In recent years, the number of self-made millionaires has continued to increase. This shows that anyone can become wealthy and live the life of their dreams. Imagine what you could do if you had more money right now? You could spend more time with your family or travel around the world. Whatever your use with more money, here are three golden rules you should follow!
Rule #1: The rule of simplicity
The first rule all money masters follow is the rule of simplicity. From the name, the rule focuses on keeping everything that involves their finances simple. They understand that when a particular topic is complex, it becomes difficult to follow. For instance, you might find it difficult to understand the conversation between 2 particle physicists if they’re using scientific terms and you don’t have a background in that field. However, you might be able to make sense out of their discussion if they use everyday language and relate their discussion to real-life examples. While finances have nothing to do with particle physics, you must understand that if you want to become a money master, then you have to follow the rule of simplicity.
So how do you apply this rule? Firstly, you must understand your finances by tracking how you spend your money and how much you make. Therefore, you must track your expenses to know where you’re spending money every month. You can do that simply by writing out everything you buy for the next month or review your account statement if you use the same credit card to pay all your bills. Also, it’s important to categorize your expenses so it will be easier for you to get more detailed financial information to play with.
Furthermore, you must determine what your financial goals are for you to be able to create an effective plan for achieving them. For instance, your financial goal may be that you want to retire at a certain age or save money for a vacation or retirement. Whatever your goals are, remember to keep them simple if you want to achieve them. The next step after this is to automate your finances. That is, you must find a way to make your expenses, savings, and investing work with little or no involvement from you.
Remember that the first thing you’re expected to do is to understand your finances by knowing how much you make and spend in a year. However, you could also use the 50/30/20 rule to plan your finances. That is, you should spend 50% of your income on your most important needs, 30% on your wants, and the remaining 20% could go for saving, investing, and paying off debts. Note that this rule is only a guide and you can change it to meet your needs.
The next step is to automate the payment of your expenses. I think you’d agree with me that it can be difficult to keep up with coordinating all of your bill payments on a monthly basis. You’re probably so busy that at times, some bills go unpaid. Luckily, you can avoid this mistake by automating your bills. List out all your monthly bills starting with the fixed ones such as mortgage or rent, insurance, loans, credit card balances, utilities, subscriptions, memberships, transportation, etc. Thanks to technological advancements, most services have a recurrent payment system that allows you to set up a plan once, and all your bills are paid automatically after that. This may not be possible with some payments such as your monthly rent but you can talk with your landlord to see what options you have. The best part is that many banks allow you to do all this from the comfort of your home so you’ll never have to worry about paying your bills again.
Now that you understand how to pay your bills automatically, let’s talk about how to do the same for your savings. Most people are bad with saving money but with automation, you can be sure that you’ll have enough money to bank on at the end of the month. The first thing you’ll need to do is to create a savings account in addition to your checking account. You can go to your bank and set up a particular percentage you would like to send from your checking account into your savings account monthly. Believe me, you will learn to live with less money trust me.
Lastly, let’s talk about how to invest automatically so you’ll be better prepared for retirement. You can automatically contribute to your employer’s sponsored retirement account such as the 401k or an Individual Retirement Account. For your employer’s sponsored account, you can reach out to your HR department to ask for more information.
Overall, simplifying your financial life will make money management a breeze, will reduce stress and will allow you to avoid paying annoying late fees which you know are a total waste of money!
Rule #2: The 80/20 Rule
The second rule that all money masters follow is the 80/20 rule. This rule is also known as the “Pareto principle” and it was first formulated in 1895, and it has been proven repeatedly to be effective. The rule states that 80% of results come from 20% of the efforts made. In other words, your goal is to find out the few activities in your life that contribute to the greatest results and focus solely on those items.
This rule can be applied in many financial contexts which I’ll share with you now. The purpose of this rule is to help you find out the activities that would give the maximum return on your time, money, energy, and resources. For instance, the result from focusing on low-income activities all day would be lesser than the result of concentrating on high-income activities for a short period. A practical example of this is 20% of your customers are responsible for 80% of your income. If you focus your energy on selling to the remaining 80%, you would only get 20% of the total sales. However, if you focus your energy on selling to the 20%, you would have 80% sales and would be using your time much more productively!
Furthermore, this applies to your products and services. That is, 20% of your products contribute to 80% of your total sales and your goal is to focus your marketing efforts on this important 20%. This may involve spending more money on advertising the products that people want to buy or improving the quality. Another practical example of this rule is with your employees. Let’s face it, we all know which employees are putting in their best efforts every day and which are simply there for the paycheck. Your job is to ensure that you develop productive employees so they can bring in more revenue for your business.
Finally, this rule also applies to your daily life and the activities you engage in. Sadly, many people waste their time on low-value activities because they think they’re important. For instance, replying to people’s comments on your business’s social media page may seem like a very nice idea but it is something you can delegate to others while you focus on other important activities. Before you start any activity, always ask yourself “how much will this contribute to my success?” If the answer is that it will have a minimal impact then you may want to reconsider.
Rule 3#: The 10% Rule
The third rule that all money masters follow is the 10% rule. This rule states that you must invest at least 10% of your monthly income towards your retirement. Although there is no fixed amount that you need to save for retirement, some financial experts have been able to come up with some estimates that will help you save enough money for retirement. One of them is that you should have at least 25 times your annual living expenses saved up for retirement. Some financial experts also suggest that you should have at least $1 million saved in your retirement account. With this, it is assumed that you would have finished paying your mortgage and any other debts such as student and auto loans. With $1 million in your retirement account, you can live comfortably on $40,000 annually for 25 years. Therefore, I’ll explain how easy it is to save $1 million for retirement by following the third golden rule that all money masters follow. Also, I’ll be assuming that you plan on retiring at age 65 and I’ll show you how much you would have if you start investing 10% of your monthly salary at 25, 30 and 40 years of age. Finally, I’ll share with you some of the assets you can invest in to ensure your retirement goals are met.
First, it’s important for you to know that the typical 401k portfolio generates an average annual return of 5% to 8% depending on market conditions. Therefore, for examples going forward, I’ll use 5% as the average annual return.
Starting at age 25 and assuming your annual salary is $100,000 and you invest 10% monthly, you would have a total of $1,213,859.54 at retirement.
If you start investing at age 30 and your salary is $100,000 annually, you would have $907,796.12 at retirement. You would need to earn at least $150,000 to have $1,001,985.14 at retirement investing 10% of your income.
If you start investing at age 40 and your salary is $100,000 annually, you would have just $480,091.03 at retirement. You would need to earn at least $210,000 to have $1,008,195.20 at retirement.
From these examples, you’ll notice that the earlier you start investing, the better. The reason why the total return for the individual who started investing the earliest is that said person gave their money more time to be compounded. That is, the earlier you start investing the more interest your investment will accumulate.
The accounts I would recommend opening are 401Ks and IRAs because these accounts offer tax advantages. A 401k account is your employer’s sponsored retirement plan while the IRA means an Individual Retirement Account. Both offer some tax advantages such as investing with pre-taxed income in traditional 401Ks and IRAs. Also, there is what is called a ROTHA account and this allows you invest with money that you’ve paid taxes and it is tax-free in retirement.
Now, if you’re wondering what you can invest in to ensure you have money on hand when you decide to retire, here are some of the best assets.
Some good assets include bonds, mutual funds, index funds, and stocks. You could also invest in real estate by buying rental properties and make passive income in the form of rent. In summation, you can become a money master by following the 3 golden rules! All you need to do is stay focused, be disciplined, have a plan, as well as follow and apply these rules strictly.