I Will Teach You To Be Rich..... Starting With Conscious Spending

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FACT: You cannot become rich wealthy without controlling your spending....consciously. 

I cross out rich because, in my eyes, rich is temporary and is seldom beneficial long term.  Many athletes, celebrities and lottery winners are rich, but if they do not practice conscious spending, then they are not rich for long.

According to a 2010 study by researchers at Vanderbilt University, the University of Kentucky and the University of Pittsburgh, the more money you win in the lottery, the more likely you are to end up bankrupt.  As a matter of fact, according to this study published in The Review of Economics and Statistics, many of them become bankrupt within 5 years of scoring a big win.

The average professional athlete in the United States will make more in one season than most of us earn in our entire lives.  However, according to Wyatt Investment Research, 78% of NFL players, 60% of NBA players and a large percentage of MLB players file bankruptcy within five years of retirement.

Most people's stinking thinking causes them to assume that they are broke because they don't make enough money.  However, according to my research, more money does not fix financial problems.

What does, then? CONSCIOUS SPENDING
Of course I'm oversimplifying things a bit.  However, if you read any of the articles or books about the habits of wealthy people with a net worth over a million (especially those who had modest income levels during their working years), you will find that one of the main ways they were able to save and invest their way into millions was to consciously spend on the money they earned, so that a large portion of it could be used to build their wealth.

In chapter 4 of I Will Teach You To Be Rich, Ramit Sethi focuses on conscious spending.  Although Ramit calls it conscious spending and says that he doesn't use budgets, the bottom line is that he does.....and you need to, as well, if you want to be rich and win with money.  He says that conscious spending is deciding where you want to spend your money up front, instead of spending it on random things here and there.  Deciding what you don't love and are not that important to you, so that you can cut back mercilessly on those things, in order to have money to spend luxuriously on those things that are important to you.

So here are the steps that Ramit suggests to create a Conscious Spending Plan:

Step 1: Create 4 major buckets where your money will go. 

Step 2: List every expense that you can think of that falls under the 'Fixed cost' category and fill in the dollar amounts for each.  A good rule of thumb is that your fixed costs should be 50-60% of your take-home pay. 

Once you've gotten all your expenses filled in, add 15% for unexpected expenditures or items you may have overlooked.  According to Ramit, a flat 15% will cover you for things you haven't figured in and you can get more accurate as time goes on.

Once you've got a fairly accurate number here, subtract it from your take-home pay.  Now you'll know how much you'll have left over to spend in the other categories.  Plus, you'll have an idea of a few targeted expense areas that you can cut down on to give yourself more money to save, invest and do the other things you love (See how this kind of sounds like a budget to me?).

Step 3: A good rule of thumb is to invest 10% of your take-home pay for the long-term.  For the record, long-term investing typically means 401(k), Roth IRA and other retirement-type savings vehicles. 

Calculate the amount and automate it.

Step 4: Short-term savings could be things like Christmas gifts, a vacation, a wedding or a down payment on a house.  This should be no more than 5-10% of your take home pay.

Calculate the amounts for the various accounts and automate a separate savings account for each.

Step 5: Feel free to spend whatever is left on whatever tickles your fancy!  If you want to use that money to invest more, do it.  If you prioritize travel over early retirement, hit up every country in the world.  Sky is the limit!  You can spend guilt free because all of your obligations are already taken care of. (Word to the wise: Just don't overdraft)

I should mention that if you don't make enough to fit in these to categories, you need to do one of two things:

1. Find a way to cut back some of your expenses.
2. Find a way to make more money.

Ramit offers some great ideas in his book on cutting expenses, negotiating higher salaries and freelancing.

Read my previous blogs for more information about Ramit Sethi's, I Will Teach You To Be Rich.  Below is an outline of the topics covered in previous chapters and a link to my blog post about each chapter/topic.

• Week 1: Optimize Your Credit.....Cards
• Week 2: Optimize Your Bank Accounts
• Week 3: Get Ready To Invest

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I Will Teach You To Be Rich And Get Ready To Invest

I Will Teach You To Be Rich And Get Ready To Invest

 

Welcome to This is me…..Then!  If you like what you see, subscribe here for free updates, or you can “like” my Facebook page here and receive new posts in your news stream.  Once you like my page, you can choose to see posts in your newsfeed first or receive a notification for each post made.  Thanks for visiting!  This post may contain affiliate links.

