The Ultimate Personal Finance Guide
If you want to be a millionaire,
You need to understand how money works.
Money’s scary for a lot of you, but it doesn’t need to be.
Let me break it down for you in this article, where we’ll teach you how to understand:
- Budget
- Cash Flow
- Net Worth statement
- Financial rules and principles
They tell you:
- What you’re earning, spending, and investing
- Your cash inflows and outflows
- What you are worth
Net Worth
This statement will tell you when you’re a millionaire.
Your net worth is the difference between your:
- assets – what you own
- liabilities – what you owe
As Peter Drucker Said, what gets measured, gets managed.
Assets are what you own
Your assets are what you can convert into cash:
- cash
- investments
- personal home
- emergency fund
- real estate holdings
You want to increase your asset balances.
Liabilities are what you owe
Your liabilities require you to pay cash to settle them:
- car loans
- credit cards
- student debt
- home mortgage
- mortgages on real estate
Your goal is to increase productive liabilities and decrease unproductive liabilities.
Cash
Cash is the simplest asset to understand, but it also has challenges.
- easiest asset to track
- readily convertible
- simple to value
Cash, though, loses its value during inflationary times.
Investments
Your investments include:
- art
- bonds
- crypto
- equities
- real estate
- collectibles
Whatever you invest in, track:
- cost base
- market value
In your net worth statement, show investments at market value.
Personal home
Despite what many well-intentioned pundits tell you, you should include your home in your net worth.
Bottom line: you can sell your house for cash, which is the definition of an asset.
Sure, if you sell it, you’ll need to rent, that’s fine.
Emergency fund
An emergency fund is meant to cover financial surprises life will throw at you, and should be cash or highly liquid.
Set your fund to cover 3 – 6 months of your expenses.
When you increase your net worth, you can use lines of credit as your emergency fund.
Car loans
Don’t overspend on cars, especially if you can’t afford them.
If you are going to buy your car with debt, secure a low-interest rate.
Until you have sufficient net worth:
- buy used
- choose economy
- rent luxury to feel good
Credit cards
CC Pros:
- points
- convenience
- deferral of spend
CC Cons:
- interest
- overspending
- lack of visibility
If you can control yourself and your behaviors, use credit cards.
If you can’t, CUT them.
NEVER carry credit card debt.
Student debt
Student debt in America is unfair.
Leaving college with this amount of debt is crippling.
Before you start college:
- know what you want
- have a plan to achieve it
- got to the cheapest school
- take on as little debt as possible
Home mortgage
If you include your home as an asset, include the mortgage as a liability.
Your interest rate on your home mortgage will likely be your cheapest debt.
If you use leverage to invest, it will be your best source.
Mortgages on real estate
Debt is good when it’s productive.
A mortgage on real estate is productive leverage.
If your tenants’ rent covers the mortgage and property upkeep costs, then it’s good debt.
Maximize your good debt.
Minimize bad debt.
Budget
A budget doesn’t tell you that you can’t spend money,
A budget tells you how you should spend your money.
Categories you’ll focus on:
- Earnings
- Expenses
- Investments
Earnings
Earnings are your budget inflows from:
- Your job
- Side hustles
- Investment income
To improve your budget focus on this category.
While you’re limited in how much you can cut costs, you’ll never reach the full limit of your income potential.
Increase earnings
Three ways you can increase your income are:
- Get a raise
- Start a new job
- Generate side income
Start a new job
Research shows if you stay in the same job for more than two years, it costs you money.
Your manager can only give you a minimal annual raise, but you go back to the market when you start a new job.
Generate side income
A side hustle is an income you earn outside your 9 to 5.
To generate side income today, all you need is:
- desire
- an idea
- a phone
- commitment
Expenses
Your expenses can be broken into fixed and variable costs.
Fixed expenses remain consistent month to month – your rent, car payment, etc.
Variable expenses change with your behaviors: gas, eating out, food, and entertainment.
