Jan. 9, 2019
No matter how they define success, money plays at least a small role for most people. So does building wealth — maybe not Oprah money, but the kind of wealth that provides a certain degree of financial freedom. So we download the latest apps. We listen t0 podcasts on personal finance. We spend hours setting up a new web-based financial management system that will organize our finances.
And sometimes those things are valuable… but sometimes they cause us to lose sight of the basic keys to making, and saving, money.
Make things too complicated and you won’t see any results.
So let’s go back to the basics. If you want to build wealth, embrace the following simple approaches:
Reward does not require huge risk.
Risk too much and failure can set you back incredibly far. So don’t think of risking it all in hopes of a big return. Think of minimizing the risks you take… so if you do fail, you can learn from your mistakes and keep moving forward.
See the most important investments you can make as the investments you make in yourself.
You will almost always get the biggest return from investments you make in yourself: Improving your skills, improving your connections, improving your health and fitness …
Consistently investing in yourself will produce better long-term results than any other investment you can make — and is the one investment outcome whose outcome you can almost totally control.
When you work for someone else, your income has a ceiling.
Granted you might get raises, and you might get promotions… but you will never be paid more than your employer decides you’re worth.
That’s why, in return for less freedom, less control, and less fulfillment, every day you work for someone else, your upside is always capped. And your downside is always unlimited, since at any moment someone else can take away your income. Start a business, and your income is limited only by you.
Keep in mind you don’t have to quit your job to start a business; in fact, you probably shouldn’t. One of the best ways to minimize your risk is to keep your full-time job while you build your foundation for success. Then you can quit.
While the downside for entrepreneurs is also unlimited, in return, they enjoy the possibility of an unlimited financial upside — and an unlimited personal upside.
No one cares about your money as much as you do.
Get help if you need it. Ask for advice. Ask for input. Enlist the aid of a financial advisor. Enlist the aid of people smarter than you.
But always — always — be the person who makes the final decisions. And make you truly understand why those decisions are the right ones.
Who is the best person to look out for your interests? You.
You can borrow money in minutes. But paying it back takes years.
If you have good credit and sufficient income, you can borrow $100,000 and buy a Jaguar. If you have no credit and no income, you can borrow $100,000 or even $200,000 and buy a college degree. If you have the right connections, you can borrow thousands to start your own business.
Borrowing money is easy. But then you spend years paying that money back.
See borrowing money as an investment that should always provide a return. And not just a financial return – the key return is the benefit you receive. If you’re scrambling every month to make your student loan payment on a teacher’s salary — and it will take you 20 years to pay that loan off – was your investment a good one? Maybe yes. But maybe not.
Don’t think about how easy it is to get a loan. Think about how long it takes to pay back that loan. And think about the impact on your day-to-day life for all the years it takes to pay it back.
That is the real cost of investment.
And while we’re talking about borrowing money …
Never borrow as much as a lender will give you.
A home mortgage is a great example. While the front-end and back-end ratios have definitely tightened, a mortgage lender will almost always lend you more money than you can really afford.
As with many things in life, just because you can… doesn’t mean you should.
Only make investments you can explain to a 10 year-old.
Like Bitcoin. Do you really understand how Bitcoin works — especially as an investment? And if you do, could you explain it to a child?
As Warren Buffett says, “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
That’s also true where analyzing investments is concerned. If you can’t explain an investment decision in one or two sentences, you probably shouldn’t make it.
Failing to max out your retirement savings account match is like giving money away.
Make sure you contribute whatever it takes to max out what your employer will match. Otherwise you’re saying, “No, I don’t want your money. You keep it.”
The same is true if you own your own business. (Especially if you’re the only employee; if you have employees, you must extend them the same match level as you do yourself.) Set up a registered retirement plan and match 100 percent of your contributions. That way you contribute pretax dollars – and so does your business.
Which is yet another reason to start your own business. (Even if it’s just a side hustle designed purely to help you put away more money for retirement.)
Money you spend impressing other people is money wasted.
Sometimes it pays to consider what other people think. But not if it stands in the way of living the life you really want to live.
Don’t buy a house just to impress other people. Buy the house that is right for you. Don’t buy a car just to impress other people. Buy the car that is right for you.
Make spending choices that are right for you. Make investment choices that are right for you.
Pick your career, your school, your business — pick everything — because it’s right for you.
Not only will you make better decisions about your money and finances, you’ll also be a lot happier because you can live the life you want to lead.
Which is the real point of building wealth.