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8 truths about money that could change your life

Business Insider 21/09/2015 Laura Adams

The answer to many questions about personal finances isn’t black or white.

There are so many variables, choices, and potential outcomes for most situations that, in many cases, the best answer is simply: it depends.

Researchers have shattered the illusion that having more money makes you happier. © Provided by Business Insider Researchers have shattered the illusion that having more money makes you happier.

But you won’t hear any uncertain or unsatisfying financial advice in this episode.

I’m going to cover eight financial truths that apply to everyone in every situation.

They have the power to transform your financial life — if you let them.

1. Money doesn’t buy happiness

Researchers have shattered the illusion that having more money makes you happier.

They say earning about $75,000 a year is the sweet spot. That’s a national average that varies depending on where you live. Happiness costs more in big, expensive cities like New York and San Francisco.

Earning $75,000 allows the average American to pay for comfortable housing, have reliable transportation, eat well, take an occasional vacation, and save for the future.

If you earn 20% more, that’s fantastic, but it’s not likely to make you 20% happier.

In other words, money definitely can buy comfort and security. But once you have a moderate amount of stability and income, having more doesn’t make you incrementally happy.

My level of happiness has generally been about the same throughout my entire life, no matter my level of wealth. I think most people are born with a happy thermostat or set point that doesn’t change drastically, no matter how much they have in the bank.

2. Your earning power is your most valuable asset

Since your earning power trumps everything, you need to protect it like a junkyard dog. © Provided by Business Insider Since your earning power trumps everything, you need to protect it like a junkyard dog.

While your home or retirement account may hold a lot of value, your ability to earn money is ultimately what allows you to build wealth. Your financial life will completely stall out if you can’t earn income.

Since your earning power trumps everything, you need to protect it like a junkyard dog. Disability insurance was designed to replace a percentage of your income if you get into a debilitating accident or get sick during your working years.

You may have the option to buy short- or long-term disability coverage through work. If not, or if the coverage isn’t enough, you can buy a policy on your own through many of the big-name insurance companies.

And being in good shape, both physically and mentally, allows you to perform at the top of your game and earn what you’re worth.

So take your health just as seriously as your wealth, by eating more nutritious foods, cutting sugary snacks, working up a sweat every day, and going to bed earlier so you get plenty of sleep and feel as rested as possible every morning.

3. The cost of your time should guide you

Before you reach for your credit card, do some quick math and divide your after-tax hourly wage into the price of the shoes. © Provided by Business Insider Before you reach for your credit card, do some quick math and divide your after-tax hourly wage into the price of the shoes.

Many times we spend money frivolously or overspend because we don’t focus enough on the cost of our time.

For instance, let’s say you earn $20 per hour as a graphic designer and you see a beautiful pair of shoes online that cost $300. Before you reach for your credit card, do some quick math and divide your after-tax hourly wage into the price of the shoes.

For the sake of this example, assume that your average tax rate is 25%. That means your take-home pay would be $15 ($20 x 0.75) per hour. If you divide $300 by $15 per hour, you see that you’d have to work 20 hours to pay for those shoes. If that idea doesn’t thrill you or feel completely worth it, forget about the shoes.

Calculating the value of your time is a powerful way to really understand what something costs. If you’re paid a salary, here’s a quick way to figure your pre-tax hourly rate: Take off the last 3 zeros from your annual salary and divide that number in half.

For example, if you earn $60,000 a year, strip off the last 3 zeros, which gives you $60, and divide by 2. You earn about $30 an hour. Then to get an after-tax ballpark, take about 20% to 25% off that number, which leaves you with approximately $23 an hour.

Not only can figuring the value of your time help you rein in spending, but it’s also a guide for when to hire people. If you need help with chores like yard work, house cleaning, or running errands, and can afford to pay someone less than you earn to do them, it makes sense to hire the help.

4. You must spend less than you make

Without discretionary income, you simply don’t have the ability to save and invest, at least not without also going into debt. © Provided by Business Insider Without discretionary income, you simply don’t have the ability to save and invest, at least not without also going into debt.

The only way to get ahead financially is to make sure you have discretionary income. That’s the amount you have left over at the end of the month after all your essential living expenses are paid. It comes from having more cash flowing in than you have expenses flowing out.

