I wish someone had taught me the basics of personal finance when I was younger. But then, almost no one gets taught the basics of personal finance in America (probably not around the world either, but I can’t speak for other countries on this issue). It is not taught in schools anywhere, and most parents don’t understand it; therefore they definitely don’t teach it. You either learn from the school of hard knocks, or occasionally from a mentor that understands it.
Note that I’m not referring to “Finance Majors” in college. Wall street, large corporations, and the banking/financial industry are full of people that understand financial wealth management (think Warren Buffet). Here is the key difference:
- “Personal Finance” is about managing your money to the point that you have wealth
- What is taught in schools I call “Wealth Finance”. Wealth Finance is about managing wealth AFTER it has been created, whether via personal income or business income
If you don’t learn #1, then one of two things will happen: a) you will never become wealthy (most people), or b) if you obtain wealth via a lawsuit, inheritance, winning the lottery, landing a job that pays you a lot of money, or getting in the right business venture that takes off, you will ultimately lose it.
First, let’s define “wealthy”. Politicians love to define wealthy as a specific income level, which is far from the truth. Being wealthy in my world means the following:
You are able to NOT work (i.e. no job) for 12 months in a row or more, yet maintain your current lifestyle without liquidating hard assets.
That is why income is irrelevant.
Here is a blog about a family who spends about $35,000/year, has no debt, and is certainly wealthy : http://www.mrmoneymustache.com/
At the same time, I know many, many lawyers, doctors, business people, professional athletes, and movie stars that have a VERY high income but are not wealthy. If their income from their job stopped, they would either go bankrupt, have to sell off assets (homes, stocks, cars, property, etc) to fund their lifestyle for a short period of time, or drastically reduce their lifestyle.
Once you are wealthy, you can:
- travel to different locations in the world, broadening your life experience and learning about all cultures first hand
- quit a job that isn’t working for you without stressing about paying next month’s electric bill
- work the job that fulfills you, even if it doesn’t pay much (or anything at all)
- work on your cause (whether it is helping animals, the poor, recycling, a computer in every classroom)
- invest in businesses
- spend time with family even if you have to travel around the country (or world)
- work on your personal life passions (diet, exercise, music, art, sports, hobbies, etc)
Being wealthy is like buying time in your life. You don’t have to wait years or decades (or for many, never) to do things you want, learn what you want, and just generally enjoy life to the fullest.
Nearly everyone “wishes” to be wealthy, but they don’t really want it. If you want it, you have to learn the skills to become wealthy. The skills are not intellectually difficult (you don’t have to go to school to learn them), but they require self discipline (which is severely LACKING in our society) and they require patience. I’ll talk about these skills in a series of blog posts.
Rule # 1 – No Debt
The first rule of becoming wealthy is no debt. If you are just starting out in the age 18-22 range, it means NOT acquiring debt. If you have debt, it means getting rid of it. And, it means getting rid of it AS FAST AS POSSIBLE. Let’s discuss why.
The first reason is the most basic: if you consume more than you produce, you are a parasite. Parasites