Money Management

Could you benefit from following these rules as well? 

Borrowing money may seem like something you only do if you don’t have enough of it, but that’s not true. There are many wealthy people who take on debt; they just do it in different ways than their less-well-off counterparts do.

Of course, not every rich person has exactly the same money habits. But here are four borrowing rules the wealthy tend to follow that others often don’t.

1. Use debt as a tool

Wealthy people aren’t afraid of borrowing. But they typically don’t borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses.

Instead, rich people tend to use debt as a tool to help them build more wealth. For example, very rich people might borrow money to acquire a company if they think they can improve its profitability. They might also borrow to fund a startup business, or use margin in their brokerage account to invest in more assets that will help them build wealth.

2. Make credit cards pay you instead of you paying them

Rich people often use credit cards. But rather than paying interest to their card issuers, they collect rewards by charging all of their purchases and then pay their balance in full to avoid owing any interest.

By collecting rewards and never paying credit card interest, wealthy people get richer as a result of their relationship with their card company rather than getting poorer. Many rich people even sign up for cards with large annual fees, but they do so to take advantage of valuable perks those cards offer, such as concierge service, flight or hotel upgrades, and more.

3. Don’t borrow for depreciating assets

Typically, rich people know it does not make sense to borrow for anything that is going to go down in value over time instead of up.

By borrowing for things like cars, consumer goods, groceries, or vacations, you end up making those purchases more expensive and thus wasting money on them. Unless whatever you are borrowing for is going to grow your wealth over time, it’s not worth paying interest charges to fund it.

4. Make lenders work for your business

Finally, rich people don’t just accept whatever loan they’re offered on whatever terms the lender wants to give them. They often make lenders work for their business.

This could involve doing something as simple as shopping around to get different quotes before deciding which bank or credit union to take a loan from. Simply comparing offers allows you to go with the company that gives you the best deal — rather than just going with a financial institution you happen to find first.

Wealthy people sometimes take this process even further. They may ask for discounts on fees or other special borrowing perks, especially if they have a relationship with the lenders and can leverage that into getting better loan terms.

The good news is, you can follow all these rules even if you aren’t already wealthy. And doing so could help you become rich yourself over time.

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It’s a decision that rarely ends well. 

Some money mistakes aren’t too big a deal in the grand scheme of things. Others can have huge financial repercussions, and they’re the ones you want to avoid at all costs. Personal finance guru Ramit Sethi, author of I Will Teach You to Be Rich, recently pointed out one of those costly mistakes, and it’s something that gets a lot of people into money trouble.

What Ramit Sethi calls the “beginning of every financial disaster”

In an episode of Sethi’s podcast, he was speaking with a couple who had purchased a vacation home. It ended up costing them quite a bit more money than they expected, so Sethi talked to them about why they bought it. They brought up how they live in a more modest home than their friends, and that even a friend who didn’t make as much money had bought a nicer home than theirs.

Sethi immediately pointed out that “this is the beginning of every financial disaster.” And, blunt as always, he added that “the worst thing in the world is finding out your friend who is stupider than you has more money.”

Now, the disastrous part isn’t finding out that your (possibly less intelligent) friend has more money than you. It’s wanting what your friends have and basing your spending decisions on that. Or, as it’s traditionally known, “keeping up with the Joneses.”

In this case, the couple on Sethi’s podcast were envious of their friends’ homes. But there are many ways this feeling can manifest. People get jealous about cars, clothes, vacations, and much more. Social media hasn’t helped matters, as it often contributes to this kind of lifestyle envy. A Point survey even found that 45% of respondents went into debt to buy something they saw on social media.

Why lifestyle envy costs you money

It’s completely normal to want to keep up with the Joneses. Most people have probably dealt with this feeling at one time or another. It’s acting on this impulse that’s problematic.

Going back to that couple on Sethi’s podcast, their vacation home went from a dream to a nightmare. It ended up putting a huge strain on their finances, to the point where their best option was to sell it, even though they’d end up losing $100,000.

That might seem like an extreme example, but it’s not exactly out of the ordinary. Let’s say your neighbor buys an incredible new car, and you decide you want one, too. The average new car price just hit nearly $50,000, and if it’s a luxury vehicle you’re after, the average is $66,660.

Even with smaller purchases, this can still become a bad habit that leads to bigger financial issues. Once you get into that mindset of “I deserve what my friends have,” it’s easy to keep using it to justify more and more spending.

How to keep your spending under control

To be clear, there’s nothing wrong with spending money on things that make you happy. In fact, it’s smart to set aside some money in your monthly budget for this. But there are a couple of caveats here.

