Everyone defines financial success differently. For some, it may mean an early retirement — by the time you turn 40, perhaps — or having enough money to travel the world or start your own business. Or maybe you just want to stop worrying about money all the time.
While everyone has a different idea of what it means to “make it,” unless you win the lottery, the steps you need to take to get there are usually the same. Saving money and building wealth isn’t a complex pursuit, it’s just hard because there are so many ways to spend hard-earned cash.
But if you make these three moves, you’ll be well on your way to achieving your financial goals. Here’s the simplest possible guide to getting rich.
1. Pretend your paycheck is 20% lower
“It is a commonplace observation that work expands so as to fill the time available for its completion,” Cyril Parkinson wrote in 1955. “Parkinson’s law” applies to money too, as one of the best known rules of finance is that “expenses rise to meet income.” And the real problems start when you start spending more than you earn and when you confuse “wants” with “needs.”
Break the cycle of excess spending by paying yourself first. “If people try to pay for everything else first, and then save, they’ll often find that they’re left with nothing. But if people save first, and then pay their bills, they’ll force themselves to make ends meet,” the Balance explains. Automate your saving so that money comes directly out of your check on the day it is deposited into your account.
How much of your money should you aim to transfer automatically? Ideally, a minimum of 20% of your income. The 80/20 rule is a good basic rule of thumb that says you should keep all your spending to 80% of your pay and save the rest.
Look for ways to cut expenses by creating a budget, cutting cable and shopping with coupons to increase your savings — and bank your raises by immediately allocating income increases to savings before you get used to living on the extra cash.
2. Accept “builder” costs — not “loser” ones
The millennial generation is the most indebted generation in history, thanks to massive student loans. While borrowing to go to school is often unavoidable, taking on unnecessary debt is something you can and should choose not to do. Rather than owing back money, plus interest, see if you can pay in cash — or simply skip the purchase altogether.
“Any time you take out a loan or charge something on your credit card, you’re actually borrowing from the money you hope to earn in the future,” the Balance wrote. Interest makes everything you buy cost more, and you’ll be working many tomorrows to pay for the stuff you bought today. You’re basically making life really really hard for the future you.