💰Money Mastery & Wealth Building [Issue #17: Week 27, July 2023]
😲Are You Keeping Too Much Money in Your Checking Account?, What is the FIRE Movement?, How to Use Credit Cards to your Advantage, How Much Money Should You Have in Your Emergency Fund?, and more!
👋 Good afternoon finance fanatics and future millionaires, I hope you’re enjoying your weekend! Thank you for subscribing to our weekly newsletter, with the goal to help you make better-informed financial decisions and build more wealth.
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🎉In this week’s issue you’ll improve your money psychology by learning:
This Week's 5 Money Lessons:
1) Why is Personal Finance Important?💸
2) Are You Keeping Too Much Money in Your Checking Account?💵
3) How to Retire Early and Live Your Best Life: The FIRE Movement🌴
4) How to Use Credit Cards to Your Advantage💳
5) How Much Money Should You Have in Your Emergency Fund?💰
This Week's Premium Insights:
6) Finance Book Club: Weekly Book Review 📖
7) Financial Tip of the Week 🎯
8) Finance Quote of the Week (and its meaning) 🧠
9) Finance Chart of the Week (and its importance) 📊
10) Finance Stat of the Week (and its significance) 📊
11) Did You Know? 🧠1) Why is Personal Finance Important?💸
Do you know what personal finance is? Personal finance is the management of your money and it includes everything from budgeting to saving, investing, retirement, banking, mortgages, tax, managing risk, insurance, protecting your assets, and estate planning.
Educating yourself about personal finance is important, because not many schools teach it. Personal finance knowledge will you to make better-informed choices in life. It will allow you to control your financial stress, manage surprise expenses, set you up for a debt-free life, and help you retire.
By mastering personal finances, you're not just handling money - you're shaping your future. There are many things you can do to improve your personal finance. Here are a few tips:
Create a budget: This will help you track your income and expenses so you can see where your money is going. Start by understanding your income and expenses, then create a budget. Manage your income and expenses wisely or risk falling into debt.
Pay down high-interest debt: High-interest consumer debt can be a major drain on your finances. Make a plan to pay off your debt as quickly as possible.
Start saving and invest your money: Even if you can only save a small amount each month, it will add up over time. Investing can help your money grow over time. There are many different investment options available, so you can find one that fits your risk tolerance and financial goals. Investing may come with short-term risks, but with knowledge, you can navigate for the long term.
Protect your assets: Always protect yourself and your assets by having a safety net and insurance. Protect yourself from unexpected events such as illness or accidents, this includes things such as getting life insurance, disability insurance, and homeowners insurance.
Understanding and managing your personal finances is a fundamental life skill. It's not just about money, it's about financial independence and freedom. Every decision we make, from daily purchases to big-ticket investments, shapes our financial future. Lack of discipline can lead to debt and stress.
2) Are You Keeping Too Much Money in Your Checking Account?💵
A good rule of thumb is to keep at least one month's worth of expenses in your checking account (and two months' worth if your income or expenses are unpredictable).
Don't hoard cash in your checking account since a checking account earns little to no interest. If you have more than two months' worth of expenses in your checking account, you should consider moving the excess to a HYSA (high-yield savings account).
The amount of money you should keep in your checking account depends on your individual circumstances. I believe that the best way to set a healthy checking account balance is to start by tracking your spending for a few months. This will give you a good idea of how much money you need to cover your monthly expenses. Once you know how much you need, you can adjust your balance accordingly. The right balance can help you avoid fees, handle emergencies, and achieve your financial goals.
Remember, too much cash in your checking account can cost you in lost opportunities for growth.
3) How to Retire Early and Live Your Best Life: The FIRE Movement🌴
You don't have to wait until you're 65 to retire, the FIRE movement is a movement that aims to help people achieve financial independence and retire early. FIRE is an acronym that stands for “Financial Independence, Retire Early”.
There are many benefits to retiring early, for one, you will have more time to do the things you love. You will also have more time to spend with your family and friends. Additionally, you will have more time to travel and explore the world.
The basic idea is to save and invest a large portion of your income so that you can live off of your investments in retirement. There are four main components to the FIRE movement:
Cutting expenses and mindful spending: The first step is to reduce your expenses. This means living below your means and finding ways to save money on things like housing, transportation, and food. Cut expenses on things that don’t add significant value to your life. The less you spend, the more money you can save and invest.
Increasing income: Find ways to increase your income. Some popular and common ways to increase your income is as starting a side hustle, starting a business, applying for a higher-paying job, or negotiating a promotion at work.
Investing: The third step is to invest your money wisely. This means investing in assets that have the potential to grow over time. The earlier you start investing, the more time your money has to grow. The S&P 500 has historically given an average return of 10% per year since 1926.
