Never spend all your money - 6th of top 14 things you should start doing immediately to get rich

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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:

1. 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.
2. 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,
3. People who are determined to go through life without debt.

(more…)

Posted in Cutting costs, Future value of money, Investment principles, Saving money, getting started | 7 Comments »

Save at least 10% of what you make - 3rd of top 14 things you should start doing immediately to get rich

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 previous tips 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

Posted in Future value of money, Investment principles, Saving money, getting started | 1 Comment »

Spend less than you make - 2nd of top 14 things you should start doing immediately to get rich

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.

Posted in Investment principles, Saving money, getting started | 2 Comments »

Top 14 things you should start doing immediately to get rich - pay yourself first

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.

Posted in Eliminating Debt, Goals, Philosophy, Saving money, getting started, success | 4 Comments »

Winning Investment Habit No 1 – KEEP WHAT YOU HAVE. Preserve your capital

Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1

Warren Buffet

„Survive first and make money afterward.”

George Soros

„If you don’t bet, you can’t win. If you lose all your chips, you can’t bet”

Larry Hite

What’s the difference between a Winning Investor and a Loosing Investor?

The winning investor – Believes that his first priority is always the preservation of capital, which is the most important cornerstone of his investment strategy.

The loosing investor – Has only one investment aim – „to make a lot of money”. As a result he often fails to keep the money he already has.

Did you know that if you have a stock that drops 20% then you would need it to grow 25% in order to get back to the same price level before the price drop. (Example: If you start with 100 dollars and lose 20% you will end up with 80 dollars. In order to go from 80$ to 100$ you need a gain of 25%).

If you lose 50% of 100 dollars you will end up with 50 dollars. But in order to get from that 50 dollars back to 100$ you need to double the 50 bucks. This means you need a growth of 100% .

It might not seem like a big deal – 50 dollars to lose is nothing catastrophic. But consider the same on a larger scale.

Let’s say that you have a pension fund that holds 1 million dollars. Because of problems in the subprime market your fund loses half of its value – now you only have 500 000 dollars left. What do you think how much time would it take to get back to the initial 1 million?

Well no one can tell for sure but the only thing that is known for sure is that it will take a lot more effort (and time) to get the money back.

Here is a chart that on the left give you the initial loss in % and on the right it shows how much you need to make afterwards in order to get the initial sum back.

This is exactly why Preservation of capital is ALWAYS the number 1 priority of any half decent investor. If you have a loss of 1 per cent you need a growth of more than 1 per cent to get the money back. The more you lose the bigger the gap between what you lost and how much you need to make to get it back will grow.

The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.

Posted in Books, Future value of money, Investment principles, Natural law of money, Saving money, Uncategorized, Warren Buffet | 1 Comment »

The natural law of money

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.

Posted in Cutting costs, Goals, Natural law of money, Saving money, getting started | 3 Comments »

Why Warren Buffet doesn’t like to spend money

So you spent a 100 dollars today without even thinking twice?

We’ve all spent money that we shouldn’t have without thinking much about it. The reason is that money is relative - if you have a lot of it you tend to spend more. If you only have a little you spend little or nothing. There is a huge difference in the perceived value of 100 dollars if you only have the 100 dollars for the whole week or if you have 10 000.

The worlds wealthiest investor Warren Buffet has a secret about the way he thinks of money.

When we think about a 100 dollars we usually give value to it by thinking what we could have or do with that money. While it’s the most common way to think about money, it is also something that holds back a lot of people from becoming rich.

When Warren Buffet thinks about 100$ he doesn’t think what will he get when spending it today but he thinks what will he get from it in the future - while gaining 20% interest on the money annually.

If you decide to save 100 dollars and INVEST it with an expected annual payoff of 20%, in 5 years you would have 248 dollars and in 10 years you would have 619$. After 20 years your initial 100 bucks would be 3833 dollars.

It’s pretty tough to spend 100$ when you know that by doing that you will loose 3833$

This is an excerpt from “The Winning Investment Habits of Warren Buffet & George Soros”:

[Buffet’s wife] Susie… was a virtuoso shopper. She dropped $15,000 on a home refurnishing which “just about killed Warren,” according to Bob Billig, one of his golfing pals. Buffett griped to Billig, “Do you know how much that is if you compound it over twenty years?”

Well - it’s 575 064 dollars. (compounded with 20% which is the average pay-off of Warren Buffet’s stock portfolio)

Posted in Books, Future value of money, Saving money, Warren Buffet, getting started | 2 Comments »