Money Matters
My son will be working soon.
Not chores for allowance or odd jobs for neighbors, but an actual job, with an actual paycheck, and actual taxes taken out before he ever sees it. It both brings back memories and terrifies me.
I started thinking about what I'd like him to know, realized I was rambling in my own head, and did what I always do when I need to think clearly: I grabbed my reMarkable and started drawing.
A few sketches in, I noticed a pattern. Two sets of three. Two trinities.
If you read my last posts, you know I recently explained the web to him using a trinity: frame, body, engine. That evolved into a three-quel that included what happens when you click and link, and the evolution of internet servers/services. Or maybe you caught my first post on this blog with its Lord of the Rings reference. Apparently I think in threes.
I swear I'm not AI.
That having been said...
The Trinity of Today
When you're young, money is immediate. It comes in, it goes out, and whatever's left sits in a drawer or a bank account until you need it.
Earn → Spend → Save
That's it. That's the whole game when you're starting out.
Earn. Get a job. Start a business. Mow lawns. Detail cars. Trade your time for money. This is your first paycheck, your first taste of what your hours are worth to someone else. It's not glamorous but it's yours. Or, if you know a market well, buy and sell things for a profit. Flipping could start with trading cards and evolve to houses.
Spend. You earned it, now you spend it. Soda on a hot day. Food because you're hungry. A gift for someone you care about. The list of options is endless. Of course, money isn't; it flows out as easily as it flowed in. This part requires zero instruction. Trust me.
Save. Assuming you don't spend everything (and this is a big assumption for a lot of people), you've got something left over. Maybe it goes in a drawer, or even better, a savings account. Doesn't matter where. What matters is that it exists. Money at rest.
Your wealth, right now, is simply your savings. Your earning potential is what you earn. Look to improve both those numbers over time. Legally.
Simple math, brutally simple, and a lot of people don't do it.
Pay Yourself First
Sixty percent of Americans live paycheck to paycheck. Earn, spend, save, in that order, with "save" getting whatever scraps are left. Which is usually nothing.
What if you flip the order. No, not spend before earning.
Earn, save, then spend. Take your cut first. Before the bills, before the wants, before the "I'll just sushi real quick." Treat savings like a tax you pay to your future self.
The people who build wealth aren't necessarily making more money than everyone else. They're just keeping more of it.
The Trinity of Tomorrow
The first trinity is about today; immediate, tangible, cash in your pocket. But eventually, today turns into tomorrow. And tomorrow has its own trinity.
Own → Debt → Invest
This is where things get interesting. And where many people get into trouble.
Own. When you spend money, you either consume something (food, experiences, that overpriced coffee) or you acquire something (a car, a guitar, an xbox). Things you own have value. How much value is the tricky part. That car you bought for $20,000? Worth maybe $15,000 the moment you drove it off the lot. Possessions are assets, but they're slippery ones.
Debt. Inevitably, you're going to borrow money. Maybe $20 for lunch. Maybe $20,000 for a car. Maybe $200,000 for a house. Borrowing isn't inherently bad, but borrowed money isn't free. It comes with interest; the cost of borrowing it. That $20,000 car loan? Could cost you $25,000 or more by the time you're done paying it off. Debt is a liability. It's future earnings you've already promised to someone else.
Invest. Here's the flip side of borrowing: instead of paying interest, you can earn it. Take your savings and put it somewhere it can grow; whether that's stocks, bonds, real estate, commodities, or something else that grows in value over time. The point is that your money starts working for you instead of just sitting in a savings account. When you consider inflation, money at rest is actually losing money. Investments are assets, but with a super power we'll talk more about later.
The Bridge
Your savings from today is what fuels tomorrow.
Want to own something? Savings becomes a down payment. Want to invest? Savings becomes capital. Want to avoid debt entirely? Well, not entirely, we'll cover a bit of that later, as well.
