In preparation for this article, I reached deep into the recesses of my mind to try and remember all of the best financial advice I received through the years. Funny thing is, money wasn’t a huge subject in my family.
I majored in Biology in college so I didn’t know any business or finance types. Nobody talked about money in medical school other than to complain about their lack of it. And in residency, I’m sure several of my emergency medicine attendings were geniuses; just not financial geniuses.
So my financial education wasn’t coming from those around me. Instead, I had to take the bull by the horns and figure it out myself. Now that doesn’t mean that people didn’t try and give me advice, but most of it was bad advice.
As the saying goes, “Opinions are like belly buttons, everyone has one.” Well, that’s not really how the saying goes, but it’s the G-Rated version and you get the idea.
So I thought it was important to share some of the best financial advice I’ve ever heard.
#1 Best Financial Advice – Live on less than you make
As obvious as this may seem, it isn’t necessarily easy to do. In fact, one study found that 70% of lottery winners had spent every last dime of their winnings within five years. Remarkably, lottery winners file for bankruptcy at a rate that is double that of the general public.
Whether it’s a financial windfall or your monthly salary check, you shouldn’t spend it all. Getting ahead starts with something called your savings rate. Your savings rate is the percentage of your income that you set aside as a nest egg to invest for retirement.
Statista reports that the personal savings rate in the United States has hovered between 6.0% to 8.0% annually. Shockingly, as many as 20% of Americans save nothing at all; they have what’s called a negative savings rate. Credit cards allow these people to live beyond their means. However, the cost is high-interest debt.
#2 Best Financial Advice – Credit cards are not your friend
Credit cards can be addictive. They’re convenient and they allow for immediate gratification while simultaneously delaying the pain of payment. Credit cards can be seductive as they allow one to live above his or her means.
However, payments always come due.
At that point, you can either pay it off in full or you can make a partial payment and carry revolving debt. More than 33% of Americans carry revolving credit card debt. And with an average interest rate of 16% (with many going as high as 25%) that debt compounds.
Credit cards make credit card companies richer and individual credit card holders poorer. So if you carry credit card debt, you might want to look at paying it off as soon as you can. You also might want to consider scrapping the credit cards and switching to cash.
For those that pay their credit cards in full each month, congratulations. You’re not compounding your debt at unreasonable interest rates that enrich the credit card companies. That’s great!
But studies show that people who pay with credit cards spend more than people who pay with cash. It’s not insignificant either. It’s so much easier to just swipe away than it is to part with actual cash.
So if you find yourself stuck with credit card debt that you’re not paying off each month or living above your means by not sticking with your budget, you might want to rethink your relationship with credit cards.
#3 Best Financial Advice – Make a budget and stick to it
The weight loss industry is worth $72 billion in the United States. There is the Mediterranean Diet, the Keto Diet, Weight Watchers, Jenny Craig and countless other diets.
But when it comes to weight loss, you have to burn more calories than you consume. It’s simple, but not easy. And that’s why so many advocate for calorie counting. Only when you know how many calories you consume in a day will you know if you’re on your way to losing weight.
Keep in mind that the destructive nature of overeating is similar to overspending. And counting calories is akin to budgeting.
If you’re going to be successful in living on less than you make, then budgeting is critical. But a budget is just a road map. You have to stick with it for it to be effective.
The first step to getting ahead financially is learning how much you’re spending each month. Once you understand where that money is going, then you can plan to stop the hemorrhaging by spending less, paying off high-interest debt, and saving for the future.
#4 Best Financial Advice – Pay yourself first
This gets back to the concepts of living on less than you make and prioritizing a savings rate. So when you create your budget, you’ll be allocating funds for various expenses. Try to prioritize as high of a savings rate as you can. Typically, financially savvy people save a minimum of 20% of their income.
Figure out what your savings rate is going to be and then be sure to put that amount aside as savings before you start paying any expenses. If your savings rate is lower than you want it to be, then you might want to consider cutting back on non-necessities.
You can use the extra money to pay off high interest credit cards, which can ultimately make it easier to have a higher savings rate.
#5 Best Financial Advice – Have a rainy day fund
Having and sticking to a budget is a really good idea if you want to get ahead financially. But we all know that things happen. Cars breakdown, people get sick, and houses need maintenance. Whatever the circumstance, stuff happens and you never know when you may need some extra money.
For that reason, it’s essential to have an emergency fund.
There is debate as to how much money someone should have liquid that they can tap into. The most common answer to that question, that I’ve seen, is three to six months worth of expenses. Some people say it should be as much as one year’s worth of expenses.
Perhaps the right answer depends on your job security, how much demand there is for the work you do, and the length of waiting time your disability insurance requires before it kicks in.
Either way, it’s probably prudent to have several months’ worth of expenses socked away for a rainy day before you consider investing any of your savings.
