The following is a post which originally appeared at Budgets are Sexy.
We all have money tips coming out our ears. Do this. Don’t do that. Do this or that. And on and on.
The advice seems endless — so much so that if you try to follow them all you’d have no time to live your life.
At the same time, all money tips are not created equal. Even while many are valuable, there are some that are exponentially better. These are the handful of tips that will make you wealthy.
So let’s get to the good stuff and cast the rest aside for now.
Based on the experience of managing my own money — allowing me to accumulate a few million dollars and retire at 52 — here are my recommended ten big financial moves that will propel your wealth skyward!
1. Get an advanced education in a valuable field.
College degrees can add significant wealth.
There’s no debate that (on average) the more education you have, the more you’ll earn and the less likely you are to be unemployed.
And if you can keep debt low while getting the degree (and there are reliable ways of doing this), then it’s almost guaranteed that getting a college degree is a good deal.
Even better is getting a degree in the right field. It’s well-known that certain careers pay more than others. Pick one that is closer to the top than the bottom and you’re finances will thank you for it.
College graduates earn $1 million more than high school graduates over their lifetime, and the income gap between the highest-paid college majors and the lowest-paid is more than $3 million dollars.
To make even more get an advanced degree in a high-paying field. This is where the big money can really kick in.
I got an MBA by spending a grand total of $5k for six years of college (because I was willing to work during school and got good grades).
My MBA was worth an extra $1 million to $2 million even though I only worked until I was 52. If I had stayed employed into my sixties you could tack on a few more million.
Of course you have to factor in abilities and interests when picking a career. But most people have at least a handful of fields that would work for them.
If they select one which pays a bit more, they will be making a solid financial decision which can help them become quite wealthy.
2. Focus on growing your career.
Even if you don’t pick a vocation in the highest-earning field, your career is a multi-million dollar asset.
If you don’t believe me, take a starting salary of $40k, add in 3% annual raises over 45 years, and look at the result. You’ll have earned $3.7 million.
The good news is that you can manage your career to make those 3% average raises much higher. Doing so will help you earn millions more throughout your career.
Take the same numbers from above and instead of 3% raises use 8.16% raises. The difference is over $10 million!
Plus it took me years to figure out the seven steps. You don’t have to go through that trouble, so you have the potential to do much better than I did.
Of course 8.16% could be considered on the high side. So let’s go low. Let’s say you average 4% annual raises. That extra 1% will allow you to earn an extra $1.1 million more than what 3% raises would.
Any way you look at it, managing your career for income growth will have a huge impact on your finances.
3. Control spending.
No matter how much you make, you can spend it all.
We don’t have to look far to find examples. It’s almost a cliche that high-income actors and sports stars go bankrupt. People who have made millions somehow spend it all and then some. As a result they are often left with nothing (or less).
A bit closer to home, you can see this principle play out across our country.
The median American household annual income is $51,939. U.S. households’ median net worth is $80,039. This means that over a 40-year period at an 8% return rate, the average American is saving a paltry $310 a year. What are they doing with all the rest? They are spending it!
On the other hand, those who control their spending do much better.
Assume a family can save $5k per year (less than 10% of their income). In 40 years at 8% they will have a net worth of $1.3 million. See what even a little bit of saving can do over a lifetime?
And this doesn’t mean you have to save on EVERYTHING, just some things. Enjoy your life by spending on what you want here and there. Just keep it in line so you have some excess to save and invest. Even 10% will make you wealthy over time.
Personally, I wanted to do better than average and was able to save 36% of my income. Others have saved much more. If we can do it, so can you.
There are two major areas to control spending: on the big things and the little things.
Big things like homes, cars, extravagant vacations, and the like can bust your budget in a single move. Little things like eating out for lunch regularly, smoking a pack of cigarettes daily, and, dare I say, drinking $5 cups of coffee several times a day don’t seem like much, but they can add up to big dollars over time.
4. Eliminate debt.
Debt is a financial killer, especially consumer debt.
And yes, even “good debt” like a mortgage and student loan debt can be bad in many situations — look no further than 2008 for housing debt and the current issues with student loan debt.
The average American will spend hundreds of thousands of dollars in interest over the course of his lifetime.
Imagine if this expense was eliminated or even cut in half and invested. This move alone would make anyone’s net worth sky-high.
We eliminated all debt over 20 years ago when we paid off our mortgage. We had already retired our car loans and a personal loan. Then we focused everything on paying off the mortgage.
It started with buying a house we could afford — one half the price the bank wanted to lend to us. We then took all extra cash — bonuses, financial gifts, etc. — and put them against the mortgage. We cut spending as well and made extra payment after extra payment.
Less than a decade later, we were completely debt free.
Not having debt for two decades allowed us to dramatically increase the amount we saved which in turn super-charged our net worth.
5. Invest early and often.
You’ve probably heard that time is your greatest investing asset. It’s true. The more investments earn and grow on their own, the greater they become.
Investment value is also greatly impacted by the amount invested.
These two factors are why you want to put away as much as you can as soon as you can. Fortunately, both of these decisions are within your control.
Return rate is the third variable in the investment growth equation and gets most of the press. However it’s actually the least important of the three in determining your overall results. Furthermore beating the averages in return rate is virtually impossible.
You can spend hours and hours trying to find the right investments and then likely won’t pick a winner. Or you can just invest in low-cost index funds and let them do the work — and beat 95+% of investments out there over time. This is what I’ve done and what I recommend.
