These days, it seems people don’t realize how straightforward and simple building wealth can be. That’s probably because the personal finance world is littered with get-rich-quick schemes, absurd investing strategies, and expensive solutions (read: gimmicks). All this noise muddies the waters and leaves people feeling overwhelmed and confused.
People assume that they aren’t smart enough to become wealthy. They think investing is complicated. That investing requires a small fortune before even getting started. That investing in the stock market isn’t much different than gambling in Vegas, unless they have somebody there to help guide them. That they need access to high profile investment advisors. That the key to real wealth is acquiring multiple real estate properties. That they’re so far behind that the only way to catch back up is by taking a chance on Bitcoin or some other high-risk investment.
With so much information (and misinformation) readily available, it isn’t hard to see why so many people prefer to postpone or completely ignore devising a plan for saving and investing.
That’s probably one of the reasons why the average American doesn’t expect to be ready to retire by the time they turn 65. And why 55% of Americans are on pace to enter retirement with less than $10k in retirement savings.
The truth is, everyone realizes that money is important.
At the same time, most people don’t want to spend their precious time sifting through the theories and advice, trying to figure out what works and what doesn’t. Instead, they’ll just hope they catch the right breaks. Or they’ll plan on figuring it out someday.
Or they’ll wait until somebody comes along and simplifies it for them.
So, let’s see if I can’t save you some time by simplifying things a bit.
The truth is, the path to wealth is
easy simple. So simple, in fact, that I think it can be summed up in four basic steps.
One Point of Clarification: The path to wealth is not exciting. In fact, it’s a little bit boring. Don’t expect glitz and glamour. Don’t expect to get rich quick. And don’t expect it to be easy. Just because it’s simple doesn’t mean it’s easy. In reality, the path to wealth is slow and rather difficult. But anyone can follow it. It doesn’t matter whether you’re making $300,000 a year or $30,000. The principles are the same.
1. Increase Your Income
Will it take you longer to “get rich” if you make $30,000 a year than if you made $300,000 annually? Of course!
The more money you make, the easier it is to increase how much you save and invest. That’s why the first step on the path to wealth is increasing your income.
An obvious way to increase your income is by asking for a raise. Unfortunately, getting a raise isn’t something the average person can do immediately.
So, what should you do? Start by developing short-term and long-term strategies for increasing your income. And whatever your plan is, make it a priority.
There are endless ways to increase your short-term income. These days – and especially with today’s gig economy – it’s never been easier to pick up part-time work, start a side hustle, or experiment with entrepreneurship. There are so many short-term job opportunities available, I find it hard to believe that there isn’t something out there that you can do to increase your income right off the bat.
Once you’ve increased your income, you can use the money to pay down debt, cover current expenses, invest for your future or have a little fun. No matter how you use the additional income, your financial position should change for the better.
And what about long-term strategies? If you’ve found a career path and are looking for a higher salary, it’s important that you keep learning and searching for ways to increase your salary. This often means making incremental increases to your compensation as you move around in the job market. By taking advantage of new opportunities every few years, you can reset your compensation baseline.
What do I mean by compensation baseline?
Let’s say you’re making $30k right now. It’s highly unlikely that you’ll make exactly $30k a year for the rest of your life. That’s because $30k is probably your baseline. Why does that matter? Because, if your baseline is set at $30k, you’ll probably never work for less than $30k a year for the rest of your life.
So, in a few years when you have an opportunity to increase your salary by $5k, that means you’ve also set a new baseline of $35k. And if you plan on working another 25 years, that $5k raise is really an extra $150k over the course of your career ($5k every year for 25 years).
If you’ve just started your career, increasing your income is even more important. The more years of work you have ahead of you, the more you stand to gain by getting that raise early on. See why increasing your income is the first step on the path to wealth?
2. Don’t Spend a Lot of Money
It doesn’t matter how big a raise you get; if you spend all your money instead of saving and investing, you’ll never become rich.
