It is said America has more millionaires that any other country. If this is true why are so many of us so poor? Why do so many Americans suffer with debt? Why are we as a society so overextended and buried under mortgages we can’t pay and live in homes we can’t afford in the first place? The answers are simple, yet must be explained carefully. Let’s examine rule one.
Rule one: Never try to keep up with the Joneses.
Each day we are exposed to a plethora of images of wealth and possessions. We see our sports and Hollywood idols buy 20 million dollar mansions, buy million dollar pieces of jewelry, we hear our neighbors boast about their expensive new car, extravagant vacations they took and about the high ticket purchases the have made. Rule one says; that if we stop trying to compete, we will immediately become clear. The pressures will lift and we will be able to live for ourselves. Try this simple rule for 30 days, stop trying to keep up with the Joneses and see how you feel. I can guarantee you will feel a weight lift off your financial shoulders.
Rule two: Start your purse to fattening painlessly.
Let’s face it Americans are not the best savers. By nature we like nice things. We like good food; we enjoy fine clothing, fine wines, travel and toys. Rule two states that you must cut back, at least a little. I once had a boss that said, “Live small, until it’s time to live big” I think he was onto something. Rule two says the easiest way to start your purse to fattening is not to take money out of your income and save it, that is way too hard for us but it is in fact simply to cut some waste, some excess. Reduce your bad credit cell phone bill by 3%, cut your cable bill by 5%, and reduce your credit card debt on one single card, saving you 9%. Do the math. These savings equal 17%. Rule two says, save your money this way because we all know that it is not realistic to take 17% of your income and save it. Savings are savings. Save wherever you can.
Rule three: understanding a Real Rate of Return.
I am by no means anti CD (Certificate of Deposit) or anti bank. They have there place but please try and understand your real rate of return when investing. Let’s illustrate this simply. If you put $1000 into a one year CD and you earn 3% that year you now have $1030. Not bad, simple, safe and easy. Did you know that your bank is going to send you a 1099? This is a tax form stating your income from your earned interest, in other words your 30 bucks. Now let’s say your tax bracket is 30% total and then deduct that from your $30. You now are left with only $21. This means that your real rate of return is 2.1%. Rule three says; don’t get fooled, understand your real rate of return.
Rule Four: Triple Compounding Interest.
In rule three we explored the tax consequences of standard savings. In rule four we will explore the magic of what I call triple compounding interest so pay close attention, so I don’t lose you. If we put money into a multiyear tax free or tax deferred savings vehicle we earn interest. Simple enough to understand, but did you know we also earn interest on our interest? Yes, of course you did, this is simple compounding interest. So here is the kicker. Did you know there is a third way we will earn interest on this account? No, you didn’t. Well let me explain. With this type of savings account we also earn interest on the money that was not taxed and subsequently not taken out of our account. This means we earn interest on our savings. In this case we are earning interest on our tax savings. Uncle Sam is actually floating us. Rule four; use triple compounding interest.
Maria Rainier writes on the topic of online education.