There’s something frustrating to me about my generation.
It’s something that people don’t understand, don’t learn (because they aren’t taught), and definitely don’t care or think about the future consequences of.
This is the fact that they don’t pay cash for things they want.
It is one of the dumbest traps for young people to get into and it’s all because they don’t understand the precautions when they don’t pay cash.
They’ll buy things on credit.
Get a huge loan.
Put items on layaway.
They’ll lock into monthly payments for years.
Listen. There’s one simple rule for determining if you can actually afford something:
Open your wallet, or go into your bank account. Is the number that’s there bigger than what you’re buying? If not, close your wallet or web browser.
YOU CAN’T AFFORD IT.
How to Pay Cash Practically
I would take this one step further and say for most purchases: is that price of what you want at least 95% cheaper than the number in your bank? If not, it’s probably not a wise choice unless it’s an investment.
Remember this rule of thumb to keep yourself safe in investments too: If it’s an investment, in most cases you’ll want to have about 2/3 of your net worth not at risk.
You want to avoid liabilities and purchase assets.
Questions To Ask To Differentiate Liabilities vs. Assets
Here’s a couple thing I learned from Mr. Robert Kiyosaki; things you might be familiar with already.
1. Does it put money in my pocket monthly?
If yes, it’s an asset. If no, it’s a liability.
2. Will it help me increase my net worth?
If yes, it’s an asset. If no, it’s a liability.
Everyone will want the new Mercedes, or that nice house on the hill. That’s understandable and a personal choice, but ensure that you have the correct cash flow to supply the ability to endulge.
Buying a mortgage, car payment, getting a loan, and having other outrageous monthly responsibilities is not a road to financial security. Rather, it’s a road locking you in to things you are responsible for regardless of availability of funds or desires to change the way things are.
Just pay cash for what you want; it’s simple.
These types of things lock you into a location, they lock you into the way you’re currently earning money, and they severely limit your potential to get out of the hole.
For the Young Hustlers: A Few Instances When Debt Is Good
Sometimes debt is actually good. Let me explain.
Many billionaires including Trump, Carnegie, Rockefeller, Walton, and more have gone into huge amounts of debt because they figured their projects would succeed and would make serious difference in their business.
The difference between these billionaires and you is they understand and have mastered capitalism.
They’ve made hundreds of millions of dollars selling goods at a profit and they know they can do it again. This is why they’re comfortable taking on debt for the necessary expenses that business accrues.
But most of the time, and with the way most people think about it, debt will get you in a lot of trouble.
Debt for new couches for the pad? Stupid.
Debt for a new plasma-screen TV in the bedroom? Stupid.
For the new Kawasaki Ninja 300? Cool, but stupid.
However, if you use debt to scale a business that is already killing it, and has had solid, consistent numbers, that’s smart.
If you’re willing to take a loan for something that is almost a guaranteed return on investment, that’s smart.
If you, however, go into debt for a stupid consumer reason, that is extremely dumb. Be careful where you’re getting into debt and why, and you’ll be fine.
Cash flow from assets should pay for your liabilities, many times over.
Limit liabilities and increase assets and remember to pay cash, because otherwise you cannot actually afford that which you are buying.
Another side benefit is that you build up good credit ratings by borrowing bits here and there. You pay it back before the end of the month (to avoid interest) and you can use that later on in life.
Cash Is King, Bootstrapping is Best, But Sometimes You Need to Get Some Help…
Sometimes you have business expenses that you don’t have the cash for. Bootstrapping is almost always better than borrowing or raising capital, especially when there’s no profits yet.
So if you want to take small, hedged investments like advertising or inventory costs, or building the systems that’ll make you money down the road, that’s your choice.
Just don’t overdo it – take as little that’s necessary.
Using O.P.M. (other people’s money) is almost always dumb if it won’t make you more money down the road. Borrowing someone’s money makes you their slave.
And if you can’t pay up on time?
Keep it simple, and borrow what you need if you must.
Otherwise, get a side source of income to support your main thing, work a job, sell a skill or service, and invest that money yourself.
I learned a ton by making newbie mistakes like spending $1000 on ads to make $500 back, and it taught me to be more insightful and calculated.
You too will learn (by losing your own money) what money is worth. Give a new business person $10k, and it’ll be gone before they know it.
Require a person to make their first $10k in business and you develop that person into a new character.