First, they should be things that actually make you happy — not just things you buy to keep up with other people. And they should fit in your budget.

As mentioned earlier, lots of people feel lifestyle envy, and it’s not always so easy to get rid of it. I’ve gone through it myself. Here are a few tips that have been helpful for me:

Remember that appearances don’t always tell the whole story. That friend with the designer clothes could be deep in credit card debt and have nothing saved for retirement. Just because it seems like someone has it all doesn’t mean they’re doing well financially.Keep your own financial goals in mind. Think about how a big, unnecessary purchase is going to impact those goals. I like to consider how much more that money could earn in compound interest if I invested it instead of spending it.Set aside a portion of your income for guilt-free spending. Ramit Sethi recommends reserving 20% to 35% of your income for guilt-free spending. While the amount you set aside depends on your income and expenses, it’s important to leave some room for fun money in your spending plan.Figure out what you really like to spend your money on. Maybe a nice car is important to you because you drive a lot, or perhaps you’d rather avoid spending too much in that area so you can travel more. Take some time to figure out your spending priorities so you can use your money wisely.

Spending money to compete with others is, just like Sethi says, a path to disaster. If you can avoid doing it, you’ll be much happier and better off financially.

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Cash stuffing may help you stay on track with your money goals. 

TikTok is full of helpful content for anyone looking to learn more. You can find various financial content that may help you make smarter financial decisions. An old-fashioned savings trend recently went viral on the video-based social media platform. Keep reading to discover why this trend is popular and see if it can help you save more.

Cash stuffing is a win for visual learners

We all have different brains, which means we learn in different ways. This is true even when handling essential financial matters like budgeting and saving. For visual learners, it may be helpful to see how much money they have as they budget their expenses and savings goals.

Cash stuffing is a recent hit on TikTok. What is cash stuffing? This money management method involves stuffing physical cash into labeled envelopes or containers for specific spending and savings goals.

As an example, you might have envelopes for rent, groceries, dining out, and emergency savings. Cash stuffing is also known as the envelope method of budgeting. Some people find this strategy allows them to use their money more effectively.

Why is this technique trending on TikTok?

I think cash stuffing videos are popular for several reasons. Here are a few:

It’s fun to watch: Since TikTok is a video-based platform, watching other people count and sort their money can be fun. Plus, it can give users ideas on how much money to budget for specific expenses in their own life.It may help with motivation: When it comes to saving or paying down debt, this technique may help you stay motivated as you work on your goals because you can visually see your progress.It may help those who struggle with money management: Some people may overspend on certain purchases because they can’t visualize how much money they have budgeted versus what they’ve spent. This method can be a winning tool for visual learners who want to reduce excessive spending and save more.

What to keep in mind

It’s essential to know that this technique doesn’t come without flaws. If you keep your money in envelopes and not in your checking account, it’s easier to lose. When you keep your money in an FDIC-insured bank account, up to $250,000 of your funds will be protected. If you lose your envelopes, you have no recourse.

Another thing to remember is that you’ll miss out on earning interest if you don’t keep your savings in a high-yield savings account. You won’t earn interest if you keep your savings in an envelope.

If you need help visualizing your budget and savings goals, but want to keep your money in the bank, budgeting apps are a virtual solution that may be helpful. Additionally, many banks have visually friendly tools to help you stay on track as you manage your money.

Do what works best for you

Is cash stuffing something that you should try? Only you can decide if this money management and savings technique will work for you. For some, it offers an excellent way to get organized, visualize their money, and stay on track with their personal finance goals.

I’m a big fan of using rewards credit cards for everyday spending to maximize my rewards. But I understand that many people struggle with managing their credit card spending. If you frequently overspend on credit cards and want better control over your finances, you may want to try cash stuffing.

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What works for you can also work against you. 

Investing advice is everywhere, but unfortunately, a lot of it is bad — and even dangerous. One of the most dangerous is the recommendation to use leverage to get a greater return on investments.

Leverage is when you borrow money to invest, and this strategy is often promoted by dubious investing influencers. If you’ve ever seen the disastrous real estate investing “advice” on TikTok, you’ve probably heard about how leverage is this amazing tool that can make you big money. It’s not just used for real estate, either. People buy stocks and other types of investments on leverage.

Financial advisor Ramit Sethi gives the opposite advice. He recommends that most investors stay far, far away from leverage, and he’s 100% right.

