7 Money Rules I Follow Daily After Having Lost My Life-Savings
After losing everything, I decided to take charge of my money.
In 2015, I lost my entire life savings because of an addiction to sports betting. After hitting financial rock bottom, I decided to make a massive change. I promised myself that I would never get myself in such a bad financial situation again.
I decided to deeply study the art and science of money. I bought every book on personal finance and investing I could get my hands on, and I watched hundreds of interviews with top experts in the field.
Ever since, I’ve established a few fundamental money rules that helped me build a solid financial foundation.
Focus On Long-Term Wealth, Not ‘Getting Rich Quick’
When you’re focused on building long-term wealth, you make rational, logical, and profitable decisions. When you’re focused on ‘getting rich quick’, you’ll make irrational and emotional decisions that end up losing you money.
I’ve been there.
Instead of following proven paths to wealth, such as investing in index funds, real estate, or dividend stocks, you’ll fall prey to ‘shiny strategies’ that promise to make you rich quickly, such as leveraged trading, options trading, or gambling (my old nemesis).
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
The formula for long-term wealth is simply to spend less than you earn and invest at least 10% of your monthly income into broad-market index funds. It isn’t glamorous, but it’s the most sure-fire way to long-term wealth.
This long-term wealth-building strategy is truly so simple that it’s boring — whereas ‘getting rich quick’ strategies are fun, exciting, and sexy. Building wealth is more like the color grey than orange. It’s more like dust than confetti.
Really, it isn’t that exciting. But it’s critical you discipline yourself to follow this ‘boring’ path. Usually, the more exciting an investment strategy, the lower your odds of success. There are always exceptions to the rule, of course — but the majority of ordinary investors are better of keeping things simple and focusing on steadily building long-term wealth.
Lives Below Your Means
As personal finance expert Dave Ramsey said, “Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.”
If you want financial security, it’s so important to live below your means. If you don’t, you won’t have any money left to save and invest — which is essential to build your wealth.
Do you want financial freedom or do you want to keep up with the Joneses?
We live in a consumer culture designed to get you to spend as much money as possible on things you don’t actually need. It might even tempt you to go into debt for it.
Buy a new $1000 iPhone? Of course, my ‘old’ one from last year isn’t good enough anymore. A survey by WalletHub found that 20% of Americans think the new iPhone is worth going into debt for.
Really, go in debt for a new phone??
If you don’t have a smartphone right now, I can still somewhat follow that logic. But if you have a smartphone that works perfectly fine, it’s beyond madness to go into debt for a device that’s slightly better than the one you have now.
This type of spending keeps you stuck in a financial trap.
Advertising tells us we don’t ‘fit in’ with the cool kids anymore if we don’t have the latest tech or clothes. Since most people are overly attached to their social status, they spend ridiculously on things that elevate their status, even though it gets them further and further away from financial freedom.
No wonder that 69% of Americans have less than $1,000 in savings. Consumer culture is designed to separate you from your hard-earned money as fast as possible.
Breaking the chains of financial struggle all starts with living below your means. Each month, make it a priority to spend less than you earn. It’s simply not possible to reach financial freedom if you keep your monthly expenses too high. You won’t have anything left to invest — which is the catalyst for financial independence.
Pay Yourself First
What’s the first thing you do when your hard-earned money hits your bank account? Do you put some money into your emergency fund or investment account? Or do you go shopping online?
If you want to build a solid financial foundation, you need to develop the habit of saving before you start spending. In the personal finance space, this is referred to as ‘paying yourself first.’
For example, when you get your paycheck and the first thing you buy is a new sweater, you’re not paying yourself first — you pay the clothing company first.
“Do not save what is left after spending, but spend what is left after saving.” — Warren Buffett
Paying yourself first means that the first thing you do with your paycheck is put some money towards your savings account and your investment account. Make sure the first transaction you make after receiving your hard-earned money is with yourself, not with other companies or people.
Personally, I save at least 10% of my monthly income and invest at least 15%. The money I save goes to my emergency fund, and the money I invest goes primarily into broad-market index funds such as the S&P500, and a smaller portion goes to high-growth tech stocks, Bitcoin, and Ethereum.
Invest To Protect Yourself Against Inflation
Merely living below your means won’t make you financially free — investing will make you financially free. You can save your way to financial security, but you can’t save your way to financial freedom.
