What is the best money advice?
Money is the reward for labor.
That statement is true, as it is misleading. You may think that the more labor you put in, the more money you earn. That cannot be further from the truth.
There are four aspects of money:
How to earn it.
How to maintain it (a.k.a. investing).
How to spend it.
How to keep it.
When giving financial advice, many financial advisors and so called wealth gurus, usually concentrate on the first two. The ability to spend money and still keep it seems to get the least attention.
However, it is the ability to spend money and still keep it that requires the most prominence.
Why?
Because you can earn all the money in the world and lose it all if you don’t know how to spend it and keep it.
Here are a few rules of money:
1. Keep it in Circulation.
Don’t hoard money. Money that’s hoarded loses value through inflation and other factors known as opportunity costs. Why do you think rich governments like China or Japan lend money to poor governments in third-tier countries?
To keep it in circulation so that they don’t lose opportunity costs.
2. Don’t Borrow. Use Other People’s Money
Don’t borrow money for consumption.
The temptation to borrow money to spend on consumption is greater than the strength to resist the temptation. When you borrow money for consumption, it goes down the drain. Most things people spend money on are perishables and vanity.
If you must spend money, only spend money you can afford to spend, and at least make sure the things are durable.
Borrow money for business (a.k.a. other people’s money). When you borrow money for business, make sure the debt doesn’t eat into your personal finances.
The reason why many people are poor is because they live on borrowing. They basically borrow money to spend on luxury items they see other people buying.
3. Never Lend Money Without Security
When you lend money without some kind of security, you’re taking a big risk.
The borrower may refuse to repay, or just decide to disappear, or even die. In this case there’s nothing you can do to recover your money.
4. Don’t Give Money Away Expecting Nothing
Do you know why billionaires like Bill Gates, Warren Buffet, George Soros, “Chuck” Feeney, and MacKenzie Scott give money away? You think it’s just for fun or for charity?
It’s for big-time business. They’re investing in society, so that they can get something bigger from society. In fact, the money they give to scientific research and education is a direct investment in companies in which they have direct vested interest.
5. Don’t Take Bigger Risks than You Can Afford To Lose
Taking bigger risks than you can afford to lose is known as gambling.
Don’t gamble with your money. Take calculated risks you can afford only after doing your math and subjecting your analyses to someone more knowledgeable in these matters than you.
6. Don’t Make Important Decisions about Money Under The Influence
Don’t make important decisions about money under duress, adverse emotional state, fear, depression, anger, or under the influence.
I don’t have to tell you that when you do this, you’re not using your best judgment.
7. When it comes to Money, There are No Friends
Money has no friends, therefore when it comes to money don’t treat your friends differently.
8. Pay Yourself First
If you pay yourself last, other people will get richer while you get poorer.
Make sure you reward yourself first before you reward others. I know this is difficult in an employment environment where the taxman gets the money before everyone else including you, but you can still do it by saving at least 10% before you spend it on rent and monthly bills.
However, don’t let your money just sit in the bank. Invest it.
9. Develop the Ability to say “No”
Say “No” to unnecessary spending.
Say “No” to door-to-door salesmen.
Say “No” to borrowers.
Say “No” to banks who want to lend you money. Remember, banks only lend to people who have money.
10. Develop the Skills, Discipline, and Mindset about Money
I know this is not easy, because it takes time to develop the skills, discipline, and mindset about money, but this is very important.
You may think that wealthy people just pass on wealth from one generation to another.
Rich families, who have passed on wealth from one generation to another, don’t actually pass on the tangible assets (physical assets, real estate, companies, stocks, cash, etc.).
They do so by passing the skills, discipline, mindset and knowledge about money, from one generation to another. That explains why inherited wealth rarely lasts more than two generations, because someone comes along in the generation tree who knows nothing about the tradition.
Now you understand why Bill Gates, despite all his wealth, has left only $10 million to each of his three children.
11. Don’t Save Money. Invest It.
What? Don’t save money? But everybody is doing it.
Yes, it’s true that if everybody stopped saving money in the banks, banks would collapse. Keeping it under the pillow won't help either.
Why?
Because savings is what keeps banks in business, that’s why.
They take your savings, and lend it out heavily to borrowers at exorbitant interest rates while they pay you interest at a paltry rate.
If you work at the bank, you can get fired just for keeping money overnight without lending it out.
Yes, savings (a.k.a. deposits), is what keeps the money in circulation and the economy going.
What should you do then?
Deposit money in banks so that you can invest it to beat inflation.
12. Understand the Time Value of Money
You have heard the phrase “time is money”. It turns out that this phrase is actually true—literally.
The concept of the time value of money (TVM) asserts that money is worth more now than it will be later due to the possibility of profit in the interval. This is a fundamental concept in finance.
The time value of money is also known as the present discounted value of money.
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