Just because it’s simple doesn’t mean it’s easy. The solution to nearly all money problems is quite simple:
- Spend less
- Earn more
- Invest the surplus
The devil’s in the details. Often, people with financial difficulties are in fact very good at least one of these, but they don’t take into account the other two.
First, there’s the very frugal type. If you’ve ever been mocked for the latte factor (pinching pennies by carrying your own coffee rather than Starbucks’), that would be you. You squirrel it away, have a budget, research every purchase, and pay off your credit cards every month (if you use them at all). You’re an expert at living on less. I love it. The danger here is that you’re so focused on not spending that you forget to invest properly, which inevitably involves some risk—something that frugal people often hate. Or, you’re so focused on steadiness that you overlook the big wins in income that can be generated by pursuing a better job or a significant raise.
Earning more, however, is not necessarily a sure ticket to wealth. Wealth is how much you hold on to, not how much money has slipped through your fingers. People with large salaries in highly visible or status oriented jobs are not necessarily rich—especially if they spend a lot on toys, travel, transportation,or the (seemingly inevitable) McMansion. Also, people in high earning jobs also find themselves under quite a bit of stress, and the urge to make it up to yourself with rewards is hard to resist. This group needs to remember that there’s a particular kind of satisfaction in a 6 or 7 figure investment portfolio as well.
Group number three: okay, you earn more than you spend, and you’re hardly more extravagant than a nun. Where is your surplus parked? In CDs? No! With a stockbroker, fee-based “advisor”, wrap account…? AAARRRGGGHHH! You owe it to your hard work to educate yourself. Investment scams and schemes can cost you way more than you’ll save in years of frugality or even earnings. Really, the hour a week you spend reading financial books or articles may earn (or save) you more per hour than any other action you can take to preserve and increase your wealth.
In fact, these three principles could as easily apply to our national economic woes as much as our personal financial management. If only…