Four simple rules to guaranteed wealth
Warning: what I am about to share is conceptually simple to follow, but challenging to execute. You can see my disclaimer at the end of this post to better understand why it can be hard for some, but at the end of the day, you are in control of your success. I have done my best to write this in layman’s terms to help you better understand complex financial strategies. I will do a follow-up post to dive deeper into these four fundamentals if you want to learn more.
Keep in mind that the four rules are dependent on each other. You cannot achieve wealth with only one, two, or even three of the principles. True wealth is not a large bank account balance, but the ability to live financially free and be immune to money problems. To attain true wealth, you must constantly follow all four together. Missing even one will put your wealth potential at risk.
Rule #1: Spend Less
This is the “easiest” to start with. The other three require you to learn more in some capacity, but cutting down on your lifestyle is merely a choice not to spend. I know what you are thinking: easier said than done. Yes, being frugal and having the self-control to set aside your immediate wishes are skills that must be developed. There is also a real limit to how many expenses you can reduce because you still need to pay for basic needs. Even so, only 40% of Americans live on less than their paycheck. Among the 40%, I would wager that, in their lifestyles, there are plenty more opportunities to cut down on spending.
The real secret to spending less is wanting less. Spending less just to save money is not motivating enough on its own. You must understand the “why” of wanting less, which is to avoid being dependent on things that do not provide happiness. Fun can be bought, but happiness cannot. A common fear of spending less, which means having less, is that it will make you less happy. One thing I have learned about life is that happiness is never found if pursued. Happiness already exists within yourself; it is a matter of shifting your perspective to see it. I know this all sounds too philosophical, but if you cannot be happy with wanting less, you will not be happy with having more. Ever hear that phrase, “more money, more problems”? Wanting less will take away stress and simplify your life.
If you want to get really hardcore about spending less, you can learn from people taking this to the extreme. One of my favorites is Mr. Money Mustache. He was able to retire by the age of 30 with a normal job by radically reducing his living expenses. You might think his way of living is not feasible for the average person, but the more you understand his philosophy the less crazy his ideas become.
Understand that I am not advocating for people to live impoverished lifestyles. Holistically, spending less brings tremendous value to your life. You will avoid the traps of materialism, you will learn to be happy with what you already have, you will realize how little you actually want, and most importantly you will have more money to invest and grow rich.
7 Practical Tips for Spending Less
- Manage a monthly budget and track your expenses
- Prioritize your expenses
- Pay with cash instead of plastic
- Stop eating out and meal plan
- Use a grocery list and get coupons
- Automatically transfer a portion of paycheck to savings
- Research and wait 48 hours before buying big-ticket items
Rule #2: Earn More
Seemingly obvious, severely underutilized. We all had the thought come across our mind that we deserve a pay increase or came up with a marvelous business idea that never took off. These are valid ways to increase your income, but the problem lies in the producing. If you want to earn more, you have to do exactly that: earn it. With the emergence of the internet, finding ways to make money has drastically increased. And I mean drastic. A quick Google search of “how to earn more money” will net you 2.7 billion results. No typo there; that is a “b” for billion. However, the only way to actually put more money into your pocket is not by reading all 2.7 billion pages but instead by being productive.
Sure, you can wait for your boss to give you the standard raise every three years or wait for the government to provide you with a minimum wage increase. Perhaps wait for your inheritance or take your chances at the lottery. These uninspiring methods may eventually bring you more money but you would be severely diminishing your earning potential. The sense of ownership, achievement, and success cannot be substituted. It takes hard work, effort, resilience, focus, and strategy to reach your potential. Unlike decreasing expenses, the beauty of increasing income is that there is theoretically no limit to how much you can earn.
Remember, money is simply a tool. It provides you with the power to do the things you desire and amplify the person you are. If you are a generous person, then more money will make you more generous. The key is to recognize that earning money requires action. Reaping what you personally sow will bring you great satisfaction and opportunity.
