At one point or another I think we can all relate on daydreaming of hitting the lottery, I know I used to!
The funny part about it is that I only played the lottery a handful of times because I knew it was a waste of money. But the powerful emotion of greed kept that fantasy alive in my head of randomly stumbling upon a lottery ticket like I was Charlie from the chocolate factory stumbling upon his golden ticket.
As I look back, I’m actually grateful that I never found that “golden ticket”. I didn’t have the mental capacity nor education to handle that kind of money properly. I would have ended up like 70% of lottery winners, bankrupt within 3 to 5 years.
It’s not just lottery winners who go bankrupt after receiving lump sums of money. It’s also actors, athletes, musicians, and other high-income individuals. There’s an extensive list of celebrities from diverse backgrounds, but they all had a few things in common. Frivolous spending, not paying or not paying enough taxes, trusting others to manage their money, and having no financial education. Just by having knowledge in these areas, they could have evaded a financial mess.
Financial literacy is not only important for high income individuals, but for everyone!
When it comes to personal finance, we hear an awful lot about emergency funds, debts, savings, and retirement, and all for a good reason as they are crucial.
However, to keep it simple I suggest focusing on the budget before anything else. Having an airtight budget is what will aid in cutting frivolous spending. By cutting frivolous spending we will have extra cash flow each month. That extra cash flow can then be used to fund our investments, emergency fund, debt repayments, etc.
Expenses can be decreased by transferring services to another provider. For example, if your cable bill is higher than you’d like, you can compare the same service with another provider and simply transfer. You will save money and have the same services, that’s a win-win.
We can also decrease our expenses by opting out of some unnecessary perks that may be an addition to the service provided. For example, if we have a cable package with all the bells and whistles, but we just use the bells and sometimes use the whistles, get rid of the whistles.
We can also decrease our expenses by negotiating with our service providers. If we see a promotion to attract new customers, and it’s for a package that we currently have, but at a better price, it’s a good idea to give them a call and negotiate for a lower bill. Even if there’s no promotion, but you’ve been a loyal customer for years, still negotiate for a lower bill. Most major companies would hate to lose you to a competitor.
Now if you really want to cut some fat, look at every bill that is not a true necessity to you, and get rid of it all together. Look through renewal memberships and cancel the ones you don’t use.
You may be surprised to see how many things you’re paying for on a monthly basis and don’t even know about, I know I was when I took this step!
Taxes, one word that may be the most loathed in the dictionary. Having no taxes would be great, though our economy would collapse without them, so they’re not going anywhere.
For this reason, it is vital to at least have an understanding of how they work. For W-4 employees, federal and state taxes are automatically taken from the gross pay. But the taxes taken are only an estimate. The true tax bill is calculated during tax time, and most of the time the IRS estimates were off, and they will send taxpayers back a refund of over paid taxes.
There is a way however to limit the amount the government takes out of each paycheck. With the right calculations, you can have a larger paycheck and potentially breakeven during tax time, meaning you don’t owe them anything more, and they don’t owe you a refund. That extra money can be used for investments, debt payments, or whatever you’d like throughout the year instead of it just sitting not collecting interest with the IRS. Just be sure to calculate correctly.
Check out https://www.irs.gov/individuals/tax-withholding-estimator to help with accurate calculations.
For 1099 self-employed individuals, taxes are not taken automatically. Self-employed filers are who I find to have the most issues when it comes to tax time. Having a good tax professional and accountant in your corner can alleviate many headaches.
There are many ways to lower a tax bill if self-employed. One way, which is a win-win, is to open a traditional IRA. A traditional IRA is funded by pre-tax dollars. By contributing to a traditional IRA, your tax bill can be lowered. The tax bill will be lowered because by contributing pretax dollars, it lowers your taxable income.
Should we rely on others to manage our money? The answer is very subjective.
The goal is to be financially independent and to have the know abouts to manage our money. But every situation is different.
If you’re self-employed, yes gain that education, but with that knowledge, you can either handle finances on your own or leverage your time by making an educated hiring decision within your financial team. Either way, you still want to have a financial education so that way you can see if who has been hired is benefiting you or not.
For a W-4 employee, I recommend handling everything on your own through your own education. W-4 tax filings are simple and sites like Turbo Tax make the process even easier.
Now if you’re a W-4 employee who owns real estate investments or other investments, I highly recommend having a tax professional in your corner. As I said, very subjective.
Now regarding investments, should you have someone manage your money for you? My unpopular answer is no. Why do I say no? Because of the fees and missed opportunities!
Our investments are already battling inflation that’s averaged at 3% per year. Now add another 1% in fees every year from a managed portfolio and that’s roughly 4% against our portfolio. Our financial advisor would need to make roughly a 4% profit just to break even for that year, and most will only guarantee 2-5% returns annually.
My suggestion – take an investment class or 2 or 10. Open an online brokerage account and begin contributing routinely so once you have the confidence to begin investing you will already have the money to do so.
Now if you’re really adamant about having someone manage your money, there’s nothing wrong with that. Just be sure to hire an advisor that is a certified fiduciary and calculate how much the fees will cost you from now until retirement.
Having a financial education is half the battle. The other half is having a money mindset. A mindset that is open to financial abundance.
It may sound crazy, but our psychology plays a HUGE role in our financial situation. From believing what’s possible for us financially to how we perceive money will directly affect how much we have, make, and keep.
Before we can change our financial situation, we need to first believe it’s possible for us, and to believe that we are worth it.
Luckily gaining a financial education is not like formal education, there’s no tuition payment to earn it. There are free websites like Wise Bread, Kiplinger, Investopedia, and many more out there. I suggest reading, studying, and of course, applying.
That’s how I received my initial money knowledge, I had to be resourceful. You can also attend seminars and financial education classes. Or if you’re ambitious you can hire a financial coach to work with – one that will be there every step of the way.
How you get your education doesn’t matter, all that matters is that you get one!
Jake Lewis is a certified personal financial consultant and a licensed life insurance agent. His passion is to help others better understand their finances and to put plans in place to help others achieve their goals.