Because we don’t fully understand how money works, we often end up storing it in the wrong places. As money flows into the household, families are not educated on how to prioritize where their hard-earned money should go. Pre-pay debt or invest? Save for college or pay down the mortgage? Pay off a credit card or create an Emergency Fund?
In most cases, people make enough money to do what they want to do in life. Unfortunately the mistakes happen once it gets into your checking account!
As you spend, pay down debt, and hopefully save some of your money, the first two blind spots – Lack of a Plan and Lack of Fiscal Literacy – become your greatest enemy.
If you haven’t taken the time to develop a plan and set goals, you get to the end of the month and wonder where the money all went!
When deciding whether to save some money or pay down your mortgage, many people have never taken the time to learn how to objectively analyze their investment decision. Will the money be liquid, or easy to get to if needed? How safe will it be? What is the rate of return by investing or paying down this debt? What tax advantages do I get?
Here are four tests of a prudent investment, otherwise known as wise use of your hard earned money:
- Liquidity
- Safety
- Tax Advantages
- Rate of Return
Keep these in mind, start planning ahead and you will be well on your way down the road to financial independence.