3 Easy Money Habits I Swear By

when i think about managing my money i tend to center around an idea that you've probably seen in video games before the idea of the war chest think about a game like civilization in that game you need resources both to expand your empire but also to be able to essentially take a punch to deal with enemies attacking you train up soldiers to go to war for you and the resources you build and gain in that game like gold and food and production other things they represent your war chest if they run out then there's not a whole lot you're gonna do and you're probably going to lose the game now in the real world your money is your war chest and it serves pretty much the exact same purpose it lets you number one take advantage of opportunities like getting a better place to live or investing in your education but it's also there to help you take punches like your car getting a flat tire when it comes to building my own war chest managing my own money responsibly i have always had some rules that i followed ever since i became an adult and left my parents house so what i want to do in this video is actually share some of those roles with you including some rules on saving money on using credit cards responsibly and on investing for the future and to give you a bit of a sneak peek on what's actually coming on this channel in the future i want to build a more detailed library of personal finance videos here in 2022 because i want this channel to evolve past just covering productivity or academic success and to start to encompass more of what it means to live a fuller more capable life and i kind of center on that term capability so think of this video as a bit of a foundation to the more detailed topics that we're going to be covering in the future and with that let's jump into our first rule build up an emergency fund and a cash buffer so as i mentioned earlier your war chest is what allows you to take advantage of opportunities but also to take punches and stand easily back up now unfortunately a lot of people live paycheck to paycheck which means they spend almost everything they make in the month that they make it they don't have a war chest so to become financially independent financially secure your first priority should be to build one and in the game civilization there's something called the tech tree it's this list of technologies that your people can research and it's laid out in a certain order so for example you have to research pottery before you can research writing and civ is my favorite video game analog for personal finance because we can actually think of the financial journey as a tech tree as well and in fact i have actually built that tech tree and i've shared a link to it in the description down below they've also included detailed comments for each checkpoint on the tech tree so if something i say here isn't clear you can check those comments and there's probably more detail for it now there are four main branches on the tree savings income debt and budgeting and along the savings path you will notice the very first checkpoint is a 500 emergency fund this is a savings account separate from your checking account that you do not tap unless you absolutely have to unless something unforeseen comes up for which you absolutely need that account like bursting a tire on your car which you need to get to work and the reason that having this account is so important is that if you don't have one and something unexpected comes up you might be forced to borrow money to handle it or even put the expense on your credit card which could put you into a debt spiral so if you don't have an emergency fund yet build one at all costs and the next thing you want to do after that is to build what's called a one month cash buffer and you can do this by first figuring out how much you need each month to pay your necessary expenses like rent and groceries and debt minimums and then making sure you at least have that much in your checking account even after all this month's expenses are paid this concept can also be called living on last month's income and doing so gives you a ton of peace of mind because at this point you're no longer living a paycheck to paycheck and this brings us to rule number two which is to invest as much as you can into what are called taxed advantaged retirement accounts these include accounts like 401ks and iras and if you use them strategically you're going to end up with a lot more money during retirement than you otherwise would now you've probably heard of these types of accounts before 401k ira but what exactly do they do besides adding more acronyms to your life well a 401k is an account usually managed by your employer whereas an ira is something that you typically open and manage yourself but both of these accounts let you do essentially the same thing that you invest money into stocks or bonds or other kinds of investments that you can't touch or withdraw until you're at least 59 and a half years old which sounds like kind of a bad deal until you realize that in exchange you get to defer the taxes that you pay on some of your income by investing into them so for example if you normally make 80 000 a year but you contribute 5 000 of your salary to your 401k then you're actually only taxed on 75 000 that year instead of 80k which reduces your taxable income and hence reduces your taxes this is called a pre-tax contribution now there are a ton of details around this whole tax deferral thing there are roth iras which work quite differently so i'm going to cover all that in a future video but the other huge benefit to using iras and 401ks is that money invested in these types of accounts tends to grow a lot faster than otherwise would if you just invested it normally in normal taxable accounts an example in the book a random walk down wall street shows how 5500 invested each year for 45 years grows to 1. 6 million dollars inside of an ira well

