[UNPUBLISHED] – How to Build Wealth and Still Have Your $3 Coffee
We all want to be wealthy, however, we’ve been duped into believing that the only way to get there is through savings. We give you some pointers that teach you how to build wealth that extends beyond the savings account and enters the realm of investing and conscious spending. Oh, and did we mention you can still have your $3-a-day coffee?
Remember those finance gurus from a few years ago (can we even say decades) who recommended that you save 10% of your income at each pay period? Pretty good advice, right?
Well, not really.
Imagine you’re a painter and you have to paint a house, inside and out, but you only have one standard paintbrush. It’s going to take a really long time and a heck of a lot of energy to reach that goal.
Let’s up the ante and say the house needs to be painted in two days.
While the premise of saving money is great, it’s sticking it all in a savings account that’s the problem. Don’t get us wrong, a savings account is important if you’re looking to protect your capital for say, an emergency fund or short-term saving goals.
However… You’ll never build wealth at this rate.
As Ramit puts it, “One of the most surprising things that people don’t realize about money is that saving is not enough,” and “What they don’t realize and what nobody tells you is that money is invisibly losing value.”
Let’s fix it, shall we?
How to build wealth in three easy steps
If you think that you need to earn more to build wealth, you’re probably right (by the way, we can help you with that by teaching you how to ask for a raise). But it goes so much deeper than your earnings; you also need to know how to spend well. It starts with getting your money to work for you. Ramit has three tools that do just that.
Step 1: The ladder of personal finance – investing money for beginners
Who would have thought that boosting your savings account until the day you retire wasn’t enough? Turns out the banks only use your savings to fund their lending. They’re not going to pay you an interest rate that beats inflation, because they won’t make money. It’s just good for emergency and short-term savings. That’s it.
For the rest, you need an investment strategy. As a beginner investor, Ramit’s Ladder of Personal Finance can provide valuable insights into making the most of your money.
Rung 1: Your 401(k) Your salary can be one of your biggest investment assets if used right. This is especially true for those who have employers who match contributions. You want to make sure you max out that matching because they’re literally funding your retirement at the rate you are. So if they match up to 4.5%, you want to take your contributions up to at least 4.5%. It’s that simple.
Rung 2: Get rid of debt Really. You don’t need to cling to debt like’s it’s last year’s favorite sports coat. Sure, there are instances where debt helps, like buying a house or funding a startup. But then when it’s done, you gotta get straight outta Dodge! Get into the habit of squaring off your credit card debt every month. Imagine all the investing you can do when you don’t have car payments, or student and personal loans?
Rung 3: Roth IRA Aaand we’re back at retirement. Yes seriously! Do you know how quickly you get to retiring age? You want to make sure that you’re doing all you can to maximize your retirement savings. Roth IRAs hold certain tax advantages that can’t be ignored. There are income restrictions (up to $140,000) and maximum contributions (between $700 and $7,000) that need to be considered. Set up a meeting with a trusted financial advisor to discuss your financial goals and get sound investment advice.
Rung 4: Max out your 401(k) Yep. We’re still talking retirement. And it’s worth it! Max out the allowable contributions for your 401(k) according to your age and current Roth IRA contributions. Be sure to stick to those limits though, as the IRS can hit you with a 6% excessive contribution penalty. It sucks but it’s true.
Rung 5: Other investments Well done player 1! You’ve reached the end of the retirement contributions line and you’re finally up high enough to see other types of investments such as investing in the stock market or mutual funds. This is also a chance to pay extra into debt to get those numbers down or to invest in your best rich life. This could be further education or studies, signing up with a personal trainer, or heck, saving up for that sabbatical to India.
Step 2: Automating your finances
If you were around in the nineties and even early 2000s, you’ll remember the tedious nature of payments. Envelopes that got lost in the mail, check fraud, and even taking time off work to make an urgent payment. If you didn’t have a cool checkbook with its own folder, you had to pop into the bank and brave the queue for cash.
But it’s not like that anymore, so why are you still taking an admin day to sort out your payments and transfers? It’s the 21st century, people! We now have the internet and secure payments. Best of all though, is automated payments.
You can automate anything from bill payments to savings. Just simply set it up on your checking accounts, either through direct debits or payment instructions.
Investments are equally easy to automate, whether you’re opting for index funds, mutual funds, ETFs, forex, whatever your investment portfolio looks like. Robo advisors do all the hard work such as asset allocation, you just make sure you diligently invest every month. Best part is you can start from as little as $1!
With this simple transition, that admin day turns into a personal day. Go to the spa or take a day trip to a nearby town. Just never waste time on manual payments and transfers again.
Step 3: Focus on the big wins – focus on $30,000 questions, not the $3 ones
Who cares. It may sound apathetic but it should be your default when you come across those “I need to cut down on my $3-a-day flat white from Starbucks. Why? Because it doesn’t matter. Sure, maybe if you save that $3 every day for the next 50 years, you might be able to afford a VW GTI. Just be sure to save that $3 in an account that keeps up with inflation. But 50 years of no coffee?
Instead, harness that savings prowess and focus on big-ticket items. For instance, work on boosting your credit rating so you can ask for better interest rates on your mortgage and other financial products.
For example, if you have a $250,000 mortgage at an APR of 4.5% over a term of 15 years, you’re looking at paying an installment of $1912.48 per month and total interest of around $94,246.98. Now, get that rate down to 3.5% and you’re looking at a monthly installment of $1787.21 and total interest of $71,697.14. That saves you around $22,500! It’s worth it, make the call.
It’s simpler than you think
When you think of building wealth, it’s the small incremental changes over a period of time that will get you the numbers. Waiting to win big at the track or waiting for the signup bonus of the century is not a great strategy.
Building wealth is a long-term game that requires discipline and the ability to prioritize your spending. With proper financial planning, you will be able to save and invest intentionally.
Through Ramit’s Conscious Spending Technique, you will have the means to prioritize your spending that will not only help you build wealth, but also grow your best rich life right now. The goal is not to only start living when you retire, but it definitely helps to have a healthy bank balance when you’re ready for the golden handshake.
The technique allows you to address:
- Fixed costs such as your accommodation
- Important investments like the ones we discussed just a few paragraphs ago
- Savings goals for big-ticket items such as a home downpayment or a wedding
- Guilt-free spending, in other words, your Oh Yeah! Budget
The bottom line is this. Whether you work damn hard for your money or not, you don’t want to wait until you’re too old to enjoy life. In the same breath, you want to create space to build wealth. We need to be fiscally responsible, right? But that doesn’t mean we should forego the things we love.
Ready to take control of your finances (without tedious budgeting?) Get the first chapter of Ramit Sethi’s NYT Bestselling Book below.