Finally, you have to stick with it, which may be the hardest investing choice of all.
I remember back in 2008-2010 when things were really dicey. My portfolio was down big-time. I had put money in all the way down and there was no sign it was going to come back.
But I kept at it and even found extra cash to invest.
Seven years later I’m so glad I did. That money is now worth a small fortune.
Many think the stock market is due for a drop soon. No one knows when it will happen, but if it does, keep the faith. Market drops are often the time to buy if you have at least a 10-year time horizon.
6. Marry well.
You can make all the great money moves in the world, but if you’re married to someone who makes all the wrong moves, you’re in trouble if not sunk completely.
You don’t have to marry Suze Orman or Dave Ramsey, but you need a spouse who shares your financial goals and general outlook on money (no two people will match exactly, of course).
This was a VERY big part of our financial success.
I was good at 1, 2, and 5 above and my wife was great at 3 and 4. In words from The Millionaire Next Door, I was good at offense and she was good at defense.
Together we had a winning combination. We knew what we wanted to accomplish, divided up the responsibilities, and climbed the money mountain.
7. Have goals and a plan to reach them.
First of all, having a goal is key to being financially successful. It sets the bar and allows you to work towards what you want to achieve.
It doesn’t need to be a 100-page treatise comparable to the federal budget, but you must have at least a general goal like “retire at 40 with $2 million in the bank.” It’s better yet to have SMART goals.
Another key is to write them down. Research has shown that “people become 42% more likely to achieve their goals and dreams, simply by writing them down on a regular basis.”
Second, simply having a goal does little good if you don’t take action on reaching the goals.
You need to break each goal into bite-sized tasks that allow you to grow your career, control your spending, and the like if you want to accumulate wealth.
I know this can seem daunting, but it doesn’t need to be. Simply write down what you want to accomplish and what you’re going to do to get you there. Then just make a small bit of progress every day. Over time, those seemingly little advances will add up to something big.
This was the tip that I missed when I was young. I went several years without a specific money plan and I lost five years or so of investing. Do you know what those five years would be worth now? A good amount, for sure.
But hopefully my bad planning demonstrates that even if you’ve made a few mistakes long the way there’s hope for you if you take action now.
8. Track net worth and cash flow.
Net worth (assets less liabilities) tells you how you are growing your wealth over time.
Cash flow statements (aka “budgets” listing income less expenses) tell you how much you are making and how it’s being spent. From there, you can make decisions that allow you to do more of the former and less of the latter, freeing up more money for investing.
We have tracked our net worth monthly for over 20 years. We use Quicken, but you can also use Mint, a spreadsheet, or even paper. The key is that you track it on a regular basis (probably at least quarterly) to see how you’re doing at growing your wealth. It lets you know if what you’re doing is working or not.
We have had a budget for years as well. We use a spreadsheet that I update monthly. It’s very useful at showing where our money is spent which allows us to make adjustments sooner rather than later.
Many people hate budgets because they think they are too restrictive. I’ve found them to be the opposite. They allow me to know exactly what I’m earning and spending which then frees me to make the lifestyle decisions I want to make.
My guess is that our budget alone was responsible for half of our spending control success.
9. Develop side hustles.
In addition to growing your career, a side hustle/business is a great way to 1) do something you enjoy and 2) bring in some extra income to grow your net worth much faster.
I’ve had several side hustles through the years including:
- Freelance writing for magazines — This was a major contributor to paying off our mortgage
- Blogging — I had a blog before my current one which was quite successful
- Refereeing — Mostly done because my son needed the money and we did it together, but a few extra thousand dollars a year never hurts
- Real estate — My biggest side business of all (though some could call it an investment) which allowed me to retire without having to draw down any assets
The great thing about a side hustle is that it speeds up early retirement dramatically.
Assume you can retire when you are able to generate $40k in income per year. At a 4% asset withdrawal rate, this means you’d need $1 million saved. Also assume you can invest $10,000 a year towards that goal at an 8% return.
If you have no side hustle, it would take you 29 years to reach your goal.
If you have a side hustle that took four years to build up to $20k per year and you invested that money, in 12 years you’d have $503k (which would generate just over $20k at 4% withdrawal) plus a business that generated $20k. Bam! You’re at your $40k annual goal.
So the side hustle is probably worth it to save 17 years of working, right?
If you want to run your own numbers, check out my ESI Scale Calculator.
10. Learn about money and manage it yourself.
No one cares more about you than you do, but there are plenty of people who care about your money.
Many of them want to turn your money into their money and they are quite good at it.
Others have good intentions but simply don’t understand how money works. And yes, this includes many, if not most, financial advisors.
The only way to avoid being taken (one way or the other) is to know the basics of managing money yourself.
Fortunately, the money principles you need to be successful are simple to learn and few in number. With a handful of books and regular reading of some good money blogs you will develop the knowledge and skill not only to protect yourself but to thrive financially. (In fact, you only need to read five money books IMO.)
We were fortunate to take a Dave Ramsey-like class at our church soon after we were married. It set up a good foundation for us. Then I read several personal finance books and started applying key principles I learned. Finally I began to write about money and became more educated along the way.
I started from ground zero, and if I can learn how to manage my money, you certainly can too.
Yes, there are a ton of other financial guidelines you could implement — probably thousands.
But if you want the biggest financial bang for the time spent, focus on the ten above.
If you get these right, you will do quite well over time.