Would you believe that building lasting wealth only involves five principles? It’s true! Everything else is details. I’m about to reveal the distillation of most personal finance books in just five simple sentences. If you can master these five fundamental wealth secrets, you will become wealthy. I guarantee it! Here they are:
1. Spend less money than you earn
This is the most basic, and the least followed. It does not matter if you make minimum wage or you’re part of the 1%. This holds for everyone. If you spend less than you earn month you will build wealth automatically. Do the opposite and you’ll build debt. It’s that simple, and yet millions of people never grasp this.
A corollary of this is that credit does not equal money! The housing market and credit crises provided abundant examples of people who were debt-rich, but had little actual money. Anything you put on a credit card should be put into the ‘spent money’ column of your budget, not the ‘forget till later’ column.
2. Reduce expenses
The quickest way you can impact your bottom line is to reduce your expenses. If personal finance is like a watering can, and water is money, then having too many expenses is like having holes at the bottom of the can. You won’t be able to put the money where it matters. It will all leak out! Pay off those debts, and cut those credit cards in two!
Be creative in the ways you can reduce your expenses. I can bet that there’s 20% of your expenses right now that you can cut, unless you’re already very skilled at cutting expenses. Do you really need Netflix? Set a challenge for yourself to reduce 5% of your total expenses over the next four months and see how much cash builds up.
3. Earn more money
As much as reducing expenses is vital, you cannot frugal your way to riches, and you’re always going to need some amount of income flowing in unless you join a monastery. How much you need will depend on your lifestyle, but for the sole purpose of building wealth you want to increase it as much as you can. Your income is the biggest factor for how fast you gain wealth.
You can get a higher-paying job, start your own business, develop secondary income streams, or any number of (legal, hopefully!) methods to hustle up some extra cash. This is another area where creativity comes into play. Think of a skill you could monetize right now, then take a tiny step toward making it happen.
4. Manage your money wisely
Beyond making sure what comes in is more than what goes out, this principle is knowing about investing, emergency funds, the nuts and bolts of interest, budgeting, and all the other tools and methods used to keep your money growing. No one knows this right off. It takes study to know how to discern which investments to make. Take some time to educate yourself about anything you might use to grow your wealth and what can go wrong. It will pay off in dividends, pardon the pun.
One great place to start is Investopedia. This is an educational site about investments and investment terminology. You can learn quite a bit just by browsing through this site and taking notes. From savings accounts to Forex trading, it’s all there.
5. Know how much is enough
This is the final key that will keep you sane in your pursuit of wealth. If you only think you need a million dollars to live the lifestyle you want, you’ll drive yourself crazy trying to go after it. If you KNOW you need a million dollars, then you have a measurable goal that can be broken down. If you’ve really done the work of figuring out how much you need to get what you want, you’ll probably be surprised at how little money you need to live the life you want.
Take some time to figure out how much you need for these three levels: your base expenses each month, your current desired lifestyle, and where you’d like to be in five years. I have found that setting hard numbers on these will keep you on track. For example, I know I need a minimum of $2,000/month to pay just my bare expenses. I need about $4,000/month to reach the level of life I want to live, and I’d love to be making $8,000/month in five years. With a target to aim at, you’ll have a rudder to apply the rest of the principles.
Note that all five principles are necessary. If you neglect just one of them the others will not function effectively. If you can master these five wealth secrets, you will make all the cash that you need and then some. The rest is just details!