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Note: This is the fifth of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
Credit card debt is an increasingly bigger problem in the US, Europe and parts of Asia. It seems that the convenience of buying something and paying for it afterwards in small payments is a luxury that is difficult to give a way.
In spite of hundreds of millions of credit card users there is however a substantial part of population who don’t use credit cards. If we take a closer look we will see, that these people mainly fall into 3 groups:
People who have been in major credit card or other debt that have faced the difficulties of paying back their enormous debts. These people have promised themselves that they will never use a credit card or take a loan again. Most people who have managed to come out of tens of thousands of dollars of debt usually end up by cutting their cards.
People who don’t trust banks or anybody but themselves to keep track of their money. A lot of Hispanics but also a good number of black and white people do the same. These people only use cash. For them cash truly is king,
People who are determined to go through life without debt.
Note: This is the fifth of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
Making a budget is one of the most important instruments that you can use in order to help you become rich.
The reason that a budget is so powerful is that it enables you to see into the future. If you make a good budget that you are able to stick to means that you know in advance how much money you are going to spend. And even better - you know what you will spend it on! Knowing your expenses let’s you come up with the sum that you can comfortably keep to yourself - the money that is going to make you rich.
There is nothing to be ashamed of when you are unable to exactly follow your budget for the first few times. As time moves on and you get more experience on making and following a budget it gets easier to stick to it. When making your first budget it can be easy to underestimate the amount of money you need for eating out, for spending quality time and so on. (more…)
Note:This is the fourth of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
The ability to set goals is in a way the most important part in becoming rich. Goals are what start this all. A goal is something that you want so badly that it hurts when you don’t get it. A goal is what makes you develop and step out of your comfort zone. Setting a goal gives us the opportunity to assess later on if we are successful or not
Written Goals pay off
In 1953, researchers surveyed Yale’s graduating seniors to determine how many of them had specific, written goals for their future. They were asked to answer the question
“Have you set clear, written goals for your future and made plans to accomplish them?”
Only 3% had written down their goals, 14% of graduates had goals but they had not written them down and 83% had no specific personal or business goals.
10 years later they made another study among the same people. It came out that:
The 14% who had goals but didn’t write them down were earning on average twice as much as the 83% who had no goals at all.
The 3% percent who had written down their goals were making 10 times more than the other 97% put together.
The interesting thing with goals is that when setting goals you don’t need to know how you will achieve them. I think that Charlie “Tremendous” Jones said it best in his book Life is Tremendous that
When you have the why the how comes itself
Be sure to think through your goals - is this what you truly want? If it is - go and do it! It is important that you should set your goals by yourself. If somebody else sets them for you it might feel that it is not what you wanted after all and the goal will never be accomplished. This is also a major problem in many companies where goals come from management and ordinary employees never feel as if the goals are theirs. Always set your own goals!
The difference between a goal and a dream
The difference between a goal and a dream is that goals have a time limit.
A dream is that “I will someday be a millionaire”
A goal is that “On April 5th in 2017 I will be a millionaire“. This imposes a deadline and therefore makes it easier to keep track on how you are doing with achieving your goal.
An even better goal would be
“On April 5th 2017 at 10 o’clock in the evening I am sitting on my million dollar yacht on the Mediterranean sea, looking at the sunset and having a cigar”.
As you can see I tried to visualize what it would be like to be a millionaire. It has been shown that visualizing your goals has a great impact on achieving them. For instance Olympic gymnasts always visualize their performance before really doing it.
Have S.M.A.R.T goals
Consultants always stress that goals should be SMART. By smart they mean
S - Specific. A good goal has to be specific. You have to know exactly what it is that you want. If you have a vague goal you will have vague results.
M - Measurable. A good goal is measurable. If your goal is to become a millionaire by 2017 then you can always measure your success by how much money you already have.
