There are many sophisticated things that we could do with our money. We could:
- Create a CD ladder for money that we want to save.
- Use tax-loss harvesting to save on taxes when we invest.
- Convert our IRA to a Roth IRA by using a backdoor Roth conversion.
Each of these sophisticated financial techniques could save us anywhere from hundreds to tens of thousands of dollars throughout our lives. Because they are so valuable, I definitely encourage you to become educated about each of them and see if you can use them either now or in the future.
While each of these are very valuable techniques to save money, they may only apply to a small part of the population instead of everyone. However, to become wealthy, we don’t need to know about sophisticated financial techniques. Instead, we just need to know about and do a few simple (and non-sophisticated) things.
Non-Sophisticated Thing #1: Don’t Buy a New Car
I’ve written before about how I drive a crappy little car to get to work and why a new car is an absolute financial disaster. However, I don’t feel that I can overstate enough how bad of a financial decision a new car is. It is such a bad decision that it can even determine whether someone has a chance to become wealthy. It really is that big of a deal!
So here’s what we should do when we are trying to become wealthy. Instead of buying a new car, we should purchase a used car and save or invest the money that was saved. After doing this for 20 years or so, we will probably have enough money to buy a new car if we really wanted to. However, after we actually have wealth, then we probably won’t care about buying a new car and making it appear that we are wealthy.
Until we are wealthy, we should avoid buying new cars. Instead, let someone else take the initial loss on a new car purchase and buy a used car through Craigslist or from the nice couple that lives in your neighborhood. We won’t have the nicest car on the block, but we just may have the biggest retirement fund.
Non-Sophisticated Thing #2: Invest Long-Term Money Instead of Saving It
Anytime that we have 5 or more years before we need our money, we should always try to invest it. This usually means that we should try to invest in the stock market or in real estate. However, when we look at the return on our retirement fund, we may notice that our returns are significantly lower than others are talking about on the news. Instead of getting an 8-10% return on our money, we may only see a 2-3% return.
Why are we always so unlucky?
Even if we feel that we are unlucky with certain aspects of our lives, we don’t have to be unlucky when it comes to investing. Instead, we just have to invest our money in the right things. For instance, instead of putting our money into the local bank where we earn 0.06% per year, we need to invest it with a company like Fidelity or Vanguard. Once we go to Fidelity or Vanguard, we need to buy index funds like FSKAX or VTSAX, so that we can get the same returns as the entire stock market gets.
We don’t need to buy “target-date retirement funds,” bond funds, annuities, or other mutual funds that have huge upfront costs and ongoing fees. Keep it simple instead by buying index funds.
We also need to be real careful where we invest our 401k or 403b money at our work. We may hear that a co-worker is putting all of her 401k money into a certain investment and figure that we should use the same investment. However, we need to look at the returns and fees on this investment before we actually put any money into it.
This may sound a bit scary, but it really shouldn’t be. Instead, just make sure that you invest your money in something that you understand that also has low fees (like an index fund).
Non-Sophisticated Thing #3: Plan for Bad Stuff to Happen
You and I both know that we are going to have many financial emergencies throughout our lives. Our car will break down, our water heater will break right after we get married, or we may get laid off from our job. These things are annoying, inconvenient, and very costly.
However, having a bit of money set aside in savings can turn these huge emergencies into smaller inconveniences. If I need to put a new transmission in my car, is it easier to do it by writing a check for it from my emergency fund or by putting it on a credit card that we won’t be able to pay off?
Obviously, the emergency fund makes the new transmission much easier to purchase!
Since the emergency fund consists of money that may be used within 5 years, we need to save it instead of investing it in the stock market. Short-term money (5 years or less) should be saved, while long-term money should be invested.
I use a money market account for my emergency fund at Capital One 360 that earns 2% on balances over $10,000. But you should use any bank or savings vehicle that you feel comfortable with. The key is not to have a huge interest rate on this money, but instead to save the money in case of bad stuff that always will happen.
The amount of money that you put in your emergency fund will vary. I recommend at least 3 months of expenses, Dave Ramsey recommends 3-6 months of expenses, and Suze Orman recommends 8 months of expenses. The key is to look at your current job situation and your risk tolerance to try to determine the size of your emergency fund. My wife and I only have a 3 month emergency fund because we both have stable jobs, but the size of your emergency fund may be way different than mine.
Non-Sophisticated Thing #4: Get Rid of Debt
No matter what, it will be tougher to become wealthy if we have a lot of consumer debt. This is true 100% of the time. I even argue that it is tougher to become wealthy if we have mortgage debt, although other people may disagree by using flawed arguments that rely on low interest rates and ignore risk.
The best thing that we can do with debt is to think of it as a huge emergency. We should be absolutely terrified about our debt and do everything that we can to get rid of it as soon as possible. Having too much debt will cause us to be unable to save or invest money, which makes many of our financial goals impossible as well.
Work extra, cut back on the budget, and sell a bunch of stuff that you own. Since debt is such an emergency, we need to get rid of it as soon as possible.
The Future
Although many of us may feel that money topics can be pretty complicated, they don’t have to be. We just need to buy used cars, invest in the stock market, save for when bad stuff happens, and be terrified of debt.
Given enough time, just doing these 4 non-sophisticated things will make us wealthy. Every … Single … Time.
What are some other non-sophisticated things that we can do with money? Share with us in the comments.
And thanks for reading!
~Nathan
Let’s keep living a great life … with the help of money. So what’s next?
- You can travel for free by using rewards credit cards.
- You can get motivated and get out of debt.
- You can check out the next post or the previous post and continue to learn.
But no matter what you decide to do, let’s leave the ordinary behind and take action today!
