Make interest your friend, not your enemy.
Interest works 24/7/365. Is interest working for you—or for someone else? The answer is easy. Interest is working for you if you have investments. It is working against you if have debt. That's because debt takes money from you and gives it to others. Here's the winning strategy: Make interest your friend, make it work for you, not against you!
Compounded interest takes small amounts and makes them large amounts over time by paying interest on the interest. If you save even modest amounts over as little as fifteen to twenty years, that savings can create financial independence for the rest of your life. Earning interest helps you the same way that owing interest hurts you.
Spend on items that increase your wealth
Buy things that will appreciate in value and pay you back. This makes more sense than buying things that decrease in value and cost you more money, i.e., clothes and cars. Investments like real estate increase in value. Just as importantly, real estate can offer more tax advantages than other investments.
An investment in your earning potential pays you back. You can invest in your career by spending on advanced training, tools, software, and the appropriate wardrobe that increase your potential for advancement. Be realistic about what will actually pay you back.
Understand the difference between assets and liabilities.
To put it simply, some assets are possessions that add to your wealth. (Let's call them "cows," because they give milk.) Other assets can actually take wealth away. (Let's call them "alligators," because they take a big bite out of your income.) Some possessions look like cows, but actually, they are alligators. The goal is to raise cows, not to try to tame alligators.
An example of an alligator is your car. Yes, a car is considered an asset, because it is something you own. But it is not a real cow because it doesn't earn you money (unless you are in the taxi or limousine business). It is like an alligator because it costs you money to maintain and fill with gas. Also, the value of the car decreases with every year and every mile.
Your home is probably increasing in value as a long-term investment. In that way, it's an asset, or cow. But you have locked up a huge investment of your funds into your home. There is a "lost opportunity cost" on that money. (That is the cost you "paid" because you couldn't invest the money in ways that made a higher profit.) Also, your house consumes income for maintenance, improvements, taxes, insurance, etc. In that way, your house is a liability or an alligator.
Renting a home is seldom good use of your money. Renting is an alligator because it only takes and doesn't give.
It's interesting to ask yourself questions about the best way to use your money. What you could have done with the funds you invested in a house if you hadn't purchased it? In other words, is your home value going to increase faster than the money you could have invested in something else?
Keep your funds invested and working for you, but cautiously.
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