Needs versus wants
Variable expenses should be broken down into needs and wants.
Needs are non-negotiable:
- food
- clothes
- housing
Wants are what they sound like – it’s spending money on what you want.
The Big 3
The big three expenses for you are:
- transportation
- housing
- food
A certain portion of the cost is a need – the bare necessity.
The remaining amount you can control – the want.
The first step in reducing spend is to know: Need versus Want.
Remove the ego
Your ego drives your wants.
What you need:
- basic transit
- a roof over your head
- sufficient food to live life
What you want:
- a shiny new car
- the penthouse downtown
- eating out 3 nights per week
Kill your ego to reduce your spend.
Audit your spend
Look at your last six months of credit card statements and ask yourself:
- was this a need
- was it a want
- do I use it
Step 1: Understand, is it a need or want
Step 2: Learn to reduce your wants
Eliminate what isn’t necessary by recognizing it.
Productive wants
You should spend on your wants.
If you can’t enjoy life, you aren’t living, but there’s a better way.
Focus on productive wants.
If you value time and cleanliness, hire a housekeeper.
It increases your productivity and scratches the want itch.
Investments
With investments, focus on:
- Invest in you
- pay yourself first
- put your army to work
To achieve financial independence or become a millionaire, your investments matter.
Invest in you
Nothing generates a better investment than an investment in you.
Wealthy people never stop learning:
- Books
- Coaches
- Online courses
- Business teachers
Pay yourself first
Don’t: receive your pay, spend your monthly bills, and invest the rest.
Do: Invest 20% of your pay, spend what’s left.
If you leave investing to the end, it will be treated as such.
Make your investment a priority. Do it first. Live off the rest.
Put your army to work
Think of every dollar you get as a soldier.
Just as you wouldn’t waste a soldier, don’t waste a dollar.
Target income-producing assets:
- real estate
- dividend stocks
Once your soldiers start compounding, the game changes.
50 – 30 – 20
The average American household saves 10%.
Some have proposed the following:
- 50% – needs
- 30% – wants
- 20% – investing
To be a millionaire, flip the script:
- 50% – investment
- 30% – needs
- 20% – wants
The closer you can get to this, the better.
Cash flow
Your cash flow is your income minus your expenses and should be tracked monthly.
Break it down into:
- inflows
- outflows
Inflows
Cash inflows are cash you’ll receive from:
- your job
- side hustles
- investments
The key is the cash, not the earnings.
Many people have non-cash earnings, such as:
- stock options
- deferred bonuses
- investment appreciation
Pay check to pay check
If your income doesn’t exceed your expenses in a given month, you’ll need savings or credit.
There are three things you can do:
- Increase cash inflows
- Defer your cash payments
- Reduce your cash outflows
Outflows
Cash outflows are cash you pay for variable and fixed expenses.
They may also include investments.
When you invest, it generally requires a cash payment or outflow.
Reduce your cash outflows
To reduce cash outflows, ask yourself:
- Do I need this
- Will I use it
If you don’t need it and won’t use it, don’t spend on it.
Pay off high-interest credit cards and debts.
Defer your cash payments
Delaying cash outflows maximizes each dollar in your cash flow.
Pay your bills on time, but not before they’re due.
Negotiate payment terms with suppliers or people you do business with.
Seasonal workers
If you’re a seasonal worker, cash flow’s critical.
You’ll receive money during certain periods of the year, but pay costs all year.
You need to learn to save extra cash that you’ll use during lean months.
Credit card hacks
If you have strong cash inflows and are disciplined,
you’ll benefit from using credit cards.
You’ll pay expenses one month and not owe money until your credit card is due, and you’ll earn points.
Time major purchases
If you receive bonuses during the year and intend to make large purchases, align the inflow with the outflow.
Some will put the purchase on credit, knowing they can pay it in time; however, they’ll incur carrying costs.
Instead, defer the purchase.
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