Real Estate Articles

Managing Money | By: Dave Van Horn

from Dave's Blog

Is there really a Magic Formula?  

I think there is.  But don’t take my word for it; many of these ideas and principles have been in existence for more than 8000 years as referenced in the book, The Richest Man in Babylon by George Samuel Clason.  This formula works regardless of your income level because it isn’t always what you make as much as it is what you keep. 

The most important rule to follow first is to save, also known as “paying yourself first.”  The reason that this is so difficult for you is that it requires discipline.  The best method I’ve found to accomplish this is to make saving automatic either by direct deposit or investments.

The second rule is to try to get a good dependable source (or sources) of income.  I find the best sort of income to acquire is completely passive income.  Whether it is buying properties, acquiring notes, or having an online store; making passive income is great for taxes and workload because as opposed to a full time job; generally once the system for it is set in place, you have to do very little to keep it going. The amount of income is not as important as what you do with said income.  If you use that income only to buy speedboats or brand new cars you don’t need, than the rest of my point will be lost on you.  The point of this income is to save it and invest it, not spend it.

The third rule is to invest wisely.  Don’t lend money to people who are risky, and that includes financial planners and money managers.  These professions are meant to help the average person find investments but often times what it comes down to is that no one is going to care about your money being invested more than you.  Even if you have a financial planner, do the research on what they advise you on and get educated.  You can’t make supplemental income with an investment that doesn’t make you any money.

The fourth rule is to invest in what you know.  The more you know about an investment the more likely you can make an intelligent investment decision.  Knowing about an investment will not only help you choose what to invest in but also how, and more importantly how much.  Hearing about a good stock and buying or placing money in a mutual fund you know nothing about is just pure gambling and investing should never be a gamble.

And fifth, is to avoid crazy investments.  If it sounds too good to be true, it usually is.  On the other hand, don’t just go off of old sayings and monetary proverbs of the past.  Know an investment is too good to be true by doing your research.  Some of the best investments have higher than “safe” returns, find out why and use that information to your advantage (like perhaps to raise money for said investment using OPM or other people’s money).

So here’s the magic formula if you have debt:

 

  • 10% Savings (Pay yourself first)
  • 20% Debts
  • 70% Expenses
  • Charity – volunteer your time

 Once debts are under control, the formula is:           

  • 10% Savings
  • 10% Investing (& Education, you can’t Invest properly without learning about it first
  • 10% Charity
  • 70% Expenses

So regardless of income level, if you stick to this formula, you’ll be well on your way to building wealth.  As you’re savings and investments grow you’ll find it easier to acquire cash flowing assets and over time this cash flow may even surpass the income from your job.

Do you have the discipline to live on 70% of your income?  How about 60%?  The more of it you can save and utilize to invest, and use that investment income to do the same, the quicker you can become wealthy.

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