General finance advice

[georgialiving]

Hello! I recently recommended some finance books to a couple people. Specifically found the millionaire next door to be inspiring. I was wondering what your favorite financial "tidbits" are so that I can throw together a couple pages to look through and break it down. They make just a bit more than minimum and I wanted to show how they can still benefit from money management and savings.

I was thinking of things like:
Explain savers tax credit
Multipliers for how much would save if you stopped a simple habit
Compound interest
Reducing spending is two fold

Just general finance advice compiled.

Thanks everyone!



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[gooki]

25x annual expenses in investments equals FI rule, along with the 4% safe withdraw rate.

Maximum effort into cutting back reoccuring expenses.

Pay your future self first (because nobody else will).

[marty998]

Work, save, invest.
(per the 3 word slogan our Government is so fond of).

You can only spend a dollar once, but a dollar spent on your mortgage saves $4 down the track.

[georgialiving]

@gooki thanks! So funny I hang around these forums and didn't think to put the 25x expenses rule. This is great. Thanks to both of you for your input!


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[acroy]

Compound interest

^^^
Understand it and earn it, or ignore it and pay it.
This worked when attempting to educate somewhat obstinate dear family. I enjoy living and speaking about 'financial badassity', they were non-receptive, somewhat willfully ignorant 'I don't care, it's just money'. Mentioning compound interest perked them a bit. YMMV.

One of them was complaining about no money. I mentioned 'bleeding money' and that their daily morning banana and red bull (which they were holding in their hand), purchased from a convenience store for $4 every single morning, was a $1000/yr habit. They were making $34k/yr at the time. That woke them up a bit too

Tailor the message to the individual. I'm not so good at it, but it it works great when done well.

[Uturn]

+1 for compound interest.  When I read Dave Ramsey's book years ago, there was a page that broke down compound interest.  That one page changed my life.  Compound interest is either lifting you up, or pushing you down. 

#1 thing to improve your finances is to track your money.  I don't care if you make $7/hr or $70/hr, if you don't track money in and money out you will be broke.  Spreadsheet, YNAB, Mint, Personal Capital, choose your poison. 

Change your view of money.  Money can buy you stuff, or money can buy you freedom.  Freedom from worry about where the car payment will come from, freedom from having to work for an unethical boss, freedom from fighting with your spouse about which bills to pay, freedom from that trapped and caged animal feeling that comes from being broke. 

[georgialiving]

Taking some of your quotes just as they are. I am listening to JL Collins on so money podcast right now and he is talking about the freedom that comes with money. How fitting


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[canadian bacon]

Start with compond Interest:

This means that the interest is repeating AND as it repeats, each new interest amount gets adjusted by the last..

For example:
Without understanding compond interest, a person may say that:

if you start with $1000 and earn 5% interest each year, after 5 years you will have $1000 and add (5% x 5) =

Year   Starting amount     Interest     Final amount
1                $1000             $50             $1050
2                $1050             $50             $1100
3                $1100             $50             $1150
4                $1150             $50             $1200
5                $1200             $50             $1250
THIS IS COMPLETELY WRONG!!!!!!

Instead, the yearly growth gets recalculated every year as shown below.  Each year the interest is the starting amount times 5%

Year   Starting amount        Interest        Final amount
1                $1000             $50             $1050
2                $1050             $52.50        $1102.50
3                $1102.50        $55.13        $1157.63
4                $1157.63        $57.88        $1215.51
5                $1215.51        $60.78        $1276.28

Note that above I illustrated compound gains on a yearly basis.  This same technique is true for losses and the term may also change.  For example, a credit card would have MONTHLY interest.

Seeing the above chart, you can create your own multiplier based on your own assumptions.  Most people on this forum like the expectation that the market will return on average 7% per year.   The chart now look like this per dollar (assuming the total amount is all invested with a monthly interest of 7%/12

year    month   monthly cost   monthly interest    total
1     1               $1.00                                     $1.00
1        2               $1.00                $0.006          $2.01
1        3               $1.00                $0.012          $3.02
1        4               $1.00                $0.018          $4.04
1     5                $1.00                $0.024          $5.06
1     6               $1.00                $0.030          $6.09
1     7               $1.00                $0.036          $7.12
1     8               $1.00                $0.042          $8.17
1     9               $1.00                $0.048         $9.21
1     10               $1.00                $0.054         $10.27
1     11               $1.00                $0.060         $11.33
1     12               $1.00                $0.066              $12.39

So your dollar a month habit costs you 12.39 after 1 year.  Extrapolate this is 10 years, 20 years, add 3% inflation to your cost each year...

Figure these out and you can generate answers on your own.