Hedge funds, derivatives, calls, puts, options. What are they? For the average person, these terms are meaningless. Understanding them as a concept is bad enough, but actually using them? It is almost laughable. Yet, everyday, people try to use these financial tools to their benefit, without knowing what they actually do.
Quick note: Investing while you don’t know what you’re doing is gambling.
So, what is the solution to this? K.I.S.S. Keep It Simple, Stupid! Your finances don’t have to be complicated. Success doesn’t mean that you will need a flow chart to explain how you’re handling your money. Sure, complicated things might work for some, but most people just need to approach their finances in a basic, fundamental way.
Finances Are Basic In Nature
Your finances, at their core, are very basic. Do you know what creates wealth? This basic equation does it:
Your Income + Your Assets – Your Expenses – Your Liabilities = X
If X is positive, then you’re on your way to wealth. If X is negative, then you’re not. How do you know if you’re wealthy? Divide X by the amount it costs you to live each year and this will tell you how long you can live on your wealth (in years). It really is that simple.
You’ll hear the government, and fancy financial planners tell you otherwise, but if what you’re doing produces a negative X, you’re losing money (and the US Government is making a big negative number!).
Debt
Yes, there are plenty of “systems” to pay off debt. Some even cost money. That doesn’t sound simple. Shouldn’t paying your debt off be as simple as making a payment? It is! You can’t wish debt away. Just make a payment that satisfies the interest for the period and pays some towards principal. The more that goes towards principal the faster it will be paid off. You know this stuff, you’ve just been hearing so much financial voodoo that you’re not sure what to believe anymore.
Savings
Do you want to save money? Then do it. Quit spending it. Stop looking at get rich quick schemes, and stop eating, or iPhoning your income away. Cut your spending, and put it into savings. Get some will power, get some courage, and tell your co-workers that you can’t go out to lunch. Saving money isn’t necessarily one good decision, it’s a bunch of small, intelligent choices. The rich got rich by spending FAR less than they make.
We’re so used to seeing movie stars wasting their money away that we think it is the norm. It isn’t! Most wealthy people are frugal. Read “The Millionaires Next Door” if you don’t believe me. It’s a real eye opener to the wealthy life we don’t see!
Investing
Sure, that guy on TV is going to get you 50% yields with his proven, secret formula. If that is the case, why is he trying to sell his DVD? At 50% yield and a minor $100,000.00 investment, he would have $323,563,384,541.41 in 30 years! Yes, that is 323.5 BILLION dollars. Even if he doesn’t have the principal, he could borrow on margin and make a killing. Do you know why he doesn’t? Because his program doesn’t work.
Enough with the complicated things. If you don’t know what options are, then don’t buy them. Learn about them, read everything that you can get your hands on, and once you feel confident in them, begin to dabble. Quit thinking that you’ve missed the boat. Invest how you know, or hire a qualified financial planner. Keep It Simple, Stupid! It will save you a ton of money, a ton of heartache, and you’ll turn out far better.