A friend of mine runs a startup that has yet to turn a profit. He’s cuts expenses, streamlines operations, maximizes efficiency… he works tirelessly to reduce the cost side of his business so it can become profitable.
That’s great, but he’s forgotten a basic principle of business. Unless spending is way out of control, it’s almost impossible to save your way to profitability. When fixed costs are high, when cash flow is poor, when labor makes up a major portion of your costs… the only way to become profitable is to increase sales.
Unfortunately, forgetting some simple truths happens to all of us, especially where our finances are concerned. We download the latest apps. We spend hours setting up a new web-based financial management system that will organize our finances.
But don’t actually help us change our behaviors.
And we lose sight of the basic keys to making, and saving, money.
In short, we make things too complicated — and in the process, we don’t see any results.
So if you’re looking for a way to build wealth and enjoy some measure of financial freedom, remember these simple truths about personal finance. And don’t say they don’t apply to your situation; while we’re all individuals, in most respects we’re basically much the same.
Which is a good thing, because it means embracing these approaches will help get you to where you want to be — and deserve to be.
1. The most important investment you make is in yourself.
You’ll get the biggest return from investing in yourself: Improving your skills, improving your connections, improving your health and fitness…
Consistently — relentlessly — investing in yourself will produce better long-term results than any other investment you can make.
And it’s the one investment outcome whose outcome you can almost totally control.
2. Work for someone else and your income is always capped.
Sure, you might get salary increases, but you will never be paid more than someone else decides you’re worth.
That’s why, in return for less freedom, less control, and less fulfillment, every day you work for someone else, your upside is always capped. And your downside is always unlimited, since at any moment someone else can take away your income.
Start a business, and your income is limited only by you.
Keep in mind you don’t have to quit your job to start a business; in fact, you probably shouldn’t. (One of the best ways to minimize your risk is to keep your full-time job while you build your foundation for success. Then you can quit.) Plus, the basics of starting a business are easy; you can do it in one day.
While the downside for entrepreneurs is also unlimited, in return, they enjoy the possibility of an unlimited financial upside — and an unlimited personal upside.
3. No one will ever care about your money (and your future) as much as you.
Especially not financial advisers. The nature of the business means they care more about making money from you, not for you.
Get help if you need it. Ask for advice. Ask for input. Enlist the aid of people smarter than you. But always — always — be the person who makes the final decisions. And who makes sure he or she truly understands why those decisions are the right ones.
Who is the best person to look out for your interests? You. Always you.
4. Borrowing money takes minutes; paying it back seemingly takes forever.
If you have good credit and sufficient income, you can borrow $100k and buy a Porsche. If you have no credit and no income, you can borrow $100 or even $200k and buy a degree. If you have the right connections, you can borrow thousands to start your own business.
Borrowing money is easy.
But then you spend years paying that money back.
Borrowing money is an investment that should always provide a return. And not just a financial return — the key return is the benefit you receive. If you’re scrambling every month to make your student loan payment on a teacher’s salary — and it will take you 20 years to pay it off — was that investment a good one? Maybe not.
Don’t think about how long it takes to get a loan; think about how long it takes to pay it back the loan. And think about the impact on your day-to-day life — or your business — for all the years it takes.
That’s the real cost of investment.
And while we’re talking about borrowing money…
5. Never borrow as much as someone will give you.
Take home mortgages: While the front-end and back-end ratios have definitely tightened, a mortgage broker will almost always lend you more than you can really afford.
As with many things in life, just because you can… doesn’t mean you should.
6. Only make investments you can explain to a 10 year-old.
(And no, “Bitcoin is the next big thing!” doesn’t count.)
As Warren Buffett says, “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
That’s also true where analyzing investments is concerned. Like a unique selling proposition (USP), if with one or two sentences you can’t explain why you want to make a certain investment… don’t make it.
7. Spend money on things and you’re left with things, not money.
And not only does the value immediately start to depreciate, so does the “joy” of the initial purchase. That cool new jacket I just had to have?
By next week, it was just a coat.
8. Failing to maxing out the employer 401(k) match is turning down free money.
Make sure you contribute whatever it takes to max out what your employer will match. Otherwise you’re saying, “Nah, I don’t want your money. You keep it.”
The same is true if you own your own business. (Especially if you’re the only employee; if you have employees you must extend them the same match level as you do yourself.)
Set up a 401(k) and match 100 percent of your contributions. That way you’re contributing pre-tax dollars — and so is your business.
As an employee you can contribute $18,500 to a 401(k) this year ($24,500 if you’re over 50), and total contributions (employer match, profit sharing) can add up to $55,000. That’s a lot of money you can sock away.
Which is yet another reason to start your own business. Even if it’s just a side hustle designed purely to help you put away more money for retirement.
9. It’s your life. Live it your way.
Some of the time it pays to consider what other people think — but not if it stands in the way of living the life you really want to live.
Don’t buy a house just to impress other people; buy the house that’s right for you. Don’t buy a car just to impress other people; buy the car that’s right for you.
Make spending choices that are right for you. Make investment choices that are right for you.
Pick your career, your school, your business — pick everything — because it’s right for you.
Not only will you make better decisions about your money and finance, you’ll also be a lot happier, because you will get to live the life you want to lead.
Which ultimately is what money is really for.