A - Attainable. A good goal is attainable. It is important to set big goals but it is also important that they are attainable. An attainable goal is one that is both realistic but also attainable in a shorter period of time than what you have to work with. Now when I say attainable, I don’t mean easy. Our goals should be set so they are just out of our reach; so they will challenge us to grow as we reach forward to achieve them.
R - Realistic. A good goal is realistic or real. A goal has to be something that we can reasonably make “real” or a “reality” in our lives. There are some goals that simply are not realistic. You have to be able to say, even if it is a tremendously stretching goal, that yes, indeed, it is entirely realistic—that you could make it.
T - Timeframe . A good goal has a deadline. Every goal that you have should always have a date associated with it. For big goals it is also OK to break them into smaller parts with each having their own deadlines. For example if my goal is to be a millionaire by 2017 my sub-goal could be to have 500 000 dollars by year 2013.
How to accomplish goals
Be sure to set SMART goals, but there are some things that make it even more realistic for you to achieve your goals.
1. Tell your friends about your goals and keep them updated. Letting your friends know of your goals can be a very powerful ally. This can help you whether your friends believe in you or not. People who don’t think that you can achieve your goals are called skeptics. A skeptic can help you because during hard times the only reason to move on with your goal could be to prove your skeptics wrong.
People who believe in you and your goals are helpful because often the can give feedback on what you can do even better and of course they are the one’s who will be there for you on difficult times.
2. Be consistent - the best way to accomplish a goal is to never loose sight of it. When you are saving money in order to reach the magical 1 million dollar mark but after getting to $500 000 decide to take a small break and spend some of your saved riches it will can set you back many years.
3. Control the controllable’s. This is the secret of rationality that you need in order to accomplish your goals. For instance in 2005 and 2007 I was a door-to-door books salesman. It was the most difficult thing that I have ever done. When talking to people I could never control how they will react to me - friendly or unfriendly. What I could do was to meet a lot of people - that way I saw more friendly people who were willing to buy the books that I offered. Seeing more people also meant that I got better at communicating and therefore I could better influence the people who were a bit less friendly. Since I knew that I should only control the controllable’s I only concentrated on the hours that I work, the number of people that I see and my attitude.
You can not control if it is going to rain but you can control how you react to it.
Note:This is the third of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
You can become an entrepreneur and build a company that will generate positive cash flow or you can do it the simple way - by saving a portion of your paycheck.The concept of saving is a simple one, but saving money is in no way simple. I would rather say that
Saving money is simple but it’s not easy
If you are too comfortable to change your spending habits, let me tell you this
Saving money is the only conventional way of getting rich
Other principles of getting rich that are not directly connected with saving money are more difficult to master and require a bigger effort!
Saving is also a universal principle for getting rich - you can save money when running a company, being an employee or still getting money from your parents. The only prerequisite to saving money is that you have an income. However small it might be - there is at least a 99% probability that you can save at least 1 dollar(it’s better than nothing and it kick-starts the habit of saving).
What are the reasons for saving at least 10% of your income?
Keep in mind that 10% is the absolute minimum that you should save. I recommend to set a goal to eventually save 50% of everything you make.
Jim and Chuck
Let me tell you a story about my imaginary friend Jim. Jim is a steel mill worker who gets paid 15 dollars an hour and usually works on average about 10 hours a day.
This makes him 750 dollars per week, 3000 a month and 36 000 dollars a year.
Since Jim is an avid reader of the blog Psychology of Money he took my advice and saves 10% of what he makes. This is exactly 300 dollars every month. By the time he has saved for 10 months he has 3000 dollars - the same as his monthly salary. Let’s also assume that Jim is a bit of a fruitcake and decides to stack all his saved money inside a box under his bed. At this rate it takes Jim exactly 10 years to collect 36 000 dollars - his yearly salary.
If Jim were to double his savings and put aside 20% of his income or 600 dollars a month it would take him 5 years to save 36 000 dollars.
Now let’s take a look at Chuck.
