This is not a new idea. The idea of paying yourself first has been around for over 100 years. the problem is that even today, over 100 years later, the majority of people in this world are not using this PC and simple principle. This fact confounds me as many people today, as we all know, are living far beyond their means. This is basically a quick path to debt and insolvency – not a future that I would want.
This living beyond our means is what caused this past recession in 2008 and 2009. this recession was so bad that it could almost have become another Great Depression. Literally four years later are only starting to see signs of life in the economy. Many families have lost their homes due to their inability to pay for their mortgages. Many of these families bought homes with variable rates – a definite no-no.
What happens with a variable teaser rate is that you get a lower rate for the first 2 to 3 years, after that your rate can go sky high if interest rates change, the economy changes, your credit changes, etc… it is never a good idea to get a veritable rate on a mortgage. You cannot bank on real estate always increasing in price every year as we have now seen this past recession there are snafus along the way. Real estate is still a good investment as long as you buy it low and get a fixed rate mortgage.
But aside from that, what really caused this last recession was people living beyond their means. I have people near me that drive cars that cost them $120,000 each. They live in homes that cost under $200,000. Their car payments could easily buy another house or two. but instead of investing in something that builds value or at least maintains it, their largest investment is in their cars – a guaranteed bad investment because cars depreciate fast.
And especially luxury cars. A car that you buy today for $120,000 is only worth maybe $80,000 to $85,000 as soon as you drive it off the car dealer’s lot. It is no longer a new vehicle and becomes used. If some unfortunate circumstance came up and you had to sell the car to get out of the payments, you would end up owing a lot more than the car is worth.
Why do people buy these expensive cars and live beyond their means? They want to show off to their friends. They want to look like they are somebody when they’re really not. they are what we call or refer to in Texas as big hat no cattle. They look like they have money when in fact they’re practically broke. they are trying to finance a lifestyle that they cannot afford and eventually it will catch up with them. This is what caused this last recession.
Don’t be one of these people living beyond your means. Instead of paying for these super expensive cars and living beyond your means be smart. take the first 10% of your income and put it into a mutual fund or exchange traded fund (ETF). Be sure that the mutual fund works change traded fund that you’re investing in is very well diversified. That way you’re protected better in extreme downturns like the recession of 2008 and 2009.
By investing in a well diversified mutual fund or an ETF like one that mirrors the Dow Jones or similar company make up, you’re basically guaranteeing that that money you’re putting in is going to be worth a lot more later on. What you have here going for you is not only the fact that you’re going to get an average of 9% return or more return per year, but you will also get the advantage of compound interest.
Compound interest can take a average investment and within a period of 10 to 30 years turn it into a significant amount of money. But the main thing here is that you need that time or compound interest to work its magic. In other words, start taking 10% of your salary from every paycheck and immediately put it into a safe investment. You must do this before you pay your bills or anything else.
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