Are you in better financial shape than you were a year ago?
If not, then you are clearly doing something wrong.
Many people think that you need to be lucky to be financially free, although there is
some truth to it, but most people who have access to the internet are already lucky enough.
The only problem they have is that they are bad with money.
The moment they receive that paycheck, they make sure to spend every dime by the end of
the month, As a wise man once said: it's not your salary
that makes you rich, it's your spending habits.
If you are 20 years old and put aside just 10 dollars every day for your retirement,
you Will end up with 1.752 million dollars when you hit 60.
Imagine if you increase that number to 20 or 30 dollars a day, you can hit that number
way faster than you imagine.
But to do that, you probably have to get rid from some of your spending habits.
Just by eliminating your daily Starbucks coffee or eating less out, you probably can do that.
Of course, there are millions of ways how people waste their money, but we are going
to take a look at some of the controversial ones.
In this video, you are going to learn why
buying a 20K dollar Rolex watch is cheaper that a 2oo dollar watch?
How can you use your car to become a millionaire?
And why you will never get rich if you ever decide to buy a house?
Buying a car - The most irresponsible financial
decision you can make
A car is no longer merely a tool to move from one place to another.
It has turned into a status symbol.
The more expensive your car is, the more money you probably make.
But the truth is, a 25K dollar Toyota can get the job done as good as a 200K dollar
Rolls Royce.
But that's not how people waste money when buying a car.
You can buy a 30K dollar Toyota and waste more money than when you buy a 100K dollar
luxury car.
When you buy a brand new car, the moment it leaves the dealership, it automatically loses
10 percent of its value even though it is still brand new.
Within it’s first year, it loses 20 up 30 percent of its value.
Within the next 3-4 years, it loses 40 to 50 percent of its value.
So no matter what car you buy, as long as it is new, in 3 to 4 years, it will lose half
of it's value.
That is the single most horrible financial decision you can ever make.
Because cars easily last 10, 15, or 20 years and there isn't much innovation in this industry
every single year.
A 3 or 4-year-old car is not going to be different from the rest of the cars in the street but
will save you a fortune.
The average price of a brand new car in the US is $36,718, and Americans on average change
their car every 6 to 8 years.
If you buy a used year car every six years instead of a new one and invest the rest of
the money, let's say in the sp500, you can end up with almost 1.5 (1,489,279.69) million
dollars (($36718/2)/6=%3059 a year) by the time you retire.
And that's if you buy the car with cash upfront every time, but if you take a loan to purchase
a car every six years where interest rates range from 4% to 20%, your opportunity cost
would much higher.
Which means, you are giving up millions of dollars just to have that car.
Next time before you buy a car, ask yourself - are you ready to give up millions of dollars
just to have this BMW?
2.
Number 2, Don’t Buy a House
A lot of people would say buying a house is one of the greatest decisions you will ever
make.
Unfortunately, that is not always true.
If you are not going to live in that house for at least ten years, then you should not
buy a house because you will end up wasting a fortune.
Now before you throw at me your angry comments, hear me out.
When you buy a house, it's not just about that price tag.
You have to pay taxes, insurance, inspection, appraisal fee, realtors, and so on.
The closing cost is really high, so if you are not going to live there for at least ten
years, you will end up paying much more than if you rent.
On top of that, when you take a mortgage, in the first 5 or even ten years, you usually
pay the interest and then gradually move to pay the principal.
So if you take a mortgage and just live there for five years, you will be paying interest
to the bank for loaning you that money instead of paying rent.
Mortage only makes sense if you intend to own that property for 20 or 30 years.
But yet in this radically changing economy we live in, it doesn't make sense to tie yourself
to one place.
That's why so many people who take mortgages decide to sell that property in less than
a decade and end up paying a fortune in closing cost.
Just imagine if you have invested that money instead in a mutual fund, for example, you
could have ended up with hundreds of thousands of dollars if not millions.
3.
Number 3, The Sunk cost fallacy
Confused?
Me too when I heard about it for the first time.
Since you have watched this video, you are now financially educated, and I assume you
are not going to borrow money to buy a brand new BMW because that is financially irresponsible.
But let's say you have already borrowed money to buy your allegedly "dream" car.
But you don't use it much because you work from home and only need a ride once or twice
a week, but you still have to make your monthly payments.
The rational decision would be to sell that car and pay off your debts since you don't
really need the car, but since you have already paid a portion of that car, you don't want
your previous investments to go to waste, so you keep the car.
It's like when you purchase a ticket to a movie but then find out that the movie is
boring, you still keep watching it because you don't want your money to be wasted.
And that is known as the Sunk cost fallacy, A desire not to see your past investment to
go to waste.
But You have already purchased the ticket.
You cannot recover that.
Now you should decide what is the best outcome for your future and not what outcome will
justify your previous spending because that investment is gone.
It is sunk.
Or take another example, some people remain in failing relationships because they "have
already invested too much to leave, although the logical thing would be to leave.
4.
Cheap Watches
To most people buying a 20K dollar Rolex watch is a waste of money because a 200 dollar watch
can get the job done as good as a Rolex watch.
But the reality is when you buy a regular watch, it might last you a year or two, and
then you will throw it away and get a new one or just stop wearing a watch like me.
On the other side, when it comes to luxury brands like Rolex or Patek Philippe, these
companies make sure that there is a limited number of their products in the market, which
keeps driving the price higher over time.
In fact, if they end up with unsold inventory, they will destroy it to keep the status quo.
So if you buy a Rolex watch where only a limited number of them were ever made, the value of
your watch will only grow as time goes by.
You will be able to sell for the same amount you bought for if not higher, whereas if you
a 300 dollar watch, you will throw it away once you get bored of it because there is
no other use to it.
5.
Impulse buying How often Do you often find yourself buying
things you didn't plan to buy?
You went to get yourself a pair of shoes, but you ended up buying a new t-shirt, a new
pair of jeans and whatever else was there on sale.
But when impulse buying turns into a habit, you are financially screwed because no matter
how much money you make, you will waste it on stuff you don't need.
Some people even end up wasting fortunes on expensive things such as cars or phones and
then question themselves a few days later, why on earth did I buy this?
If there is something you feel excited to buy, especially if it's something expensive,
sleep on it, give yourself at least a day or two to think about it.
Once you calm down, then you should decide whether you should buy it not.
That brand new iPhone or BMW will always be there in the store, and if someone else buys
it, there will be more.
As long as there is a demand, there will be a supply.
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Thanks for watching and until next time.