There Is No Secret to Financial Success

by Kevin on December 22, 2011

As we wrap up the year and head into 2012 you will undoubtedly see a lot of products associated with making 2012 your best year ever. You’ll walk the aisles at the bookstore and see books aimed at a new diet, an exciting exercise plan, a peculiar take on getting on a budget, and the hipster way of paying off credit card debt.

While I’m all for you buying whatever it is that will finally motivate you to get off your butt and get your finances in order, let’s be real for a second. There is no secret sauce. There’s no special methodology to getting out of debt. There’s no seminar that can save you from your poor spending habits. The foundations of a successful financial life do not change. Sometimes it takes special wrapping around those foundations to get us to act, but the core principals are the same. Let’s review those for good measure.

Core Principals of a Successful Financial Life

I think there are 4 principals every single person should understand.

Make More Than You Spend

It is mathematically impossible to get ahead if you are spending more money than you have coming in on a consistent basis. No matter what amount you start with — $100 or $100 million — continuing on a path that has less money coming in than you spend every month will bankrupt you. Every. Single. Time.

You always hear this as Spend Less Than You Make. It is essentially the same thing; this just emphasizes getting out and making an income rather than focusing on not spending as much of that income. If you want to go spend $100,000 per year, that’s fine, but find a way to go earn $101,000.

Be Prepared for Emergencies

My Dad always says It’s always something, and you know what? He’s right. Life is crazy, chaotic, and impossible to plan down to the microscopic level. The roof will leak, the transmission will go out, and the new suit you just bought for an interview will rip as you step out of the car. Emergencies happen. The only question then becomes did you have the foresight to prepare for them? Did you save money for a rainy day and can handle the emergency? Or are you left outside with no umbrella?

Avoid Paying Interest Where It Makes Sense

Paying interest makes sense — but only in the rarest occasions. If you are confident you can earn a 10% return on your money in the stock market and your mortgage interest rate is 4.5%, then you should take every extra dollar you have and put it into your portfolio. You’re winning by 5.5% every time you do that rather than paying off your mortgage.

However, under normal circumstances, interest is bad. You’re paying extra money on top of the actual cost of whatever it is you bought. Credit card debt falls squarely into this category. Paying for a $1,000 item is fine, unless you’re financing it at 21.99% interest for 6 years. That’s a terrible decision. This is the kind of interest you want to avoid.

Invest for the Future

Lastly, you need to prepare well into your future — your retirement. Don’t rely on government handouts or programs to finance your basic living in your old age. You can make smart decisions today and save just a fraction of what you would need if you start early in the process. Let the power of compound interest benefit you by starting as soon as you can. Even a few thousand dollars per year, given a healthy growth rate and a long enough period of time, can grow into a sizable nest egg.

The problem most people have with saving for retirement is they feel there is never any money to save… and that’s true because of the above problems. If you’re spending more than you earn, there will never be any money for retirement. If you are paying high interest rates on items, you are limiting the amount of cash you have available to invest. Cut out the above problems and you will naturally have more money to invest for your future. Do it — your future self will thank you.


Golfing Girl December 23, 2011 at 5:35 pm

X principles?? I’m thinking you forgot to go back and type how many?
I would add the principle of don’t worry about other people (how much they make, what kind of house/car they have, etc.). The Jones don’t mean anything to your personal finances.

Long Term Care Plans February 4, 2012 at 1:06 am

I think your income doesn’t necessarily determine how financially successful you are – your choices and priorities do.

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