Money and finances can be as complicated as you want them to be.
I'm sure we could sit here forever discussing any number of strategies and philosophies focused on growing wealth and becoming rich.
But if you take a step back you'll see at a basic level we're all playing a very simple game.
The game of living below your means.
This game is not overly complex, yet a lot of people struggle to win. Why?
Because they don't realize they're playing the game.
So let's fix that.
In this post, I will explain how you can constantly grow your wealth by living below your means and investing your savings.
What is living below your means?
When I said the game was simple I wasn't joking.
Living below your means is just another way of saying spend less than you make.
That's it. That's the answer.
Why is living below your means so hard?
Well there's two different sides to this question.
Living Paycheck to Paycheck
On one hand, some people work hard to pay rent and put food on the table to support their family and still barely make it by each month.
This is just a reality of life and not necessarily a sign of carelessness or any wrongdoing. Improving your situation in this case involves making drastic shifts in your life to put yourself in a situation where you can increase your income.
On the other side, I would almost always look to lifestyle inflation.
The Curse of Lifestyle Inflation
I want to write a post solely, on lifestyle inflation, but today I'll give you the short version.
As people make more money, they spend more money.
It's the reason you hear about professional athletes and other people that seem set for life going broke.
It's a common mental pitfall to think, "Hey if I'm making an extra $X, that's $X more I have to spend."
No.
If you're constantly looking to spend everything you've earned you're losing the game. You'll never grow your wealth.
The 2 Step Plan
As I promised I'm going to discuss the 2 step plan to ensure that you are consistently growing your wealth. It's going to sound so simple that it may seem unhelpful but stick with me.
Step 1: Live Below Your Means
Step 2: Invest What You Save
How to Live Below Your Means
This is not necessarily a game of who can pass on the most avocado toast.
Living below your means requires you to shift yourself in a certain mindset.
Don't look at transactions or purchases as a source of happiness or achievement, because that will drive you to constantly spend.
Understand how to be content with a lifestyle you can comfortably afford.
Regardless of your lifestyle, each pay cycle you should aim to put at least 20% of your paycheck towards saving.
If you can do that you're on the fast track to success.
So how can you cut back to get to 20? Here are a few ideas:
- Start budgeting and planning out your paycheck before you spend it
- Start living more efficiently week to week
- Cut down expensive purchases by tying them to personal rewards
- Reduce the amount you spend on fast-food and takeout
- Move to a more affordable living situation after your lease ends
Investing What You Save
So you're able to spend at least 20% less than you make. Cool. Now what?
Make that money work for you.
I discuss a thorough flow chart in my how to handle money post, but this is the idea:
Once you've taken care of your debt and your emergency fund you want to look for ways to invest your money.
High interest savings accounts are great, but if all of your savings sit there you're not making much progress over the next couple decade.
Look at investment opportunities such as:
- Retirement Accounts (Very Safe)
- Index Funds (Fairly Safe)
- Real Estate (Fairly Safe, High Cost)
- Individual Stocks (Very Risky)
- Bonds (Very very safe)
Winning the Game
The goal of all of this is to put yourself in a position where you don't have to work as hard (or at all) to sustain your lifestyle in the future.
If you can, avoid making life harder on yourself by always feeling the need to spend everything you have.
Living below your means is always, and will always be the key to long term financial success.