There are literally thousands of books, websites, magazines, professionals and other “resources” on saving and investing. The topics covered are nearly limitless ranging from the basics (budgeting, dollar cost averaging, buy and hold) to exotic (technical and charting analyses, options trading, derivatives) to the downright fraudulent (pump and dump schemes, penny stocks, unsolicited “hot tip” websites and other “get rich quick” schemes). Given all of this (largely useless) information available, it is very (very!) easy to get overwhelmed and confused.
Before I go on, I cannot stress enough that I am NOT a financial professional and nothing I write should be construed as as professional advice. Nor am I some kind of financial wizard. However, I have read many books and tried many of the traditional and exotic approaches listed above. Further, despite my (relative) youth, I have accumulated a sizable nest egg and am on track to retire in relative comfort by age 40 (or thereabouts).
Given the absolute volume of ink spilled doling out savings, investment and retirement advice, many people are overwhelmed to the point of inaction. I am a big fan of simplicity, so I am asking you to forget for a moment everything you have learned (or think you have learned) about these topics and ask a simple question: What is the purpose of saving and investing? Although many people may have a specific goal for which they are saving (down payment on a house, college education, etc.) I would propose all people ultimately save to get rich (that is, reach what I call “financial independence”).
Warren Buffet, in one of his investment letters, once famously said “The are only two rules to investing: 1. Never lose money and, 2. Never forget rule number 1.” To paraphrase even further, the smart investor will invest very conservatively to minimize the chance of loss while creating a positive return (ie. make more money) in the future. From this advice alone, from the world’s second most wealthy person, the normal investor can safely ignore investing fads and the more exotic investing approaches listed above. (Note: Don’t get me wrong, some of the exotic investment approaches can work, but they don’t work consistently over long periods of time, so your effective chance of getting rich with these approaches over long periods of time are effectively zero.)
Although I am no Warren Buffet, I do like to make things as easy as possible. As such, I propose there are three (and ONLY THREE) ways to get rich:
- Make a lot of money.
- Minimize your spending (ie. live below your means)
- The most powerful way: Do one and two above.
That’s it. Too good to be true? It’s not. I promise you, it works and anybody can do it. Now, to discuss each in a little more detail.
1. Make a lot of money
(Difficulty: Challenging, but do-able.) By implementing the advice in the other section of this website on how to succeed in the corporate world, you will learn how to play the corporate game and accelerate you progression up the corporate ladder. The primary factor to financial success is the same as corporate success–discipline. Some thoughts on how to make more money:
- Invest in yourself
Invest in your career by implementing the principles from this website in your daily work, taking classes to keep your skills relevant, or getting a degree/training if that is required to move forward in your job. The focus is on accelerating your career, getting promotions, and more pay.
- Consider a company/career/geography change
If you have not been promoted in your current role in the last 4-5 years, consider a move to a similar role in another company (you are generally worth 10-20% more outside your company). If you are in a low paying/dying industry, consider a move to a higher paying profession (there are a lot of websites with information on high paying, in demand jobs). If you are mobile, consider a move to a new geography. It is common for similar jobs in similar industries to pay higher wages due to demand for talent (do your research and compare cost of living as there is no point in more pay if your cost of living increases as well!)
- Check your investments
Do you have money saved up already? If so, how is it invested? If all of your money is in savings accounts gaining very low interest, you may want to consider stocks and bonds. If you are already invested in stocks and bonds, does your allocation make sense? The objective is not to take on more risk, but to ensure you are taking an appropriate (ie. conservative) asset allocation. If you don’t have a financial adviser, consider getting one.
- Find alternative sources of income
I realize we corporate types put in long hours and the last thing we want to do is find more ways to work, but there are some easy, “low effort” ways to make additional income on the side.
- Do you have a hobby you can monetize? For example, if you make jewelry or like arts and crafts, consider selling your creations on Etsy.
- Uber is a very common source of extra income. I am an Uber super-user and am continually amazed by how many drivers have full-time, high paying corporate jobs but drive Uber because they enjoy meeting people and appreciate the extra income. It’s easy to sign up and you only work the hours you want.