 

Week 3: Get Ready To Invest

Open your 401(k) and Roth IRA -- even with just $50

 

I am reading I Will Teach You To Be Rich by Ramit Sethi.  This book provides a 6-week step-by-step guide to getting your finances in order to become rich. 

Week 1 focused on optimizing your credit.
Week 2 focused on opening and optimizing your bank account.
Week 3 focuses on teaching you to get ready to invest.

This chapter will discuss why you should invest and the best way to start investing your money and how to set up the process in a week.

THE WHY
A millionaire is not a person who makes $1 million or more per year.  A millionaire is someone who's net worth is $1 million or more.

On average, millionaires invest 20 percent of their household income each year.  Their wealth isn't measured by the amount they make each year, but by how much they've saved and invested over time. 

Investing is the single most effective way to get rich!

THE HOW
Step 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100% of the match.  This is free money and there is, quite simply, no better deal.

Step 2: Pay off your credit card and any other debt (excluding any primary home loans you may have outstanding).  If you can't pay this off immediately, set up a plan to pay off your debt within a specific amount of time.

Step 3: Open up a Roth IRA and contribute as much money as possible to it, up to the maximum allowed by the Internal Revenue Service.

Step 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it, up to the maximum allowed by the Internal Revenue Service.

Step 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there.  Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.

*Please note that my philosophy varies slightly from what Ramit suggests in his book.  My how, which takes into account Dave Ramsey's Baby Steps, would be the following.

Step 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100% of the match.  This is free money and there is, quite simply, no better deal.

Step 2: Pay off your credit card and any other debt (excluding any primary home loans you may have outstanding).  If you can't pay this off immediately, set up a plan to pay off your debt within a specific amount of time.

Step 3: Open up a Roth IRA and contribute as much money as possible to it, up to the maximum allowed by the Internal Revenue Service, but no more than 15% (minus the % you have already contributed to 401(k)) of your income.

Step 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it, up to the maximum allowed by the Internal Revenue Service, but no more than 15% (minus the % you have already contributed to 401(k) and Roth IRA) of your income.

Step 5: If you still have money left to invest, open a regular nonretirement account  and put as much as possible there.  Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.
              5a: If you have children, open an ESA or 529 plan to save for their college education.  If not, skip to 5b.
             5b: Use all extra money to pay off your home early.  If you don't have a mortgage, skip to 5c.
             5c: Open a regular nonretirement account and put as much as possible there.  Also, consider investing in yourself: Whether it's starting a company or getting an additional degree, there's often no better investment than your own career.


BUY BOOKS HERE:

I Will Teach You To Be Rich by Ramit Sethi

The Total Money Makeover: A proven plan for financial fitness by Dave Ramsey

Want to be a Millionaire? Start Here!

*The below passage is a composite of information retrieved from Dave Ramsey and the author of The Millionaire Mind, Dr. Thomas J. Stanley. 

I was actually doing a 10-day reading plan on what the Holy Bible says about money.  Today's topic was all about integrity and how it plays a large role in the lives of those who have lasting wealth.  It also talks about the role that integrity plays in all areas of your life, not just finances.

When I truly looked at my life....When I truly looked at the life of those around me, both personally and in the public eye, I can truly say that this philosophy holds true. 

There is a definite correlation (my husband's statistics class is having an effect on me) between LASTING happiness/success and integrity.  I know several people who have made loads of money, moved up quickly in business and have acquired what appears to be a great family unit.  Those that lacked integrity have always fallen in the end.  They've gotten demoted, lost their families, gone to jail, become mentally depressed, etc.

Integrity is not all about being a 'good person.'  Frank Lucas (American Gangster....duh) was a great person, if you look at how he fed the poor people in Harlem and employed people in various businesses around New York and New Jersey.  He took care of his mother and made sure that all of his family wanted for nothing.  However, his integrity lacked.  Sure, he cared about his family.  Most of the other 'good' things he did were mainly used as a means to cover up his lack of integrity.  In the end, Frank Lucas' entire empire was taken down and he spent many years of his life behind prison bars. (This is an extreme case, but this philosophy holds true in less dramatic situations as well....think along the lines of the mistress, the adulterer, the person who doesn't pay tithes because they have too many bills, the person who does the least amount of work to be viewed as 'doing their job' at work, the person who steps on whomever is in their way in order to get to the top, etc., etc.).

I am far from being rich and not even close to being a Millionaire, but I do attribute the things that I do have to my level of integrity.  I also attribute my deficiencies to the areas where I lack integrity. 

