Welcome to the series with the most important financial lessons our school system doesn’t teach. Articles in this Don’t Live Broke Series explore in depth each of the 7 Golden Rules of Wealth Accumulation.
Hello best life seekers!
The secret money formula has 7 rules you break at your own risk. A lot of us find out first hand how detrimental breaking Rule 5 is to our finances, our quality of life and even to our relationships and job prospects. You might consider Rule 5 a lesson in self-restraint and reliability. By avoiding certain pitfalls you set yourself on a firmer footing for success and wealth.
Rule 5: Don’t Dig Money Pits
As you build your financial foundation, it is important not to wreck your progress and prospects. Therefore, follow Rule 5: pay your bills on time and don’t take on new debt that doesn’t buy money-producing assets.
Let’s unpack this.
Pay Your Bills on Time… or Else
Paying bills on time is easy if you are following Rule 4: Stash Your Cash. Automate your payments and you’ll hardly have to worry about your bills. However, one late payment can produce a tidal wave of consequences.
If you’ve ever failed to pay a bill on time, you probably got hit with a late fee. If it was a credit card bill, you also might have seen your interest rate go up on your debt. Maybe that late payment got recorded with the credit bureaus so that your credit got dinged and when you went to the bank for a mortgage, the loan officer saw you as riskier since you didn’t pay your bill on time. They gave you a higher interest rate or if you had a history of late payments, denied your loan entirely.
Paying bills late is a bad financial habit and generally indicates a lack of organization and prioritization. This is why banks grade your credit score lower and see you as a financial risk they will only take on for more money to compensate for that risk.
Late payments have consequences so not paying at all has even worse consequences, including capitalized interest, garnished wages, and bankruptcy. Needless to say, this will set you back on the road to prosperity and financial freedom, as well as increase your stress and anxiety levels as an added bonus.
Wise and wealthy people make their payments on time. This is a point of character as much as a hedge against the negative consequences of late payments. Also, why give free money from your hard-earned hoard to banks or credit card companies who have done nothing to earn it? Make that money work for you.
Don’t Take on New Debt That Doesn’t Buy Assets
At My Best Life Secrets we don’t think all debt is bad. It can be useful if used wisely and implemented at reasonable amounts. However, debt should really be used for purchasing assets and little else.
As we saw in Rule 3: Make Money Work For You, an asset is anything that generates cash flow or equity. A car is not an asset because it constantly depreciates and costs money to maintain. Your house may or may not be an asset depending on how much you save versus rent or make with income from renting it to others.
Purchasing something and accruing debt for an item that won’t make you money digs a financial pit with several negative consequences.
Firstly, debt generally comes with payment terms and interest. Many times, the interest accruing each month will be at least 3+ times more than the principal you pay off. For instance, an $840 monthly mortgage payment actually pays only $175 on the principal with the remaining $665 paid to accrued interest. As you can see, interest will suck away the value of any payment you’re making.
Secondly, any monthly debt payment is money you can’t use to live the good life. It lowers the value of that 70% living expenses cap since now you have that much less to spend on entertainment or other fun things.
Relatedly, when you take on debt for something that doesn’t make you money, that is money basically thrown away since you can’t use it toward other goals that will get you ahead like investing in your business or professional skills, adding to your portfolio or passive income scheme. If you want something like a car or an expensive vacation, budget for it instead under the 70% Rule. When it comes to debt, choose wisely and don’t pay for anything that won’t get you ahead.
Rule 5: Don’t Dig Money Pits Wrap Up
What this goes to show is that digging these money pits is a bad habit that will wreck your dreams for the good life or financial freedom. As if the monetary fallout of digging money pits wasn’t bad enough, financial problems are a major cause of relationship troubles and breakups. Having responsible money habits might not only save your wealth, it could also save your marriage.
Best life seekers, you work hard for your money and dreams. Taking on frivolous debt is a recipe for financial disaster. Thanks to interest, debt takes longer than typically expected to dig out from under, setting you back financially, tying up money you could use towards the good life or collecting assets, and losing you time toward financial goals. Bad spending habits can ruin your credit but also wreck your relationships. Stick with Rule 2: living on 70% of income and Rule 3: allocating the remaining 30% to money-making investments.
The following will help you keep from digging money pits:
- Make it a habit and point of pride to pay your bills on time and in full.
- Automate your payments whenever possible.
- Only take on new debt if it is reasonable in its amount and for an asset, i.e. something that makes you money. If it isn’t an asset, then budget for it under the 70% Rule.
Achieve that and you’ll soon be living your best life in style!
Next, learn how to avoid this costliest of mistake in Rule 6: Body of the Gods.
- Don’t Live Broke Series Introduction
- Rule 1: Know Your Wealth
- Rule 2: The Midas Lifestyle
- Rule 3: Make Money Work for You
- Rule 3: Debt Payoff Option
- Rule 4: Stash Your Cash
- Rule 5: Don’t Dig Money Pits
- Rule 6: Body of the Gods
- Rule 7: Hustle
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