- Monetize your industry experience: I work with AlphaSights which is a company that puts subject matter experts in touch with companies who are looking for in-depth industry knowledge (usually industry consultants, wall street analysts, and private equity companies). If you have the skills they are looking for, AlphaSights pays between $200-$500 per hour to talk to their clients. The commitment is usually 1-2 hours and they deposit the money directly into your bank account within a week. I do 1-2 engagements per quarter.
2. Minimize your spending (live within your means)
(Difficulty: Moderate) Making more money is hard because for most people their primary source of income is their salary and is influenced by many factors outside their control. By comparison, spending less money is much easier, it just takes discipline and insight. I am so passionate about this topic that I will discuss it in depth in a future post, but for now here are some tips on spending less:
- Don’t try to “keep up with the Joneses”
Why? The Joneses are probably up to their eyeballs in debt. I can’t stress this enough. We all have the coworker who is our same level in the company (so you know you make roughly the same amount of money) who has the fancy car, the big house, goes on fancy vacations, etc., right? I PROMISE YOU that (unless they have a large inheritance) they likely have no savings. Debt is at record levels in the US and the average person has less than $50,000 saved for retirement. If you do what everyone else does, you will NEVER achieve financial freedom. (Note: If you are the person with the biggest house, fanciest car, etc? STOP NOW. You are ruining your financial future).
- Have a budget
This is about the most generic advice possible, but it is critical to financial success. Know what you make, what goes to taxes, living expenses, savings, etc. DON’T SPEND MORE THAN YOU MAKE. Period.
- Get out of debt
Once out of debt, avoid using debt in the future. Debt is the opposite of wealth.
- Track your net worth
Create a spread sheet that tracks all of your assets (cash, investments, etc.). Subtract all of your debts. What is left over is your net worth. Track it monthly.
- Get into a “net” mindset
This one is important. Lets say you make $200k per year salary. That’s a lot of money, right? Not so fast. Lets say you live in a high tax state and you don’t have a lot of deductions, so your tax rate is 40%. That $200k after taxes is now $120k. Still a lot of money, but not nearly as much and this number will go down once you pay all of your living expense. What you “make” is what you take home after taxes and expenses (your “net” pay). Convince yourself you make $120k instead of $200k. This will help you control your spending.
- Respect Small Amounts
People who do not respect small amounts of money (say, $20) will struggle to achieve financial independence. $20 wasted here and there adds up very quickly. Before spending more than $20 on an impulse buy, get into the habit of asking yourself “what do I want more… this [car, watch, vacation, etc.] or financial independence in X years?” Keep your eye on the prize and play the long game.
- Minimize unnecessary expenses
Make a budget and identify big uses of money. Ask how you can reduce each substantially. Does your company offer you a company phone? If so, why do you need a personal cell phone? Why do you need a land line? I cut cable out of my life seven years ago and switched to Netflix and Amazon and have never looked back. Also, question luxury. I have owned an Audi, an Infiniti, and three difference Mercedes Benzes. Now that I have relocated to Canada where taxes are much higher, I opted to save money on transportation and am leasing a 2016 Mazda CX-3. I am literally saving $750 on auto bills per month and the Mazda is easily 90% as good as any of the (far) more expensive cars I have owned (no joke). Live and learn…
- Minimize taxes
Taxes and death are unavoidable, right? Kind of. Max out your 401k and IRA. Max out an HSA if you get one. Avoid sales taxes by buying online from Amazon. The less you pay in taxes is the more money in your pocket, period.
3. Do both
Due to a strange confluence of circumstances (corporate connections, banker friends, and family connections) I know a lot of wealthy people. Some observations:
- Make more money and spend below your means
The people who are status conscious (e.g. big house, all of the toys, fancy cars) don’t have that much money. Seriously. If you have the time, read the excellent book The Millionaire Mind which provides a lot of details into the lives of wealthy people. They tend to be rich because they don’t waste money. The people who are very “status conscious” are trying to act richer than they are. It’s a common trap–avoid it.The people who are very wealthy (meaning, $100M+) are extremely modest. In fact, you wouldn’t know they are wealthy at all. They drive old, modest cars (a beat up pick up in one example). If they have nice things, they don’t flaunt it. They make 7 and 8 figure amounts per year but live so far below their lifestyle. Again, think Warren Buffet. They exude quiet confidence and don’t see a need to flaunt what they have.
There is no secret. You only have three options: Make more money, spend less money, or do both. I of course, am opting to “do both” and hope that you do as well.