Without discretionary income, you simply don’t have the ability to save and invest, at least not without also going into debt. Living paycheck to paycheck may take care of your immediate wants and needs, but it’s extremely dangerous because you’re kicking a financial can down the road.

The trade-off for spending all of your paycheck today is a future with no financial security. In order to be comfortable later on, you may need to feel slightly uncomfortable today.

So secure your earning power, cut unnecessary spending, and evaluate your financial priorities carefully.

5. You’ll accomplish more by paying yourself first

I highly recommend that you put your savings on autopilot so it happens in the background without you having to think about it or do anything. © Corbis I highly recommend that you put your savings on autopilot so it happens in the background without you having to think about it or do anything.

I don’t know who originally came up with the phrase pay yourself first, but it’s a golden rule of personal finance. It means you should save and invest before you pay anyone else.

I highly recommend that you put your savings on autopilot so it happens in the background without you having to think about it or do anything. Automation is what makes workplace retirement plans, such as a 401(k) or 403(b), work so well. Contributions come out of your paycheck before you ever get the chance to spend them.

You can create a similar system by having money transferred out of your checking account into an IRA or a savings account as soon as you get paid. Making consistent contributions, even if they’re small, goes a long way toward building financial safety nets, like an emergency fund and a retirement nest egg.

6. Your financial past is irrelevant

Make decisions and move forward based on what’s best for your future. © REX Features Make decisions and move forward based on what’s best for your future.

In the business world, a cost that you’ve already incurred and can’t recover is called a sunk cost. The term comes from the oil industry, where you spend a lot of money to dig a well, but may not find any oil. What do you do next, keep digging in that same well or spend more to dig another one?

Both companies and individuals have to make decisions based on what’s best for their futures, not based on bad moves or hardships that occurred in the past.

We all have personal sunk costs we wish we could get back, like bad investments, purchases that we really didn’t need, or unexpected bills. Don’t dwell on them. Feeling sorry for yourself or being regretful doesn’t accomplish anything.

Make decisions and move forward based on what’s best for your future, not according to what challenges you may have had in the past.

7. Investing early turbo-charges your success

It isn’t always easy; but it can make the difference between poverty and comfort in the future. © Provided by Business Insider It isn’t always easy; but it can make the difference between poverty and comfort in the future.

One of the most important financial concepts and truths to understand is that investing early is magical. It isn’t always easy; but it can make the difference between poverty and comfort in the future.

The more time you have to make investments and allow them to compound, the less you need to invest to achieve your goal. For instance, if I want to retire with over one million dollars, I just need to invest $300 a month starting in my 20s. That’s a total of $144,000 out of my pocket.

But if I don’t start saving for that million-dollar goal until I’m in my mid-40s, I have to invest $1,700 per month, which is over $400,000 out of pocket. The earlier you start investing, the cheaper your future becomes.

So don’t start planning and saving for retirement too late in your working life. Begin the habit of investing a minimum of 10% to 15% of your gross income for the long term every month, no matter what’s going on with the stock market.

You’re in the investing game for the long term and simply can’t afford to wait. Start small and start now. 

8. More of the same gets more of the same

If you’re not making slow, steady progress to improve your financial life and build wealth, you may need to radically rethink your strategy. © Provided by Business Insider If you’re not making slow, steady progress to improve your financial life and build wealth, you may need to radically rethink your strategy.

Doing the same things you’ve always done will give you the same results that you’ve always gotten. In other words, repeating the same bad choices will give you the same problems.

If you’re not making slow, steady progress to improve your financial life and build wealth, you may need to radically rethink your strategy. Try something different, like moving into a smaller home or apartment, driving an old car instead of buying a new one, finding a better-paying job, or starting a side business for extra income.

Your success comes from your choices, like whether you spend your nights and weekends improving yourself or wasting them on too many video games and bad TV shows. Also consider how you spend your downtime at work. Use your lunch hour to read, study, build your professional network, or start a small business.

Successful people generally aren’t smarter or luckier than every else. But they do use their time more efficiently and make better choices more often than the average person.

So think carefully about how you’re spending time brings you closer to your goals or takes you farther away from them. Be courageous and forge your own path to success. You’ll be glad you did.

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