I was speaking with someone this week about smart money. They wanted to know how I defined smart money. The easiest way that I knew how to define it was to explain to her about smart money vs dumb money. I used the 5 principles or paths that I teach to build wealth to become a financial independent. Read through the list and ask yourself, am I smart money or dumb money?
Uses career to build wealth. Looks for positions in small companies that are going to get bigger, have an IPO or where they can hold equity. Looks for very good bonus structures that will allow them to leverage their time for above average income.
Trades dollars for hours. Usually in a dead end job and is either paid by the hour or has a staff level salary. Often found in large corporations and stays there thinking that they are “safe.” Little chance for substantial advancement.
Save, Save, Save
Has a plan for saving and sticks to it. Saves a minimum of 20% of their income. Can weather most storms by having ample savings. Gives up on materialistic items to save.
Lives paycheck to paycheck. Possibly states that they can’t save because of all their bills hold them back, but has maxed out cable, drives a new car, takes vacations and eats out a few times a week.
Debt Free Living
Is debt free or working towards it as a goal. Doesn’t eat out, would rather watch a movie at home, brings a snack to work, pays cash for most items and knows where every dollar is going before the month starts. Will “pay themselves” first before spending on luxuries.
Has a lot of debt and has no plan on how to get rid of it. Is 40 and still has student loans. Buys things on credit even if they carry a balance on their credit cards. Would rather have a big house, new car and the nicest clothes compared to a small house, 8 year old car and clothes that came out last season.
Invest, Invest, Invest
Contributes the maximum in their 401K plan, has a Roth IRA, a 529K and has a brokerage account. Is on a first name basis with their financial adviser. Knows what ETF, REIT or IPO stands for. May have a forex or options account. Likes to read the Wall Street Journal or Financial Times.
May put 2-3% in their 401K. Throws out the financial section in their Sunday paper before reading it. Thinks that they have no money to invest. Doesn’t know who said “The most powerful force in the universe is compound interest.”
Create Multiple Streams of Income
Has money coming in outside of their job. May own a side business, is earning substantial interest, or has investment property. Is working on a plan that will bring in more lines of income in the future. Is in the position to have money working for them. Can make life decisions because they have multiple streams of income. Loves ebay, Elance, Odesk or 99 Designs.
Still living pay check to pay check. If they loose their job they need to find another immediately because that was their only stream of income. Thinks multiple streams of income is a second job.
I am not calling any one dumb. This was meant to be a lighthearted look at different lifestyles. The good news is if you fall in the “dumb money” category you can learn the skills to switch to the “smart money” side. All you have to do is to pick one of these areas and get started. Maybe, you start by skipping one meal out a week and saving that money or creating a second stream of income by selling some of your junk. Just get started on something. I think the best place to start is to build up a little nest egg to have 3 to 6 months of savings then paying down debt. Everything else will fall in place if you have a plan. Just go ask one of the “smart money’ folks.