This guideline assisted me in gaining an understanding of the worth of my assets.
“It’s not how much money you earn, but how much money you retain, how hard it works for you, and how many generations you keep it for,” said investor Warren Buffett.
We are all aware that putting money aside for savings is a good practice, and that investing one’s savings is preferable to keeping it in a savings account. But when it comes to deciding where to save our money, what is the best sequence to follow to ensure that you have a good financial future?
The majority of people believe that the best thing you can do is to start investing in index funds or starting with real estate as soon as you have the 20% downpayment. This is due to the fact that both of these options will leave you with a respectable amount of money on a monthly basis. However, the fact of the matter is that if you want to be successful in matters pertaining to your finances, there is a certain sequence that you should stick to.
In this section, I will demonstrate the sequence and the guidelines that assisted me in comprehending the worth of my money and determining where it would be most prudent to invest my profits.
Rule 1: is to get rid of everything that causes you to lose more money and replace it with something that will provide you with greater financial security.
No matter how attractive the return on your investments may be, it is unlikely to be superior to the rate of interest you are required to pay on your outstanding loans. In addition, it doesn’t matter how hazardous an investment maybe if you don’t owe anybody any money and you’ve already taken care of all of your financial obligations.
Because of this, the first thing you should do when deciding what to do with your funds is to settle any outstanding debts you have. This is the first step in the operation sequence.
The most effective method to do this is to work backward from the lowest interest rate to the highest. For instance, credit card debt is the most costly sort of debt, and hence it should be paid off first. The effect on your finances of paying off a loan with an interest rate of 30% is the same as the impact of a return on investment of 30%.
If this is the case for you, you should prioritize establishing an emergency fund since, in the absence of one, you run the risk of suffering substantial financial setbacks and incurring further debt. If you do not have an emergency fund, you run the risk of being unable to pay your other payments and may possibly end up losing all of your other assets.
After you have those two payments under control, you need to move on to the loan with the medium interest rate. Loans for automobiles, education, and personal use in addition to lines of credit secured by one’s house all fall under this category. These payments can have the same effect on your finances that a ten percent return on investments would have had.
When you have paid off all of your debts, including your bills, education, and car payments, you are ready to start investing in more risky options. It is a very different experience to lose money in the market while also having to make payments on debts. When you have paid off all of your debts, you are ready to invest in more risky options.
Rule 2: Proceed from the product that offers you the greatest liquidity all the way down to the one that gives you the least.
If you have all of your money invested in stock index funds and a bear market begins, you will not have access to your money for a period since the funds will be sold. The same thing takes happens with real estate, cryptocurrency, and even options contracts.
For this reason, you should start making investments in the product that will gradually provide you greater access to the most challenging one over the course of time.
For instance, I begin by placing a certain portion of my funds in a high-yield account, which serves as the foundation for my savings. Because of this account, I can access my funds in less than 24 hours in the event that I need them, and it also helps me capitalize on chances when the market is down.
After opening a high-yield account, the majority of individuals also contribute to their 401(k), HSA, and IRA, which is another smart move if you have a financial strategy that includes those products.
You also have the option of putting your money into government bonds, treasury yields, or investment certificates. The amount of time it takes to receive your money back from investing in these options ranges from six months to one year. I have been able to earn returns of between six and ten percent.
The level of risk you are prepared to face will determine how much of your money you should invest in potentially lucrative markets. Real estate is first on my list, followed by the stock market, and then cryptocurrency comes last.
Even though cryptocurrencies are the market that is giving me the most cash flow and returns in the short term, it is the market that is at the very bottom of my list. This is because I know that in order to get all of my money out of there with profits, I will have to wait for a longer period of time.
Rule 3: Put the money you make from your second set of investments toward paying down your mortgage.
Debt with a low-interest rate is a sort of debt that has a lower priority than the majority of investment possibilities; nonetheless, paying off this type of debt sooner than planned would be beneficial since you may utilize this credit line for other investments. Your mortgage and any other secured loans or credit cards fall under this category of debt.
I do this by making additional principal payments to my loan using the cash flow that is generated by my other assets. These payments are above and above what is required.
Because of this, I was able to pay off my first home in only five years, and I anticipate that I will be able to do the same with my second home by the middle of the following year. Because of this, I was able to accomplish my objectives earlier than I had anticipated and keep my net worth expanding via investments that were both more significant and risky.
When deciding where to put your money in the form of an investment, it is important to consider not only which product will provide you the maximum return over a period of time, but also which choice is most appropriate given your present level of wealth.
Paying off your dangerous debts and putting money aside for unexpected expenses will always be a wiser financial move for you than investing in a fund that returns 10–12% annually. This is due to the fact that you are throwing money away by paying higher interest rates.
Also, it is sometimes better to start investing in products that give you access to your money at any time rather than a 3–5 year investment because you could need it in a bear market, and it is better to understand your current financial situation before analyzing new possibilities. Also, it is sometimes better to start investing in products that give you access to your money at any time.
The following is a rundown of the steps to take in order to improve the quality of the judgments you make with your money:
- Rule 1: is to get rid of everything that causes you to lose more money and replace it with something that will provide you with greater financial security. This encompasses the use of credit cards, hazardous forms of debt, the establishment of an emergency fund, as well as personal and educational loans.
- Rule 2: Proceed from the product that offers you the greatest liquidity all the way down to the one that gives you the least. These include accounts with a high yield, certificates, investment funds, and markets.
- Rule 3 states that you should pay off your mortgage with the cash flow generated by your second set of assets so that you may take advantage of greater investment possibilities in the future.