It sounds crazy, but it’s certainly possible to get rich by living below you means, and lots of people have done it. But this is usually a slow and steady process that most people are not willing to do.
Now, rich to some, may not mean the same thing to others. So when I say rich, I’m talking about becoming a millionaire by retirement: to have a net worth of at least a million dollars when you retire (but hopefully you will have even more).
Sure you can get rich instantly, but that’s not very likely. For example, you could win the lottery. But I shouldn’t have to remind you that you probably won’t . . .
Even if you were to win the lottery, what makes you think that you wouldn’t lose it all and end up broke again? I mean, most people who win the lottery do.
Another way to get rich might be to start a business or something, and hope it doesn’t fail. Maybe it will flourish, and maybe you can become rich that way.
Maybe you could invent something, get drafted into the NFL, or be the next American Idol. I don’t know. I guess any of that is possible, but is it likely? Probably not.
The truth is, there’s a greater chance that none of these things will happen, and you being an employee for the rest of your life is probably the most likely.
I’m not saying you can’t dream; you absolutely should! I’m saying that in the event your dream fails, there’s still a surefire way to become wealthy, and it’s called living below your means.
Here’s how you do it.
Get out of debt as soon as possible
I know, you’ve heard this all before, right? It’s not rocket science. But it might as well be in today’s economy. Just try to find someone who thinks that having a good credit score is dumb. You probably won’t find anyone.
People today are also looking for instant gratification. When they want something, they want it now, and they refuse to wait or save up for it.
We live in a society that has been brainwashed in thinking that you have to have a good credit score. But that’s a trap! In order to have a good credit score you must be willing to get into debt and stay in debt. That’s how you increase your score: by staying in debt and paying your debt on time, every time.
There’s only one problem: when your money is all tied up in debt, you have no real money to save or invest. Your money can’t work for you. To fix this problem you have to free up your income; you have to get out of debt as soon as possible.
You have to quit tying up all your money in payments! If you don’t, you will always be broke; this is exactly what broke people do, just look around.
If you want to be rich, you need to do what rich people do. And 90% of rich people didn’t inherit their wealth. They didn’t try to “keep up with the Joneses.” They did it by not borrowing money, living on less than they make, and investing for the long haul.
The sooner you get out of debt, the sooner you will be able to do that, too.
In order to be effective with what I’m about to share, you might need to get motivated first. At this point, I’d like to recommend two books that will help you with that: TheMillionaireNextDoor and TheTotalMoneyMakeover.
These two books have completely revolutionized the way I think about money. After reading these books and applying the principles therein, I finally started winning with money. I can see that becoming wealthy is certainly attainable. I believe it is for you, too, but you have to get serious.
Dave Ramsey has said that, “You have to get sick and tired of being sick and tired.” And he is spot on with this. Until you reach the point where you’ve had enough, making a change is not going to happen.
If you have reached that point and are motivated to change, then the principles below will help you do that. These are the principles I’ve learned from the books and how I’ve implemented them in my life. I can honestly say, “It’s been a tremendous success so far.”
Cut your expenses
We all have stuff we waste our money on; I’m sure my waste is different from yours. But whatever it is, it is waste nonetheless, so get rid of it! If you don’t need it, it’s gone! Simple as that.
At this point, I’m not talking about debt. Of course paying off debt is a waste; that’s a given! That’s why I said earlier, “You need to get out of debt as soon as possible.”
Here I’m talking about other monthly expenses like gym memberships you never use, costly internet and television, costly cell phone bills, eating out, you name it! You know what it is. If you don’t need it, don’t do it. Or if it’s too expensive, cut it out!
Live on a budget
Living on a budget seems like a novel idea today because most people are living paycheck to paycheck. You might say, “Their paycheck is their budget.” Although there may be some truth to that, that’s not what I’m talking about. I’m talking about living on less that you make; not what you make.
Some people don’t think they need a budget because budgets are for poor people. But this line of thinking could not be further from the truth. Without a budget, you most certainly will become poor if you’re not careful.
When you live on a budget, you don’t live paycheck to paycheck, so you’re actually able to get ahead . . . slowly but surely.
You live on a budget because you don’t want to be broke; not the other way around.
When you live on a budget, you have more money to save and invest. This will cause you to build real wealth.
Cut your expenses again
So you knock out all the waste, and you’re left with a few bills you can’t live without, or so you think.
Well, you need the essentials, right? So let’s define the essentials: rent, utilities, water, and food. That’s it.
Do you really need cable? Could you not get by with one of those antennas that give you all the local channels for free in HD? That’s what I use.
Do you really need a $100 cell phone bill through whomever, with unlimited everything? Why not switch to something cheaper like MintMobile?
This is where you get creative. Look at your monthly expenses after you have eliminated all the waste and see where you could cut even more from the bills you have left.
Is this penny pinching? Well, you can call it whatever you want; I call it winning! It’s called not being broke and keeping more of my hard-earned money.
