7 Basic Money Rules You Need To Know
Build your financial freedom, start today.
The Road to Financial Freedom
About 50% of Americans are living pay check to pay check. In Israel, it is also not looking great: According to research from the Central Bureau of Statistics (based on data from 2018), 22% of households in Israel reported having an overdraft in 10 or more months in the past year.
The first step in the path of financial freedom is- Financial Stability= being able to comfortably pay off your monthly expenses. Point B in the path Is Financial independence= your necessities and current standard of living are not put under threat, even if you never work again. Complete Financial freedom can be defined when your “dream lifestyle” is supported, even if you never work again. (Point C)
When have you arrived at financial independence?
Calculate roughly: 25 times your annual expenses. It may mean saving up a million dollars or more. It could be years or decades away. In this article we will focus on arriving from point A to point B, and arriving as soon as possible.
Does money make us happy?
Some say the Four Pillars of a Good Life are Health, Wealth, Love and Happiness. If you have money issues and stress, a major pillar of your life is harmed.
According to Kahenman and Deaton, money can buy happiness, up to a point. They find “Emotional well being” rises logarithmically, and only up to a point of about $75,000 income per year.
How to spend your money
While very personal, research shows there are ways to spend that for most people will make them happier-
- More experiences vs material goods.
- Use money to benefit others. Donate.
- Buy time for yourself- buy your way out of things you dislike doing.
Perchik: “Money is the world’s curse.”
Tevye: “May the Lord smite me with it. And may I never recover.”
~Fiddler on the Roof
Financial Freedom is mostly a Mindset-
Even if you are still years away from obtaining the “mathematical number” of financial independence, you can and should make choices that make you happy. Make the most out of your life immediately. With a financially free mindset, money no longer drives your decisions. You are driven rather by your passions and values.
We want to arrive at financial independence and should strive towards this goal (read rest of this blog post ;) ). This doesn’t mean that we need to suffer- for example by working an insufferable, meaningless job to us.
Even after reaching financial independence, you still may not be happy. In order to be happy when you arrive at financial freedom, you need to discover what you value and are passionate about and what makes you happy. Learn how to spend your time and money in alignment with your values. Living the life that you want to live is achievable well before you reach actual financial independence.
Of course someone who is living pay check to paycheck (before point A), is less likely to have the capability and means to seek their ultimate true purpose. If you can’t make ends meet, you are probably focused on the money aspect over the fulfillment of your job.
Ways to make money
- Salaried employee- Trading your time for money.
- Start a full time business —typical business ideas are rental/licensing system, licensing, distribution system (example amazon), software system, content system. You want to make sure your business provides a real value.
- Side hustle — Add revenue streams.
Most millionaires either worked at a job that payed well or owned a small business. They lived beneath their means and got rich slowly by investing at least 15%, becoming millionaires when they are in their 50’s or 60’s. The business route might be a faster one to becoming a millionaire/financially independent, especially with a business that can scale- either magnitude of people or small amount of people but high impact.
With the FIRE retirement movement, you don’t retire/become a millionaire in your 50’s or 60's. By maximizing your savings rate, along with aggressive investments you can arrive at the goal of financial independence (~25 times annual living expenses) in your 30’s and 40’s. (more about this movement below)
“If millions seek you, you will be paid millions.”
~ M.J. DeMarco, The Millionaire Fastlane
Increase your income
Many people don’t have a savings problem, they have an income problem. When you’re able to grow your income, it’s much easier to save.
- Ask for the highest possible wage when you first start.
- Make sure to ask for appropriate increases in salary.
- Side hustle/freelance if you are able to do this. (Without selling your soul)
Save as much as you can —
Know your savings percentage —
The absolute most important financial figure to tell a person’s financial situation is his saving rate=monthly savings/monthly income. For example, if I make $10,000 a month and save $4,000, my savings rate is 40%.
With F.I.R.E (=Financial Independence, Retire Early) you save an invest aggressively, (at least half your income) so you can retire in your 30’s or 40’s.
This number is important in determining the # of years before your can arrive at financial independence-
For example, if my savings rate is 75%, my expenses are 25%. For every 1 month I work, I am able to “save” 3 months of living expense; 4 Months of work- will yield me 12 months = 1 year of living expenses. 120 months = 10 years of work, I am able to save ~30 years(>25) my annual yearly living expenses. Meaning in less than 10 years, we already arrived at financial independence. If your salary is low, this may take more time, but don’t let it discourage you. Most millionaires invested for an average 28 years before arriving at their target. By increasing your saving percentage as much as you can, the earlier you will get there.
Focus on the big wins-
Saving is not really about clipping coupons and not drinking that daily cup of coffee from Starbucks. Focus on the big wins- what are your major costs? Housing? Focus on the main areas in which you can save.
Second hand —
- Shop at second-hand clothing stores especially for children.
- Second-hand furniture.
- Buy good used cars. You’ll save thousands of dollars.
Be wary of life style inflation-
Many times people as they get bigger jobs, tend to inflate their lifestyle. They buy a bigger home, better and more cars etc.. This is causing them to get sucked into a lifestyle that can be harder to keep up and further their financial independence.
Learn how to invest your money
Basics
- If you have money, the worst thing you can do, is to let your money sit and not work for you.
- Don’t invest if you are in debt (excluding perhaps mortgage), or if you will need the money in the next 5 years.
- Leave enough buffer money for ~6 months.
- After investing don’t follow the news too much (so not to stress too much), just let the compound god do his magic :)
- Diversify. Structure your portfolio well. Generally prefer index funds over single stocks.
- Be patient and get rich.
- Try to lower investment fees, these can make a big difference in your portfolio returns in the long run.
- Educate yourself via books, blogs, friends and videos.
Sources- Blog post financial independence vs financial freedom, “The psychology of Money” (Morgan Housel), How to master the game of money (Tony Robbins), Israeli Blogger “Hasolidit”, Data review — happiness and money
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