This is an excerpt from my new book, The 4 Minute Millionaire*. If you enjoy it, you can buy a copy on Amazon for $4.Disclaimer: This is not financial advice.
One way to think about money in a more positive light is to consider literally every dollar you spend as an investment rather than an obligation.
Your rent is an investment in a home that feels safe and comfortable. Food is an investment in your health. Even your phone bill is an investment: Your smartphone allows you to stay connected with friends, forge new relationships, and access the world’s knowledge!
When you make investing your default perspective, you’re not asking, “Ugh, what do I have to pay?” You’re asking, “What am I investing in here?” Once you do this consistently, you’ll notice a pattern: Every dollar you spend ties back to you.
Think about the examples I just mentioned. They’re all investments in you. You are your greatest asset, and every dollar you spend will either support or undermine your ability to live, be, and do better tomorrow.
Let’s add debt into this picture. Since future-you will have to pay it back, it’s them you are borrowing from more so than the bank. Depending on the size of the loan and what you use it for, taking on debt today can trigger considerable stress in your future self tomorrow, not to mention the financial strain you’ll heap upon their back.
If you borrow $100 from a friend for a sales training that allows you to book $500 in commissions the following week, that’s fantastic! The risk you put on future-you was worth it because it was a manageable and productive amount of money — and you paid it back really fast.
If you borrow $80,000 from the bank to buy a new Mercedes, however, that’ll likely end up feeling like cement blocks around future-you’s feet. It’s a big sum that’ll take forever to return, and the car won’t come with a clever repayment scheme in the glove compartment either. Now future-you is stuck with the debt and the task of figuring out how to repay it. Unless you give it that plan in advance, say by renting out the car for $500 a day for 160 days, you’re hamstringing your future self twice!
In a way, debt is time travel. It means you’re saying no to something later so you can say yes to something else right now. Which two goals are you trading for one another? Is that “something else” even a goal of yours at all? It’s incredibly important to figure this out before your credit card runs hot — because you can never be sure what exactly you might have to sacrifice later.
Every dollar on your credit card bill is a dollar that’ll keep future-you busy paying interest down the line. That busyness will prevent future-you from saving and investing towards what you really want to achieve.
In that sense, paying down your debt is one of the best, most enabling investments you could make in your future self. By protecting future-you from having to pay $2 tomorrow so you can spend $1 today, you’re allowing them — and thus you — to run faster towards financial freedom.
You are creating your financial future one dollar at a time, and you’ll move much, much faster when you don’t have fat interest payments dragging on your heels.
Action Item: Understand the compounding pressure of interest payments
As long as you’re gaining even tiny percentages on your net worth, exponential growth is your best friend. When you’re making debt payments, however, that same compounding force can add up to a crushing burden.
The formula at the heart of both is the same: Multiply an initial sum by 1.XX^Y, where XX is the percentage gain or cost in each period (aka the dividend or interest rate) and Y the number of periods, usually in years.
If you have several loans, find the one with the highest interest rate. How much did you borrow? In how many years do you think you’ll pay it back? Calculate how much you’ll end up paying in total, then subtract the original amount. You might be surprised by how much interest will land on top of your borrowed sum. You can also use a loan calculator to do this, of course.
If you have just one source of debt, pick that, and if you have none, use the calculator to get a feel for how much weight various loans might put on future-you’s shoulders. What does a $500,000 house at 5% per year over 40 years ultimately cost? Where does a five-year, 10% loan on a $40,000 car lead?
It’s not easy to put yourself in future-you’s shoes today, but the more willing you are to do it, the more likely you’ll be to make choices you’ll be proud of tomorrow.
This is chapter 17 from my new book, The 4 Minute Millionaire: 44 Lessons to Rethink Money, Invest Wisely, and Grow Wealthy in 4 Minutes a Day*.Sourced from the world’s leading money experts, most successful investors, and the author’s own journey to financial independence, each lesson comes with a short, realistic action item you can complete quickly without feeling overwhelmed.Whether you want to build a saving habit, pay off debt, or invest like the pros – if you're ready to look at money from a new perspective and build long-term wealth, this book is for you.Get it on Amazon*.
*Affiliate links
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This post was previously published on Four Minute Books.
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