Today’s post will be about some money lessons I have learned on my financial journey. Everyone has different life goals, backgrounds, and situations, but I figure I can share some lessons over the years for continuing down the path of financial freedom.
I mean if you follow me, you clearly are trying to grow your money 🙂
I started with a negative net worth when I first graduated college. One of the most exciting days was when I got to a net worth of $0. College loans suck!
One thing you learn is that your net worth starts to go up exponentially though if you stay consistent with saving and investing over time.
By that I mean the power of compound interest. At a certain point, your investments start to outgrow the actual deposits you are putting into your accounts!
There is the saying that compound interest is the 8th wonder of the world!
Below are some personal finance lessons that are great for those that are trying to get into the right mindset to build wealth over the long term.
Set Financial Goals
It’s always easier to work backwards. So what do you want in terms of money goals in order to reach financial freedom. Is it $1 Million or is it $10 Million?
Once you realize the end goal, then you can break down what you need to do to get there over time. Without the goal in your mind how will you be able to execute? It comes down to taking that end goal and breaking it down into manageable steps.
So something like if I save 30% of my after tax income and invest it with a 10% return while also 2% inflation for 20 years I’ll be able to reach my number. Then you can back into how much after tax investment money is needed on a yearly basis. After than you can figure out what kind of income you’ll need in order to be able to realistically save that amount of money without living down by the river.
Long story short, know what you are aiming for so you can set up a system for saving and investing.
You can use something like https://www.nerdwallet.com/investing/retirement-calculator to help.
Budgeting is the Most Important Part of Investing
Some people will tell you just make more and more money and you don’t have to worry about a budget. Well even if you make a million a year and spend 2 million a year you are going to be screwed.
It really comes down to building a habit just like anything else in life. Budgeting comes down to knowing where your money is going. If you have a budgeted amount to go towards investing you are more likely to follow through. If you blindly just say I’ll invest if there is money left over, well then you aren’t really building a habit and giving an excuse to not get started.
Because if you don’t budget there won’t be a way to effortlessly dollar cost average into investments and not get emotionally attached to those dollars you invested. Once you have your money set for living, you won’t panic when the stock market crashes. Instead you will see those crashes as great opportunities for the dollars you allotted to investing on a monthly basis for the long term.
And if you have bad debt (high interest rates), that is similar to investing but with guaranteed returns. So you can direct your savings first towards those and once those are paid off you then are free to invest and have the interest compound for you instead of against you!
This is where people will get rubbed the wrong way because not everyone has the money left over to invest because of their life situation. Unfortunately, that will always be the case that some people have it easier due to life circumstances. You do have to get to a certain income level where it’s plausible to start investing left over money.
But I think that mindset and determination can overcome those situations! I am a big believer that if someone dedicates time and gets in the right mindset there is a ton of things that can be done that don’t seem possible at first.
So whether that is increasing their income or savings rate, I think there is always a way!
Budgeting isn’t fun because it may cause you to make decisions about to cut back on spending. One huge personal trait that leads to wealth generation (slowly and predictable not the get rich quick way) is delayed gratification.
One thing I want to mention is I don’t believe either in living a miserable life. Some people say oh you should just save 90% of your income and live in the forest! Well I think budgeting for fun experiences or living your life a little is alright. Everything in moderation!
My favorite free tool is https://mint.intuit.com/ to get started with budgeting.
At some point when you get in the routine, you get excited to check your progress every month to see all the money objectives you are hitting! Budgeting is the first part of the system for becoming wealthy.
Just Get Started Investing
So for me I have been a finance nerd at heart since I was a child and loved money. I was a weirdo and would ask for money instead of things for birthday presents.
I first got interested into investing when I was in middle school. I found out about this thing called dividends and how if you would just get a check for doing nothing. I was hooked with the concept of just passive money rolling in.
In high school I dabbled in buying stocks. At the time I had no idea what the hell I was doing, but that is where everyone starts. The first lesson is to just get started.
Now it doesn’t matter if you start in high school, after graduating college, 10 years after you started your career. The scariest part of investing is taking the money you have and taking some risk to grow it over time.
I think one thing that makes it easier to take some risk is just looking at how inflation destroys your purchasing power over the years. Once you realize you lose automatically by just sitting on cash, you realize the only way to grow wealth is by putting it to work.
One big hurdle is the emotional hurdle of losing money. People hate to lose money and worry about crashes in the stock market. And while losing money isn’t fun, you realize over time that if you take an optimistic viewpoint on the economy and businesses you realize over time investing will make money.
“Short term volatility presents long term opportunities.” – Me just thinking of this quote 🙂
Think of it this way, something like the investing in index funds where you are diversified across 500 businesses in something like the S&P 500. So as long as businesses continue to grow and become more efficient overtime, their profits should follow. It’s really that simple. And it goes back to the whole time frame of the investment. As there will be times where there is a bear market and the markets trend down.
But those bear markets are the best times to buy for the long term!
I also think starting with index funds is a great way to get exposure to the stock market and then dabbling in individual stocks to test the waters with analyzing companies and trying to beat the market is a good way to manage risk.
For me, beating the market is part of the ultimate strategy game. For others they may want to be more passive as they aren’t a huge finance nerd and are okay with those average market returns!
Everyone is different with different risk tolerances and dedication to investing. At the end of the day though, you are losing to inflation by sitting on cash that is saved from budgeting. And in order to hit those long term financial goals, it’s going to be hard to hit just by saving unless you pull in a high salary already.
Make Mistakes and Learn
By starting you make mistakes. By making mistakes you learn. By learning you will become a better investor over your lifetime.
One of my first investments was blockbuster lol.
Lost a couple hundred bucks because at the time it was a penny stock and I figured to only way to make some serious money. Everyone makes mistakes along the way and so as long as you learn from those mistakes you are better off. Think of those mistakes as tuition in the school of investing.
I think this mindset is better than being afraid to make mistakes. If you are afraid to lose or make mistakes you’ll never take risk.
Get caught up in FOMO and get burned? Lesson learned to not chase returns.
Put too much money into aggressive plays and can’t stomach the volatility? Lesson learned about your risk tolerance.
The earlier you make these mistakes with less capital, you’ll thank your older self when you are playing around with more money.
Hopefully these 4 lessons revolving more around the systematic setup towards wealth generation and mindset are helpful.
When it comes to personal finance, well it’s personal. That is why with all these lessons there are no hard set rules. Like…you have to save 50% or make $150k/year. At the end of the day it is quite simple.
“Make more then you spend and invest the rest.” – Also a quote I just made up that I like 🙂