Yesterday’s post prompted some email questions about how I handle my finances, so I figured I might as well answer them here:
What’s the easiest way to get rich?
- See Below
- Build and sell your dot com/business/art/dream project/whatever
Aside from inheriting and hitting the actual lottery, the easiest, most feasible way to get rich is to spend less than you earn. It doesn’t matter what kind of job you have or how much you earn, if you do this long enough you will be rich. Guaranteed.
The Six Steps to Riches Without Worry:
- Eliminate debt as quickly as possible. If you have credit card debt, you’re an idiot, but you’re not alone. Pay it off as quickly as possible. There’s little point in saving or investing when paying down your debt can effectively net you a 20% return (depends on your card’s APR, obviously). If you’ve got student loans, I’d pay them off as fast as possible too. You’re probably not going to be able to beat the 7-8% rate on those by investing either, so this is a good strategy for now.
- Open a high interest savings account and a checking account if you don’t have them. You should never pay fees for these. If you can’t negotiate out of them (you almost certainly can), find another bank. These accounts are key because you’re going to use them to automate your finances so you never have to think about this stuff again.
- Open a discount brokerage account, or if you have enough money, a brokerage account where they’ll waive your fees. If your employer matches 401k contributions, open a 401(k) and max out the match. This is free money. If you don’t do this, you’re an idiot. If your employer doesn’t offer a match, open a Roth IRA. If you expect your tax rate to rise over the course of your life, max out your Roth IRA. This is the greatest investment deal in history. Do it.
- Set up your spending plan. See Below.
The Spending Plan
Steps 1-3 are pretty self explanatory. Step 4 is where most losers get lost. People have a problem with budgeting (aka setting up a spending plan). Their fat asses can’t even budget calories, let alone money. But here’s a secret: it’s not hard, and it’s actually a huge relief. You’ll never have to think about money again. You just need to set aside 5 minutes to do it, then you need to automate it. Let’s look at a sample budget for someone making $70k a year. If you’re in California and don’t have a bunch of deductions, this comes out to around $4100 per month after taxes.
|Guilt Free Spending||$400|
Obviously you can change these numbers around any way you like. If you don’t have a car you can lop $350 bucks right off the top of this thing. Don’t mind sharing a room? You could easily knock that rent in half, even if you live in New York, LA or San Francisco. Live in Ohio? Slash it in half again. The point here is that it’s all about what you value, and this will let you concretely see that and make a decision.
Remember though, saving as much as possible is the real goal here. The more you save now, the more that money can compound, and the richer you’ll be. If this is your first budget, you should aim to save 30% of your take-home pay. And, while one catch-all bucket called “Savings” is good, it’s even better to break it down:
|Retirement (401k, IRA, etc.):||$300|
|Big Goals (House, Kid’s College, etc.):||$300|
|Other (Vacations, Emergencies, etc.):||$275|
Breaking down your savings serves three big functions: (1) If you have to cut your spending, you know what it’s coming out of, not just some big amorphous “Savings” blob. (2) It’s good to state your goals and to constantly remind yourself of what you’re saving for. If you’ve got a big vacation planned, it’s motivating to watch that account grow (yes, I put them in separate sub-accounts) and realize you’re getting closer to your goal. (3) Your attitude towards saving will change. You might realize that you’d rather see some of the money from the other categories be directed into one of your savings goals.
Wait, wait, wait. What the hell was that “Guilt Free Spending” bit? It’s just what it sounds like. You get, in this case, $400 a month to blow on whatever you want. Fancy dinners, gadgets, shoes, whatever. It’s guilt free. This is an awesome part about the budget. You don’t have to have to think about “Can I afford this?” or “Gee, I don’t know how much I should be spending on stuff like this.” You won’t feel ignorant or shameful or guilty about over-spending. Nope. Now you get to spend $400 a month on whatever you fancy. Light it on fire, for all I care. All your other needs and goals are already being fulfilled.
Now that you know how much to spend on everything, let the computers do everything for you. (1) Get your paycheck directly deposited into that checking account. (2) If your employer has a 401(k) match, have him deduct that amount automatically from your paycheck (be sure to calculate your take-home pay based on that). (3) Set up your credit cards to automatically pay off the full balance each month by pulling money from that checking account. (4) Set up any other monthly bills you have to get paid automatically. You can pay pretty much anybody automatically through your bank, even companies that don’t accept web payments. (5) Have your savings account and investment account automatically pull out your monthly savings amount.
Boom. Done. Minutes spent per month thinking about money: however long it takes you to figure out how you’re gonna spend your guilt-free money.
Now that your money is automatically flowing to your investment and savings accounts, put that money to work. Unless you intimately know some industry, you’re not going to beat the market. Even if you do intimately know some industry, you’re still probably not going to beat the market. Take the experts’ advice, buy some index funds, and be done with it for now. If that’s too much work, you can buy a lifestyle fund that will get you 80% of the way there.
That’s it. Do this for enough years and you’ll be rich. You won’t be able to retire when you’re 30 (unless you’re making a crazy amount of money or your dreams don’t require a lot of cash and you’re cheap as fuck) but life will be a lot of fun, you’ll have plenty of cash to blow, and you’ll never be worried about money.