So much was going on in the beginning of 2014 that I never took the time to sit down and map out my goals for the year.  Despite a few setbacks, I was able to have a very successful 2013, achieving almost every goal I set out to achieve (some things are just out of our hands and must be turned completely over to God.)  I've decided that in 2014, I would like to work on my integrity.  With a daughter on the way, I really want to be an example of how a woman should be.  I want her to grow up loving and admiring me, not just because I am her mother, but because I am strong, driven and truly a woman of integrity. (see commentary below)

In his book The Millionaire Mind, Dr. Thomas J. Stanley studied the habits of several hundred individuals with a net worth of at least $10 million. He really wanted to find out what makes the typical millionaire tick and uncover any common characteristics that contributed to their wealth.

As he examined the results of his interviews and surveys, Stanley found a definite connection between personal integrity and financial success. In fact, he ranked integrity as a prime predictor of wealth potential - even higher than an individual's chosen business or industry.

In other words, integrity matters!

The reason so many people struggle with building wealth is that they also struggle with integrity. They lack a basic commitment to honesty. That's a strong statement. In fact, it may be so strong that you think it doesn't apply to you. But if you're breathing and if your heart is beating, you have wrestled with being completely truthful at one time or another - and some of those struggles probably had something to do with money.

Simply put, there are two ways to make money and build wealth. You can rely on dishonesty, or you can stay completely committed to integrity.

Dishonest money may seem to come more easily, but it never lasts. It dwindles away like sand running through our fingers. But honest money, gained through hard work and investment over time, grows. It provides security - not to mention a clear conscience.

Given the current harsh economic conditions, it may be tempting to compromise integrity for short term gain.

In the long run, however, economic gain is easier and more psychologically rewarding if one is truthful.  Millionaires rated integrity (being honest with all people) as the number one factor out of 30 that explains their economic success.  Note that these 733 respondents represented the top 1% of the wealth holders in America.  Jon, one of the respondents and a wealthy entrepreneur, attributed much of his success to what his father taught him about integrity: Never lie.  Never tell one lie.  If you tell one lie, you will have to eventually tell fifteen more to cover up the first lie.  In turn, each of these 15 requires 15 more or 225 lies and on and on.

Integrity matters - in your finances and in every other part of your life - because a moral breakdown is not a victimless crime. Dishonesty will deeply wound you and those around you. Unless you hold yourself to an ultra-high standard, you will walk through life with an emotional and spiritual limp.

Fortunately, it's not too late to correct course. If you've skimped on integrity in the past, now's the time to come clean - to yourself, to others and to God. Repair that chink in your armor today.

Remember, integrity matters!

There are few topics in life that I hold near and dear to my heart.  Building wealth is one of them. 

 

I'm not exactly sure how I got here, but the only explanation I can think of is that God gave me this gift.  I did not grow up knowing anyone with wealth or money.  There was just something in me.  I can still remember creating ridiculous businesses as a child where I would get my little brothers to search the entire house and find unclaimed change.  As a reward, I would give them a portion of the money found or some kind of gift and save the rest for myself.  I remember when I got my first job at the age of 16.  I worked a few hours a week at KFC.  I remember saving all my money to buy my sister and I some respectable clothing to wear to school and on the weekends.  I also remember having money leftover long after I quit my job.

 

Anyway, I love when I come across articles that have really good explanations on how to build wealth.  This is one of them (see below).  The only thing I would change is how much you should invest in company-sponsored 401(k)/retirement plans.  I would not contribute the maximum amount they allow, but instead would contribute the maximum amount they will match.  My job will match up to 6% of your salary, but will allow you to contribute much more.  I contribute 6%.  If you want to save additional amounts for retirement, I would suggest a ROTH IRA.

 

Investing

Steps to building wealth

By Bruce W. Fraser • Bankrate.com

Remember playing Legos as a kid? You could quickly take a random pile of blocks and build something solid. The steps to building wealth are not so different, as the process involves a series of small decisions that move us along, one building block at a time.
"It is from those daily decisions that individuals build wealth," says J. Landon Loveall, founder and president of Cumberland Wealth Planners in greater Nashville, Tenn. "What you do now will determine where you are financially 20 years from now."
The steps to building wealth begin with a clear intention to attain it. After all, accumulating money is not a haphazard occurrence, but a deliberate process.
Once you determine that attaining wealth is a priority, focus your energies on maximizing your income, saving a portion of it and investing it for growth. Building wealth also requires you to make decisions on potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Building your income