People often theorize that their lack of savings is due to a “saving problem” they haven’t yet overcome. They say, “I really want to save and invest, but there’s just nothing left after I pay the bills.”
When I hear that, I think to myself, “I wonder what they’d do if they still had money left after paying all their bills.” My guess – they’d probably spend it. So, in my opinion, it sounds like more of a “spending problem” than a “saving problem.”
But here’s the good news – it isn’t that tough to fix a “spending problem.” And by doing so, saving and investing won’t seem like such far-off concepts anymore!
Start by creating a realistic budget. Now, the truth is that most people hate budgeting. If you hate it, then you probably aren’t going to do it. So don’t make it an elaborate process. It doesn’t have to be. Keep the exercise short and sweet by keeping things simple.
Here’s how. Look at your checking account balance. Then do some quick mental math to total up your upcoming expenses. If things are tight, then you probably shouldn’t be spending extra cash outside of your basic financial obligations, right? It’s as simple as that.
If things always seem to be tight, it’s probably time to look for ways to cut back. Set aside an hour or two and review your recent credit card statement (or statements). How much are you spending on going out to eat? If it seems excessive, set a limit for dining out. What about all those subscription services? Do you really need HBO, Amazon Prime, Netflix, and Hulu? Cancel a subscription (or two…or three)!
I guarantee you’ll find some expenses that you can cut without missing them. If not, let me take a look and I’ll help you out! Or, even better yet, try the Trim Bill Negotiator and see if you can start saving money today!
That’s how you address a spending problem. One expense at a time.
And let’s not forget the most important part – what you do with the money you didn’t spend. You save and invest it, of course!
A “spending problem” is just one way to make it more difficult to become wealthy. Even worse, perhaps, is wasting money. At least when you spend money, you have something to show for it – a dinner, a new outfit, a month of Netflix, etc. When you waste money, however, you come away with nothing as a result.
What do I mean by wasting money? I mean letting your hard-earned money slip away by being lazy and uniformed.
How can you avoid “wasting” money?
Take the time to understand your financial decisions. I see people at the supermarket putting more thought into choosing the avocados they’ll purchase than the auto loan they’ll be repaying for the next 72 months! Don’t be that person!
Make sure you understand the terms of your student loan, auto loan, lease, or mortgage. Do a little research before opting for the default enrollment settings for your employer’s health care and retirement plans. Commit to learning a little bit about the tax code so you can minimize your tax liability. Avoid speculative investments and situations that invite unnecessary risk. Stick to index funds and avoid actively managed funds that rack up costly investment management fees.
In my estimation, most people are leaking money like crazy by not taking basic steps to understand their financial decisions. In fact, most people have no clue how a few minor leaks will impact their long-term financial status. And they have no idea how quickly and easily they can plug those leaks.
The bottom line is, being an uninformed consumer or a not-so-savvy investor usually means you’re just throwing money away. Quit being lazy and start enjoying the benefits of being knowledgeable consumer.
The final step on the path to wealth is putting your money to work for you.
Start by developing a financial plan that details your investing strategies and goals. Next, take steps to make that plan a reality. I recommend automating your financial life so your money automatically goes where it’s supposed to every paycheck. At that point, you can shift your attention to fine-tuning your finances. Maximize your tax efficiency to keep more money in your pocket instead of giving it to Uncle Sam. Avoid high investment expenses. Stay educated and informed about ways to optimize your personal finances.
Lastly, find ways to keep your finances in order. Over time, you’ll open more and more accounts. If left unchecked, your well-designed financial system will become complicated and disorderly. Take the time to organize your financial system. Ditch unused spreadsheets. Closed inactive accounts. Get rid of the clutter.
By updating and maintaining your financial systems from time to time, you’ll find that managing your finances really doesn’t take much work. And when you’ve reached that stage, your money will finally be working harder for you than you are for it.