The Secret to Personal Finances

Once you understand the secret to personal finance, you will look at the world differently.  Financially independent people learn the secret early and continue to use it throughout their life.  Notice how I don't use the adjectives "rich" or "wealthy" people.  Just because you are rich or wealthy doesn't mean you are financially independent.  Financially independent means you have the means to live within your means and self-sustain at current income levels for long periods of time.  The secret to personal finances is understanding RETURN.

I remember being in my early twenties and becoming debt free and feeling like I was on top of the world.  After the excitement wore off, I realized that I still wasn't financially independent.  It is then that I realized that debt used correctly, also known as leverage, can RETURN you more money than being debt free.  Consider acceptable levels of student loan debt, a house loan or investment debt. Financially independent people utilize debt to get more RETURN on their money than debt-free people do.

Anytime someone asks me for financial advice I look at the maximum RETURN on every dollar they are asking me about.  Some people automatically assume that I will recommend paying off any debt before doing anything else and then are surprised when that's not always the case.  For example, you can buy a stock paying dividends at 3% or a 30-year bond for 3.6%.  If you have debt that is at 2.75%, then I would recommend you let that debt ride and invest in the dividend-paying stock or the 30-year bond and make the .5% plus difference.  Or if an employer offers a 5% matching retirement contribution, it would make sense to do that than to pay off debt at less than 4.9%.  Conversely, you should pay off debt at higher interest rates than you could find in any investment type.  If you use this scenario to guide every decision and let the secret of RETURN guide you, you will become financially independent.

Whenever you spend a dollar, you must consider the RETURN on that dollar.  I struggle with spending money correctly; or spending in general rather.  Some sort of survival mechanism kicks in from my past and it's difficult for me to let go.  A $20 fun day with your family can have a greater intangible RETURN than saving that money.  Going out to dinner as a family every Sunday can provide more intangible dividends that just being at home or having my kids spend more time with friends than with me.  And the cliché, "A happy wife is a cheaper wife" is a cliché I totally agree with.

Understanding personal finances is like playing a board game without knowing all the rules and players that have been playing for a long time (the government, banks, corporations) know all the rules.  Understanding the concept of RETURN can be difficult at times, but that's why this blog is here and that's why I'm here to help.