Chuck is Jim’s co-worker and makes exactly as much. In addition to being extremely good with roundhouse kicks he took a personal finance class during his sophomore year at highschool.
Just like Jim, Chuck saves 10% of his income but instead of putting the money in a box under his bed he invests it. The interest rate on his savings is also 10%.
At this rate it takes Chuck a bit less than 7 years to get 36 000 dollars. That’s a 3 years win over holding the money under your bed.
If Chuck were to double his savings and put aside 20% of his income a month it would take him just under 4 years to save as much as his yearly salary.
Since Jim and Chuck are both in their twenties this means that over a course of 30 years and saving 10% of their income they end up with the following:
Jim who stacks the money under his bed ends up with 108 000 dollars
Chuck who invests the money he saves ends up with $ 651 396 dollars.
Get this - they both saved the same amount over the same time but one ends up with over half a million dollars more. This money is living proof of compound interest at work. Chuck’s extra 500 000 dollars is interest that the 108 000 dollars that he saved from his paycheck generated over time.
If Chuck would have been able to invest his money with an average return of 20% a year as the famous investor Warren Buffett has done for over 30 years he would have ended up with 5 105 728 dollars.
The average return of the US stock market is about 12%. Getting a return of 12% instead of 10% would automatically make Chuck 973 053 dollars instead of 651 396. That’s a pretty big jump if you ask me.
When saving at least 10% and investing it for the long run you will end up with many times more money than you can save.
It is possible that money that you save ends up being 10 or 20 times more than you make during your lifetime from working.
Tips for saving money
Since saving 10% of your income will be unnoticed by most people it is an idea that I can not recommend enough. The 10% savings mark should be took as a starting point - over the course of a lifetime you should try to increase this to 20%, 30%, 40% and eventually as high as 50%. In countries like China, saving half of everything you make is the norm. Financially it is the best advice one could get.
The best way to start would be to make saving money as effortless as possible. Use the information that you already know from my previoustips about getting rich. If you have access to internet banking it should be possible to set up your account so that the 10% gets wired to a different account that you use for saving and investing.
Never keep the money you have saved on the same account with your everyday money. This gives you a false sense of wealth and makes it easy for you to spend the money that you should actually be saving.
Also keep in mind that saving money should always be done as the first thing after getting your paycheck - always pay yourself first.
When for some reason you should skip a month of saving as you have planned, always make the extra effort to get this money back. By paying back the money that you spent instead of saving you will tell yourself on a subconscious level that it is not OK to be spending this money in the future.
When deciding whether to save or not to save money one should keep in mind that because of the way compound interest works:
A dollar saved can eventually be 100 dollars gained
Note:This is the second of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
Spending less than you make is a principle that a lot of people in the States and in the world have trouble with. An average American today spends 108 dollars for every 100 dollars that he makes. We are spending 8% more than we make and since this is the average there must be people who spend 2, 3 or four times more than they make.
Guess, where does most of the money we don’t have, come from? Credit cards!
In comparison the average person in China spends about 50% of what he makes. This means that in China an average person spends 50 dollars for every 100 dollars(or yuan/renminbi) they make and saves the second 50 dollars.
From the view point of finance and specially personal finance what China is doing(saving) is good and what the US is doing(spending the money we don’t have) is bad.
The problem with debt is that it has to be paid back. For an average American who spends 8% more than they make this means that when repaying your debts you will get to keep 92 dollars for every 100 dollars you make. But since we also have to take into account interests that almost every loan in the world comes with - it will more likely be that you are left with 70 dollars. And remember - you have to use these 70 dollars to buy all the stuff you used to by for 108 dollars. There is just no way you can do this without lowering your standard of living. Check out my article What’s wrong with most „Get out of Credit Card debt” tutorials? for some pointers about getting rid of credit card debt.
