This post may contain affiliate links, allowing us to earn a commission on the products we would recommend to our families and closest friends. You can find more info on our Legal Stuff page.
You’ve heard the phrase “the rich get richer”. A sigh and a little shake of the head at how jacked up our income-gap-society is usually follow the phrase. But what a lot of us don’t know (because no one’s ever explained it to us!) is that anyone in our capitalist, opportunity-driven-society can get rich. Yup, this includes you 🙂
Thomas J. Stanley wrote a fascinating book called The Millionaire Next Door to show that anyone can be a Millionaire. His book chronicles stories of normal, middle-class people with average, or even below average, salaries. They all grew their net worth to over a million dollars through smart, but simple, saving and investing plans.
We’re happy to share these plans with you so you can get on your way to your millions:
1: Get Rich
2: Get Richer!
Phase 1: Get Rich
Step 1: Pay down “Bad Debt”
Not all debt is created equal. We tend to think of debt as a bad thing. And it can be, but we forget (or never learn) that some debt can be really smart! Generally, it’s good debt if the interest rate is reasonable and the thing you’re buying will get more valuable with time. We’ll talk about this more in Phase 2 of this post, but think home loans as an example of good debt. Otherwise, it’s bad debt, and it should get gone!
Credit cards, car loans, student loans. These are bad debt. And we tend to have huge amounts of bad debt. Clearly, you can’t make these disappear overnight, especially with American Household student loans averaging $49,042, credit cards averaging $16,061, and auto loans averaging $28,535 (source). But you need to have a solid plan for paying them off. If you haven’t already read How to be Debt-Free 13 Years Sooner and Save $38,600 in the Process, check it out to learn how to pay down your debts faster and cheaper!
And for goodness sake, once you’re out of bad debt, try to stay out of that hole!
Step 2: Save!
If you read The 3 Accounts You Need to Grow Your Savings, you know how much to save and what to do with those savings. Quick refresher for easy-reference:
- Emergency Savings: 5% of your paycheck until you have 3-6 months of living expenses saved for emergencies only. Kept in a savings account so you can get to it when you need it.
- Retirement Savings: aim for the IRA maximum, $5,500/year ($458.33/month) until you retire. If $458.33/month is too steep, start NOW with 5-7% of your paycheck and increase your percentage over the next couple years. Kept in a 401(k), IRA, or Roth IRA so it’s completely inaccessible until you retire (I mean, the penalties for taking money out of your retirement account early is enough to make sure I won’t touch the money before retirement!).
- Dream Savings: Any amount you want, but recommended 5% of every paycheck. Can be kept in almost any kind of account. For simplicity’s sake, we recommend a money market account or CD’s, depending on how long you have until you plan to use the money.
And if you read Fool-Proofing Savings for Guaranteed Financial Success, you know you need to put all of this saving on auto-pilot so you literally can’t mess it up! Even when you don’t have the willpower to keep saving all that money you so badly want to be spending.
Phase 2: Get Richer!
Step 1: Take Advantage of Compound Interest
If you read The $831,751 Reason to Save for Retirement While You’re Young and Broke, you know the trick to growing savings is to start early. Like TODAY so you can take advantage of compound interest. You basically make money on the money your money is making. Without lifting a finger!
Step 2: Buy Assets, NOT Liabilities
Now we get to the real secret to getting richer: buy assets, not liabilities.
In Rich Dad’s Guide to Investing, Robert T. Kiyosaki points out that most people spend nearly all of their money on buying liabilities – things that don’t ever grow more valuable.
- Cars: they lose value the moment you drive them off the lot
- The latest technology: it’s awesome, but loses value immediately because newer technology will be available next month
- Home furnishings: we all want to impress our friends, but styles change every few years, so we’re stuck in an endless cycle of buy, use for a short time, trash.
Kiyosaki argues that we should be spending more of our money on assets – things that grow more valuable or bring in cash.
- Property: it generally grows more valuable, and if you rent it out, you have cash coming in every month
- Annuities: you pay some money upfront to buy the annuity, and you get paid a lump sum every year. Lifetime annuities pay you every year for the rest of your life (leave a comment if you want to learn more about annuities)
- Bonds: you buy a bond (usually from the government or a municipality), and they agree to pay you back plus interest at a certain time (so it’s more valuable over time)
But of course, we NEED transportation, technology, and furniture. So what do we do?
Solution 1: Limit your spending on liabilities so you have more money to spend on assets.
Free up money to purchase assets by limiting your liability spending. Buy a
used certified pre-owned car or use cost-effective public transportation. Use last season’s technology, which has about 95% of the current tech’s capabilities at about half the cost! And use classic, not trendy, home furnishings, which, btw, can be found for pennies on the dollar on Craig’s List or at garage sale.
And the more assets you buy, the richer you get because your assets are always bringing you more money!
Solution 2: Buy assets that will pay for your liabilities
Instead of buying a liability, Kiyosaki will buy an asset that will generate enough money to pay for the liability (often with generated money left over!). Like, dude doesn’t just go buy a car. He buys real estate that will generate enough money to pay for his car. Let that sink in a sec. It’s brilliant!
But how does he buy the real estate? He leverages good debt. Think about this: the bank is willing to lend you money at a low interest rate to buy real estate (good debt). You can rent out the real estate so the renter is paying off the loan for you with enough extra so you have enough coming in each month to pay for the car. PLUS the real estate is appreciating (getting more valuable with time) like real estate does, so when you sell it, you’re making more money! Win, Win, Win!
OMG, I love real estate investing so much! Everyone should consider buying real estate even if you never want to own your own home!
The richer you get, the more assets you can afford, which will make you richer, which will let you afford more assets. Which will make you richer, which will let you afford more assets, which will make you richer, which will let you afford more assets…
And the rich get richer…
Come back every Friday for the latest and greatest personal finance discussions (well, some oldies but goodies too)! Check out our latest posts.
And if you haven’t already joined the conversation, get involved! We’re looking to create a small group of Founding Members for our Savings and Sangria Club throughout 2017: women willing to undergo a money makeover and share their experiences with the community. Please email email@example.com for more details!
Feel like sharing?
Post a comment to let us know which personal finance topics are interesting to you. What do you want to know more about?