5 Basic Money Skills You Need To Know
We talk a lot about the stock market here on this channel, analyze the stocks and try
to figure out where the market is headed to.
That's all, of course, important; however, to start your journey of getting to financial
independence, you first need to master the basic money skills to improve your financial
literacy.
For some reason, a lot of people believe that just because they can spend money, they know
how to manage it, which is not the case.
Managing money is an art.
The reason why a company like Apple has been so successful is because it has a team of
incredible accountants who have been playing around with tax regulations to keep most of
what apple makes to apple so that they can keep investing in themselves to keep producing
innovative products.
It not just Apple.
The current US president has been avoiding taxes for years.
Despite his 3.5 billion-dollar fortune, the president has only paid 750 dollars in federal
taxes in 2017 and had completely avoided taxes in many prior years.
We will not dive deep into accounting skills and the methods they use to avoid taxes because
we have covered that in one of the previous videos, which link I will leave in the description.
But we will shed some light on 5 basic money skills that you should know.
In fact, they are so important that everyone should know them.
Number 1 - Asset vs. liabilities
If you have read the book rich dad poor dad, the most important idea the author is trying
to get to his audience is the difference between Assets and liabilities.
The reason why so many people are struggling financially is because they don't understand
the difference between assets and liabilities.
An asset is anything that puts money into your pocket, whereas a liability is anything
that takes money out of your pocket.
The concept looks so simple, but yet most people get it wrong.
People buy houses, cars and think that they are acquiring assets when, in reality they
are not.
When you buy a home, you have to pay taxes, utilities, insurance, and so on.
It constantly takes money out of your pocket, which means it's lability.
Your car is also a liability.
You have to buy fuel, pay insurance, maintenance and so on.
However, if you rent that car out and it brings more money than it takes, then it turns into
an asset.
The same applies to a house.
If you rent it out and after subtracting all the expenses and it ends up generating income,
then it's an asset.
The rich buy assets, the poor buy liabilities, and the middle class buys liabilities that
they think are assets.
2.
Number 2 - Taxes
Taxes are one of the most complicated things out there, and that's not by accident.
They are meant to be complicated so that your average folk wouldn't understand them.
The tax code is written by the rich to keep them rich.
While on paper, it seems like the tax rates on the rich people are high, in reality, rich
people pay a small amount or, in some cases, close to nothing in taxes.
Corporate taxes in the US were around 39 percent during Obama, but no one really paid that
much.
In fact, sometimes they paid nothing.
When you pay taxes, you pay a fixed percentage base on your income, but when a company pays
taxes, they first subtract their expenses and pay taxes only on their net income.
And that means a company can have as many expenses as it wants.
A rich person doesn't pay himself to live lavishly but uses the company's funds to cover
his expenses.
And writes them off as business expenses and ends up paying lower taxes.
Many rich people run their companies at a loss to keep paying for their lavish life
and, at the same time, avoid taxes.
In fact, you can forward your losses to future years, so even if you end up making a profit,
you can deduct last year's losses and still avoid taxes.
When politicians say that we will increase taxes on the rich, they don't mean the ultra-rich
who make billions but the middle class who makes over 500K.
Since that 500k dollar is taxed under income tax, which is the highest tax rate in almost
any country.
If you don't master taxes, even if you end up making millions, you will be paying a big
portion of that to uncle sam.
And that takes me to the next point.
3.
It's not how much money you make that matters — it's how much money you keep
Let's say you are a successful lawyer in California, and you make 1 million dollars.
How much of that you are going to take home, only $532,382.
Your total income, federal and state taxes are going to amount to 46.7 percent.
You are literally giving half of your money to the government.
And if you have a mortgage and a car loan, you will hardly be making ends meet.
Even with a million-dollar income, you will be living paycheck to paycheck.
That's why what matters at the end of the day is how much money you can keep after paying
taxes and covering your expenses.
Learn to save money.
If you lose that job, the government isn't going to give you back that half-million dollar
you paid in taxes.
The bank is going to come after your house and the car.
But saving alone isn't enough.
4.
Learn how to let your money work for you
Having a lot of money sitting in your bank is useless to a certain degree because money
is a resource, and resources are meant to be used.
The only way to get out of a rat race is to have enough money working for you so that
you don't have to work another day.
The point isn't to lie on a couch and do nothing but rather have the freedom to do whatever
you enjoy doing.
So no matter how much you save, your money will run out at some point.
That's why you should let your money work for you by buying assets.
Remember, when we talked about assets vs. liabilities.
An asset could be anything from a rented property to a government bond.
Investing in some ways is easy and straightforward; however, in practice, it's a little more complicated
than it seems.
Stocks don't always go up, not every house is easily rented out, and government bonds
can sometimes have a lower rate of return than inflation.
So learning how to invest to get a high enough rate of return is an art by itself.
5.
Number 5 - keep your credit score high
You probably heard that you need money to make money.
And that's true.
Making a 5 percent return on a thousand dollars a year is just 50 dollars, not enough to get
you a pair of sneakers from Nike, but a 5 percent on a hundred million dollars is 5
million dollars, enough money to let you live like a king in any corner of the world.
Debt is an important financial tool.
Whoever has mastered it has built a fortune out of nothing, and whoever is bad with debt
ended up bankrupt.
It's up to you on which side do you want to be in.
You can of course, work and save every penny to buy a house 30 years later or be good with
debt and get a mortgage at favorable terms now.
The first step to being financially responsible is keeping your credit score high.
The easiest way to do that is through credit cards.
I know that you might have a negative opinion about credit cards because you had to pay
incredibly high interest since you didn't cover your credit card debt on time.
That has happened to a lot of people, but if you are financially responsible, it's not
that difficult to pay your debts on time to avoid the extra interest.
Now you might say, why use a credit card when you can use a debit card.
Well, to build your credit score, you need to take credit and pay it back on time.
You can basically use a credit card to pay for the things you pay with a debit card and
at the end of the month, simply pay your credit.
That's how you raise your credit score, so next time when you need to get a mortgage,
for example, banks will consider you a financially responsible citizen and would give you a better
mortgage rate.
Imagine how much you will save even by getting a slightly lower mortgage rate.
Whether you like it or not.
You have to learn to be financially literate to a certain degree because even if you hate
money, you can't avoid it, and money will always play an important role in our lives,
so start mastering at least the basic skills first.
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Thanks for watching and until next time.