So you wanna get and stay rich?
I get a lot of questions about how to get rich, and my answer is very simple.
Don’t spend too much. Mostly save. Always invest.
Yet so many people do the exact opposite—invest poorly, spend way too much, save almost nothing, and remain willfully ignorant about their finances.
Why? Because they don’t understand their relationship to money.
So how do you develop the good habit of turning you situation around, get out of your hole, get on the right track and stay on it?
The first step in changing money habits is taking a cold hard look at your financial input and output by adding up all your earnings and subtracting all your expenditures over three months. If your number is positive you’re one of the few people taking in more money than you spend. If your number is negative, and like the majority of men and women, you spend more than you make.
So what to do to keep your number positive at all times? Here are my 10 basic tips.
1. Get rid of your credit card debt starting with the card with the highest interest rate. With typical compound interest rates averaging around 16%, this black hole of debt keeps growing, and growing, and growing.
2. Get a handle on emotional spending. Recognize when you’re about to spend with your emotions, and go for a walk, cook, or read instead. Do anything; just don’t head for the mall.
3. Create a “Fun Money Fund”. Many people who commit themselves 100% to eliminating debt and saving money find that a certain joylessness creeps in after a while. The same thing happens to dieters who deprive themselves of all their favorite foods for months, and then cave to late-night binges. That’s not a way to live, and that’s not what I advocate. Austerity, yes; deprivation, no. The key is to include spending on fun things in your budget. Set aside a manageable percentage every week in a fund that will let you splurge with cash.
4. Don’t invest in anything you don’t understand. Put your money in things, not concepts. Oil, soap, insurance, computer technologies—these are recognizable products. When people invest in new products like “mortgage-backed securities”, complicated derivatives, or high-tech start-ups, they can get themselves in trouble. Skip them unless you know these products inside and out.
4. Diversify your stock portfolio. Look at your portfolio and make sure you’re investing only 5 percent of your money in any one stock or bond, and only 20 percent in any one segment (for example, energy). Anything more than that and you’re courting risk and destabilizing your portfolio.
5. Insist on dividends. Never buy a security that doesn’t pay a dividend, or a bond that doesn’t yield interest. Think of it like you’re renting out your money. Don’t let someone live in your spare room for free.
6. Don’t be greedy. It’s called buy and hold. That means you don’t want to buy and sell stocks with every single up and down of the market—a paranoid and insecure way to invest, and one that rarely leads to great success. Plus, it’ll make you crazy unless you’re an experienced day trader.
7. Don’t believe the hype. Stock tips are often a bunch of hokum designed to sell a product. It’s all marketing. Trust your gut, and your money manager. Data can be interpreted a lot of ways, and a good broker knows how to understand the numbers. Go back to your mother’s advice: If it sounds too good to be true, it is
8. If you create a budget, discipline yourself. The worst thing for your wallet is going shopping without creating a maximum budget for everyone on your shopping list. Determine your spending thresholds before you hit the mall, and don’t exceed them under any circumstances! Make sure you total all of the spending so that you’re confident the ultimate number isn’t too much.
9. Summarize all your spending. You already know how important it is to set aside some of your income – even if you start small – to invest and put to work towards building your wealth. But it’s also easy to get tempted to spend more than you should. That’s why you need discipline – and a great way to build discipline it is to prepare a monthly summary of all of your spending. Plenty of tools can help you, from a pen and paper to spreadsheets or smartphone apps. Once you start seeing these lists of where your precious money is going, you’ll be amazed at how quickly you start thinking twice before spending what you should be investing.
10. Share this with your family and make sure they follow the same discipline. There’s nothing like family to help motivate people when it comes to being smart with money. It makes sense – you’re more driven to save and invest when you know that your savings will help your kids and grandkids – not just yourself. And you’ll be more careful about big risks when you know that a bad decision can affect your family.
Hope this will put you on the right track once and for all… Get Started.
NB: None of this content should be construed as investment advice. Investors should speak with their financial advisors for any investment advice and to discuss the risks of investing in any financial product. This represents my personal opinions and should be enjoyed as such.
