How To Become Rich
Step 1: Invest early and often to become rich
The single most crucial thing you can do to ensure your financial future is investing — and the sooner you start, the easier it is to get rich.
This isn’t BS. There’s more than 100 years of evidence in the stock market that suggests this.
Still don’t believe me? Let’s look at a real world example of how to become rich by investing.
Say you’re 25 years old and you decide to invest $500/month in a low-cost, diversified index fund. If you do that until you’re 60, how much money do you think you’d have?
That’s right. You’d be a millionaire after only investing a few thousand dollars per year.
Notice, I’m not talking about the Hollywood type of investing where hot-shot stockbrokers make huge multi-million dollar trades while yelling “SELL” into a phone for some reason.
Pictured: Some dude trading stocks and losing money. Not pictured: You investing in low-cost index funds and getting on with your life.
The two essential ways to invest your money are straightforward:
- 401k: Be sure to take advantage of your employer’s 401k plan by putting at least enough money to collect the employer match into it. This basically means that for every dollar you contribute, your company will match that (pre-tax!). This ensures you’re taking full advantage of what is essentially free money from your employer. That match is POWERFUL and can double your money over the course of your working life:
- Roth IRA: Like your 401k, you’re going to want to max it out as much as possible. The amount you are allowed to contribute goes up occasionally. Currently you can contribute up to $5,500 each year.
Step 2: Practice conscious spending like a rich person
Anyone who knows me knows that I detest ultra-frugality — otherwise known as the lifestyle of clipping coupons and sacrificing things like lattes for the sake of saving money.
Unlike a lot of people you see in the personal finance world, I’m not ashamed of how I spend lots of money on things I enjoy like eating out, traveling, or nice clothes.
And that’s all because I practice conscious spending. It’s the same system people uses in order to spend more than $21,000 on going out. I’d never tell you to skip on spending on the things that make you happiest. Just do so purposefully, and by avoiding the mindless spending that can come from disorganized finances.
Setting up the system might seem hard — but in the end, it’s all about:
- Automating your finances.
- Knowing where your money goes so you’re in complete control of the situation.
Automating your finances allows your system to work for you and passively do the right thing instead of you constantly wondering if you have enough money to spend. Or, getting your credit card bill each month, shrugging, and saying to yourself, “Yeah, I guess I spent that much.”
And it’s simple: at the beginning of the month, when you receive your paycheck, the money is immediately sent to where it needs to go through automatic systems that you have set up already.
Some spending recommendations for your system:
- 50%-60% Fixed Costs: This includes things like utilities, rent, internet, and debt.
- 10% Investments: This includes your Roth IRA and 401k plan.
- 5%-10% Savings: This is money that goes towards things like vacations, weddings, home down payments, and unexpected expenses.
- 20-35% Guilt-free Spending: Fun money! Spend this on anything you want from nice dinners to movies.
Because as humans we have incredibly limited willpower. It’s so limited in fact that it can render things like paying bills and putting money away in your savings each month a very difficult task.
Automating your finances subverts this by allowing you to save money without ever having to do it yourself.
Step 3: Tap into “hidden income”
I’m not talking about piles of cash buried somewhere in your backyard — this is the money that you can be saving right now by negotiating your bills.
That’s right. With just a few one-time, 5-minute phone calls, you can save HUNDREDS a month on bills for your:
- Car insurance
- Cell phone plan
- Gym membership (less likely but still possible)
- Credit card
It’s simple too — there are only 3 things you need to do to negotiate with these companies on fees and rates:
- Call them up.
- Tell them, “I’m a great customer, and I’d hate to have to leave because of a simple money issue.”
- Ask, “What can you do for me to lower my rates?