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Want to Retire Rich? Master Two Core Financial Concepts
Published: 07/19/2011 by Kevin Mulligan
» Money
» Retirement
Want to get rich? Want to grow your wealth so you can live a comfortable lifestyle in retirement? Do you have a desire to have the nice car sitting in the gorgeous driveway in front of the big house in the neighborhood where all the grass is pruned just so?
Wanting to improve your personal situation, even to these heights, is not a bad thing. But many people think of these as “pie in the sky” ideas. Something to be wished and dreamed for, but never achieved. How can anyone get ahead with student loans, a car payment, and a low annual income?
No matter where you are starting – or restarting – with your financial situation, you can achieve great heights by making change in critical areas of your financial life. Make the following changes and you can build that nest egg and retire comfortably. But failing to do these will virtually guarantee you never live the life you want to.
Spend Less Than You Earn
The absolute most critical financial strategy you must understand is to simply spend less money than you earn. If you spend more than you earn consistently, you will never get ahead. You will constantly be digging a hole full of debt; debt is the only thing that can make up for the difference between what you spent and what you earned.
Compare two individuals: an NFL rookie that just signed a $30 million contract and a college graduate that just landed a $30,000 per year job. For simplification purposes, let's say the rookie gets paid a flat $6 million per year for the five year contract.
If the rookie spends $6,500,000 his first year, he needs $500,000 in debt to make up the difference in what he makes to what he spends. The college graduate, on the other hand, bides his time, lives with two roommates, and socks back $10,000 in a Roth IRA for his future.
Who is better off?
Some would say the NFL rookie – he earns more money! But he's already developed the habit of spending more than he earns. If he can't stay out of debt with a $6 million annual income, will he ever be able to manage his money? This is a big reason you find many professional athletes completely bankrupt a few years after their careers are over.
You must learn how to spend less than you earn. That can mean sacrifice, pain, and doing without. But you will be better off in the long run for learning that habit today so when you earn more money in the future, you handle that well, too.
Save Diligently for the Future
Once you know how to spend less than you earn, you should discover you have a growing checking or savings account balance. That extra money that you aren't spending can be used for things like debt repayment, building up an emergency fund, and saving for future goals.
This habit requires yet more financial discipline. It is easy to justify spending your excess cash on frivolous things. Hey, you're not spending more than you earn, just everything you earn. Spending up to your income limit is only slightly better than spending more than your income limit.
Many people struggle to pay for emergencies when they inevitably pop up. They aren't prepared. Many people pay their bills as they come in – and they get surprised by that car insurance bill every six months. They aren't prepared.
Financial surprises are going to happen, but many shouldn't be surprising. You know you are going to need an oil change, new tires, a trip to the dentist, your car insurance, and the typical problems that pop up during the year. Instead of being surprised when they happen, take some of your extra cash left at the end of the month and start saving it for a specific goal. If you have a goal, really find it important (rather than just because someone told you to save for it), and can stay committed to it, your extra cash isn't as likely to be spent on a night out on the town.
If you can master these two core principles you will never have serious financial issues in your life. Failure to learn and utilize them can only lead to difficulties. Maybe not today, but eventually.