The spend less than you make principle is actually a derivative from the “pay yourself first” rule, which in my opinion is the most important principle of getting rich. If you are paying yourself first then you are also spending less than you make (unless you are paying yourself first and then living on credit cards which is a very stupid thing to do and I have no idea why anyone would do something like this).
Spending less than you make is psychologically difficult to do. When one achieves a higher position at work he automatically wants to show his success to the world - and what better way than buying new shiny things, right? Wrong! While shiny things are good for showing off they will almost always loose value over time - this means that instead of making you richer they are making you poorer. For instance after driving a new car out of the car dealer, it’s value drops more than 20%. In order to increase your net value one would need to buy things that go up in value or invest money.
Spending less than you make is the prerequisite for being able to invest your money. The money that you will not spend will make you rich because it will generate you interest.
Thanks to the way compound interest works the money that you saved by not spending it will after some years make you more money than the actual amount that you saved in the first place. Compound interest is also the reason Why Warren Buffet doesn’t like to spend money.
How to spend less than you make
Spending less than one makes is tricky because of the natural law of money - our spending habits will expand by the additional amount we have available. This is a golden rule and will work always unless one starts to think about his spending habits and patterns. The good news is that you only need to start thinking about the way you spend your money and the spell of the natural law of money gets broken.
Good practical advice is that every time you get a raise or an extra income you should take half of this money and spend it as you like. After all, you have earned it with your hard work and are worth to loosen it up a bit! The second half of the extra money you should keep - and by keeping I mean pay it to yourself. If you follow this advice, it means that every time you get more money you will be able to spend more but at the same time you will also save more. - you get the benefits of both!
Shawn at Watson Inc put it this way: Financial intelligence is not measured by how much you make but rather by how much you keep.
Note:This is the first post of 14 consecutive posts from 2nd to 15th of April about how to get rich. Check back daily or subscribe to the RSS feed
There probably isn’t a person in the world that does not want to be financially free. The idea that one day you have enough money to do whatever you want thrills everyone from children to grown ups.
But as we all know - some of us make it rich and some of as don’t.
The laws of success are universal and by following them carefully it is possible for anyone to get rich.
Today I am going to talk about the most important rule on getting rich:
Pay yourself first
This is the single most important and also most overlooked principle on how to get rich. The concept of “pay yourself first” is so easy that even a 3 year old can understand it but few of us are actually using it.Most people think that getting rich can’t be as simple as paying themselves first and tend to skip this step.
BIG MISTAKE! Not following this principle automatically reduces your chances of getting(and staying) rich by 90%. In fact I would go as far as to say that if you are not willing to start following this principle there is no point in reading this post any further - you will not get rich. Go back to work!
What does it mean “pay yourself first”?
Each and every time you get paid, immediately take a portion of your money and set it aside - you can not spend this money. This is the money that is going to make you rich. You can simply save this money on your bank account or better yet - invest it wisely.
This money is going to generate interest and grow your investments. The compounding interest from your money will eventually be more than the money that you have set aside. Albert Einstein didn’t say “The most powerful force in the universe is compound interest” without a reason.
Remember: It is important that immediately after getting paid you should put aside an amount of money that you have predetermined. It is of the utmost importance that you do this before paying any bills, shopping or spending some of the money on something else. Whenever people decide to start saving money they will usually pay for all their bills first and then live as frugal as they can only to discover that they have spent all their money and there is nothing to set aside. It doesn’t work this way!
The natural law of money says that our spending habits will expand until we spend everything available. For example if you have 1000 dollars until the end of the month you will spend it all by exactly the end of the month. If you put aside 500 dollars from your paycheck immediately after receiving it you will have only 500 dollars left until the end of the month but this will almost always be enough. In fact depending on the amount of money you set aside you might not feel any difference. The only difference will be that in the end of the month you have some money set aside that otherwise wouldn’t be there.
By paying yourself first immediately after getting your paycheck you will make sure that you will stick to your plan of collecting money - Always sticking to the plan is the best way of realizing your goals and getting rich.