7 Practical Tips for Earning More
- Negotiate your salary for a pay increase
- Get additional training in your field to qualify for a promotion
- Start a side hustle (sell apparel, make an ebook, etc.)
- Offer freelance services (website designer, photographer, etc.)
- Find odd jobs (online surveys, focus groups, etc.)
- Find a part-time job (deliver pizzas, work at a coffee shop, etc.)
- Sell things you no longer use or want
Rule #3: Grow Your Money Wisely
Now comes the hard part. If everyone knew how to grow money, everyone would be rich. I tried my best to make this section as digestible as possible, however you may need to read this over a few times to fully grasp the concepts. Making your money earn money is critical to attaining true wealth. This additional money is what we, in the financial world, refer to as “investment income.” While earned income comes from a trade of your time and effort, investment income comes from a trade of time and money— for more money. Notice how I did not use the word “your” in the second part of the statement. That is because with investing, it is not necessary to use your own time and money. You can invest with someone else’s time and your money or with your time and someone else’s money. The best combination will be investing with someone else’s time and someone else’s money. Either way, once you get to a point where your money outearns you then you will be in a position to not have to work for money at all. You can still work, but now it is on your terms and money will not dictate your input/output. This ultimately frees up your time, which is the most valuable asset in life.
If you understand why investing is so paramount to wealth building, you must also understand how to do it wisely. This can range from simple to complex strategies, but what you should be focusing on first is having the right mindset. Wisdom is the ability to think with experience, knowledge, and understanding. Given that, it would surely be wise to model after someone like Warren Buffet, who achieved the title of richest man in the world mainly through investing. That is why his investing principles are heralded. Two of his most common ones are:
- Have a long-term outlook to growth. Having patience will help you avoid decisions based on emotions, like greed or panic, and takes a lot of the stress out of investing. No matter how much you lose in a given year, a long-term strategy will almost always recover your losses. Also, this strategy naturally utilizes the power of compound interest. Long-term investing + compound interest = exponential growth. Lastly, having long-term growth almost always equates to long-term sustainability. The longer it takes to build something, the longer it usually survives. You can see many examples of this in nature. Flowers can grow quickly and beautifully in a short time-frame, but die just as fast. However, a tall tree takes decades to reach a breathtaking height, and can live hundreds of years beyond. Wealth works very similarly.
- Invest only in things you understand. Buffet’s approach to buying stock is pretending to purchase the entire company itself. If you are not willing to back the entire company, than why are you willing to back a portion of it to grow? Investing your money will always be your responsibility as there is risk to losing it. By knowing what you are getting into, you are doing your due diligence on investing wisely. So if you do not fully comprehend what bitcoin is, do not try and put money into it. That is called gambling.
Some other concepts to consider are “diversification” and “asset allocation.” I’m not able to do a deep dive into these topics in this post, but I can explain the basics. Diversifying means putting your money in multiple types of investments. Spreading out your money into portions of stocks, bonds, real estate, and gold can be a way of diversification. Essentially, it is following the old adage “do not put all your eggs in one basket.” Asset allocation takes this further and focuses on finding a balance between all your different investments. The more risk you are willing to take, the more money you will invest in high-earning volatile assets like stocks over low-earning stable assets like bonds. Allocating your funds accordingly helps you to stay on course with your growth goals.
Following these few investment principles will undoubtedly lead you to grow more money with wisdom. But if you are looking for more complex strategies, I would recommend working with a certified Financial Advisor to help you build an investment portfolio. Be sure to look for ones that are “fiduciary,” which means they must always act in your best interest. If you want help with this process, contact me and I will refer you to some personal recommendations.