#6 Best Financial Advice – Up Your Financial Education
If you’ve done the above things right, then your savings rate should have soared. It may not have happened immediately, if you had a lot of high interest debt. But you made progress.
You’ve funded an emergency fund and you’re accumulating savings. The reason you’re doing this is so that you can invest in your retirement.
Keep in mind that the average American retires at 62 but lives to 79. And that’s just average. The U.S. has the largest number of centenarians in the world and it’s growing.
Nobody knows for sure how long they will live, but it’s prudent to plan for a long, fruitful life. And Social Security isn’t going to cut it. So you better invest for your future.
With that said, it’s important to determine just how qualified you are to make sound financial investment decisions?
The good news is that it’s not rocket science. It’s learnable and you can absolutely get money smart. And if you’re reading this article, then you’re definitely on the right track. So put the time in to learn about investing so that you can be your own best advocate and craft a diversified portfolio that matches your risk tolerance and will provide for you in the future.
#7 You can’t buy insurance when you need it
As I said earlier, “Stuff happens.” And sometimes it’s big stuff. That’s what insurance is for. But insurance needs to be in place before you need it. You can’t buy it after-the-fact.
You definitely need health insurance. And if you own a home, you should have homeowners insurance. For those with cars, auto insurance is a must.
If you have dependents and don’t have a sizeable nest egg, then you likely need term life insurance to ensure their future should you die.
Most people’s greatest financial asset is their earning potential. Imagine how much money you can earn over a thirty or forty-year career. But what if something happened that kept you from going to work? That’s what disability insurance is for. Look into it. Your financial future might depend on whether or not you have disability insurance.
#8 Don’t use debt to finance depreciating assets
In the right circumstances, debt can be useful for financing certain appreciating assets. This is especially true if the asset’s returns exceed the interest on the debt.
Done correctly, debt can finance profits. But is it a good idea to use debt to finance a loss? The answer is no. Depreciating assets, lose value by definition. When you finance them, you are magnifying that loss.
There are those that will argue that in low interest rate environments, this advice becomes less solid. They would argue that instead of paying cash for things, it would be better to finance them as long as you can invest that money and earn a rate of return greater than the interest rate on the debt.
While that is true, all investments have risk. There are no guarantees that your investments will make money let alone preserve your capital. What is guaranteed are those debt payments.
#9 – Best Financial Advice – Consider building passive income within your broader portfolio
Everybody knows what earned income is. It’s trading your time and expertise for money. It’s getting up in the morning and going to work for a paycheck. That’s how most, if not all of us, put food on the table.
Work is noble. But for those of us who have missed family gatherings, children’s games, recitals, and other important activities, it comes with a price. Work steals our most precious resource; our time.
That’s why I believe that it’s important to turn some of that earned income into recurrent passive income.
Passive income is different than earned income. It’s when you uncouple the time for money paradigm. Instead of you working for money, it’s when your money works for more money.
With passive income, you can earn money on your days off or while you’re sleeping because you don’t have to work for that money. And if you build enough stable streams of recurrent passive income, you might even be able to stop working for money altogether.
I like to think of passive income as self-insurance. Having money coming in that you don’t have to work for gives you options. Options in case you don’t love your job or have burned out. Or maybe you just want to cut back and work part time. Those things can happen if you’ve developed recurrent streams of passive income.
So whether it’s distributions, dividends, royalties, or some other form of passive income, you just might want to look into creating passive income. For me, I choose real estate. You can read more about that by downloading this free e-book:
#10 – Do your best to minimize your biggest expense
For most accredited investors, their biggest expense is taxes. And while the tax code is thousands of pages long, most of it has nothing to do with paying taxes. The bulk of the tax code is actually about how to legally avoid paying taxes.
In short, the government offers tax incentives to those that do what they want them to do. There’s a whole host of ways that you can defer or eliminate taxes. And every dollar you don’t send to the government is a dollar that can grow your wealth.
Tax breaks alone are typically not a good enough reason to invest in something. At its core, an investment should be made to make money. But if that investment also saves taxes, then all the better. So don’t be afraid to research the subject further, speak with experts, look into a tax strategy and determine what you can do to lower your tax burden. You can start by checking out his video:
Making It Work For You
I’m not a financial advisor, an insurance agent, a CPA, or an attorney. And in no way does this article or website offer legal, financial, or tax advice. Instead, this is information that I’ve found particularly helpful in getting ahead financially.
If any of it resonates with you, you should speak with the appropriate professional to make sure that it will be useful to you and your own personal situation. The fact that you’ve made it to this place in the article shows your commitment to getting wiser with your personal finances.
Congratulations and I hope to see you contributing in the accredited investors network to help us all get smarter with our money. I’d encourage you to think about and share the best financial advice you’ve ever received.