FreeImages.com Jerzy Müller
Poor people tend to believe that money is meant to be spent. This is why they tend to remain poor. This is why so many lottery winners are broke. If you want to build wealth you need to save money. I can summarize my entire financial mantra into one sentence:
Spend less than you earn
I’ve come across this time and time again in books, seminars, audio programs, and financial guides. It’s also called living below your means, and sometimes pay yourself first. But before I go on lets define what I mean by “rich”
Rich Person – Someone free from having to trade their time for money, and retiring in comfort. AKA Financially Independent
Forget winning the lottery, getting a big inheritance, or inventing the next iphone. The vast majority of us will build our own wealth slowly over time and spending less than you earn is the easiest and safest way to do it. It’s similar to losing weight, we all know the way to weight loss is by burning more calories than you consume, yet so many people are looking for that magic pill or quick fix.
Of course I’m simplifying. If you earn $2000 per month and spend $1999 per month what I’m saying is technically true, but you won’t be building wealth. A good rule of thumb that I’m sure you’ve heard before is to save 10-15% of your gross employment income. Are you doing this right now?
TOOL: Check your savings rate (don’t worry nothing is saved):
Gross Yearly Income ($):
Savings Rate (%):
Surely you can find room for these savings! It seems easy enough but more than 51% of Canadians are still living paycheque to paycheque (source).
Most people believe the path to riches is to earn a higher income. The Millionaire Next Door by Thomas J. Stanley describes this as "economic offence". This makes sense because people assume millionaires earn six figure incomes. Not true. With slow and steady saving almost anyone can become rich by being frugal. Frugality is playing "economic defense" and it can have a much larger impact on your wealth. Who will become wealthy sooner in the following two scenarios:
Joe earns $120,000 per year post-tax, but has a high consumption lifestyle. With expenses of $110,000 he only retains $10,000 per year. Buying too much car, eating out all the time, living in too much house, drinking and smoking too much are all causes of this.
Jane earns $50,000 per year post-tax, less than half of Joe, but lives a frugal life below her means. She drives a used car, cooks her own food, lives in an inexpensive neighborhood, doesn't smoke, and rarely drinks. With yearly expenses of only $20,000 she builds up $30,000 per year. She saves three times more than Joe despite earning less than half his income.
Joe will certainly look wealthy to an outsider. He drives fancy cars, wears fancy clothes and eats at fancy restaurants. And if he suddenly changed these habits people would notice. If he is a lawyer or real estate agent he may even lose business. He is stuck in the consumption loop. Don't be like Joe, Jane will be retired long before Joe.
Now before you light me up in the comments, yes I understand that I'm generalizing. But before you can advance to the "how to" details the first thing that changes is your mindset and attitude. I don't expect you to change your life based on a poorly written blog post by some guy on the internet, but if you start thinking about this stuff and maybe pick up a book or two on finance you're already ahead of 51% of the country (Above average at last!)Spam your friends: