Everyone defines financial success differently. For some, it may mean an early retirement — by the time you turn 40, perhaps — or having enough money to travel the world or start your own business. Or maybe you just want to stop worrying about money all the time.
While everyone has a different idea of what it means to "make it," unless you win the lottery, the steps you need to take to get there are usually the same. Saving money and building wealth isn't a complex pursuit, it's just hard because there are so many ways to spend hard-earned cash.
But if you make these three moves, you'll be well on your way to achieving your financial goals. Here's the simplest possible guide to getting rich.
1. Pretend your paycheck is 20% lower
"It is a commonplace observation that work expands so as to fill the time available for its completion," Cyril Parkinson wrote in 1955. "Parkinson's law" applies to money too, as one of the best known rules of finance is that "expenses rise to meet income." And the real problems start when you start spending more than you earn and when you confuse "wants" with "needs."
Break the cycle of excess spending by paying yourself first. "If people try to pay for everything else first, and then save, they'll often find that they're left with nothing. But if people save first, and then pay their bills, they'll force themselves to make ends meet," the Balance explains. Automate your saving so that money comes directly out of your check on the day it is deposited into your account.
How much of your money should you aim to transfer automatically? Ideally, a minimum of 20% of your income. The 80/20 rule is a good basic rule of thumb that says you should keep all your spending to 80% of your pay and save the rest.
Look for ways to cut expenses by creating a budget, cutting cable and shopping with coupons to increase your savings — and bank your raises by immediately allocating income increases to savings before you get used to living on the extra cash.
2. Accept "builder" costs — not "loser" ones
The millennial generation is the most indebted generation in history, thanks to massive student loans. While borrowing to go to school is often unavoidable, taking on unnecessary debt is something you can and should choose not to do. Rather than owing back money, plus interest, see if you can pay in cash — or simply skip the purchase altogether.
"Any time you take out a loan or charge something on your credit card, you’re actually borrowing from the money you hope to earn in the future," the Balance wrote. Interest makes everything you buy cost more, and you'll be working many tomorrows to pay for the stuff you bought today. You're basically making life really really hard for the future you.
Asking whether an expense is a "builder" or "loser" is a good way to decide whether to borrow, Howard Dvorkin, founder of Consolidated Credit Counseling Services advised Quicken.
"An education enhances your job prospects and allows you to build greater wealth, and a home increases in value over the long term," Dvorkin said. "On the contrary, something like a car is a loser. It loses value as soon as you drive it off the lot."
If your debt isn't going to help you gain in the future, just say no. Make do with what you have, find a cheaper option or wait until you can pay cash.
3. Put 15% of your pay toward retirement
While the early bird catches the worm, the early investor catches all of the compound interest. If you invest in tax-advantaged accounts like 401(k)s and IRAs from day one of your career, you'll be miles better off — even with making smaller monthly investments.
It may seem painful to put money toward retirement when you have lots of competing demands on your income, but you will thank yourself later.
Kiplinger suggests: "Don't think of saving for retirement as subtracting money from your paycheck or checking account. Rather, consider them automatic payments to your future self." Be generous to that future self. "A saving rate of about 15% of income would be sufficient to achieve retirement income targets," the Center for Retirement Research at Boston College recommends.
If you start investing $300 a month at age 20 — which is just about $10 per day and around 15% of a $24,000 annual income — you'll have more than $765,000 at age 65 if you earn a 6% rate of return and don't increase your investment over time, per the Edward Jones retirement savings calculator.
Start at 30 and invest the same $300 monthly? You'll have invested $36,000 less (10 years of missed investments at $3,600 annually) but you'll end up with just about $400,00 at 65 — or a little over half of what you'd have had if you began investing a decade earlier. That's a strong case for starting today.
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