You are made to want what you do not need. You are then given the opportunity to go into debt to get the things that we are induced to wanting but we do not really need. Once you get into debt, the people who have given you the debt take charge of your lives, time and money and then you are stuck in this prison of living your life paying off debt. The people who make us do these things are the government, bank and the big businesses. If you fall into this trap, you are financially stupid. Will you live in debt or will you live free?
The First Rule of Finance is to live within your means by spending no more than 80% of your take-home pay.
When you follow the above rule, you do not get into debt when you buy things. You save up for them. Most of the joy of buying is anticipation. If you get into debt whenever you want to buy something, you have lost the joy of anticipation. There is nothing to look forward to anymore. You also get other benefits when you save before you buy:
- The money you save will generate interest until the day you use it.
- By the time you have saved enough for the object of your desire, there will probably be a newer and better model available for less.
- You will really own the thing when you actually buy it; when you take debt, the person who has given the debt actually owns it and it is only yours unless you pay it back.
- You will never suffer buyer’s remorse because your purchases will be carefully planned and not be made on whims that happen on the spur of the moment.
If everybody lives this way, then this debt based economy that we have will gradually die. Companies will start making things that we truly want. The things that they make will be affordable and last for a long time. And the economy will truly grow and people will truly become wealthy. There will be real growth of all the people in the world and not some people alone. Isn’t this what we all really want? Then one of the things that each one of us can do is to not to get into debt. Save and buy what you really want.
The serial killers of financial lives are cars, credit cards and castles:
1. Credit cards: Banks make money out of credit cards when we carry a balance and pay interest and late fees. If we did not do that banks will not earn a lot of money out of the credit cards. 80% of the money made from credit cards is from interest payments and late fees and 20% in fees paid by merchants who accept the cards. The way to properly use a credit card is to use a no-fee credit card and pay off the balance in full every month and if you cannot do this then do not use a credit card and use a debit card instead.
2. Cars: Cars can eat up a lot of money if you are not careful. To prevent this from happening follow these rules:
- Don’t finance when you are buying an automobile. Then you will really own the automobile.
- The best way to avoid finance charges and keep taxes, registration, insurance and maintenance costs low is to pay cash for cars that are two or three years old. Vehicles do not change that much from year to year. Cars that are two to three years old are exactly as safe as new cars and will cost 20-40% less.
- If you want to finance your first car for some odd reason you believe( like new cars are safer), keep the payment under 10% of your take home pay and you should do it for not more than a single 3 year period. You will do this only once for your entire life.
- Buy the cheapest gasoline that does not cause your car to knock.
- Change oil according to manufacturer rather than every 3000 miles( many can go for 5000-7000 miles without a change)
- Go by the factory’s maintenance schedule rather than the dealer’s.
- Find a reliable independent mechanic near your area and be on good terms with him and you will save a lot of money.
- Learn to replace the windshield wipers, learn to change the air filter after every other oil change, and keep your tyres properly inflated with a monthly pressure check.
3. Castles: By castles we mean houses. You can either rent or buy a house. Things that you can do to not be financially stupid when doing either are:
- Renting can often make sense because of many reasons. You can get a lot more space for the same amount of money, you do not have maintanence duties, taxes or expenses and it is easier to pack up and move somewhere.
- Spend no more than a fifth of your take-home pay for renting. So if you take home $20000, you can spend 1/5th or 20% of this, which is equal to $4000. This is equal to a quarter(25%) of your spending limit(80% of your take-home pay).
- When you buy a house, put 20% down-payment. This will help you get around private mortgage insurance( PMI ). Keep your total monthly payment: PITI= principal, interest, taxes(property) and insurance to 30-40% of your take home pay. So if you take home $20000, you can spend upto 40% of $20000, which is $8000 on your total monthly payment. Use 30 year fixed rates when you calculate the interest or as long-term fixed rates that you can get.
The government, the banks, and the big businesses are all hand in glove with each other. They scratch each other’s back in monetary ways and in a lot of other ways as well. There are always concerned with more money for themselves and less money for others. Therefore they engage in policies to make healthcare profitable, to sell oil to make money, to finance wars so that military spending can be kept up and receive bailout money from the Treasury rather than let failed companies fail. They inflate the money supply to reduce the value of savings, raise prices and encourage borrowing and spending. They do not want us to enjoy a stable money supply so savings retain value over time, prices don’t rise, and debt is less tempting.
The governments, the banks and the big businesses will continue to do this because this system works for them. They can use the people to make more money for themselves. But it does not work for us. Therefore we should not expect them to take care of us. We should take care of ourselves.
The money that we earn goes into taxes, into essential expenses not provided by taxes and the money that we truly have. Taxes are often misspent on bailouts, wars and the like. Health care, education is all not provided by the government. So we only get a portion of the money we actually make. It is therefore important to use this well. Your lifestyle depends on what you do with the money you make than how much money you make. Anyone can live a financially free life.
The first steps to this financially free life are:
- First rule of finance: do not spend more than 80% of your take-home pay.
- Never carry a credit card balance.
- Pay cash for your vehicles and never finance for them.
- Put at least 20% downpayment on your house and keep the mortgage payments to less than 40% of your take-home pay.
Investing comes later. You have to first master the basics before tackling complex things. ABCs are more important than getting a PhD.
notes from the book ” Financially stupid people are everywhere: Don’t be one of them by Jason Kelly”