- Hey, what is going on guys?
So when it comes down to it
this channel is kind of all about
building your resources, right?
I mean we have videos about building
your cognitive abilities
so you have the resources to take on tests
and do challenging work,
we have videos on improving your health
so you have more energy on a daily basis.
And we have videos talking about a lot of tools
that can help you be more productive
and get a lot more work done.
But one of the resources we haven't talked a lot about
on this channel is your money.
Which is kind of weird because I actually spent
the last three-and-a-half years
co hosting a personal finance podcast on the side
and I am not too proud to admit
that I have spent many a Saturday night in the past
staring at a financial spreadsheet.
- Does this look dull to you?
- So now that I have lost all of my friends
I've got time to break down seven
really common financial mistakes
that you're gonna wanna make sure you avoid
if you want to start building a solid financial base.
Cue the llamas.
(upbeat instrumental music)
So our first common financial mistake here
is failing to plan for medium-term expenses.
And by this I mean expenses that are more than a month out
but still coming up in the sort of near future.
Now if you're like most people
you're probably very well aware of the fact
that you have to pay rent at the end of the month.
And you have many other typical monthly expenses,
you have to buy groceries every single week
and tomorrow you need to go out as soon as possible
and buy the Tim and Eric Chrimbus Special DVD.
You know this.
But what you might not be as aware of
is the fact that maybe three months down the line
you've got to buy textbooks for your next semester.
Or that a holiday's coming up and you have to buy gifts.
A lot of people don't think about these medium-term expenses
and that can get them into trouble.
So this is why it's important to frequently look ahead
and ask yourself the question,
what is coming up in my life?
I think of this as a mindfulness practice.
Think about all of your life's dependencies
and what you're going to need to do
in the medium-term future
to make sure that they're all going
to continue to run smoothly and that you're prepared
for any expenses that they might bring.
Mistake number two is making big financial decisions
in your life without running a what-if analysis.
This basically means that you take the data
that applies to your current financial life
and then you ask what if?
And you ask it using data.
You ask what would happen if I say,
bought a new car or got a new job?
Or took a payout on my current job
because I maybe want to cut down to part-time hours
so I can pursue a passion.
A lot of people jump into these big decisions
without actually seeing what they are going to do
to the numbers that run their financial life.
Now for all my flaws and all the dumb decisions
that I make in my life,
one thing that I am not is one of these people
because for the past couple of years
I have been developing this very complicated spreadsheet
that basically runs my entire financial life
and allows me to easily run these what-if analysis.
Is it analysis?
Analyses, analyses, yeah.
Now what you're gonna see on the screen here
probably looks a little bit complicated
and you definitely don't have to build something
this crazy, although I am gonna have publicly available
demo version of this spreadsheet
in the description down below if you wanna download it
and start playing with it.
But essentially I built this spreadsheet
so I could put in all of my income sources
and all of my typical monthly expenses.
And then over on the left side
I've got cells that add everything up,
do subtractions, do division, addition,
all those other math things
and to tell essentially how much money
is left over at the end of the month,
how much I'm investing, how much I'm spending on housing
and all sorts of other useful things.
Now to be honest I've gotten pretty nerdy with this.
I even have a second page in this spreadsheet
that has accurate federal tax brackets
and state tax brackets so I can see
what I'm going to be paying in taxes
given the amount of income I bring in during the year.
And the best part of this is that I can
if I want to make a change in my life,
simulate that change before I actually make it in reality.
So whenever you are contemplating a big financial change
in your own life I would implore you
to run a what-if analysis like this.
Build a spreadsheet or at least know in your head
how much you probably make on a monthly basis
and how much you roughly spend on a monthly basis
and then do the simulation in your head or on paper
so you know what's gonna happen before it actually happens
and you don't get yourself in hot water.
(upbeat instrumental music)
Bit mistake number three
and this can be a potentially very big mistake
is not having an emergency fund.
A lot of people out there are so gung-ho
about paying off their debt quickly
or investing money in the stock market
or other risky investments that they don't take the time
to actually build a base of cash that they can use
if something goes wrong.