Why Ramit Sethi advises against using leverage

If you’re unfamiliar with using leverage to invest, it helps to know exactly how it works. Here are a couple of popular examples of leverage in action:

Buying real estate: You can purchase a home with a down payment of 20% or less and let the mortgage lender cover the remaining 80% or more. This is the largest amount of leverage available to most people.Investing on margin: Many stock brokers offer margin accounts that allow you to borrow money to invest. If your investment increases in value, this amplifies your returns.

Sethi has discussed leverage several times on his Twitter account. He believes that employing leverage shouldn’t be a goal for the average investor, because it’s an advanced strategy that can go bad quickly. In a recent tweet, Sethi said, “Leverage is lionized on social media without properly explaining the risks.”

That’s all too true. The people who promote leveraging focus on the potential benefits. The house you invest in could be worth 25% more in a few years! Buying stocks with margin will boost your gains!

They usually avoid talking about those pesky risks. Things like:

Your real estate investment might not increase in value. If you buy at the peak and the price falls, you could be stuck paying a mortgage for much more than the property is currently worth.If you buy stocks on margin, you’re on the hook if the price drops. This can trigger a margin call if the value gets too low. A margin call requires you to deposit more money, otherwise the broker will liquidate some or all of the stocks you purchased.

Leverage multiplies gains and losses. The more you borrow, the greater your potential downside. And remember that you need to pay interest on the money you borrow, which cuts into any returns.

You don’t need to invest with leverage

Many investors, especially those who don’t have large portfolios yet, like the idea of using leverage. Everyone wants to build wealth faster. Leverage may seem like the secret to doing just that.

While this sometimes works out, for most investors, it’s an unnecessary risk. There’s no safe way to dramatically increase your returns.

You’re much better off focusing on a few sound investing and financial habits. These will do a lot more for you than high-risk strategies. Here are the habits to focus on:

Set aside a portion of your income to start investing. This could be 10%, 20%, or whatever number you’re comfortable with. Regular investing is the key to building wealth.Build a diversified portfolio. You could do this yourself by investing in 25 or more quality companies. Or, you could pick low-fee investment funds that contain a large number of stocks, such as index funds.Grow your income. Look for opportunities to get raises and move up in your career. Making more is the easiest way to invest more and speed up the wealth-building process.Stick to long-term investing. Plan to hold your investments for at least five to 10 years. Short-term investing is much more of a gamble.

If you do those four things, your portfolio will grow, and you won’t need leverage. It takes time, but it’s the surest path to building wealth.

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These habits could improve your finances and your quality of life. 

Financial influencer Humphrey Yang says that when he was 22, he made $40,000 per year working in customer support. Four years later, he made six figures, and he believes there were six key habits that helped him do it.

Yang shared his six habits in a recent video where he provides some excellent and unique advice. Whether your goal is to get better at personal finance, reduce stress, improve your time management, or all of the above, these habits could help.

1. Time blocking

Time blocking is a popular time management practice. It’s been used by many top performers such as modern CEOs, and goes as far back as Founding Father Benjamin Franklin.

The idea is that you block off time in your daily schedule and assign it to specific tasks. Here’s a basic example of time blocking in action:

Work on a project from 9 a.m. to 12 p.m.Respond to emails and messages from 12 p.m. to 1 p.m.Conduct meetings from 1 p.m. to 4 p.m.Prep for the next day from 4 p.m. to 5 p.m.

Not everyone can fully commit to time blocking. Maybe you get time-sensitive Slack messages often, in which case it’s probably not a good idea to only respond during a single hour of each day. But this technique is good for improving efficiency. When you assign time to a specific task, it can really help you lock in on what you’re doing.

2. Journaling

Yang says he has been journaling two to three times per week since he was a teen. He believes this habit can help you with your goals and your mental clarity, and there’s data to support those benefits:

People who write down their goals are more likely to achieve them, according to a study by Dr. Gail Matthews. Success rates were even higher among those who also shared their goals and their progress with another person.Multiple studies have found that journaling can help reduce stress and anxiety.

3. Dipping your toes

Although Yang had a full-time job, he knew that he wanted to be an entrepreneur. The way he achieved this was by taking small, calculated risks. He saved a portion of his income to put toward projects, and he tried launching business ventures on the side. His first attempt, an app in which he invested $5,000, didn’t work out. Even though it failed, he considered it a learning experience.

Most entrepreneurs and small business owners take this approach. They have a stable source of income, and they build their businesses on the side. This is smart because you can explore potential opportunities without taking on too much risk. Consider doing what Yang did by setting up a savings account specifically for future ventures that are important to you. That could be money you use to launch a business or pay for training that improves your skills.

