In my last column, I wrote that making a lot of money, even millions of dollars, does not guarantee financial security or independence in your lifetime.
I used the example of Ed McMahon, Johnny Carson's sidekick on The Tonight Show. Once a multimillionaire, McMahon today is facing foreclosure on his home and mountains of debt.
There are plenty of other examples to look at--Michael Jackson and MC Hammer come to mind. Both are famous individuals who amassed a fortune and later found themselves facing financial disaster.
So many people think it's money that solves all their financial worries. In reality, it's sound financial habits that allow you to sleep well at night.
So how do you get a good night's sleep, without the help of Ambien or Sominex?
In last month's column, I presented the first of three ideas to help you create financial security and independence. That involved taking 30 percent off the top of every dollar bill that comes into the household. Ten percent is for investment, 10 percent is for savings, and 10 percent is for charity.
This month I'll share the other two.
Rule Number Two
Understand that all debt is not bad. You need to know the difference between good debt and bad debt: Most of us are pretty familiar with bad debt. This includes credit card debt, car loans, your home mortgage and school loans, for example. Why is this bad debt? Because every month you have to pay for this debt. Money comes out of your pocket every month to make these payments.
What is good debt? Simply put, it's debt that someone else pays for every month. For example, I have a lot of mortgage debt. Almost every investment property I own has a mortgage on it. I have many mortgages attached to apartment buildings and commercial buildings. Every month the rents collected from the tenants of those properties pay for the mortgages. I don't. These mortgages are good debt.
A car loan could actually be good debt. Let's say you buy a nice, roomy sedan for use as a taxi. The fares you collect from passengers pay for your auto loan. You don't pay for it yourself.
A girlfriend took out a loan to buy 100 gumball machines. She and her son positioned these machines all over town, and every week they collect the money from each machine. The money they collect goes toward paying her loan.
The bottom line is this: Bad debt keeps you poor. Good debt makes you rich.
One Rich Woman rule that I love (because we Rich Women like to enjoy all the good things in life!) is this: You can have all the bad debt you want . . . as long as you have the good debt to pay for it.
Rule Number Three
Treat your money as a business: Better yet, treat it as an entrepreneurial business that you create, are actively involved in and for which you call the shots.
Many people deal with their money as a necessary evil. They'd rather not be bothered with the details of how much is coming in and how much is going out. That's not a healthy money habit, and it could lead to financial disaster down the road. Here's an article that explores how to adopt a positive mindset to become the best possible investor you can.
Instead of looking at your household finances as simply money in, money out, create a new business called Managing & Growing My Money. Managing your money is only the beginning of your venture. Growing your money is where the entrepreneurial spirit comes out. How can you take what you have and multiply it? That's the mark of a true entrepreneur.
If a business continually spends more each month than it brings in through revenue, it eventually winds up bankrupt. It's no different for an individual household. If your habit is to spend more than you bring home and not pay attention to which way your money is flowing, then you, too, will end up in a financial crisis.
So be a savvy entrepreneur with your money. Actively manage and grow every dollar that comes into this "new business" of yours. Just as a business needs to make a profit to stay in business, your money needs to make a profit to secure your financial future.
Study, learn and invest wisely. Treat your money as a business . . . so that your money can treat you to the future you truly desire.