Most of us could stand to have more money. Living is expensive, and it only seems to get more expensive. If you want to get your finances under control and working for you, it's pretty doable. You simply need to learn a few things along the way. This is a starter guide to give you some invaluable money tips to help anyone called a modern man.
It's all about interest
Everyone talks about investing, and the reason for that is that investments can grow at a rate of compounded interest. If you remember math class, compounded interest is powerful. Every time your investments grow, they start growing even faster. There is no amount of work you can do that will ever catch up to compounded interest. Every day you put off investing, you lower the total amount of money you can make through compound interest.
That all sounds great, but compounding interest can also be an enemy. Credit cards and debt also contain compounding interest. When you're trying to improve your finances, you want to look at all of your debt. Anything with an interest rate above eight percent should be paid aggressively before you worry about investing. For debt below five percent, it's better to make your scheduled payments and put extra money into your investments.
There's a reason for this. The S&P 500 has a historical growth rate of about 8 percent each year. So, if you're paying down a 2.5-percent loan ahead of schedule, you're wasting money. Eight is bigger than 2.5, so investment in an S&P 500 index fund would grow faster than you can save money on low-interest loans (as long as you don't incur late fees or penalties).
For debt between 5 and 8 percent, things are a little trickier. Investments might typically average 8 percent, but there will be down cycles, and lean years, so they won't always do that well. You have to gauge whether it's better to pay the debt or invest. For small debts, you can clear them quickly and get rid of a monthly payment. That makes the choice a little easier. Any monthly payment you eliminate is money in your pocket that can go into suitable investments.
For more significant debts, you can try to get a few months ahead in the payment cycle. That gives you breathing room and a little more freedom to invest along the way.
Strive for passive income
Getting interest on your side sounds great, but it's not a solid goal. How much money do you need in your investment portfolio? There's no definite answer to that, and anyone who gives you a number is missing the point.
The real goal is to have passive income. If your investments make enough money to cover all of your bills, life gets a lot easier — financially speaking. To earn passive income, you have to think about investing a little differently. You can't just pour everything into your 401(k) and assume it will all work out.
Some investments generate passive income better than others. Primarily, those are real estate, stocks (including index funds), and direct business lending. If you own real estate, you can lease it. That's money in your pocket every month. Stock investments can include dividends, which give you money without requiring you to sell the stock. That's better for taxes (which is a can of worms worthy of its own post), and it's regular money that you can put to use. Likewise, if you can invest in a business, you can own part of the profits. As long as the business does well, it's providing you with regular income.
Investing in this way requires a lot of learning. You need to know how to get into these investments without too much risk. It's too much to fit here, so commit to the idea of studying investments regularly. Until you get to that point, you can put all of your investment money in safe things like a 401(k) or index funds.
Right now, it might feel like you have to choose between compounding interest and passive income, but that's not the case. Interest effectively works like passive income for you. The real goal is to prioritize investments that grow on their own. You want a mix of things that build into a giant nest egg and things that produce spendable cash right now. That's what diversification is really about.
How to find extra money
Ok. You're convinced that investing is good, but where are you supposed to find the money? Most people who don't invest are in that boat because they don't have extra cash lying around. If you're in that camp, you need more money, and there are two ways to go about it. The first is annoying, but it's also kind of easy. You just have to make a budget.
Don't guess about how much you're spending. Right down every single expense — including every random purchase you make — for a whole month. Once you track your spending, you'll see where all of your money goes. Every time someone does this, they're surprised by something that eats up more money than expected. There's your opportunity for savings. You don't have to eliminate things you like, but cutting back a little frees up money that you can invest.
Looking at monthly bills helps a lot, too. Any monthly spending that you can get rid of suddenly becomes a regular investment, and that's a fast way to grow your nest egg. If you have a credit card with a small balance, kill that balance, and the money that used to go to payments can now go into an investment that makes you more money. It's a nice snowball.
You can also make more money; this sounds exhausting, and it can be, but it doesn't have to be as bad as you assume. If you can make $200 more a month, that's enough to get the snowball rolling, and you don't need an extra job to do this (although that works too). Browse the internet for side gig ideas. You can take on freelance gigs, tutor people, or go any number of ways to make more money. If you can monetize a hobby you love, you're putting extra money in your pocket, even at a low rate.
The point is to invest 1000 percent of your side gig money to get your passive income started.
Stay grounded along the way
With all of this talk of growing investments and financial snowballs, it's easy to get carried away. You can get stars in your eyes and think about how you'll be a millionaire by this time next year. That's a good way to burn out and fail at improving your finances. You have to stay grounded and think about realistic goals. What costs can you cut without being miserable? What can you do to increase your income that doesn't drive you into the ground? These are the ways you find incremental success, and because you're using compounding interest to your benefit, incremental success grows into massive success over time.