1. Banks Are Not The Safest Place To Store Your Money
Is your money safe with a bank? Well, it depends on our understanding of banks. Traditionally, banks were public services which stored individuals money in return for flat fees each year.
In recent years, banks have changed from being something that shields your assets, to a highly leveraged business that invests your money and gives you back interest. When you give your money to a retail bank today, they use that money to issue loans to other individuals and businesses. Statistically, it is incredibly unlikely for everyone to ask for their money back at the same time, so this money is used for other purposes.
The bank uses these profits to pay interest rates.
A bank’s primary concern is not to protect its customer, but to make profits and share them with their customers.
This distinction is important. One should think of banks as a low-risk investment, but not a save-haven for their cash.
The safest place to put your money as a US citizen is Treasury Bills. These are loans you issue the federal government which they are obliged to repay by law.
Inflation is the process of the prices increasing over time. When the price of goods and services increase, the value of the dollar stays constant.
This means that the currency slowly looses value over time, unless you invest it carefully. In the last ten years, inflation has been roughly 2%.
Lets look at an example. If you had $100,000 in 2007 and you left it under your mattress for ten years, that $100,000 would only have the purchasing power of roughly $80,000 – the price of goods increased by almost 20% in ten years time (if the rates for the last ten years are anything to go by).
There are two proven methods of keeping up with inflation – stocks and property.
3. Stocks Protect You From Inflation – Most Of The Time
People today seem to think that the stock market is a money pit for gambling your fortunes.
However, you also loose money by doing nothing as we have seen above – on average about 2% a year.
A report by Barclays Bank on stock market investment pointed out that stocks have nearly always outperformed cash since 1900. Although the report is in pounds, the same is true of US stocks.
4. The Best Investment Is In Yourself
Invest your money in yourself. Whether its courses, books, tools that further your career, invest in things which have a clear benefit for your.
Perhaps the most important thing of these is learning. You should be constantly learning and developing skills which could benefit you in the future.
The famous Chinese billionaire Li Ka Shing recommended all people should split their money into five portions. One of the portions was on your own development.
One note: spending on learning is important, but watch out for your book spending habits on Amazon. Sometimes the temptation to buy huge volumes of books on Amazon is tempting, however it can seriously add up over time.
5. Your Ability To Cut Costs Will Determine Your Entire Financial Worth
In you are interested in building wealth to pursue a business, protecting your family, or as a general safety value, the rate at which you accumulate is determined by your savings rate.
If you can cut your household spending by 10%, you will invest it in index funds, you will be one step ahead. If you save 50% (the extreme option), you will be streets ahead and will be able to build wealth at an absolutely incredible rate.
Lets look at two scenarios. In the first graph, there is a person earning a high income and investing 10%. If he earns $100,000 after tax, he can save 10%. After 10 years, he will have $150,000.
If that same person earned $100,000 and saved $50,000 – he would have earned nearly $850,000 after ten years.
In scenarios, he earns the same amount of money, except he saves more in the second scenario
6. Avoid Debt
There are some forms of debt that are necessary – student debt and mortgage debt.
Any other form of debt should be completely shunned. Debt usually means spending money you don’t have today and repaying it tomorrow. Over long periods of time, this principal sum builds up.
If you are familiar with compounding, debt is compounding in reverse.
If you are taking out debt to fund your lifestyle, this is probably the worst form of it. As we have written before, “Keeping Up With The Jonses” and social climbing is getting too expensive.
7. Learn To Automate
Automation can be an incredibly powerful tool when you want to develop long-term habits. This is especially true in personal finance where discipline is crucial to success.
If you want to automate your habits, the most obvious choice is to automate your investments. Create a direct debit from your bank to your personal investment account to savings account, or pension and let the account run.
By automating your finances, you create financial habits which are completely sustainable.
8. High Fees Could Be The Most Expensive Investing Mistake In Your Life
People often focus on the returns their investments have made – they rarely focus on the costs.
This is an enormous mistake.
If you invested $10,000 every year into a retirement account for forty years, your total investment would be worth $1,392,870 – assuming that the charge was 1.5% (the average) and the rate of growth was 7%.
If you sought an investment which had a far lower cost, for example an index fund with a .2% – that figure would rise to $2,146,096 – nearly a $753,226 difference! By avoiding the 1.5 charge, you would have saved closed to 31% of your savings.
The cost of your investments matters greatly – keep a close eye on them.
9. Compound Interest
Einstein famously said that “compound interest” was the eight wonder of the world. Compound interest occurs in investing when you re-invest your interest payments into the stock to generate greater returns.
Over time, this creates a snowball effect where wealth is accumulated with greater speed. There are powerful benefits to compound interest.
The beauty of compounding is that you can accumulate large sums of money, even if you being quite small.
And maybe, most incredible of all – it’s a proven formula tested by the greatest investor of all time – Warren Buffet.
10. Create An Additional Income Stream
Many money experts recommend starting a rainy day fund, just in case of emergencies.
Although it may be harder, it would be better to create a rainy day income stream. This will be something that can generate a certain amount of income each year, rather than than a simple stock pile.
If you could generate a stream of income through a side project, you could keep a small portion on hand and re-invest the rest into the business.
There are many ideas of an income genereating side project:
• Start a website
• Start a business selling products online
• Develop a skill and market it
In the article, we look at things you must know about money before your 30. Hopefully this information was helpful for you.
There are a range of options.