4. Everyone’s an NPC

NPC is a gaming term that’s short for non-player character. The message here is that you shouldn’t worry about what others are thinking or let them affect your decisions. You’re the one in control of your life. Everyone else is — you guessed it — an NPC.

Yang brings up that many people are hesitant to start something new because of what their friends, family, and the rest of the world might think. Feeling self-conscious is normal, but it can also hold you back in life. And despite what any troublesome voice in your head might tell you, the truth is that people are typically focused on themselves, not critiquing your every move.

5. There’s no perfect time

By Yang’s own admission, he spent several years as a wantrepreneur. That’s someone who really wants to be an entrepreneur, and likely does plenty of research on it, but never actually takes action. They’re forever waiting for their moment.

Paul Ponna, CEO of multiple startups, has found that there are usually three main issues for wantrepreneurs. Here’s what they are and some good recommendations from Yang on dealing with them:

Fear of failure: People often second guess themselves because they’re worried about failure. Yang dealt with this issue, but now he has the mindset that every failure gets you closer to success.Laziness: Everyone deals with this to some extent. Instead of pushing yourself to do it all, aim to accomplish something toward your goals every day, even if it’s something small. This way, you build consistency and momentum.Lack of motivation: This is often due to a lack of goals. If you’re not feeling motivated, spend time setting clear goals for yourself. Once you have clear goals, motivation comes naturally.

6. Take time to reflect

The final habit is one that a lot of people neglect. Set aside time to slow down, disconnect, and reflect on your life and your goals. It’s important to do this to recharge your batteries, so to speak, and to take a big picture perspective of your plans.

When you have a routine, the days can all start to blend together. Most of us have probably experienced that before. This is normal, but make sure to schedule time to reflect regularly.

These habits have clearly had a positive impact for Yang, and they can do the same for you. Give them a try and see which ones work for you.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Less competition for homes? Yes please. 

Did you spend 2022 watching the housing market and shaking your head sadly? You’ve no doubt got company there. But as we head deeper into 2023, there is one tiny bright spot: Redfin recently released some predictions for the 2023 housing market, and it believes that investor activity in the market will ease some this year. This could mean fewer investors buying properties and selling them, and instead sitting on currently owned homes and opting to rent them out.

If you’re hoping to buy a home this year, this potential development should come as welcome news. Here’s why.

A bit of good news for buyers

We started off 2022 in a bad enough spot for buyers, with home prices up nationally. This was thanks to the buying frenzy (and low supply of homes) of 2020 and 2021. Then mortgage interest rates started rising, just adding insult to injury. At the start of 2022, the average rate on a 30-year fixed-rate mortgage was 3.22%, per Freddie Mac. As of this writing, we sit at 6.48% for the same mortgage.

Investors leaving the market won’t have an effect on interest rates, but if there’s less competition for the homes available, you could save some money on your purchase that way (and avoid getting into a bidding war). This could be a good year to offer less than asking for a house, and see what the magic of negotiation can do for you. You could also end up with some seller concessions, like getting your closing costs covered, even if you end up offering the full asking price.

If Redfin’s prediction comes to pass, you could be looking at less competition from real estate investors, but you will likely still need to contend with other aspiring home buyers. Here’s how to give yourself a fighting chance.

Be the best buyer you can be

Ideally, you’re not in a rush to buy a home. If you are in a bad situation with your rental or need to move sooner rather than later, you may not have the option to take on these tasks. But if you’re able to wait for the right moment (and the right house), focus on the following to be the best buyer possible.

Improving your credit score

Mortgage lenders will want to see at least a 620 FICO score for a conventional loan, but if you can beat that, it’ll save you money by allowing you to qualify for a better interest rate (and every little bit counts with the average rate as high as it is right now). Focus on getting errors removed from your credit report and making on-time payments, which has a big effect on your score.

Paying off debt

This will improve your credit score, too, and show lenders that you’re capable of keeping up with your mortgage and all the other costs of homeownership. Focus on getting your debt-to-income ratio under 36%, as that’s generally the threshold lenders like to see from borrowers.

Saving money

Not only will you need a down payment for a home, but you’ll also likely need to pay for closing costs (unless you can get a seller to cover them) for your mortgage. And you don’t want to leave yourself flat broke in the process of buying a home — unexpected costs are a hallmark of owning a house. Plus, you might want to be able to paint or do a little remodeling when you buy a place of your own.

Keep your chin up — sometimes we get good news. And fewer investors to contend with this year could mean less competition and fewer bidding wars for ordinary aspiring home buyers.

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