So to give you a little insight
on my personal finance philosophy
I feel like your number one goal
when trying to establish a financial base
is ensuring that you can take a punch.
What's a punch?
Well a punch is when someone balls up their fist
and they connect those bones and tissue and skin
with your face and then you get a bruise.
But in metaphorical terms a punch is really anything
that sort of requires you to pay a bunch of money
that you weren't expecting in order to continue
living your life the way that you want to live it.
And to make things really simple the way that you ensure
that you're able to take a punch
is by establishing an emergency fund.
Having a base of cash that you can tap into
if you need it.
Now a lot of people have asked me
how much do you actually need to have in an emergency fund?
How much do you need to have saved up in your checking,
your savings account before you can start
accelerating debt payments, or invest it?
While I can't give you exact numbers here
because there are huge cost-of-living differences
all around the world and many other variables to work with
I do have a couple of ballpark numbers
that I think are good rules-of-thumb to start with.
So goal number one in my mind would be to establish
an emergency fund of $500.
Now to be clear this is just a ballpark number
that I think is a useful figure to start with,
but it may be different if you live somewhere in the world
that has a very different cost-of-living index
than say the average cost-of-living
here in the United States.
So if you want to find out what a good equivalent number
might be for where you live,
you can actually go over to a site called numbeo.com
and run a cost of living comparison
between two cities.
For example here I've run a comparison between
Des Moines, Iowa which is my hometown
and Prague.
As you can see it cost 1.3 times as much
to live in Des Moines, Iowa as it would to live in Prague.
Now these are definitely averaged numbers
based on aggregata data
so there are going to be variations in real life
but this is a good planning tool.
Anyway, goal number two after you have established
that $500 emergency fund is to figure out your number.
What is your number?
Well your number is your minimum monthly expenses.
So this means cutting out Netflix,
cutting out Spotify,
cutting out all the chocolate you buy at the grocery store,
yes this is projection.
And figuring out how much do you need
to basically maintain a minimum standard of living
where you're actually living.
So not getting kicked out of your apartment or anything,
but you know buying rice and beans,
living in your apartment and all that stuff.
So maybe you look at your bank statement
and you find out that last month you spent $1,200
on all of your expenses.
And you look through all the expenses,
you cut out the ones that seem non essential
and you get down to a number of $800.
So $800 a month is your minimum monthly threshold.
Goal number two is to build up that amount of cash
in your checking account at all times,
which means after all monthly expenses are taken care of
that amount of cash should be left over
in your bank account.
You should never go below it.
And finally goal number three is simply the combination
of goal number one and goal number two.
Have a $500 emergency account somewhere,
maybe a savings account
and then have your minimum monthly expense
as a cushion in your main checking account.
Only then should you start accelerating debt payments
and by accelerating I mean going
beyond the monthly minimums
or investing in maybe riskier investments
like the stock market, mutual funds, whatever it may be.
- Bitconnect!
- Alright, mistake number four
is carrying a credit card balance.
Now I have had a credit card for about nine years now
and I use it every single day,
but I do not view my credit card as credit.
I don't view it as borrowing money.
I view my credit card as simply an intermediary step
between my bank account, the money that I know I have
and the purchases I want to make.
This means that while I do use my credit card
for most everyday purchases,
I make sure that I go in every single month
and I pay off the balance in full.
And as a fail safe I also have an auto payment setup
so I know it's always going to be paid.
Now the reason that this is so important
is that credit cards are in general a very bad tool
for borrowing money.
I don't think that the concept of debt itself
is inherently evil,
but the way that credit cards do it
can get you into trouble really fast
because credit cards often have a 20% interest rate
or higher and if you start building up a balance
the compound interest from that high interest rate
can start to get you into a position
where you can never dig your way out
because the interest is accumulating
faster than you can pay it down.
So please raise your hand and swear to me
that if you're going to use a credit card,
and I think that you should,
always pay your balance off at the end of the month,
never carry one and never pay a dime of interest
to the credit card company.
