#3: Don’t save what’s left after spending — spend what’s left after saving.
The Simple Path To Wealth by JL Collins is one of the most popular personal finance books of all time.
It has helped thousands of people around the world achieve financial freedom.
In this article, we’ll look at six money habits that wealthy people practice according to The Simple Path To Wealth.
Have A Financial Plan
“Without a plan, it’s easy to get sidetracked and never achieve your financial goals,” writes JL Collins.
Most people struggle with money because they’ve never created a financial plan.
A financial plan will help you be more intentional with your money. And the more intentional you are with your finances, the wealthier you’ll become.
An example of a financial plan is:
Every month, I’ll save at least 25% of my income, so I can put $500 towards my investment account and $500 towards my emergency fund.
The more specific your financial plan, the better.
Trying to save money without a plan is a recipe for failure. You’ll leave your finances too much up to chance — which is bound to go wrong.
As Benjamin Franklin famously said, “If you fail to plan, you are planning to fail.”
Read also: The single skill that made me a millionaire at 28
Avoid Lifestyle Inflation
Lifestyle inflation is the tendency for most people to increase their spending (on extra luxuries) as their income grows.
More money in = More money out.
But when you spend all the extra money you make, you’re not building wealth, you’re simply living higher.
“Lifestyle inflation is the enemy of wealth building.” — JL Collins
Next time you get a raise or make more money with your business, resist the urge to upgrade your car, buy fancy clothes, or go on a luxury holiday.
Consider saving the extra money in a retirement/investment account to secure your financial future.
The more you can keep lifestyle inflation at bay, the faster you’ll achieve financial independence.
Automate Your Savings
“Saving is the most important part of the wealth-building process,” writes Collins.
The more you save, the more you’ll have to invest. The more you can invest, the faster your wealth will grow.
But most people approach saving completely the wrong way. They save whatever’s left at the end of the month — if there even is anything left.
A better approach is to decide how much you want to save each month and **set up automatic transfers **from your checking account to your savings account on the day you receive your paycheck.
Don’t save what’s left after spending — spend what’s left after saving.
Avoid Bad Debt
Not all debt is bad. Debt can be used to finance your home, start/grow a business, or acquire real estate investment properties.
This is labeled as good debt in the finance space because it’s used to grow your wealth rather than to fund your lifestyle.
(Just be aware that even good debt can still turn out to be dangerous if you don’t handle your money right.)
The real enemy is consumer debt, which is used to fund your lifestyle rather than increase your wealth.
- Taking out a car loan to buy an expensive new car
- Using the _buy now, pay later _feature to buy new stuff
- Racking up credit card debt to pay for things you can’t truly afford
The interest on consumer debt averages around 15% (but can be as high as 30% for those with a bad credit score), keeping you trapped in the financial rat race.
If you want to have healthy finances, avoid bad debt like the plague.
Invest In Index Funds
As JL Collins writes in The Simple Path To Wealth, “Investing in low-cost index funds is the simplest, most effective, and most efficient way to build wealth over time.”
Studies show that individual investors consistently underperform the S&P 500 index by 4-6% per year.
And even 90% of investment professionals fail to beat the S&P 500 over the long run.
But financially smart people understand that they don’t need to try and outperform the market in order to get rich.
They realize that simply getting ‘average’ market returns (those of the S&P 500) is enough to build wealth through the power of compound interest.
For example, by investing $5,000 per year into an S&P 500 index fund (with a historical return of 10.4% per year), you could end up with:
- $80,455 after 10 years
- $292,961 after 20 years
- $854,250 after 30 years
- $2,336,778 after 40 years
- $6,252,561 after 50 years
Read also: 3 empowering truths that help you reach your fullest potential
Invest In Yourself
“Investing in yourself is the most important investment you’ll ever make,” writes Collins in The Simple Path To Wealth.
By investing in your education, skills, and network, you can massively increase your earning potential.
Wealthy people understand that their most valuable asset is their capacity to create wealth.
This is why they continuously invest in books, courses, masterminds, or coaches that help them acquire more skills and knowledge.
Contributed by Jari Roomer
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