Five Simple Steps to Wealth
There are volumes written about how to manage your finances – hundreds of books and blogs and websites all claiming that they have some secret sauce. All claiming that if you adopt their program you too can be rich, wealthy and happy. They have some trick that will bring you riches. I suspect that many of those places are trying to sell you something.
I will let you in on a secret: there is no secret. There is no trick. Unfortunately, becoming financially secure is actually simple. Difficult, but simple. The difficulty varies a great deal based on your initial circumstances. It’s much easier if you have a high income and very marketable skills than if you have a low income and failed to graduate from high school. But while the difficulty varies, there is no hidden path, no shortcut other than inheriting large sums of money or titles. And if you don’t fall into that lucky category you should prepare yourself. You can be financially secure, achieve independence, and retire early. But it’s a path that actually requires you to work hard, cut back, and delay gratification. There are only five very simple steps to follow.
Unless you were born with riches you need to earn your money. The only way to do that is to work hard: in school, at jobs, on your own endeavors. Short of Ponzi schemes and other hustles, if others are going to hand you money they need to receive something valuable in return. You must do good, high-quality work. Work that requires dedication and effort. No shortcuts, no gimmicks. If what you offer is valuable, timely, and well prepared you will be rewarded. You can work within large organizations, or on your own as an entrepreneur, but whatever path you choose requires effort. There are plenty of tips available on how to do this more efficiently or make extra money here and there. I am not saying that these tips and tricks do not work, but you cannot expect to get rich without a bit of sweat.
Additionally, I acknowledge that the world is not fair, some have advantages. Many people are catapulted to easier paths due to the accident of birth. Many also struggle their entire lives due to circumstances beyond their control. The starting points always very, but from whatever point you begin your effort and your skill determines your fate. So if you want to be successful, be prepared to work for it.
Track what you spend
Unless you are one of the lucky few who earns so much that any earthly expense becomes trivial, you’d better know where all your cash is going. Not knowing only ensures that it ends up in one place, straight down the toilet. If you don’t understand what and where you’re spending there’s no hope for any of the next steps. All of your hard earned dollars simply become so much water down the drain.
Have a budget, know what the biggest outlays are, be able to justify them. Don’t spend frivolously. You can track using nifty software or simply use a pad of paper and pencil. But you have to track what you spend, have it categorized, and understand what falls into each category and why. Just like in step number one, there is no shortcut here.
Spend less than you earn
Take what you earn through hard work. Subtract out what you spend. If the difference is large you’ll eventually be rich, if the difference is small you will not be. The key is realizing that you have an immense amount of control over this variable. Spending varies such a huge amount across the United States and the world that almost all of us can increase this difference. Some will be able to increase it more than others, but to claim it is immovable is untrue.
Reduce spending where possible
In order to increase that difference focus on the biggest items first. For almost all Americans this is Housing, Food, and Transportation in that order. These are not fixed categories, and you are not locked into purchasing the most expensive option. We currently have a very expensive house with a massive mortgage. If we want to retire on our current timeframe of two years we need to get rid of it and move somewhere cheaper. We purchased wasteful amounts of high-priced food, we needed to shift to Costco and awesome meals at home in order to retire. If you are purchasing high priced vehicles regularly you will not become rich. There are many other tips and tricks to attack other big areas, but for most of us, it comes down to reducing our demand for luxuries and wasteful spending. Be prepared to cut back.
Invest the rest intelligently and simply
Once again, this is simple. Take the difference between your income and your spending and invest the rest in low-cost index funds. Max out whatever tax-advantaged accounts you have in a sensible order. Don’t pull money out of the market. Don’t try to pick stocks. Just leave it in and let it grow. Let time do the rest.
Do those five things and you’ll see your net worth go up year after year. It will take time. It will take energy. It will take eliminating unnecessary spending. But don’t obsess over it, live and enjoy your life. The getting rich part is simple.