(upbeat instrumental music)
Now our fifth mistake here is kind of
the opposite side of the coin from our last mistake
and it is refusing to build credit at all.
Some people out there are just so fearful of debt
they refuse to use credit cards outright.
They refuse to take on any debt whatsoever.
They hate debt,
but this can be a destructive mindset.
Think about this philosophically for a second.
There's this saying that goes,
"No man is an island."
And it is more true today than it ever has been in the past.
To achieve almost any of your big goals today
requires participation in society
and that participation usually involves interactions
between strangers.
And like this or not one of the primary ways
that our society uses to gauge the trustworthiness
of strangers is to use their credit history.
Can you borrow money and be trusted to pay it back?
And many of the basic things in life
use this as a trust indicator,
whether it be something as big
as getting a mortgage for a house
or something as relatively simple
as getting approved for an apartment lease.
I actually know people who've applied to live at apartments
and they have had more than enough money
in their bank account to pay for six months
or even a year's worth of rent but have been rejected
because they did not have an adequate credit history.
So as soon as you can start looking for ways
to intelligently build up credit.
When I was 18 years old I did this by getting
a credit card with a $500 limit
and just as I do now,
I went in every single month
and paid the balance off in full.
And honestly if you do this you don't even have to use it
for every single transaction.
You don't even have to carry it
with you on a day-to-day basis
and deal with the temptation to use it,
you could lock it in a drawer
and just set it pay something
like your Netflix or Spotify bill.
(upbeat instrumental music)
Alright, mistake number six is failing to invest your money
or waiting far too long to do so.
Albert Einstein once may or may not have said that,
"The most powerful force in the universe
"is compound interest."
It's kinda one of those quotes
that has less than trustworthy sourcing,
but it is true, compound interest can work wonders for you
if you get in on it early enough.
So to answer two questions related to investing,
first and foremost where do you invest?
This is one of the areas where people get tripped up
because there are so many choices out there
and they just simply don't know where to start
so they get analysis paralysis.
Now I am not a registered financial advisor by any means
and I don't want to be the kind of person
who's telling you where to put your money
so I will just tell you what I have done myself.
When I was a junior in college I started an account
with VanGuard and I started investing
a small monthly amount with them every single month
and then later I complimented that with an account
over at betterment.com.
And aside from those resources there are many other places
to invest your money out there.
There are places like Fidelity,
places like probably your local credit union or bank.
But the one thing that I'm going to point out here
is that you want to avoid high fees
in whatever investment you choose,
anything more than 1% is probably
just a reason to avoid that investment.
Beyond that there are great books out there
like I Will Teach You To Be Rich
where you can learn more
and we actually did an entire episode on investing
on our podcast so I'll have that in the description below
and there are also websites out there like Bogleheads
which give really solid and I think sane investing advice.
So those might be good places to check out.
And that brings us to our second question
that I get asked quite a bit because I'm in the college
and student space
and that is should I pay off all my student loans
as fast as I possibly can
or should I pay the minimums and use all my excess cash
to start investing early?
Now this a nuanced question,
I should probably make an entire video on it
but I'm going to give you my abridged thoughts here.
First and foremost the answer to this question
is going to be very dependent
on how tolerant of holding debt you are.
If you're one of those people
who is very emotionally affected by having debt
then you should probably pay that off
as quickly as possible.
That being said if you are more tolerant of holding
a little bit of debt
then we can start to get a little bit nerdier about this.
So an investment is going to have a certain rate of return,
right, and your debt is going to have
a certain interest rate.
So if the rate of return on investment is higher
than the interest rate on your debt,
then putting money towards that investment
is going to make you a little bit more money
in the long run than if you were to put more money
towards the debt and not invest at all.
There's a spread between those two numbers
and that's where you can make more money.
But the problem is that the rate of return
on any investment out there is uncertain.
That is the nature of investing,
you have to take on some risk to get reward.
So because of that you have to be slightly risk tolerant
to use this strategy.
Now if you invest in something like an index fund
which is just a simple investment
that follows the stock market
and you look at the historical returns
of an investment like that over the long-term
then you get a rate of return around 7%.
