Apr 152019
 

Actionable Advice – From Rags to Riches

I recently came across Quora contributor Kevin Yue’s response about the best financial advice he had ever received. The surprising answer comes from his dad, who escaped to the U.S. as a broke, war refugee. Over time Kevin’s dad turned his life around and eventually became part of the top 1% richest in the country. So here are some of his financial rules.

1. When making a purchase ask questions from an investment point of view instead of one based on consumption

There are financial ramifications to every spending decision. If you buy that new laptop, will you also need a case for it? What about extended warranty? If you buy that car, will you need to buy premium gasoline every time you fuel up? Will the vehicle hold its value well over the next 5 years? If you buy a house, how will that impact your taxes or gas bill? Will your maintenance and repair costs go up over time?

What is the potential for land appreciation in that neighborhood? The point is just because you buy something once doesn’t mean it will only cost you once.

Kevin warns that people usually ask all the wrong questions when they shop. For example, “when buying a new pair of shoes, do not ask how good they look or what brand they are. Instead, ask how long will they last, and in what kind of weather, and what the warranty is. If you get a good pair of warm waterproof boots with a lifetime warranty, they could literally be the last pair of boots you’ll ever buy. It is much better to buy a $400 winter jacket which will last you 20 years than a $200 one which will last you 6.” And both of those options will be better than the $800 jacket that will be out of fashion in 2 years.

2. A dollar saved is $20 earned

$1 invested will become $20 in 40 years.  “This is the magic of compound interest,” Kevin explains. “In practical terms, it means that your go-to option should always be to tighten your belt. Put away some money every week, and it will eventually pay itself back 20 times over.”

3. Never lose money for free

“Paying extra tax is losing money for free. Never pay your credit card late. Late fees are losing money for free. Paying interest is losing money for free. Always comparison shop. Why pay more for the same product? That’s losing money for free. Turn off your heat when you leave the house. Leaving the heat running is losing money for free.” Kevin’s dad used to turn off the heat entirely, but left his apartment door wide open to steal heat from the hallway.

Although going into debt is generally not advised, “there are some occasions when borrowing money is not losing it for free.” For instance, investment loans, HELOCs, and mortgages in the U.S. can be tax-deductible. “In these cases, sit down with a calculator. Doing the math wrong (or worse, not doing it at all) is losing money for free.” Another thought is to not leave any money on the table when negotiating.

4. Free lunches do exist

Credit cards often offer rebates on purchases. Kevin has 4 credit cards that offer 5% back on select categories each quarter. Every time he makes a purchase, he uses the one which gives him the biggest rebate. “Congrats. I just got 5% back on life,” he exclaims. He goes on to explain other examples. “Just this morning, I got sent a promotion where I get $300 back for opening a new bank account. Of course, the devil’s all in the small print. Yearly fees, etc etc. Which would be really bad (see rule #3), except I’m going to cancel the account the second they deposit the money. Thanks for the free $300.”

5. Minimize risks

It’s important to keep expectations realistic and not take on excessive risk.  It’s more achievable to reach a few million dollars in net worth than to aim at becoming the next big Rockstar, pro athlete, stock trader, or tech tycoon. “One of the big problems with how people think about money is that they only tend to hear about the big successes, never the big failures.”

I think all of these points are practical. 🙂 I especially like the first one. The decisions we make today have a ripple effect across our future selves. It’s good to keep that in mind or else we may purchase something today that leads to a larger than expected expense down the road that ultimately we’ll have to deal with.

 

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