Your income represents the foundation upon which you build lifetime wealth. The higher your income, the greater your potential for accumulating significant assets.
When you're young, the value of your future earnings is your No. 1 financial asset. Find a job you love, invest in educating yourself and keep abreast of changes in your career field.
"The lifetime return for making these investments at this time is greater than saving in Roth IRAs, or any investment, even factoring in the power of compounding," says Certified Financial Planner Joe Alfonso, founder of Aegis Financial Advisory in Santa Clara, Calif.
To stay on top of your field, take advantage of college savings plans with tax-favorable characteristics that are available to students of all ages.
Going hand in hand with earning money is the ability to live within your means and plan for contingencies.
"By far, the most destructive forces to building wealth are inertia, procrastination and, ultimately, magical thinking -- couples passing away peacefully and synchronously just after they spend their last dollar," says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management in Purchase, N.Y. "They simply fail to plan, not only for retirement, but also possible obstacles they will face on the way to retirement."

Saving your money

Saving money is the next step to building wealth. How much you save is a measure of how efficiently you use the wealth-building opportunity in your income. In their book, "The Millionaire Next Door," Thomas J. Stanley and William D. Danko discovered that self-made millionaires are very efficient at turning income into wealth.
Ultimately, it comes down to a balancing act. "The most important decision is how to balance current spending with future savings, or living a good life now versus saving for a great life in the future," says Loveall. Both he and Alfonso advise clients to save at least 10 percent of their annual income.
Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D., would double that to 20 percent or more "until you have six months to one year of living expenses for an emergency fund."
In addition to creating an emergency fund, Kahler, co-author of "Wired for Wealth," advocates opening a separate savings account for purchases of future cars, car repairs, vacations and Christmas gifts. The rest of your income can be spent on current consumption.
"For most people, this means living on 30 to 60 cents out of every gross dollar you earn," he says.
Saving can be an easily accomplished, automated process when signing up to contribute to a workplace retirement plan such as a 401(k). Kahler warns against "leaving money on the table if your employer offers a match on a 401(k) plan. It's like turning down a guaranteed 100 percent return. It's a no-brainer."
He suggests maximizing your contribution. Currently, the contribution limit is $17,500; $23,000 for those 50 and older. If you're truly motivated to build wealth, after maximizing your 401(k), contribute to an IRA. The contribution limit is $5,500; $6,500 for those 50 and older. (The tax deductibility of IRA contributions may be limited if you contribute to a workplace plan and your earnings exceed certain levels.)
If self-employed, set up a retirement plan that will allow you to invest as much as possible. Investing in a tax-sheltered account such as a Solo 401(k) cuts taxable income now and enables you to build wealth by deferring taxes until you take distributions.

Putting your savings to work

Wealth-building strategies include investing in paper assets such as stocks and bonds, buying income-producing real estate and owning a business -- or all three.
Experts generally agree on the importance of such core investment principles as keeping a balanced and globally diversified portfolio, and diligently rebalancing to maintain your investment plan. Maintaining a long-term perspective is also important.
"Successful investing is about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns," says Einberg.
Studies have shown that an asset allocation policy can explain most of a portfolio's investment returns over time. When investing in stocks, diversifying across markets both domestic and international, developed and emerging, is key, says Alfonso. For bonds, closely managing credit and maturity to avoid taking imprudent risk is also important.
Passively managed funds that mimic an index allow investors to build diversified portfolios of inexpensive funds. Actively managed funds generally cost more and are susceptible to style drift, given the leeway managers have in carrying out their investment strategy, says Alfonso.
When choosing investments, your tolerance for risk will likely dictate your asset allocation. Professionals with steady paychecks and generous employer retirement benefits usually can tolerate more risk than a salesperson earning commissions or a young investor starting out -- though young investors can afford to dial up the risk by investing more in equities since they have plenty of time to make up any losses.
Beyond stocks and stock funds, many investors are diversifying into nontraditional asset classes, such as commodities, managed futures, merger-arbitrage and market-neutral or long-short funds, as well as absolute-return mutual funds. These "alternative" funds aim to hold up in all types of markets with less volatility. They also help to fight inflation -- that seemingly benign annual increase in the price of goods and services that actually destroys your purchasing power over time.
While choosing non-correlated assets to increase diversification is important, Alfonso advises investors to stick to a prudent investment strategy, regardless of market conditions. "Keep investment costs as low as possible; net returns will be higher. And, most importantly, never try to time the market."
As famous investor Peter Lynch once said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."