There's a great blog post that I'll link
in the description down below if you want to see
the data behind that.
Now you might be thinking 7% sounds great
and my student loans are at 4%,
so it's clearly a good decision right?
The one thing you have to keep in mind here
is that 7% figure is a long-term figure,
sometimes the market may be way up
and may return like 20%
and some years, like 2008,
you get a negative return,
you could lose a bunch of money.
So we're talking about long-term returns here
and you have to be risk tolerant.
And for that reason I think that it is a good idea
to have a little bit of a cushion
between that 7% figure and your interest rate on your debt.
So here is my rule-of-thumb,
for those of you who are a little bit risk tolerant
and want to maximize your returns
as much as you possibly can.
I say to pay off any debt
that has a 5% or higher interest rate as fast as possible.
Don't invest until you do this,
of course get your emergency fund,
but don't invest in the stock market.
But for any debt that is below 5%,
just pay the minimums on that debt
and take all the extra money
you have at the end of the month
and put that into a responsible investment
like an index fund.
(upbeat instrumental music)
Alright we have arrived at our final money mistake
which is a bit more of a meta mistake
than some of the other ones on this list,
but I think it is still important.
And the mistake is focusing on immediate financial ROI,
as in return on investment in all of your decisions.
What I mean by this is a lot of people out there
are focused on the money far too often.
They chase the money and they turn down opportunities
that could result in a lot of potential personal growth,
career growth, relationship growth,
because it doesn't come with a paycheck right now.
So once you've established that financial base,
and this is important,
once you're able to take a punch,
start thinking a little bit more long-term.
Start investing yourself,
don't chase money for too long
and let your personal development stagnate.
And on a related note and I have to mention this here
make sure that the investments you make in yourself
aren't only the result of spending money.
And what I mean by that is make sure that you're investing
time and effort into your development as well as money
because a lot of people out there think
that just by buying productivity books
or buying gym equipment they are going to magically
become stronger or more productive or smarter.
And that isn't the case.
When it comes to professional development
there are really three different steps
to you know any kind of improvement.
There is the purchasing of new tools,
which is the most fun part,
the most novel part
and the part that gives you the biggest rush when you do it.
But then there's also the learning stage
and the practice stage
and both of these stages are harder,
they're not as fun as going out and buying something
but ultimately they're more rewarding and more important.
Now earlier in the video we made a point
about looking ahead and making sure
that all of your life's dependencies are covered.
And one area where people often fail to do this
is in their digital life,
especially when it comes to their security.
I cannot tell you how many times I've met a friend
who's using the same exact password for their bank
as they are for their Final Fantasy VII Fan Fiction
forum login.
And that is a big problem,
when you repeat passwords you open yourself up
to a lot of vulnerabilities
and the potential of getting hacked
and maybe even having your money stolen.
So going forward make sure that you are always using
strong, unique passwords
for every single online account that you have.
And an easy way to do this
and keep it all managed and organized
is by using a tool like Dashlane.
Dashlane is a really well-designed password manager
that can easily generate, strong, unique passwords
for all of your online accounts.
And it can also auto fill those passwords
and login forms so you can easily get into the websites
that you use every single day
and what's even better, especially for me,
it can automatically fill in any other form online as well.
This saves a ton of time and eliminates a lot of friction
in your everyday life.
Dashlane can also store things beyond just passwords.
They can store secure notes for you
and your payment information
so you can pay for things online really quickly
and all of your information is stored
in a patented security architecture
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So if you want to start improving your online security
in a very easy and convenient way
then head on over to dashlane.com/collegeinfogeek
to give them a try for free today.
And if you want to save a little bit of money
on their premium subscription
which let's you sync passwords across all of your devices
and securely share passwords with trusted friends
and family members then you can also use
the promo code, collegeinfogeek at checkout
to get 10% off your order.
I want to give a big thanks to Dashlane
for sponsoring this episode
and being a supporter of our show
and as always guys thank you so much for watching.
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Thanks for watching and as always
I will see you in the next video.