In today’s economy with zero percent interest rates (and even negative interest rates), your savings get eaten away by inflation. This is why investing is essential.
Not only is investing a hedge against inflation, but it also helps you generate real passive income. Each dollar you invest is like a tiny employee working to generate more money for you, no matter what you’re doing. This is why they say that the rich don’t work for money, they make money work for them.
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” — Robert Kiyosaki
Personally, the majority of my investment portfolio is allocated to broad-market index funds such as the S&P500. This is my ‘freedom fund,’ intended to build long-term wealth.
I steadily invest a fixed percentage of my monthly income into these index funds and don’t intend to sell for the next 40+ years, so compound interest has all the time to work its magic.
In simplified terms, an S&P500 index fund is a ‘basket’ of the 500 most valuable companies listed in the United States. So, even for just $100, you can own a small portion of 500 of the biggest businesses in the US (and, therefore, the world).
By investing in index funds, you instantly have a well-diversified portfolio without having to research hundreds of individual companies — which is a whole science in and of itself.
“A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.” — Warren Buffett
Next to index funds, I invest in more volatile assets such as high-growth tech stocks, Bitcoin, and Ethereum. However, these investments form less than 25% of my entire investment portfolio.
I wouldn’t recommend investing in these assets unless you’ve already built your index-fund portfolio, done a lot of research, and have a high tolerance for risk. Else, it can be a quick way to lose a lot of money.
Learnable High-Income Skills
Most personal finance advice is overly focused on reducing expenses instead of teaching people the importance of increasing income. The thing is, you can only reduce your spending so much, whereas there’s no ceiling on the amount of money you can earn.
Don’t get me wrong, it’s essential to live below your means and significantly reduce your spending if you want financial freedom. However, at the same time, you should focus on maximizing your income potential as there’s no ceiling to how much you can earn.
The more money you make, the more you can save and invest to build your financial foundation. It will rapidly accelerate your path to financial freedom.
The quickest way to earn more money is to develop high-income skills so you can bring more value to your customers or organization. Examples of high-income skills are:
These skills are in high demand because they either directly lead to higher profits or they are rare as not a lot of people have developed these skills. Learn a few of these high-income skills, and your income potential will skyrocket.
Avoid Lifestyle Inflation
I already mentioned the importance of living below your means. However, there’s one pitfall that most people run into when they start earning more money: Lifestyle Inflation.
Lifestyle inflation means that the more money you make, the more you spend to increase the quality of your life. The problem is that this quickly turns into a financial cage.
I know, we all want more luxuries. Most of us want more convenience, a bigger house, a faster car, etc. Just don’t fall into the trap of inflating your lifestyle to such a point that all the extra money you make is spent. This way, you’ll never break out of the financial ‘rat race.’
Of course, when you make more money, it’s okay to spend some of it on things that improve the quality of your life — but make sure the majority of the extra cash you make goes to your savings and, especially, your investments.
The bigger the size of your investment account, the more passive income it will generate for you through dividends and capital gains. This passive income can then pay for the luxuries you desire. It’s a game-changer.
Maintains a 6-Month Emergency Fund
According to a survey by GOBankingRates, 69% of Americans have less than $1,000 in savings. Even worse, 45% of Americans said to have $0 in their savings account.
This lack of savings makes you vulnerable. What if your heating breaks? What if you get into an accident? What if you lose your main source of income?
As an ex-gambling addict, I know what it’s like to experience crippling financial stress. When there’s pretty much zero in your bank account, it creates a ton of stress that dominates the majority of your time, mood, and thoughts.
To regain peace of mind, you must build an emergency fund for yourself — preferably one that covers at least six months of living expenses. This means it covers six months of essential expenses such as housing, food, utilities, transportation, and insurance.
Emergency Fund = Monthly Living Expenses x 6
Hopefully, you won’t ever have to tap into your emergency fund. However, it’s better to have it and not need it — than to need it and not have it.
As Sun Tzu said in The Art of War, “The art of war teaches us to rely not on the likelihood of the enemy not coming, but on our own readiness to receive him; not on the chances of his not attacking, but rather on the fact that we have made our position unassailable.”
The Covid-19 crisis has shown us how important it is to make your financial position ‘unassailable’ to use Sun Tzu’s words. Without a clear warning, and due to events beyond our control, we can suddenly lose our primary source of income.
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
CONTRIBUTED BY Jari Roomer
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