The government pays himself first
The government also uses the pay yourself first principle in order to secure the money that they have already budgeted for.
Have you ever thought why does the government take taxes from your paycheck before you get paid?
They are simply making sure that they will get their share of the money. If you would have to pay your taxes in full at the end of the month with the money you have left from your paycheck there would be awfully lot of people who would not be able to pay. If the government uses the pay yourself first principle why shouldn’t you?
How to pay yourself first
The easiest way to start paying yourself first is to open a separate account where you can deposit your predetermined amount of money from your paychecks. It is also a good idea to make sure that it is not easy to spend this money.
If you are using online banking it might be possible to set it up so that the transfer to another account is made automatically after receiving the paycheck. If you can do this it is highly recommended. For example my online bank is set up to transfer a predetermined amount of money every month to an account with a brokerage firm. It saves me the hassle of doing it myself and ensures that I follow the pay yourself first principle of getting rich.
Always remember that part of your money belongs to yourself
If you spend all your money by the end of the month it means that all of it belongs to someone else. What’s the point of working for money when it does not belong to you?
The reason that you are already not rich is probably because you do not follow this principle. You might know it, but that’s not enough. In order for it to work you have to use it!
Check back tomorrow for the second most important principle of getting rich.
Excellent investors always take responsibility for their results.
When a good investor takes a loss he doesn’t say „The market was against me” or „My stock broker gave me bad advice”.
After a mistake an excellent investor always admits „I made a mistake”.
A winning investor accepts the result without recrimination and always analyses what they did or didn’t do so that they won’t repeat the mistake.
A true investor acknowledges that the best lessons are always the ones that you get from your own mistakes.
By taking responsibility for your actions – both profits and losses - a good investor stays in command of himself.
It’s exactly like the expert surfer dude hitting the waves. He doesn’t believe that he controls the waves but because of his experience he knows when to ride a wave and when to avoid it. He is in control of his own actions. If he falls – it’s his fault.
Below is a short video about the things that make us successful in life. The presenter is Richard St. John who made his observations based on over 500 interviews with successful people.
Here is a short review about the video.
Here are the 8 common things that help us be successful.
1. Passion
Do it for love not for the money. The money will always follow when you truly enjoy what you are doing.
2. Work
It’s all hard work. Nothing comes easily. But remember to have fun.
3. Good
Put yourself into something and get damn good at it.
Practice makes perfect.
4. Focus
It all has to do with focusing yourself on one thing
5. Push
Push yourself. Physically, mentally. You have to push, push, push and push
6. Serve
Serve others something of value - that’s how people really get rich.
7. Ideas
Have ideas and make them come true.
Listen, Observe, Be Curious, Ask Questions, Solve Problems, Make Connections - Ideas will follow.
8. Persist
Persistence is the number one reason that successful people are successful.
Each and every one of us has seen the natural law of money at work.
It is so simple that most of us are familiar with the law in a subconscious level but almost never think about it consciously.
So what is this law you ask?
It is simple. The natural law of money is as follows:
The more money you have the faster you will get to the point that you don’t have any money at all. The less money you have the slower you will get to the point that you don’t have any money.
In other words - the more money you have the faster you will spend it.
This is a universal law but it only works in the middle of the scale - it will cease to work when you don’t have any money at all or if you are a wealthy multi billionaire.
So, the natural law of money says that the more money you have the faster you will get rid of it?
How can this be you ask? It is common knowledge that in order to make money you need to have money in the first place - aren’t these 2 statements contradicting?
Well, not really - the natural law of money only works if you are not thinking about how to make more money. If you start to think about how to keep your money - or better yet - how to grow your money then the natural law of money stops working.
If you start thinking about how not to spend your money your chances of multiplying what you have grow exponentially.
This site is all about my knowledge, discoveries and experiences related to personal finance, investing, tips on success and life, and how to make money online.