7 Practical Tips for Growing Your Money
- Buying mutual funds or ETFs with a long-term outlook
- Using a robo-advisor for automated investing
- Utilizing CD’s or high-interest savings for liquid cash
- Investing in small businesses
- Investing in real estate
- Taking advantage of tax-sheltered retirement accounts
- Lending it to others with interest (can use peer-to-peer platforms)
Rule #4: Protect What You Have
This last principle is highly underrated. It is so vital to your wealth because it ensures you do not end up losing everything you have from an unfortunate catastrophe. You can spend your whole life accumulating wealth, but watch it all disappear if you did not have the right protection in place. For example, a fire that burns down your home or the absence of long-term care insurance can cost hundreds of thousands. I know what you might be thinking, “that will never happen to me,” and you may very well be right. The point of this protection is not to prove you were right but to ensure that you do not suffer in the unlikely event that you were wrong.
The way I see it, there are three main ways to protect yourself: get adequate insurance for large disasters, create enough padding to absorb smaller crises, and minimize liabilities to strengthen your foundation. I view insurance to be one of the best human inventions when used properly. It allows an individual to harness the power of the crowd. Imagine it this way: it basically works like a mega-millions lottery system, but the “jackpot” is instead shared with the people that need it most. You contribute a small portion into a shared pot and then redistribute it to someone that suffers a hardship. Even if you do not end up ever receiving anything in return, there is only minimal loss experienced because the contribution is so small per person. This is especially useful when you have built a large net worth, meaning, you have more to lose. The more you are worth, the more you need to protect yourself.
In regards to smaller events, having a monetary “Plan B” should be highly considered. For example, a car breaking down may cost $2,500 to repair. You would not benefit from getting protection at this small of a scale. Statistically, you will end up with more money if you put the savings from insurance into an emergency fund and pay for the incidents in cash. Plus, having this margin of padding in your life will protect your monthly budget and give you so much peace of mind. It just feels so darn good when you lose your phone, crack a windshield, have to book an emergency flight, or an appliance goes out, and there is zero stress involved.
Finally, minimizing liabilities prevents you from living on a house of cards. The most damaging is consumer debt. Why? Because borrowing money on interest to pay for depreciating liabilities (things you own that lose value and cost you money) ends up being extremely costly both mathematically and emotionally.
Let us consider the scenario of a husband that recently lost his job while his wife is a stay-at-home mom. If they have adequate insurance and an emergency fund, that is great and will keep them going for a few months until a new job is found. The problem arises if they have a loan on a new car. They must make the monthly payments, or risk losing the car. The husband has to keep the car to find new work so they cannot get rid of it. They also cannot sell it and buy a cheaper vehicle because they are “upside down” on the car from depreciation. The pressure of meeting the monthly car payments with no income can be incredibly stressful when you are living solely on your emergency fund.
You can make the argument that a larger emergency fund would solve this problem, but this is not only a math problem. There is too much emotion involved in a typical scenario like this, and having zero consumer debt will make you feel more secure and allow you to fully focus on getting back to work. I can write an entire series of blogs on solely this topic, but the bottom line is that debt keeps you chained to your lender. My philosophy is that we should break free and live on a strong foundation where none of the bricks are owned by someone else.
7 Practical Tips for Protecting What You Have
- Get term life insurance
- Get long-term disability insurance
- Get an umbrella policy for liability protection
- Get identity theft protection
- Pay off all your consumer debts (credit cards, student loans, car notes)
- Put together an emergency fund of 3 to 6 months of expenses
- Form an estate plan and create a will
Again, simple and easy have very different meanings. My rules are simple to understand, but hard to apply. This is not rocket science, but it does take a level of mastery to attain true wealth. Personal finance is primarily mastered through control of your financial behaviors rather than through financial literacy. The behavioral principles you will need are having a long-term outlook towards reaching wealth, keeping yourself disciplined to maintain good habits, balancing your contentment with ambition, and persisting to achieve your goals.
Build Wealth Better with a Coach
Having a Financial Coach isn’t a replacement to the work you still need to do, but it’s an effective way to guide you through these four rules and set you up for success. Ultimately you are in the driver’s seat to reaching your own financial goals, but I can help provide directions on the best route possible. If you want to make a change and start driving towards wealth, reach out to me for a complimentary call and we can discuss your best options.Book a Free Consultation