1) Spend less than you make.
It’s tempting to look at the wealthy and want what they have: fancy cars, extravagant homes, designer clothes. Some people give in to the temptation, in spite of an inability to afford it.
It’s all about “delayed gratification,” says Daniel Ally. Work hard and sacrifice everything now so that you can become rich sooner. That’s when you’ll really be able to enjoy your wealth.
2) Pay cash for everything.
The only way to spend less than you make is to avoid using a credit card. If you can’t afford to pay for it in cash, you can’t afford to own it.
Credit is an easy voice to fall prey to, but its path never leads to wealth. Debt is the fastest route to the poorhouse. If you can’t afford to pay for it in cash, you can’t afford to own it.
Rich people pay cash for everything. They rarely use credit.
Or, if they use a credit card, it’s for the sake of the convenience of not carrying around a lot of cash. Then, they pay off the balance right away.
Rich people don’t carry a credit card balance because they know it’s a waste of money. Paying interest is like giving away money.
3) Get out of debt as soon as possible.
(And stop incurring new debt.) Almost everyone enters adulthood and their professional life with some debt.
Not many college students are able to graduate without at least some student loan debt. Car debt is also common with young adults entering the workforce. Some young adults may even have credit card debt.
Pay off your existing debt before you think about buying a new car or jumping into a mortgage. The faster you can stop paying interest on debt, the sooner you’ll be able to put money in your own bank account.
4) Make saving money a priority.
Entrepreneur and author Andrew Medal calls it a self tax (Entrepreneur.com).
“If the government suddenly increased taxes and forced you to pay an extra $100 each month, you’d find a way to pay it. You would have to,” says Medal. “Yet when it comes to saving money, people constantly find ways to rationalize their inability to sock away $100 each month.”
Medal suggests setting up an automatic payment that goes into a savings account each time you get a paycheck. Taking it right off the top reduces the temptation and ability to spend it. It forces you to adjust your lifestyle to live off of what’s left.
5) Live by the rule of 50-30-20
(Forbes.com). This is how you should be spending your money. Broken down, it looks like this:
Spend no more than 50 percent of your monthly income on day-to-day living needs. This includes housing (rent or mortgage plus home maintenance), car payments and maintenance (or alternative transportation, like a bus pass), insurance, groceries and incidentals.
Spend no more than 30 percent of your monthly income on wants. This includes clothing, cable TV and entertainment (going out to eat, vacations, going to a movie or to the casino, etc.)
The remaining 20 percent of your income should go into savings. This can be some type of a savings account. Or, you can split it up between a savings account (money that is easier to access later when you need it) and an IRA (money that you can’t access easily until retirement).
6) Focus on the big picture.
Don’t obsess over the minutiae when it comes to saving money. For instance, don’t lose your mind when you see that gas is a penny cheaper at the next gas station after you already filled your tank.
Instead, develop the habit of spending wisely. Then wait to judge the results over a long period of time, say, one year.
Says Andrew Medal, “While it is important to keep a tab on how you’re doing month to month, it’s far more important to judge success over longer periods of time. A year is a good indication of your financial practices. Some months might not be great (things happen), others might be wonderful.”
So, you see, this is not some magical formula. You can’t do A plus B plus C and come out with wealth. Getting rich is a long-term process, but one worth pursuing.