You can make $2 Million a year and still go broke if you’re making these mistakes
The money you earn has a limited impact on the wealth you’re going to build. Many athletes, football players, and rock stars go broke in the blink of an eye once they leave their best days behind.
A few basic rules apply from everyone earning $30K a year to $2M a year, and they are so simple that it’s almost a joke that people can’t save enough money for a comfy retirement.
It is not about getting rich or buying a luxury car. Everything I’m about to tell you is to secure a future as soon as possible before you stop working for any reason and still save enough money to maintain the lifestyle you’re used to.
The sooner you start avoiding these mistakes, the better your future will be, so I will keep it as brief as possible to accelerate your pace to achieve your dreams.
Mistake #1 – Spending First, Investing Later
Don’t save what is left after spending, but spend what is left after savings. – Warren Buffett
It’s not about how much you earn, it’s how much you save, but more importantly, it’s how much you invest.
If you wait till the end of the month to see how much money is left to invest, you’ll end up investing close to 0 Dollars. Life has a way of creating unexpected expenses on your way all the time.
The moment your salary or your income from your business hits your account, a certain percentage of that money should go to your investment account at lightning speed. Automate the process if possible, so you don’t even see the money leaving your checking account.
There is no magic number, but the rule of thumb is to invest at least 10% percent of your monthly income.
You may be thinking that you need that money, so you can’t just invest, but the moment you develop this habit, your lifestyle will also evolve to still make it through the end of the month with 90% of your income.
Just assume you’re making 10% less money than you earn today. Maybe you’d shop from a less fancy grocery store, yet you’d cut a few expensive habits or eat less outside than you’re doing today, but believe me, in the long run, it pays out handsomely.
As you may have noticed, I’m not telling you what to invest in. It’s a different discussion based on your risk appetite and investor profile. That’s a conversation you should have with a licensed financial consultant.
I’m just here to tell you to invest in whatever you do but invest first before spending that money.
Mistake #2 – Stop Investing in Bear Markets
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing. – J.L. Collins, The Simple Path to Wealth
According to Hartford Funds, 78% of the stock market’s best days happen in a bear market or at the beginning of a bull market. If you missed the market’s ten best days in the last 30 years, your returns would be 50% less compared to not selling it. The more interesting figure here is if you miss the best 30 days, you’d lose 83% of your gains.
No one has a marble ball to guess exactly when a bear market ends, and a bull market begins. If you buy in every market jump, you’ll likely buy a dead cat bounce.
Don’t be Tricked by Short-term Market Moves
Dangers of FOMO in current financial markets
Even Warren Buffett is not trying to time the market, so don’t play a loser’s game.
If an investment is good, it’s even better at a discount. If you get frightened to invest when the markets are in a downturn, it’s no different than resisting buying your favorite t-shirt when there is a discount, only to buy the next day when the price returns to normal.
Mistake #3 – Growing Your Debt While Growing Your Income
Wealth is the nice cars not purchased. The diamonds were not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. – Morgan Houssel, The Psychology of Money
A fancy car doesn’t make you rich; it makes you poorer. It’s vital not to get in a show-off race with other people once you start making money. No matter how much money you make, you can’t save it if you spend it all.
A person who earns $30K a year may save $5K a year and multiply that saving by investing it. On the other hand, another person who makes $2M a year and spends all that money on cars, jewelry, and fancy parties, saves and invests no money for the future, or, worse, gets swamped in debt can’t multiply 0 with anything. The $ 30K earner would be wealthier than the $2M earner sooner than you’d expect.
Debt is only good if you’re going to use that money to open a store, or a factory, buy a machine that’ll generate cash flow, or pay your employees who’ll bring more income to pay the loans back. However, debt for consumption is destined to bring you financial catastrophe.
Have a good understanding of your purchasing power. The rule to avoid this mistake is very simple. Don’t spend more than you earn!
Mistake #4 – Underestimate the Power of Compounding
Investing is not about a once-in-a-lifetime opportunity. It is a life-long journey of prudent investments that grow with time. You need to start small and let the magic of compounding do its trick.” ― Naved Abdali
One of the biggest arguments against investing is claiming that the amount saved is too small to invest, so there is no point. Yet everything starts small. A snowball may turn into an avalanche rolling downhill.
I’m sure you have heard the story of the villager who asked the king to put one piece of rice grain on the first square of a chess board, then double it in the second square and keep folding until the 64th square. In that story, the kingdom was out of all rice halfway on the board. That’s how powerful compounding your money to multiple folds is, in the long run.
How Much Time Do You Need to Double Your Money?
Legendary investor Benjamin Graham had a very simple answer for this question and I want to tell you all about it.
Warren Buffet is always appreciated for his past performance in the stock market. However, his biggest secret is not his ability to pick stocks; it’s the time he spent on the market.
Buffett started buying stocks at the age of 11, and still at 92 years old, he keeps his money on the stocks he invested. He made more than half of his wealth today after the age of 83. Even better, he made 99% of his wealth after age 50.
That’s why, independent from the market conditions, you should never interrupt the compounding process. If you don’t take my word for it, here is from Buffett’s lifelong business partner Charlie Munger on compounding.
The first rule of compounding is never to interrupt it unnecessarily. – Charlie Munger
All in all, if you want to be broke by the time you retire, follow these four rules:
Spend First, Invest Later
Stop Investing in Bear Markets
Growing Your Debt While Growing Your Income
Underestimate the Power of Compounding
If you follow these four rules, you’ve set your destiny to fail glamorously. However, if you would prefer a comfortable retirement life, no matter at what stage of your life, please avoid these mistakes at all costs.
They are so simple yet fundamental for a healthy financial future it’s hard to grasp why we’re not teaching how to avoid each of these mistakes early in life.
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 major financial decisions.
Contributed by Furkan SAATCİOĞLU
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