Hi friends,
This is going to be a long post, its about my financial journey and I want to share what I've learn about personal finance.
If you don't want to read much just keep this in mind.
- Spend less than you earn
- Build an emergency fund
- Try to pay off debt as soon as possible
- Focus on your goals and dreams.
Last year (mid 2016) I started a finance process which I decided to be top priority to get my finance status sorted out and learn how to handle big debt for my house. I was living paycheck to paycheck,( and I think it was worst as I had a credit card back then). I was with balance 0 or sometimes negative (more on this later). I wanted to be debt free as soon as possible.
Baby steps & getting on track
- Magical formula to get rich
- Do this 10 steps and you will be rich
- Whatever book title you feel like reading
Most of them are ok, not good but for sure the best title will sell more. So I want all in reading this books. I read the famous 'Rich dad, Poor dad'. After reading it and 'Cashflow quadrants' and then thinking about 5 minutes I said to myself:
I've been just the result of a great marketing strategy and I really thank Robert for this, but his way of getting rich might not be suitable for everyone.
At the same time, my brother was all in for this coaching philosophy and he even started his own business and I really hope the best for him. I'm a bit upset I pretty much lost contact in his business marathon and I guess it will be like that, he will be working from 4 am to 10 pm from Monday to Saturday and he will be very successful doing that... ohh and maybe he will get rich and then retire early and ... ohh yeah do what he wants then.
Sorry maybe its my personal view of what his live is all about, but I can also learn from that he is very honest about his live goals (sadly I don't fit in those) but I understood that.
So back to my life... I got my house build which meant getting in debt, 30 years in debt. Add 25 years land debt and no wonder why some people never get out of debt. So I'm pretty much trapped in the rat race as some authors will state, but owning a place to call home and live with my family there has been an amazing journey. My mom a retired teacher and my dad (2 years away from retirement) always tell me that at my age they did not have what I do now and I can tell how proud they are.
I'm not really proud of this chart as house being build played a lot with the actions taken over the year, I'm happy at least my balance is positive at the end of the year.
So getting in debt to make your goals and dreams come true is a valid way to get them. Just do not over spend and try to pay off debt as soon as possible. We all have debt at some point, there are two types of debt in my opinion. The long term and short term. You should never fall into short term debt avoid it as much as possible. Long term debt is more likely to be an investment, but what's the point on so many years paying if you are not taking advantage of early payments.
Long term debt
Education
I've seen many people in other countries with lots of student loans and debt, I'm thankful to have my degree in a state university in Costa Rica which are by far very good education and way cheaper than private universities. But it doesn't matter how much you have 'spent' in education if you do not take advantage of it. Try this kind of loan as an investment and some people say is one of the best investments you can do and I agree 100% on this. If you are getting paid more after you get the degree you should try to pay student debt as soon as possible and then you will be living on the student dividends for life.
Buying a house, apartment, land.
The second investment is house,real estate, land. This kind of assets usually gain value over time and that's why you bank wants you pay for many years. So even if you are in debt paying you house, apartment, land you will end up being richer than many that pay rent for life. So don't be afraid on getting in debt in order to pay education or living space.
In this chart, red line means what the bank wants me to pay after the loan period ends, blue line is what I will actually will pay, so I've been paying just between $20-$100 extra per month and I did a $10k extra payment ( later on this) to reduce debt amount. So as you can see I will save almost $60k dollars just by adding couple bucks per month.
Short term debt
- Travel
- Entertainment
- Electronics
You should avoid getting in debt to travel, buy a car, electronics and any other kind of entertainment. I get it some people would love to travel the world and some would just like to buy land to live peacefully, and that's fine you can do both or either one, just ... don't get in debt that is not healthy.
Unhealthy debt is the one usually short term, so let's say you get in debt to buy a laptop. Usually it might take 1-2 years to pay it off, but then will it be worth the same or less? will you be able to use it for 10 years? 5 maybe? will you like a new one after paying it off? Why not save the money instead and buy it cash? I cut my credit cards when I started this process, its been hard but after a year now I feel no need to have credit hard and now I feel very proud to say: ' I don't have credit card and I don't need them'. I guess some people will want travel miles, points, cashback, etc, but I can tell you that you end up paying less without it.
Emergency fund
It doesn't matter how much you are saving per month, bi-weekly, weekly or daily, what matters is that you do it and as frequently as possible creating a good habit. The benefits are countless and this will also open a new world of opportunities as well as reducing the risk of obtaining new debt to fulfill an emergency.
So its been a very first year of being able to track expenses, learning, creating my spreadsheets, using tracking expenses app, and all I can just say now is that this is the first step. I laugh when people ask me how to get rich, I'm like would you like to track expenses, reduce spending habits, focus on whats important to you, let that roll for a few years and you will start growing your small fortune. I mean its really hard to get rich overnight and even if that happens I doubt it will last much without the proper education.
Thanks for reading, this is like my 2017 year finance conclusion and retrospective.