My man ESI from ESIMoney.com
makes a return today to share his tips on what to really focus on in order to
grow our wealth exponentially. You might remember him from his previous post
that went viral on the 10 things he didn't expect in early retirement, which he's
still very much in and still very much enjoying. Thanks for taking the time,
good sir!
We all have money tips coming out
our ears. Do this. Don't do that. Do this or that. And on and on… The
advice seems endless. So much so that if you try to follow them all you'd end
up with no time to actually live your life.
At the same time, all money tips
are not created equal. While many are valuable, there are some that are
exponentially better. These are the tips that will make you wealthy.
So let's get to the good stuff
and cast the rest aside for now. Based on the experience of managing my own
money — allowing me to accumulate a few million dollars and retire at 52 — here
are my recommended ten big financial moves that will propel your wealth
skyward!
1. Get an advanced education in a valuable field
And if you can
keep debt low while getting the degree (and there are reliable ways of doing
this), then it's almost guaranteed that getting a college degree is a good
deal.
Even better is
getting a degree in the right field. It's well-known that certain careers pay
more than others. Pick one that is closer to the top than the bottom and you're
finances will thank you for it.
Consider this finding: College graduates earn $1 million
more than high school graduates over their lifetime, and the income gap between
the highest-paid college majors and the lowest-paid is more than $3 million
dollars.
To make even
more, get an advanced degree in a high-paying field. This is where the big
money can kick in.
I got an MBA by
spending a grand total of $5k for six years of college (because I was willing
to work during school and got good grades). My
MBA was worth an extra $1 million to $2 million, even though I only
worked until I was 52. If I had stayed employed into my sixties you could take
on a few more million.
Of course, you
have to factor in abilities and interests when picking a career. But most
people have at least a handful of fields that would work for them. If they
select one which pays a bit more, they will be making a solid financial
decision which can help them become quite wealthy over time.
2.
Focus on growing your career
Even if you
don't pick a vocation in the highest-earning field, your career is a
multi-million dollar asset. If you don't believe me, take a starting salary of
$40k, add in 3% annual raises over 45 years, and look at the result. You'll
have earned $3.7 million.
Even better,
you can manage your career to get those 3% average raises even higher. Doing so
will help you earn millions more throughout your career.
Take the same
numbers from above and instead of 3% raises use 8.16% raises. The difference is
over $10 million!
Think it can't
be done? I
averaged 8.16% increases for 28 years using seven steps that grow any career. Plus, it took
me years to figure out the seven steps. You don't have to go through that
trouble, so you have the potential to do much better than I did.
Of course,
8.16% could be considered on the high side. So let's go low. Let's say you
average 4% annual raises. That extra 1% will allow you to earn an extra $1.1
million more than what 3% raises would.
Any way you
look at it, managing your career for income growth will have a
huge impact on your finances.
3. Control spending
No matter how
much you make, you can spend it all. We don't have to look far to find
examples. It's almost a cliche that high-income actors and sports stars go
bankrupt. People who have made millions somehow spend it all and then some. As
a result, they are often left with nothing (or less).
A bit closer to
home, you can see this principle play out across our country.
The median
American household annual income is $51,939. U.S. households median net worth
is $80,039. This means that over a 40-year period at
an 8% return rate, the average American is saving a paltry $310 a year. What
are they doing with all the rest? They are spending it!
Assume a family
can save $5k per year (less than 10% of their income). In 40 years at 8% they
will have a net worth of $1.3 million. See what even a little bit of saving can
do over a lifetime?
And this
doesn't mean you have to save on EVERYTHING, just some things.
Enjoy your life by spending on what you want here and there, just keep it in
line so you have excess to save and invest. Even 10% will make you wealthy over
time.
Personally, I
wanted to do better than average and was able to save 36% of my income. Others have saved much
more. If we can do it, so can you.
There are two
major areas to control spending: on the big things, and on the little things.
Big things like homes, cars, extravagant
vacations, and the like can bust your budget in a single move. Little things
like eating out for lunch regularly, smoking a pack of cigarettes daily, and,
dare I say, drinking $5 cups of coffee several times a day don't seem like
much, but they can add up to big dollars over time.
4.
Eliminate debt
Debt is a
financial killer, especially consumer debt. And yes, even "good debt"
like a mortgage and student loan debt can be bad in many situations. Look no
further than 2008 for housing debt and the current issues with student loan
debt.
We eliminated
all debt over 20 years ago when we paid off our mortgage. We had already
retired our car loans and a personal loan. Then we focused everything on paying
off the mortgage. It started with buying a house we could afford — one half the
price the bank wanted to lend to us. We then took all extra cash — bonuses,
financial gifts, etc. — and put them against the mortgage. We cut spending as
well and made extra payment after extra payment.
Less than a
decade later, we were completely debt free.
Not having debt
for two decades allowed us to dramatically increase the amount we saved, which
in turn super-charged our net worth.
5. Invest early and often
Investment
value is also greatly impacted by the amount invested.
These two
factors are why you want to put away as much as you can as soon as you can.
Fortunately, both of these decisions are within your control.
Return rate is
the third variable in the investment growth equation and gets most of the
press. However it's actually the least important of the three in determining
your overall results. Furthermore, beating the averages in return rate is
virtually impossible.
You can spend
hours and hours trying to find the right investments, only to not pick a
winner. Or you can just invest in low-cost index funds and let them do the
work — and beat 95+% of investments over time! This is what I've done and what
I recommend.
Finally, you
have to stick with it, which may be the hardest investing choice of all.
I remember back
in 2008-2010 when things were really dicey. My portfolio was down big-time. I
had put money in all the way down and there was no sign it was going to come
back.