Have fun with this! I still get a kick out of finding places in my budget I can cut. The cheaper I can make my cost of living, the funner it is!
Always be saving
My mom always told me growing up, “The more money you make, the more you spend.” She was right, according to today’s standards. But in order to win with money, you have to change that way of thinking. So I adopted a new motto: “The more money I make, the more I save.”
The truth is, you have to always be saving. If you get a raise, that’s more money in the bank! If you pay off debt, that’s more money in the bank! If you save on car insurance . . . you get idea.
You have to always be in a state of saving because life is going to happen, and you are going to need that money for an emergency. TheTotalMoneyMakeover talks about these kinds of emergencies and suggests having an emergency fund: 3 to 6 months of expenses in savings.
Here’s how I make sure I’m always saving
From week to week, I consistently live on a budget, so I know I am living on less than I make (I am always saving x amount each month), unless there is an emergency that comes up (this is going to happen). But from week to week, I am constantly doing this, knowing that I am always saving as a result.
If my fully funded emergency fund is x, then whatever money in excess of x goes into my Roth IRA, one lump sum at the end of the year (or whenever you want). Then I start over: always saving, while anticipating emergencies at the same time.
If at the end of the year I have no money in excess of my emergency fund, then I obviously won’t contribute to my Roth (but this rarely happens; I don’t think it’s ever happened, actually).
The key is to always be in a state of replenishing your emergency fund (3 to 6 months of expenses) by constantly saving month to month. This helps you stay out of debt (once you are out of debt) and should be done before investing.
Always be investing
In TheTotalMoneyMakeover, Dave Ramsey recommends investing 15 percent of your household income in mutual funds: 401(k)s and IRAs. Here’s how the 15 percent breaks down.
If your employer offers a 401(k) match, say they match up to 4 percent, then it’s wise to contribute the match (this is money being invested for you), and invest the remaining 11 percent into a Roth (like I mentioned above).
Why Roth over Traditional or 401(k)?
Well, from a mathematical perspective, it makes more sense, even though the growth is the same. That’s because the amount you have to pay in taxes is significantly greater with Traditional IRAs and 401(k)s. Here’s why.
A Roth IRA grows tax free, while Traditional IRAs and 401(k)s grow tax deferred. So, say you invest $200 per month (which is likely not even close to the 15 percent you should be doing) for 40 years and average an 11 percent return (which is actually below what the S&P 500 has averaged over any 40 year period since inception), you would have about $1.5M at the end of those 40 years. You would have contributed $96k, which is about 6 percent of that $1.5M, and you would have 94 percent in growth. Whether you do a Traditional IRA or a company 401(k), you will have to pay taxes on the growth portion, which equates to millions of dollars. However, on a Roth, you would have already paid taxes on the $96k, and the millions of dollars in growth is not taxed at all (you would be saving 100s of 1000s of dollars in taxes).
A Roth is a powerful investment vehicle that allows you to shield millions of dollars from taxation; that’s why it makes more sense.
This is not your grandpa’s economy
Back in the day, after the Great Depression, people were scared to put their money in banks. The economy crashed not simply because people lost a lot of money, but because people reacted badly by taking their money out of the Stock Market and out of their banks.
People didn’t trust Wall Street, nor did they trust banks. But, I’m inclined to think that if people hadn’t freaked out like they did, the Great Depression would not have been as bad as it was, nor would it have lasted as long. However, people did freak out and took all their money out of the economy (some people even stockpiled cash in their mattresses).
In an effort to deal with this, the government (via the Federal Reserve) helped banks raise interest rates. This incentivized people to start putting their money in banks again. You might remember that some banks were paying interest rates around 16 percent for 6-month CDs! That is unheard of today; you’d be lucky to get 1-2 percent these days.
Yes, back in the day, you could make a lot of money simply by keeping your money in local banks. My grandpa did it. But with interest rates egregiously low now, those days are long gone. This is not your grandpa’s economy anymore; things have changed.
The only chance you have at getting even close to those kinds of returns today is by investing in the Stock Market and Mutual Funds (regardless of what your grandpa thinks or feels).
Yes, this requires tremendous discipline. Yes, it can be a long and slow process. But if you’re gonna be content with working for someone else for the rest of your life, it’s probably the only chance you got.
If you’re gonna do this, you gotta get serious. If you don’t get serious about cutting expenses and living on a budget, none of this is gonna work; you’ll always be broke.
If you’re trying to “keep up with the Joneses” by buying things you can’t afford, using credit cards to do it, you will continue to tie up your income in monthly payments, and that’s not gonna work either.
You have to get motivated. Maybe you have to get mad, I don’t know. But I do know you have to make up your mind to change, to be different, to unlearn all the garbage that the world has tried to feed you all these years. The principles have not changed since Ben Franklin said, “A penny saved, is a penny earned.” So save you pennies! If you’re lucky, those pennies will be worth millions when it comes time to retire.