I want to talk to you about something I never learned in college. Personal finances.
Oddly enough, I did take a personal finance class in college but either it didn’t stick, or it missed the mark because I am just now learning how my money actually works.
I thought it would be well worth sharing my newly found knowledge with you.
Does this story sound familiar?
You got through high school fairly easy. You studied hard for the SAT and got a good score. You applied to top colleges in the country as well as your local state ran college. You take out student loans, get a 4 year degree, and land your first job. You get married, cram yourself into an apartment, find that living with two salaries is awesome and you have extra money laying around.
You save that money and then you…
This is where things get interesting for young people
For the first time in your life, you have discretionary income and money you can “invest”.
So what do you do?
Most people will save that extra money and buy their first house.
After all, a house is an asset…right?
Perhaps yes, perhaps not.
It depends on how you view your money.
I recently started reading more about real estate investing and personal finance and found a book that does an excellent job of explaining the difference in views on money for middle-class people and rich people.
Robert Kiyosaki’s Rich Dad Poor Dad is all about how to let your money work for you instead of you working for money.
The basic premise of the book is understand what is an asset and what is a liability.
I strongly recommend you read this book if you want more insight into what these are in more detail.
As I was reading through Rich Dad Poor Dad I had a lightbulb moment.
In the book Kiyosaki has a simple diagram that I have recreated below, and I wanted to take a minute to explain the power behind it.
When you think about YOUR money it usually falls into buckets like this.
- Income – working for another company, making them rich and helping them reach their financial goals.
- Taxes – helping the government stay rich and hoping they take care of you in the end.
- Mortgage – helping banks stay rich by locking up a good chunk of change for 30+ years.
Do you see a missing bucket?
Where do you put money that works for you?
This was a big eye opener for me. I realized that rich people have a 4th bucket that most of us don’t have.
Kiyosaki breaks down the difference between a poor person, a wealthy person, and a rich person.
I think it’s about high time we get some examples up in here.
A poor person who makes $2,500 per month and has bills that amount to $2,800 per month. They must rely on credit and other methods to make a living.
A wealthy person makes $2,500 per month and has bills that amount to $2,500 per month. They have generated enough assets to offset their expenses (more on this in a minute).
A rich person makes $2,500 per month and has bills that amount to $2,000 per month. They have assets that pay for their expenses and leave them money to reinvest in more assets.
Of course this is overly simplistic
But what I learned from these examples is most people are caught in the rat race for a couple reasons.
- When they make more money, they take on more expenses (think buying a bigger house).
- When they have extra money they spend it on things that are not assets (things like new clothes).
- They think that more money will mean they will become rich.
- They don’t know how to make money work for them passively.
The whole idea of being rich is that,
- You don’t need to rely on a salary to pay your expenses.
- You are constantly reinvesting money.
- You look for opportunities where others play it safe.
So back to buying that first house
You need a place to live.
Renting your entire life is not a good idea.
So what are you left with?
The answer is simple: live below your means.
Find a house that doesn’t tie up all of your money for 30+ years, isn’t your only investment, and leaves you enough money to invest in other assets.
What those other assets are up to you.
This may be simple and common knowledge to some, but I don’t remember learning any of this in college.
I have recently started thinking about ways to build assets aside from my salary.
Unless you work for the government, job security is always a fear that most people deal with.
Financial freedom can come in many ways for the savvy investor.
But the only people who will reach financial freedom are those who understand how money works and more importantly how money can work for them.