
- Daily expenses, covering yours and your family’s necessities.
- Emergency fund for just-in-case scenarios.
- Money for long-term investments.
- Pleasure savings account for leisurely expenses.
It doesn’t matter how much money you have saved, what matters is that you use the money you have according to their purposes. Let’s say you want to go on vacation but don’t have money left in your pleasure savings account, then you shouldn’t use money from your other existing accounts, even if you have enough money if you were to combine all your existing bank accounts.
2) Think like a college student
University students usually have a very frugal mindset. However, once people have a higher salary, they suddenly forget how frugal they used to be, as a kid or as a student. The majority of individuals get caught up in consumption, some forget that they have to pay off their college debt first, while others seek debt because they believe they need a car or need to buy a house, even if their current living situation is just fine. Moreover, people tend to spend more once they earn more. If you want to live financially independent, sacrifice now to reach wealth faster – live below your means for as long as possible. In the long run, you will have more wealth than the ones who were impatient.
3) Avoid bad debt
While debt can be good with a long-term mindset, people can also use debt for the wrong reasons. Car debt is an example of bad debt, you don’t need the latest car model, when a used car or different car brand, can add the same benefits and safety. Real estate, if financed wrongly, can also be bad debt given the loan interest rates and the years one has to pay for a mortgage. The majority of times it is better to pay rent and buy an apartment or a house later with less debt or no debt. Not all real estate properties increase in value, sure everyone needs a place to live and property can be rented but you always have to consider interest rate expenses and opportunity costs.
4) Stocks are not only for the uber-rich
People that don’t invest in stocks usually believe that stocks are too risky. Warren Buffett, America’s richest investor says, “ Risk comes from not knowing what you are doing.”, this advice applies to all circumstances in life, including stocks.
The stock market might be volatile but by taking the time and doing the research anyone can invest in the stock market. Penny stocks, literally as the name implies, only cost a penny. One may not become wealthy overnight, from one-time investments, penny stocks, mutual funds, or ETFs, but it is still a revenue stream that everyone should be familiar with.
5) Don’t rely on one income source
The wealthy always have multiple sources of income, not only are they interested in maintaining their wealth but also in growing their wealth. Regardless, your age or job profession, always have more than one income source. Having multiple streams of income can only benefit your livelihood. While creating a product may not be the fastest way to grow wealth, you can generate additional income by offering your hobby as a service, investing in the stock market, joining the dropshipping business, starting a blog, or investing in real estate.
6) Pay yourself
When it comes to building wealth it is also important to celebrate successes and to reward yourself. Whether it is something you buy for yourself or splurging on experiences, rewarding yourself is important. Everyone deserves to enjoy the money they work for. People have an emotional relationship towards money and if you reward yourself in moderation, you will strengthen your positive mindset about money.
7) Donate regularly
No one has ever become poor from giving. Donating regularly is crucial to wealth. Not only does giving back make you happier and healthier but it also motivates you to manage your finances with a bigger purpose. As Robert T. Kiyosaki, the author of Rich Dad, Poor Dad says, “Give what you want.” If you want to be healthy you need to practice giving money regularly, this is the mindset of the wealthy. While you shouldn’t expect something in return, giving back does make us better people, more appreciative of what we have, and lets us think about what we can share.
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