But I kept at
it and even found extra cash to invest.
Seven years
later I'm so glad I did. That money is now worth a small fortune!
Many think the stock market is due for a drop
soon. No one knows when it will happen, but if it does, keep the faith. Market
drops are often the time to buy if you have at least a 10-year time horizon.
6. Marry well
You can make
all the great money moves in the world, but if you're married to someone who
makes all the wrong moves you're in trouble.
You don't have
to marry Suze Orman or Dave Ramsey, but you do need a spouse who shares your
financial goals and general outlook on money.
This was a VERY
big part of our financial success.
I was good at
tips #1, #2, and #5 above, but my wife was great at #3 and #4.
In words from The Millionaire Next Door, I was good at offense
and she was good at defense.
Together we had
a winning combination. We knew what we wanted to accomplish, divided up the
responsibilities, and climbed up the money mountain together.
7. Have goals and a plan to reach them
First of all,
having a goal is key to being financially successful. It sets the bar and
allows you to work towards what you want to achieve.
It doesn't need
to be a 100-page treatise comparable to the federal budget, but you must have
at least a general goal like "retire at 40 with $2 million in the
bank." It's better yet to have SMART goals.
Second, simply
having a goal does little good if you don't then take action on
reaching these goals.
You need to
break each goal into bite-sized tasks that allow you to grow your career and
control your spending if you want to accumulate wealth.
I know this can
seem daunting, but it doesn't need to be. Simply write down what you want to
accomplish and what you're going to do to get you there. Then just make a small bit of progress every day. Over time, those
seemingly little advances will add up to something big.
This was the
tip that I missed when I was young. I went several years without a specific
money plan and I lost five years of investing. Do you know what
those five years would be worth now? Thousands.
But hopefully
my bad planning demonstrates that even if you've made a few mistakes along the
way, there's hope for you if you take action now.
8. Track net worth and cash flow
Net worth and
cash flow statements are financial success scorecards. Net worth (assets less
liabilities) tells you how you are growing your wealth over time, and is of
course something that J$ likes to drill into our heads.
Cash flow
statements (aka "budgets" listing income less expenses) tell you how
much you are making and how it's being spent. From there, you can make
decisions that allow you to do more of the former and less of the latter,
freeing up more money for investing.
We have tracked
our net worth monthly for over 20 years. We use Quicken, but you can also use
Mint, Personal Capital, a spreadsheet, or even paper.
The key is that you track it on a regular basis (probably at least quarterly)
to see how you're doing at growing your wealth. It lets you know if what you're
doing is working or not. (Editor's Note: I'm on month
#114 in a row – best thing I ever did for my money!!!)
We have had a
budget for years as well. We use a spreadsheet that I update monthly. It's very
useful at showing where our money is spent which allows us to make adjustments
sooner rather than later.
Many people
hate budgets because they think they are too restrictive. I've found them to be
the opposite. They allow me to know exactly what I'm earning and spending,
which then frees me to make the lifestyle decisions I want to make.
My guess is
that our budget alone was responsible for half of our spending control success.
9. Develop side hustles
In addition to
growing your career, a side hustle/business is a great way to #1) do something
you enjoy and #2) bring in some extra income to grow your net worth much
faster. Also something J$ loves to share here. (See: 71 Ways to Make Money On The Side)
I've had
several side hustles over the years including:
• Freelance
writing for magazines — This was a major contributor to paying off our mortgage
• Blogging — I
had a blog before my current one which was quite successful
• Refereeing —
Mostly done because my son needed the money and we did it together, but a few
extra thousand dollars a year never hurts
• Real estate —
My biggest side business of all (though some could call it an investment) which
allowed me to retire without having to draw down any assets
The great thing
about a side hustle is that it speeds up early retirement dramatically.
Assume you can
retire when you are able to generate $40k in income per year. At a 4% asset
withdrawal rate, this means you'd need $1 million saved. Also assume you can
invest $10,000 a year towards that goal at an 8% return.
If you have no
side hustle, it would take you 29 years to reach your goal.
If you have a
side hustle that took four years to build up to $20k per year, and you invested
that money, in 12 years you'd have $503k (which would generate just over $20k
at 4% withdrawal) plus a business that generated $20k. Bam! You're at your $40k
annual goal.
So the side
hustle is probably worth it to save 17 years of working, right?
10. Learn about money and manage it yourself
No one cares
more about you than you do, but there are plenty of people who care about your
money. Many of them want to turn it into their money and they
are quite good at it.
Others have
good intentions but simply don't understand how money works. And yes, this
includes many, if not most, financial advisors. The only way to avoid being
taken (one way or the other) is to know the basics of managing money yourself.
Fortunately,
the money principles you need to be successful are simple to learn and few in
number. With a handful of books and regular reading of
some good money blogs you will develop the
knowledge and skill not only to protect yourself, but to thrive financially.
We were
fortunate to take a Dave Ramsey-like class at our church soon after we were
married. It set up a good foundation for us. I continued by reading several
personal finance books and applying the key principles that I learned. Finally,
I began to write about money and became even more educated along the way.
I started from
ground zero, and if I can learn how to manage my money, you certainly can too.
Everything you need to know
Yes, there are
a ton of other financial guidelines you could implement — probably thousands.
But if you want the biggest financial bang for the time spent, focus on these
ten wins above.
If you get
these right, there's no way for you not to become financially free yourself.
*********
ESI is the founder of ESI Money, a blog about
achieving financial independence through earning, saving, and investing (ESI).
It's written by an early 50s retiree who achieved financial independence,
shares what's worked for him, and details how others can implement those
successes in their lives. You can learn more about him, and get his free ebook,
here: Three Steps to Financial Independence.
