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.

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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.
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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.

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

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.