How to obtain wealth – this one metric is key

Welcome back folks it’s Wednesday and that means another blog post. So, you saw the title it’s not click bait (well maybe a little) but obtaining wealth is one of the more important endeavors many of us pursue. Is wealth the key to happiness? No not really. Does wealth give you more options to achieve happiness? Yes! So, as we journey through life and into adulthood there are a couple of key metrics you can measure to figure out if you will obtain wealth at some point.

To be clear, wealth doesn’t mean tens of millions of dollars. I mean it could mean that for you but wealth, in my view, is having enough income to enable you to pursue things that make you happy. Yes, having a 100 Million dollar yacht might make you happy, so might a 15K bass boat. Hopefully you get the picture here. The point is there are a couple of important aspects of adulthood we all have to deal with. This one key metric I reference in the title is one of the most important to determine if you have a chance to obtain wealth. “Well Karac what is it?!?!?”

How much of your income do you spend on housing.

Everyone has to live somewhere unless you are in dire financial straits. Your housing costs usually represent a huge chunk of your income. The principle here is pretty simple, the more you spend on your four walls the less money you have to spend on other things. Over time this has a debilitating effect on your wealth. To put it simply, if you are spending most of your money on rent you don’t have money left to invest, pay off debt, accumulate items you want etc., so on.

Money can’t buy happiness, but it can buy you time to do things that make you happy.

So how much should you be spending on housing? You should try and land somewhere between 25%-33% of your net income (take home pay, not gross). Now the important thing here is to remember your income can change over time. So, you might be getting a mortgage in 2023 and it is 33% of your income. You project that in a few years your income will increase 10-20% (for argument’s sake) and therefore the % goes down. You always want to start as low as you can on the curve and hope your income increases over time.

You may also lose income at some point, that happens. You may also get to the point where you do not pay for housing (you paid off your house). So, to be extremely clear here the metric for housing is the actual payment you make every month for rent or a mortgage. We aren’t talking about electricity, sewer etc. JUST HOUSING. Ideally you keep your housing costs at 25% of your net income through your adult life with the goal of someday having a house paid for with no mortgage.

At 24 that might not be realistic but let me leave you with this example. You are 24 you make 60K a year. Depending on where you live, taxes, benefits you chose etc. you will probably take home approx. 45,000 (these are rough estimates based on probable outcomes for the U.S.) So that equals $3750.00 a month. 33% of that (the high end) =$1,237.50. That’s the max amount of rent you should be paying to ensure you obtain wealth. Remember the numbers I used here are to give an example. For you here is how you do it.

Take home pay multiplied by number of annual pay periods = net income. Net income multiplied by 25% – 33% = housing cost you should be paying.

We don’t want to spend more than a third of our take home pay on housing because we need our income to pay bills, reduce debt and invest. The lower your % of housing cost the greater chance you will have to build wealth over time. Housing is likely the biggest monthly expense we face as we go through our adult lives. Keeping its cost in perspective as a % of take home pay is the key metric.

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One simple way to determine if you are healthy financially

Not a long post today. Remember the finance posts you see on my blog are opinion pieces and not meant as financial advice. When making financial decisions you should seek out several resources and do your diligence and research. Now that out of the way there is one simple way to determine if you are healthy financially.

Do you pay the full balance of your credit card every month?

If you pay your credit card balance every month and never carry a balance this means you have enough income to cover all of your expenses. Now this has to be consistent, you cannot do it one month and then the other 11 not do it, but if you are paying off your CC balance every month this is a clear indication that you are healthy financially.

You see millions, tens of millions of people actually cannot pay their CC balances off every month. This means they spend more than they make, and that is the simplest way to know you are unhealthy financially. Simply put, if you can pay everything month to month you have created a sustainable financial life. Now do not confuse this with being wealthy, that is completely different.

Cash is still king

It does mean that you are financially healthy, now can you be healthier? Sure. You see what happens ideally is after you pay everything off every month you have money left over to save. That is how you move into wealth building and that is another post altogether. Remember this is simple, do not over think it. If you pay off all your CC balances monthly it is highly likely you are healthy financially.

You are living within your means. Now if you are skipping car payments and mortgage payments to make these CC payments that’s a problem but generally people skimp on the CC payments because there is a minimum payment which enables them to retain the balance to apply to other non-minimum payment bills, like mortgages.

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Why I don’t invest in Crypto

So another finance piece today. There is a massive story that broke recently pertaining to FTX exchange collapse. Let me get this out of the way now, I am not a crypto expert. You should take any advice/opinion you see online with a grain of salt and always do your own research. The FTX collapse is tied directly to Crypto currency values. Many people have lost a lot of money and for them I offer my deepest condolences. I know what it’s like to lose money on investments, it sucks.

So for me I never invested in crypto. Why? Because I am not educated in that market. It really is that simple folks and YOU should apply this simple philosophy to anything you chose to invest in. You have to be educated on the investment type. Now a caveat here, you can invest in things you are unfamiliar with if (big if) you are not risking a major portion of your portfolio (5% or less).

I simply don’t know crypto currencies. Further they, for the most part, are not regulated in any manner so the risk is much higher. So is the reward of course. Like most things in life the higher the risk the greater the reward. For me I use a long term conservative approach to investing. I invest in things I know, like Microsoft, Toyota, McDonalds. You see companies like that, whether you like them or not have long term established business models.

Money gives you the opportunity for a comfortable life.

I always felt more comfortable investing in companies who produced a tangible product that I actually used. See for me, the best advice I ever got for investing was “Take note of the products you buy and use and invest in those companies”. It made sense to me, if I am buying the product its likely other people are as well. That establishes a revenue stream that equates to value.

So those simple principals enable me to avoid the current decline in crypto currency. It also means I missed any and all gains by crypto as well. It’s a double edged sword. Meantime I keep the long term boring process of investing in companies that produce goods and services with a long term track record. Coca Cola, Intel, Google, Apple we can go on and on. The point here is I know these products, I use them and by slowly and steadily investing into stocks and mutual funds that hold these stocks I’ve created a nice portfolio.

Maybe you know crypto, maybe you know oil or real estate? There isn’t a perfect formula here, but investing in what you know is often the best you can do. Sure you might miss a trend and not get in on those huge returns, I get it that sucks. By long term steady investing into companies and products you are educated on is a great way to ensure liquidity and viability of your investment portfolio.

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