We are going to analyze stocks, and try to figure out where the market is headed to. That’s all of course important. However, to start your journey of getting to financial independence, you first need to master the basic money skills to improve your financial literacy.
For some weird reason, a lot of people believe that just because they can spend money, they know how to manage it, which is not the case. Managing money is an art by itself.
The reason why a company like Apple has been so successful is that it has a team of incredible accountants who have been playing around with tax regulations to keep most of what Apple makes to Apple so that they can keep investing in themselves to keep producing innovative products. It’s not just Apple, the current US President have been avoiding taxes for years. Despite his $3.5 billion fortune, the President has only paid $750 in federal taxes in 2017 and had completely avoided taxes in many prior years.
But we will shed some light on five basic money skills that you should know. In fact, they’re so important that everyone should know them.
1, Assets versus Liabilities.
If you have read the book, Rich Dad Poor Dad, the most important idea the author is trying to get to his audience is the difference between assets and liabilities. The reason why so many people are struggling financially is that they don’t understand the difference between assets and liabilities
. And assets are anything that puts money into your pocket whereas liabilities, anything that takes money out of your pocket. The concept looks so simple, but yet most people get it wrong. People buy houses, cars and think they are acquiring assets when in reality, they are not. When you buy a home, you have to pay taxes, utilities, insurance, and so on. It constantly takes money out of your pocket, which means it’s a liability. Your car is also a liability, you have to buy fuel, pay insurance, maintenance, and so on.
However, if you rent that car out, and it brings more money than it takes, then it turns into an asset. The same applies to a house if you rent it out. And after subtracting all the expenses and it ends up generating income, then it’s an asset. The rich buy assets, the pool by liabilities, and the middle class buys liabilities that they think are assets.
Taxes are one of the most complicated things out there. And that’s not by accident. They’re meant to be complicated so that your average folk would not understand them. The tax code is written by the rich to keep them rich. While on paper, it seems like the tax rates on rich people are high.
In reality, rich people pay a small amount, or in some cases close to nothing in taxes. corporate taxes in the US were around 39% during Obama, but no one really paid that match. In fact, sometimes they paid nothing. When you pay taxes, you pay a fixed percentage based on your income. But when a company pays taxes, they first subtract their expenses and pay taxes only on their net income.
That means a company can have as many expenses as it wants. A rich person doesn’t pays himself to live lavishly, but uses the company’s fence to cover his expenses and writes them up as business expenses, and ends up paying lower taxes. Many rich people run their companies at a loss to keep paying for their lavish life and at the same time, avoid taxes.
In fact, you can forward your losses to future years. So even if you end up making a profit, you can deduct last year’s profit and still avoid taxes. When politicians say that we will increase taxes on the rich. They don’t mean those ultra-rich people who make billions of dollars, but the middle class who makes over $500,000 since that half a million dollars in tax and their income tax, which is the highest tax rate in almost any country. If you do not master taxes, even if you end up making millions, you will be paying a big portion of that to Uncle Sam. And that takes me to
3,. It’s not how much money you make that matters.
It’s how much money you keep. Let’s say you’re a successful A lawyer in California and you make a million dollars, how much of that you’re going to take home only $532,000 your total income, federal and state taxes are going to amount to 46.7%, you’re literally going to give half of your money to the government.
And if you pay a mortgage and a car loan, you will hardly be making ends meet. Even with a million-dollar income, you will be living paycheck to paycheck. That’s why what matters at the end of the day is how much money you can keep. After paying taxes and covering your expenses.
4, Learn to save money.
If you lose that job, the government isn’t going to give you back that half a million dollars you paid in taxes, the bank is going to come after your house and a car. But saving alone isn’t enough. Learn how to let your money work for you. Having a lot of money sitting in your bank account is useless to a certain degree. because money is a resource and resources are meant to be used. The only way to get out of a rat race is to have enough money working for you so that you don’t have to work another day.
The point isn’t to lie on the couch and do nothing, but rather have the freedom to do whatever you enjoy doing. So no matter how much you save, your money will run out at some point. That’s why you should let your money work for you to buy buying assets. Remember when we talked about assets versus liabilities and assets could be anything from a rented property to a government bond. Investing in some ways is easy and straightforward. However, in practice, it’s a little bit more complicated than it seems. Stocks don’t always go up not every house is easy to rent it out. And the government bonds can sometimes have a lower rate of return than inflation. So learning how to invest to get high enough rate of return is an art by itself.
5, Keep your credit score high enough.
You probably heard that you need money to make money. And that’s true. Making a 5% return on $1,000 a year is just $50 not enough to get you a pair of sneakers from Nike. But the 5% on $100 million is $5 million, enough money to let you live like a king in any corner of the world.
That is an important financial tool. Whoever has mastered it has built a fortune out of nothing. And whoever is bad with that ended up bankrupt, it’s up to you on which side do you want to be in, you can of course work and save every penny to buy a house 30 years later, or be good with debt and get a mortgage at favorable terms.
Now, the first step to being financially responsible is keeping your credit score high. The easiest way to do that is through credit cards. I know that you might have a negative opinion about credit cards because you had to pay incredibly high interest. Since you didn’t cover your credit card debt on time. That has happened to a lot of people.
But if you are financially responsible, it’s not that difficult to pay your debts on time to avoid the extra interest. Now, you might say why use a credit card when you can use a debit card? Well, to build your credit score, you need to take credit unpaid back on time, you can basically use a credit card to pay for the things you pay with a debit card, and at the end of the month, simply pay your credit.
That’s how you raise your credit score. So next time when you need to get a mortgage, for example, banks will consider you are a financially responsible citizen and would give you a better mortgage rate. Imagine how much you will save even by getting a slightly lower mortgage rate. Whether you like it or not.
You have to learn to be financially literate to a certain degree. Because even if you hate money, you can’t avoid it. And money will always play an important role in our lives. So start mastering at least the basic skills first.