Building wealth is simple. Not easy, but simple. We’d all like to make more money, but if your long term prize is financial independence, there aren’t any shortcuts. There are only these four basic rules.
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That doesn’t mean it’s equally easy for everyone to build wealth. Some people have much bigger mountains to climb, and other people are being pulled down the mountain as they try to press forward (while others start halfway up). But when it comes time to take a long-term look at your financial future, these are the four starting points that every single person will have to follow, no matter where you’re starting from.
1. Spend Less
Let’s start with the thing you have the most control over: your spending. Most people can spend less, although we often don’t feel that way. Everyone I know who travels to a poor country comes back shocked at how well we live here. Most of us have no idea. Even if we feel like we don’t have much, our life is luxury compared to billions of people around the world.
Much of our spending stems from social pressure, successful advertising, or simply from our perception that “we can afford it”. Absent from that decision making process is the key question: how will this purchase make me wealthy twenty years from now?
If there’s a common theme from the lives of people who succeeded financially, it’s that they spent less than they earned. Are there things “on the margin” you might be able to do without in order to spend less than you make? Take a look at your spending and find out. Whether you’re a big spender or completely broke, everyone needs a budget.
No matter which way you slice it, until and unless you spend less than you make, you won’t get wealthy. You don’t need to be Hetty Green extreme, but making a deliberate decision to spend less than you make is a key step to long-term financial independence.
2. Earn More
Of course, there is an even more obvious way to build wealth, though it’s significantly harder: earn more money. Everyone has opportunities before them to earn more, but they aren’t always easy, and they aren’t 100% in your control like your spending is.
Here are a few examples of ways to start earning more:
- Asking for a raise: You know what they say: if you don’t ask, you can’t receive. Four or five years ago, the climate may have been tough to ask for a raise; but today your chances might be much better. Make sure you go in prepared for the best possible shot.
- Moonlighting: if you do IT for your company, for example, there may be other businesses who’d be happy to hire you to do things you can do in your sleep over weekends or evenings.
- Flipping: Flipping, i.e., buying cars, bicycles, homes, refrigerators, or other products and repairing them in your spare time can bring you extra money. It can even lead to the next possibility…
- Starting a business: Most businesses were started after hours in someone’s garage or basement. A good place to start may be your hobby. eBay and other trading sites offer you a low-cost entry point, where you can begin selling things you make or buy.
- Teaching: if you’re good at something, odds are many people are willing to learn…and pay for that knowledge. Community centres and your local university probably have continuing or adult education programs that run in the evenings, and for which they need teachers.
These are just a few options, but you get the idea: earning more is the simplest way to build wealth. Again, don’t confuse “simple” with “easy” — taking on another job means a lot more work for you. But as the saying goes: where there’s a will, there’s a way.
3. Pay Off Debt
Debt is like a fire: you can do a lot with it, but it can kill you, too. All it takes is for the wind to change direction or one little thing to go wrong. Debt can be incredibly useful, but most people are unaware of its dangers, as the ten million people who lost their homes in the Great Recession can testify.
For example: If you saved $500 a month, you would be able to buy a $30,000 car after five years for cash. However, you can buy that car today with debt, and pay a little more than $500 each month. The main difference is the date you get the car.
Put another way: debt is nothing but impatience expressed in dollars.
There are two problems with this. You end up losing money in interest that you would have received in your monthly savings. Granted, the latter isn’t that much in today’s economy, but the principle holds universally: impatience costs money, and saps your wealth. Secondly, when you save and something bad happens, like a layoff, health problem, family catastrophe or some other disaster, you can simply put your savings program on hold and cut back your expenses to where you can make it. You can’t do that with debt. The bank insists on getting its full payment each and every month. Bankruptcy has only one cause: debt. You can’t go bankrupt without debt.
There’s a saying among Alaskan bush pilots: there are old pilots and bold pilots, but there are no old, bold pilots. Put more bluntly: those who takes risks don’t make it. The same principle applies to wealth builders, and there is no bigger financial risk than debt. Donald Trump used debt to build his empire, and was all but wiped out when the next recession came along. After barely surviving, he resolved to stay away from debt and trade more on his name. The lesson: Stay away from new debt, and if you’ve already racked some up, it’s time to start paying it off.
You either get money from what you do (job or business) or what you own. You’ll never retire until you make that transition, because retirement requires making a living solely from what you own — that is, your retirement savings. Unless you were born rich, the only way to have enough to live on when you retire is to invest your money, and the earlier you start, the better.
You know you’ll never get beyond the lowest person on the totem pole at work unless you apply yourself to getting better at your job, right? Investing is your “next job:” you have the option of sticking your head in the sand and pretending you can live without it, or you can realise your future depends on it and learn what you can to do well.
Chances are, you already know about these things. Most people do — but few realise how exclusive these pillars are to everything else. Not all of them are easy, but there’s no other way to build wealth and have the financial freedom that comes with it.