Smart personal finance is something you can only learn from experience. Sure, you can read books, you can listen to your parents, you can think about how well you would use your money if you just had some. But there’s nothing like having money to save or waste that forces you to deal with the nitty gritty details of your wants, needs, and future plans. If you’ve read this blog for any length of time, you’re more than familiar with the snowball effect of debt. Poor financial decisions breed debt, and debt breeds more debt. If you’re locked into high credit card debt, you could be packing on to your debt snowball at a rate of 25% or more each year. Killing off debt is its own thing. If that’s what you’re struggling with, I advise you to read another post. But eliminating debt has some marked similarities to wealth creation, chief of which is the snowball effect.
Making money is a lot easier when you already have some. The old saying goes, you’ve got to spend money to make money. And that’s true, more or less. Once you’ve managed to get rid of your debt, it can take awhile to scrape together some actual savings. What’s more, savings do very little work for you in terms of wealth generation. Savings tend to sit around, actually losing a little bit of value against inflation, and they don’t start doing you any good until you spend them on something. While I advocate strongly for a large emergency fund, once you’ve got that in place, your savings need to be allocated as investments.
Investments can take many forms. You’ve got short term day trading like Forex. You’ve got mid-term investments like real estate (as well as personal investments like your own education). Finally, you’ve got very long term investments like ETFs and mutual funds, which may take the form of IRAs and/or 401(k)s, as well as other retirement accounts. There are plenty of other ways to invest, but if you have accomplished even these three, you’ll probably start to see money accumulate at a noticeable pace.
Financial growth (and loss) tends to occur at an exponential pace. Basically that means accelerating change. A little bit of money can make a little bit more. That little bit more gives you more money to work with, which can make more money. When you’ve saved up a lot of money, that amount can work to create a lot more, etc. But without good decisions made early, you’ll never have the chance to create wealth later in your life. You’ll be stuck with little money or just a lot of debt. So the time to start creating wealth is now. If you have debt, it’s time to start killing that off. Once it’s gone, use the money that you were putting into debt reduction into savings. Once you have a big emergency savings pile, use the money you were putting into savings to start investing. From there, you’ll start earning meaningful financial growth.