Six Great Money Slogans
Live Within Your Means:
This saying is fairly simple to understand, but should be looked at further to really understand it fully. If you do not have the money donÃ¢â‚¬â„¢t spend it. The unfortunate trap most people over look is the use of debt to purchase items. First they will buy too much on a credit card and not have the money at the end of the month to pay off the credit card. This will lead to debt issues very quickly. The second way this catches up is with payment plans. You may pay off your credit cards every month, but people will also buy a house, a car, utilities, etc. and have a monthly payment due every month for these items. Now I am not suggesting that these are all bad things to do, but every one of them has a cost that will last for years. In some cases you may be paying for a car even after you have gotten your next car. This is clearly delaying the inevitable cost of your purchase. So when you decide that you can afford whatever it is that you are purchasing make sure that you are taking into account all of the cost not simply the initial cost.
Save For A Rainy Day:
To save for a rainy day is typically considered have an emergency fund. The standard is 3-6 months worth of income or expenses. In todayÃ¢â‚¬â„¢s economy there can be a much larger need required. I generally would not recommend that you have an emergency fund larger than 6 months worth of income. I would however recommend you go through the scenario where you are out of work for 12 months. You should look at ways you can stretch that 6 month pay into 12 months or more. This can be done with part time work, unemployment benefits, reducing expenses, or a combination of these. There are several other though process that need to go into your specific situation so you need to take a real look at your finances and determine what amount is right for your situation. One example of another solution is you may have a house that you can refinance or get an equity line on that will reduce your monthly bills or get you additional funds to help you through the rainy days.
Pay Yourself First:
Paying yourself first is a great exercise in self discipline. The idea is if you make $2,000/month than you should take $200 per month and put that away for your emergency fund or a saving/ investment account. The best way to do this is to have it taken out of your account or pay check automatically. Out of sight, out of mind. Unfortunately most people do not even save this much, and to make matters worse even if they do this it is only the first of several steps to reach your financial independence.
A Penny Saved Is A Penny Earned:
If you are spending all of your income, then you are really not earning any money for yourself. You are simply working to survive. Think of yourself like a business. If a company has their expenses equal to their income then they never make a profit. When this happens they do not stay in business very long. You have to make a profit as an individual or you will always be working just to stay alive. The housing contractorÃ¢â‚¬â„¢s version of this is a penny borrowed is a penny earned. This is based off of their business of building houses with borrowed money and profiting once it is sold. Unfortunately most contractor will go broke if they stay in business long enough with this mentality.
It Takes Money To Make Money:
There are two points I want to make about this. The first is that your money needs to be working for you to make more money. Once you have your rainy day fund and your budget in order, you need to have your money working for you. It doesnÃ¢â‚¬â„¢t matter whether you have $5,000 or $500,000, it need to be working for you. If you have $5,000 earn a 10% return you have made an additional $500 without have to work for it. This is the way you get rich. The second point is that you do not need to use your own money to make money for you. You can use your knowledge or time to add value to someone elseÃ¢â‚¬â„¢s investment and reap the rewards accordingly. This does take a little more effort but can be as rewarding as using your own money.
The Only Sure Things In Life Are Death & Taxes:
It is true we are all going to die some day, and as long as you live in a structured society you will pay taxes. The key is to limit the amount of taxes you pay. There are so many tax deferral and tax exempt options out there that we cannot cover all of them. One of the best tax exempt investments is a Roth IRA. This is funded from money that you have already paid income tax on, but as long as it is in a Roth IRA it can grow tax exempt and be used for retirement or a few other acceptable purposes. Another tax exempt investment can be municipal bonds. These are typically not taxed locally by the state to promote investments in the state, and since they are local municipalities the federal government is not allowed to tax them. These can really help high income earning individuals get a solid return and limit the tax burden. One of the most common tax deferral techniques is retirement accounts. These are typically a 401k, 403b, or IRA. They save you on taxes when you invest through them, but you will get taxed when you retire and take the money out of them. Another popular tax deferral method is through real estate investments. Real estate is allowed to be depreciated over 27.5 years or 30 year. This depreciation amount is considered an expend and directly reduces the income on the property for tax purposes. This enables the owner to receive more in income from the property than is shown on the tax return. In a lot of cases there may be no income tax due even when the property is producing income. Once the property is sold this depreciation amount will be taxed. This can be delayed using a like-kind exchange, but that is a whole different discussions.