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As I noted earlier, the formula for financial prosperity is pretty simple:<\/p>\n
\u2022 Spend less than you earn<\/p>\n
\u2022 Do this for a long time<\/p>\n
If you do these two things, you will be wealthy. Why? Because you\u2019re saving money.<\/p>\n
On the other hand, if you\u2019re not saving, you\u2019re not making progress financially. And the longer you wait to save, the harder it will be to catch up later.<\/p>\n
The proper financial move is to save a portion of every paycheck you receive. A good rule-of-thumb is to start out by saving at least 10% of your income, and from there the amount should increase over time.<\/p>\n
And some may ask just what you are saving for? Any major expense you know you\u2019ll have in the future: a house, retirement, cars, college costs for kids, etc.<\/p>\n<\/div>\n
I\u2019ve talked a bit about how to buy a house and there\u2019s really not much else to say other than this guideline from the book \u201cStop Acting Rich: \u2026And Start Living Like A Real Millionaire\u201d:<\/p>\n
If you\u2019re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household\u2019s annual realized income.<\/p>\n<\/div>\n
There are three factors that determine how well your investments (savings) perform:<\/p>\n
\u2022 The amount that\u2019s invested (how much is invested)<\/p>\n
\u2022 The return rate on your investments<\/p>\n
\u2022 The length of time they are invested<\/p>\n
Most of what we see in the press deals with getting the best return on your money. But actually, the factor that most influences the value of your investments is the time you have it invested.<\/p>\n
And the longer you wait to save and invest, the more you\u2019re costing yourself.<\/p>\n
Here\u2019s an example that illustrates the power of saving early:<\/p>\n
Smart Saver starts saving $3,000 every year, starting at age 20. After 10 years, her $30,000 total contributions are worth $47,000 (at an annual growth rate of 8%). At age 30, Smart Saver stops saving and makes no further contributions. She just lets the money grow at an 8% annual rate of return for the next 30 years, until age 60. At age 60, the $47,000 will have grown to $472,000.<\/p>\n
Her sister, Late Saver, waits until age 30 before she starts saving $3,000 a year. Unlike her Smart Saver sister who stopped saving after 10 years, she doesn\u2019t stop saving. She saves every year for 30 years, from ages 30 until she is 60. At age 60, her account is worth only $367,000.<\/p>\n
Now I\u2019ll add a couple extra points to this example to show how Smart Saver could really have made it big in saving and investing for retirement:<\/p>\n
\u2022 If Smart Saver would have kept saving $3,000 her whole life, she would have ended with almost $835,000.<\/p>\n
\u2022 And if that $3,000 would have been $5,000, she would have ended with $1.4 million.<\/p>\n
So the solution for this money problem is to:<\/p>\n
\u2022 Save early<\/p>\n
\u2022 Save often<\/p>\n
\u2022 Save more (as a percentage of your income) as time goes by<\/p>\n<\/div>\n
AARP notes that, \u201cOver a lifetime, the average American will now pay over $600,000 in interest.\u201d<\/p>\n
$600k? Ouch! This is a pretty big example of the fact that debt is very costly \u2014 it can rob you of hundreds of thousands of dollars.<\/p>\n
The solution to this mistake is simple:<\/p>\n
\u2022 If you\u2019re in debt, start taking my steps for how to get out of debt.<\/p>\n
\u2022 If you\u2019re not in debt, don\u2019t get into debt.<\/p>\n<\/div>\n
Your career is your most important financial asset.<\/p>\n
This is because the average American can reasonably expect to earn in the neighborhood of $2 million during his lifetime. But if that person works hard and grows his income at 8% per year, he could have more than $3 million more than that. If he doesn\u2019t, his $2 million can dry up to a bit over $1 million (or even less). So not working to make the most of your income can cost you millions of dollars.<\/p>\n
To avoid this bad money mistake, simply develop and execute a plan to make the most of your career.<\/p>\n
And let me add a couple other mistakes you do not want to make because they can derail your career and your income as well:<\/p>\n
\u2022 Do not quit your job without another job lined up. Yes, it may be stressful to work where you do, but not having enough to eat is much more stressful.<\/p>\n
\u2022 You must take care of yourself physically. Eat well, get plenty of rest, exercise, and enjoy life. Your career and its earning potential are dependent on you being able to work.<\/p>\n<\/div>\n
If your outflow exceeds your income, then your upkeep will be your downfall.<\/p>\n
The first step to gaining wealth is spending less than you earn \u2014 it\u2019s vital to making any financial progress. So when you over-spend, you\u2019re doing the most damage possible to your finances.<\/p>\n
Here\u2019s what \u201cStop Acting Rich\u201d says about the issue:<\/p>\n
\u201cMost people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households (97%) are unlikely to ever earn even $200,000 or more annually. So what if you are unlikely to become rich by generating an extraordinarily high realized income? The only way you will become rich is by being like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.\u201d<\/p>\n
There are two types of over-spending that can ruin your finances:<\/p>\n
\u2022 Over-spending on the little things \u2013 the small amounts that seep out of your pockets here and there and eventually become large.<\/p>\n
\u2022 Over-spending on the big things \u2013 homes, cars, boats, cottages, and so on.<\/p>\n
The top complaint I hear from people who don\u2019t have balanced budgets is, \u201cI don\u2019t make enough money.\u201d<\/p>\n
I\u2019m telling you that in the vast majority of cases (probably 95% or more), it\u2019s not the amount these people make \u2013 but the amount that they spend that\u2019s the problem. (In some cases it\u2019s true that people simply don\u2019t make enough money to save, invest, etc. As such, they need to concentrate on increasing their income as much as they need to control over-spending.)<\/p>\n
My wife and I once counseled a guy who made $130,000 a year. This was back in the early \u201890\u2019s, so $130,000 was worth something (it\u2019s still pretty good today.) When I saw his income, I thought \u201cthis will be a piece of cake\u201d to make a balanced budget. But once we got through the mortgage on the mansion he owned, the four luxury cars he leased for himself, his wife, and his kids, and the amounts they spent on clothes and vacations \u2013 they had spent it all and then some.<\/p>\n
This is why over-spending is the #1 money mistake \u2013 because no matter what your income is, if you spend it all plus some, you\u2019re going backwards financially and you\u2019re losing ground.<\/p>\n
\u00a0<\/p>\n
\u2013<\/p>\n
By:\u00a0ESI Money.<\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"
6. Not saving As I noted earlier, the formula for financial prosperity is pretty simple: \u2022 Spend less than you earn \u2022 Do this for a long time If you do these two things, you will be wealthy. Why? Because you\u2019re saving money. On the other hand, if you\u2019re not saving, you\u2019re not making progress […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-391491","post","type-post","status-publish","format-standard","category-business"],"yoast_head":"\n