Be patient: It takes time to achieve financial independence and retire early. Small, sustainable changes are better than drastic ones that you can’t maintain.
Financial independence often means having 25 times your annual expenses or 300 times your monthly costs saved. This is based on the 4% rule: if your portfolio is diversified, you can take out 4% every year without running out in a typical 30-year retirement.
4) How to Use Credit Cards to Your Advantage 💳
Credit cards can be a great financial tool if used responsibly. However, it is important to be aware of the potential drawbacks before you sign up for a card.
Credit cards can be a great way to build your credit history, earn rewards, and protect yourself from fraud.
However, it is important to use them responsibly to avoid high-interest rates, late fees, and the temptation to overspend.
Only use credit cards that you can afford to pay off in full each month and on time. Don't use credit cards to finance unnecessary purchases. Here are 7 benefits of credit cards:
Build credit history: Credit cards can help you build your credit history by reporting your on-time payments to the credit bureaus. This can make it easier to qualify for loans and other forms of credit in the future.
Earn rewards: Many credit cards offer rewards, such as cashback, points, or miles, for using your card. These rewards can be redeemed for travel, merchandise, or statement credits.
Protect against fraud: Credit cards offer more fraud protection than debit cards. If your credit card is lost or stolen, you are typically not liable for unauthorized charges. This is a significant advantage over debit cards, where stolen funds are deducted directly from your account.
Purchase protection and extended warranties: Credit cards offer purchase protection and extended warranties on items bought with them. If a product turns out to be defective or even gets lost or stolen, your credit card company can reimburse you.
Balance transfers: Many credit cards allow you to transfer and consolidate debt from other cards or loans, often offering a 0% introductory rate which can save you money on interest charges.
Convenience: Credit cards are a convenient way to pay for purchases. You don't have to carry cash or checks, and you can make purchases online or over the phone.
Track your spending: Credit card statements can help you track your spending. This can be helpful for budgeting and managing your finances.
Here are 4 disadvantages of credit cards:
High-interest rates: Credit cards typically have high-interest rates. This means that if you carry a balance on your card, you will be charged a lot of interest.
Late fees and penalties: If you do not pay your credit card bill on time, you may be charged late fees and penalties. These fees can add up quickly.
Credit score damage: If you miss payments or default on your credit card debt, it can significantly harm your credit score. A poor credit score can make it more difficult for you to obtain loans, rent an apartment, or even get a job in some cases.
The temptation to overspend: Credit cards can make it easy to overspend. If you are not careful, you may spend more money than you can afford.
If you do not have a good credit history, you may want to start with a secured credit card. This type of card requires you to make a deposit, which will be used to cover your purchases if you do not pay your bill on time. Once you have built up your credit history, you can then apply for a regular credit card.
5) How Much Money Should You Have in Your Emergency Fund?💰
An emergency fund is an essential part of financial planning which can help you cover unexpected expenses and avoid debt. It’s important to have an emergency fund because it’s a financial cushion against unpredictable troubles, such as medical problems, job loss, and sudden home or car repairs.
Most people don't save enough for emergencies. If you don't have an emergency fund, you may have to use credit cards or other high-interest debt to cover unexpected expenses. This can lead to financial hardship and make it difficult to get out of debt.
Many financial experts recommend saving 3-6 months of expenses. You can start by tracking your spending to determine how much you need to save each month. Then you can set a specific goal and make a plan to reach it. Lastly, automate your savings so you don't have to think about it.
An emergency fund can give you peace of mind knowing that you're prepared for unexpected expenses. A good starting point is to aim for a fund that can cover 3-6 months' worth of expenses. If your income is stable and predictable, you may not need as much. But if you're a freelancer, self-employed, or have an irregular income, aim for the higher side of this range.
Unexpected expenses happen, and they are often larger than we anticipate, so having an emergency fund is one of the best ways to protect yourself from financial hardship.
🔒Premium Insights:
6) Finance Book Review of the Week📖
"The Millionaire Next Door" by Thomas J. Stanley is a book that challenges the stereotype of what a millionaire looks like. The book is based on a study of millionaires in the United States, and found that most millionaires are not flashy or extravagant, they are typically middle-class people who live below their means and save and invest their money wisely.
The book also provides many insights into how these individuals accumulate wealth and explains how millionaires live frugally and invest their money in assets such as stocks and real estate. They prioritize saving over spending, and investing over indulging. They tend to focus on financial independence over social status, avoid luxury items, and often own their own businesses. The book also explains how to avoid common mistakes that can lead to financial ruin, and identifies 7 key traits that are common among millionaires:
They are self-made. Most millionaires did not inherit their wealth. They earned it through hard work and determination.