the same money only grows to 938 000 invested in a taxable account even though it was put into the exact same investments the exact same mix of stocks or bonds or mutual funds that's a difference of over 600 000 and the reason for it is something called tax drag this is when taxes act like molasses slowing down the growth of your investments see anytime you make income off of your investments you have to pay what are called capital gains taxes on that income and to give you a very simple example of this one form of income that most people get off of their investments at least if they hold stocks are called dividends these are just regular payments that shareholders get literally just for holding the stock now not all stocks pay dividends some stocks are called growth stocks they're companies that basically want to take all of their income to grow the company so they don't pay a dividend instead reinvest the money to grow the company but a lot of older more mature bigger companies do choose to pay a dividend either because they can't find anything else that would be a better investment for that extra money or because they have investors who want dividends the greedy bastards and nintendo is one of those companies they do pay out a dividend so for every share that somebody holds currently nintendo is paying out about two dollars and 30 cents per year so for example right now i have about 140 shares in nintendo in my fidelity account so they are currently paying me about 322 each year in dividends now older investors might take these dividends and actually live on them but most younger investors myself included who are trying to grow their investments as much as possible choose to automatically reinvest their dividends instead and it's the smart play because every single dollar invested is going to grow over time so in my case it means buying another 322 of nintendo stock automatically or at least it would if not for taxes see since those dividends are income the government comes in and takes 20 percent of my dividends in taxes capital gains taxes so i actually only get to reinvest about 257 not 322. and that's 65 that i don't get to invest and grow over the next 20 or 30 years and that's tax drag now the great thing about iras and 401ks tax advantaged retirement accounts is that they are not subject to capital gains tax when things like this happened so if my nintendo stock were in ira i would actually get to invest the entire 332 dollars instead of the 257 and with compound interest working the way that does and with a long period of time ahead of me that tax drag or lack thereof makes a huge difference on my overall returns so for this reason i do my best to contribute as much as i possibly can to my retirement accounts each and every single year now one caveat that i will throw out there before we move on is that it's generally impossible to take money out of one of these accounts early without paying a huge penalty and then also paying taxes on them so if you're saving it for something big like a down payment on a house you may want to consider that when deciding how much to split out into an ira or 401k and into maybe a savings vehicle or a taxable investment account now there are ways to take some money out of an ira for a first-time home purchase and you may want to look up that but in general it's good to know about the withdrawal penalties as well now our next rule sounds kind of bad at first glance b a deadbeat but this is actually a really good thing to aspire to be this term has to do with how you use credit cards see in the credit card industry a deadbeat is somebody who always pays their entire balance on time every single month and if you know anything about how credit cards work you probably know that they come with some pretty insanely high interest rates often over 20 percent but if you pay off the entire balance every single month you actually don't pay any of that interest at all and since the credit card company isn't making any money off of charging you interest you my friend are considered a deadbeat now i got my first credit card when i was 18 years old and i have been a deadbeat ever since not once have i ever let the credit card company charge me interest which means that i've gotten all the benefits of credit cards essentially for free and there are quite a lot of benefits notice how this rule isn't don't use a credit card it's be a deadbeat because i truly do believe that you should have and use credit cards there are several reasons for this that we could list off for when credit cards generally have better fraud protection for online shopping than debit cards do and a lot of them also give you cash back rewards travel points miles all kinds of nice little bonuses which are cool to get but the main reason that you should have a credit card is to build your credit score now i've got a whole video on credit scores in the works with lots more detail coming down the pipeline and you can also learn more about credit scores in the tech tree as well but what i'll mention here is that your credit score controls a lot of what you can do in life honestly it probably controls a bit too much but hey we gotta play the hand that we're dealt and your credit score right now determines whether you're gonna get approved for a home loan for one what interest rates you're gonna pay for home loans for literally any other kind of loan the higher your score the lower the interest rate so it literally saves you money to build your credit score and it can even decide whether or not you're getting approved as a renter for rental units townhomes apartments things like that i recently saw a townhome for rent here in denver that actually requires a minimum

700 credit score just to get approved but the problem when you're young is that you probably don't have a whole lot of experience using credit cards or using loans which means that you don't have much credit history and you might not even have a credit score at all you need at least one loan or credit card on your report to have a credit score and while you can build up that credit history with things like car loans or student loans the nice thing about a credit card is that it actually allows you to build up your credit score essentially for free as long as you're a deadbeat now essentially is the key word there because ever since 2009 actually the year i graduated high school it's harder for people who are 18 to 21 and don't have credit history to get a credit card back when i was in high school and college they were shooting credit cards out of t-shirt cans of people it was really easy to get one back then not the case today so today typically the easiest way to get a card with no credit history is to get what's called a secured card where you make a deposit up front then becomes your credit limit so for example you give the bank 200 you receive a secured credit card with a 200 limit now eventually you can get that deposit back and the card goes from being secured to being unsecured like a regular credit card and once you've got it you can start building up your score over time by following tom's three golden rules of dead beatitude number one always pay your balance on time on-time payments unsurprisingly are the biggest single factor in determining your credit score number two always pay your balance in full again so you don't get charged any interest on that credit card and finally number three never use more than about 30 of your credit limit now this last rule has to do with something called credit utilization which is your current balance divided by your credit limit and the lower that ratio is the better your score is going to be so by keeping it under 30 you are going to be building a good score over time 30 isn't a hard rule but it's a good rule of thumb additionally is a great idea to set up automatic payments for your card as well so you're guaranteed to never miss a payment and i actually made a whole video about that so you can check that out after this one now one final rule that i'm gonna mention is to consistently be investing not in stocks not in bonds not in mutual funds but in yourself so my second rule was to maximize your retirement accounts and that is a great idea but i truly believe the best investment i am ever going to make is in improving myself which means continually improving my current skill set learning new skills and most importantly looking at the world with a beginner's mindset rather than assuming that i know everything already i want to be open to learning new things it also means taking advantage of opportunities by connecting with new people maybe even traveling to conferences and professional events to deepen relationships you've made online and it can also mean improving your meta skills like your ability to solve problems creatively since easy problems are very easily automated in pretty much every single industry out there the people who can innovatively solve complex problems are the ones who are most in demand and if you want to improve your skill in this area one great resource that you can practice it at is brilliant who have kindly sponsored this video and who have been an amazing supporter of my channel brilliant if you haven't heard about it is an online learning library that teaches you math science and computer science while also helping you become an all-around better problem solver and they do this by creating courses that are entirely based on the principle of active learning the vast majority of the time you're going through any of their courses you're not reading walls of text you're not watching videos you're actually solving interactive puzzles and challenges and brilliance library has more than 60 of these courses that cover topics like calculus statistics logic computer algorithms and lots more so if you want to start building your stem expertise if you want to get better at problem solving and if you want to support this channel you can head over to brilliant. org thomasfrank to start learning today or you can click that link on screen right there if you enjoyed this video if you learned something you might also want to check out the video i mentioned earlier on automating your finances or this video here which youtube has kindly picked for you if you enjoyed this video definitely hit that like button for the algorithm hopefully you learned something useful here let me know if you have questions in the comments down below and i'll see you in the next one