Net Worth
People love to talk about how much they make. Salaries get compared at parties. Raises get celebrated. But income isn't wealth. As I mentioned earlier that's one financial power, but there's another one, perhaps more important for your end game. It's called net worth, and the calculus is simple:
Net worth = Savings + Investments − Debt
That's it. Possessions don't count. Yet. You'll have to sell them to realize their value, and may be greatly disappointed when you do so. Remember what I said about the car's worth the instant you own it? What matters is what you've saved, what you've invested, and what you owe.
You want this number to go up over time. There will be peaks and valleys along the way, but keep an upward trajectory on average. And just to keep your interest, yes, you can spend the money later when you retire, but not if you don't save it now. I assume you don't want to be sweeping floors when you're 70, right?
Smart Borrowing
Debt isn't evil; it has a bad reputation, though, mostly due to misunderstanding. It's a tool, like a hammer or screwdriver. And like many tools, a lot of people don't know how to use it.
Quite simply, borrowing costs money. That's the whole business model of lenders and credit card companies: they give you money now, and you give them more money later, albeit over time.
So borrow only when you must: a car to get to work, a house to live in, an education that actually pays off. Not a TV, not a vacation, not dinner because you didn't feel like cooking.
Or, and this might surprise you, borrow when you CAN. If you can borrow money at a lower rate than your investments earn, the math might work in your favor. A car loan at 5% while your investments return 10% means your money is technically still growing. Or borrow money to invest, but that gets tricky. Think about renting a house for more than its mortgage, but that's another topic. Basically, be careful. Do the math first. Most people don't, and most people lose.
And now for the part you hear about all the time, and why debt has such a bad reputation... Credit cards are a trap dressed up as convenience. If you get one, use it only for the float: charge things, pay it off completely every month. The moment you carry a balance, you're paying 20%+ interest on yesterday's purchases. That's not building wealth. That's lighting it on fire.
Smart Investing
Remember how I said interest compounds when you're in debt?
It works the other way too.
Let's say you invest $1,000 and it earns 10% in a year. You've now got $1,100. Leave it alone, earn another 10%, and you've got $1,210. Then $1,330. Then... you get the idea. You're not doing anything; your money is doing the work.
Compounding adds up fast. The earlier you start, the more time your money has to grow. This is the closest thing to a cheat code that exists in personal finance. Investing the same amount over time, given a reasonably average rate every year, you'll have more at the end with $200/month for 40 years than $400/month for 20 years. So start early.
The catch? You have to actually leave it invested. Maybe you move it from stocks to real estate or vice-versa, but keep it earning. Which is harder than it sounds when you're 19 and there's a new PlayStation.
Taxes (The Unavoidable Surprise)
Nobody teaches you about taxes. Then April hits and suddenly you owe the government a chunk of everything you made. What are taxes, you ask? I'm not sure anyone can fully answer that question, not even the government, but basically it's money taken from your earnings (salary and investments) to pay for things. What things? The roads you drive on, the parks you visit, the police, the firefighters, schools... basically all the things you likely take for granted. It all costs money. Your money.
Here's the short version: plan for 20-40% of your income to go toward taxes. It varies based on what you earn. There are too many variables to list. Federal, state, local... everyone wants a piece of your money. That paycheck with the confusing deductions? That's just the beginning.
Be prepared for a surprise every year anyway. My advice to you is to expect to pay a little extra every April rather than hope to get something back. Why April? I have no idea.
Business Taxes (A Brief Aside)
Not to get ahead of ourselves, and definitely not because I like talking about taxes, but if you ever start a business (and I hope you do), taxes work differently.
Personal taxes hit every dollar you earn. Business taxes hit your profits. This is why businesses write things off. That laptop? Business expense. That lunch meeting? Business expense. It's not free money, but it's taxed differently than personal income.
Don't get too creative though. The IRS has seen every trick you and I are capable of imagining.
The Bottom Line
There are two realities. Today and tomorrow. It's something many of us already know. Taking the time to write it all down (or scribbling it into my reMarkable) I think this is about as simple as I can get it.
Today: Earn → Spend → Save
Get a job. Don't blow everything. Keep something for later.
Tomorrow: Own → Debt → Invest
Possessions have value but depreciate. Borrow only when necessary and pay it off quickly. Invest what you can and let time do the work.
Hey, can I bum $20 for lunch