They live below their means. Millionaires are not big spenders. They drive modest cars, live in average homes, and eat at chain restaurants.
They are frugal. Millionaires are careful with their money. They save and invest their money wisely, and they avoid debt.
They are educated. Most millionaires have at least a college degree.
They are business owners. Many millionaires are self-employed or own their own businesses.
They are risk-averse. Millionaires are not gamblers. They invest their money in safe, conservative investments.
They are patient. Millionaires understand that it takes time to build wealth. They are patient and persistent in their financial goals.
The book challenges our idea of what a millionaire looks like. It's not about the outward display of wealth, but the accumulation of assets. This reminds us that flashy lifestyles often lead to debt, not wealth.
7) Financial Tip of the Week🎯
If you own a business, you can hire your children and pay them up to $13,850 per year tax-free. This is a great way to save money on taxes and help your children build wealth. You can then invest their salary in a tax-free Roth IRA, which will allow their money to grow tax-free over time.
To be eligible for this tax benefit, your children must perform actual work for your business and be paid an age-appropriate reasonable wage. You should also track the hours worked and create a contract detailing the responsibilities. Here are some of the benefits of hiring your children for your business and investing their salary in a Roth IRA:
You can save money on taxes. The money you pay your children is tax-deductible, and their earnings are not subject to income tax.
You can help your children build wealth. The money your children earn can be invested in a Roth IRA, which will allow their money to grow tax-free over time.
You can teach your children valuable skills. Working for your business will teach your children about budgeting, saving, and investing.
Here are some of the things you need to keep in mind when hiring your children for your business:
Your children must perform actual work for your business. The work they do must be age-appropriate and reasonable.
You must track the hours worked. You will need to keep track of the hours your children work so that you can calculate their wages correctly.
You must create a contract detailing the responsibilities. The contract should outline the work your children will be doing and the wages they will be paid.
You must pay your children an age-appropriate reasonable wage. The wage you pay your children must be fair and reasonable for the work they are doing.
If you are considering hiring your children for your business, I encourage you to do your research and consult with a tax professional to make sure you are following all the rules. This can be a great way to save money on taxes, help your children build wealth, and teach them valuable skills.
8) Finance Quote of the Week 🧠
“Wealth is not about having a lot of money; it’s about having a lot of options.”
—Chris Rock
My take: In this quote, Chris Rock is making the point that wealth is not just about having a large bank balance, it’s also about having the freedom to choose what you want to do with your life. True wealth is about having the freedom to choose your own path, to pursue your own dreams, and to live the life you want to live. Wealth gives you the ability to have more options in life, such as the option to travel, start a business, or retire early. In the big picture, this quote highlights the importance of financial freedom.
9) Finance Chart of the Week📊
According to a recent study, Americans need $1.3 million to retire comfortably, but most don’t have enough saved. The average savings is $90,000. This means that many Americans are not prepared for retirement and may struggle financially in their later years.
This highlights the importance of early and adequate retirement planning. It serves as a wake-up call to those under-prepared for retirement and reinforces the need for comprehensive financial planning.
There are a number of reasons why Americans are so under-saved for retirement. One reason is that many people simply don't start saving early enough. It’s important to start saving for retirement as early as possible. Even small contributions can add up over time. It’s also important to have a plan for how you will save and invest your money, this includes setting up a 401(k) or IRA account.
10) Finance Stat of the Week📊
UBS reports that the production of cars is outpacing sales by 6%, this leaves about 5 million cars just sitting around, unsold. The global automotive industry is facing an oversupply of vehicles, which is leading to manufacturers slashing prices. Data shows that vehicle prices have fallen for 3 straight months.
This trend is likely to continue in the coming months, as manufacturers try to clear out their inventory. The drop in car prices is good news for consumers, who will be able to find great deals on new cars.
In the big picture, this highlights the importance of supply and demand in the economy. When there is an oversupply of goods, prices tend to fall.
11) Did You know? 🧠
In 1977, Apple (AAPL) was valued at only $3 Million, and this week it became the first company worth over $3 Trillion. Apple is one of the most successful companies in the World. This incredible increase in Apple's valuation underscores the transformative power of innovation and technology in our modern economy.
Apple’s growth story is a testament to the power of constant innovation, strong branding, and consumer-centric products. Apple has built a strong brand, the company is synonymous with quality and innovation. This has allowed Apple to charge premium prices for its products. Apple has a strong portfolio of products, a loyal customer base, and a culture of innovation. The company is well-positioned for continued growth.
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A great stuff on personal finance management.