So many people today are financially ignorant – it’s really quite embarrassing. I’ve always been good with money, so I feel like it’s my duty to teach you how to save it.
Obviously everyone wants to get rich, but few have the effort to make the money and even less have the self-discipline to save it.
Making money doesn’t mean anything if you don’t save it. A guy with a $100k/year salary who spends it all isn’t rich. Nor will he ever be. He will just look rich to the world by what he spends.
Table of Contents
- 1 Example:
- 3 Step 1. Lower Your Expenses and Save
- 4 Step 2. Invest and Grow Your Money
- 5 House Hacking
- 6 Final Thoughts
Money is most powerful when it uses itself to make more money.
No-one has gotten rich by saving alone, but no-one has gotten rich and sustained it without saving.
I get it, it’s not cool to save. But you have to make sacrifices today if you want to really live life in the future.
And I’m not talking about saving $2 a day by not getting your daily cup of coffee. That kind of saving is crap.
You have to drastically lower your big expenses – rent, car, food.
You shouldn’t be renting for a long period of time though. You should save enough to start buying real estate. That’s the simplest way out of the rat race – more on that later.
The simplest way I can put it, is to save at least 50% of your income. And if you’re really making a lot of money it should be closer to 75%.
If you’re barely making ends meet, try to get it as close to 50% as possible.
To some, 50% might seem like a crazy high number but that’s just because you’ve never saved more than 5% of your income, if ANY.
The average saving rate in America is 5% and honestly that shouldn’t even be called saving.
Want to know what 5% does for you?
Bob works for 40 years at $50k a year (after tax). Assume he gets a raise each year equal to inflation so lets just keep it at $50k in future value.
He saves 5% a year (which goes directly in his 401k), which equals $2,500 a year.
Now at age 65 after working for 40 years, he has only saved $100k. Assuming he averaged a 4% return in his 401k, he made an additional $137,563.79 in interest. This brings his grand total in retirement savings to $237,563.79
Since he only saved $2,500/year, his cost of living is $47,500 a year, meaning it would only take 5 years before he is out of money. Even if he reduced his cost of living to $30,000 a year, he would only have 8 years before he runs out of money.
To sum things up, Bob worked for 40 years to live work-free for 5 years, all while worrying about whether or not he’s going to die before he runs out of money. Sounds fun huh?
That is why 5% is a completely unacceptable amount to save. On the other hand if Bob had saved 50% of his income, he would have $2,375,637.89 when he retires (enough to last 47 years at a $50k/year cost of living).
And that is only with 4% returns. Later I’m going to show you how to blow 4% out of the water.
You honestly have to be really stupid to not retire a millionaire. Anybody that saves can do this easily.
But – a million dollars isn’t cool, you know what is cool? A Billion dollars. (The Social Network).
Guess why so many celebrities end up bankrupt? They don’t save and one day their income stops.
There’s even shows on TV about thousands of people that have their lives ruined after they win the lottery. It’s not a coincidence that this happens to all these people, it’s because people who play the lottery are usually poor, stupid, and have awful money management skills to begin with.
Them winning $100 million dollars out of thin air isn’t going to solve their money problems because they don’t know how to spend/save it. They usually blow it all on cars and houses when they should have immediately put most of it into low risk investments.
You could give them an unlimited amount of money and they would still find a way to fuck it up.
Step 1. Lower Your Expenses and Save
Ok so you get the picture. Like I mentioned earlier, the first step to saving is to lower your major expenses.
If you’re making $50k a year (after tax) most people’s budgets probably look like this:
|Expense||Amount||Percentage of Income|
Notes: ‘Everything Else’ includes phone, internet, insurance, clothes, drinks, entertainment, etc.
I rounded $4,166 a month ($50k/year) to $4,000 to make easier looking percentages.
This is a decent budget as you are saving 25%, 5x more than the national average, but it’s still not good enough.
The only time saving 25% is okay is if you’re making less than $25k/year (after taxes).
With a few simple lifestyle changes to the table above, you can easily increase your 25% savings to 50%.
First, go get a roommate or live with your girlfriend (only after being together for 1 year), and cut your rent in half. Easy.
Next, go sell your car and get rid of that car payment. Go to Craigslist and get something for $5,000.
Lastly, cut $200 from ‘Everything Else’ by not going out as much, or just spend less when you go out. An easy way to do this is to just pregame with some vodka in your car.
Now you’ll have saved an extra $1,000 – bringing your new savings per month to $2,000 (50% of your income).
|Expense||Amount||Percentage of Income|
Step 2. Invest and Grow Your Money
Continuing with the example, now that you’re saving $2,000 a month, you have plenty of funds to start investing.
The next thing to do, is to diversify your investments into 5 different categories:
A. Safety Money – 10%
B. Fun Money – 10%
C. Retirement Money (401k) – 20%
D. Business Ventures – 30%
E. Real Estate – 30%
*The percentages are a suggested split you should divide your savings into. You can alter the percentages based on how you see fit, but use these numbers as a guideline.
A. Safety Money
Safety Money is money you keep in your checking account in case of an emergency or a big opportunity to invest in something. It’s always important to have liquid cash so you can move money around quickly.
Once you reach a certain number that you’re comfortable with, then you can stop contributing 10% to this account and instead add it to one of your other accounts.
B. Fun Money
Fun money is money that should be used in high risk investments such as picking individual stocks, venture capital, or private lending. This is money that you shouldn’t care if you lose, as there’s a decent chance for huge returns, but also huge losses.
Start out by picking a portfolio of 5-10 small/mid cap growth stocks. Diversify the stocks between sectors and do your research before investing. Keep track of your stocks and change things around if you have a good reason to do so. Eventually you’ll hit a home-run.
After you get some solid capital in this account then you can start having a lot of fun by investing in other people’s businesses in exchange for equity. This is called Venture Capital . If you hit it big in VC, you’ll pretty much be set for life.
C. Retirement Money
Retirement money should equal around 20% of your total investment portfolio. This is money that will deduct automatically out of your paycheck and into your employer’s investment offerings that you get to choose.
Most companies will match 50% of what you put in up to a certain percentage of your salary. Be sure to take advantage of this, it’s free money.
Keep in mind this retirement money should be considered a safety net. If you invest right in your other accounts, you won’t even care about this extra money when you retire.
D. Business Ventures
Now back to more fun. This account is where you invest in yourself. You become an entrepreneur and build a business.
Once again, this is an account that can yield massive returns. And you get to have something exciting and profitable to do once you have enough money to quit your job.
But, you shouldn’t spend the money in this account right away. Wait until you have a good product/service/idea that meets the 5 Commandments of Fastlane Business.
The 5 Commandments are called NECST and was coined by Author MJ Demarco who wrote Millionaire Fastlane: Crack The Code To Wealth and Live Rich For A Lifetime The Millionaire Fastlane is hands down the best business book ever written, and will totally change the way you look at the world after you read it.
It’s like you couldn’t believe you lived life the way you did before you read the book. It’s truly an eye opener.
The 5 Commandments:
Need – There has to be a demand for your product. Most people severely overlook this law and just assume there is a demand. Or they just think that their passion will be enough. Without demand, you won’t be successful no matter how much passion or effort you put in.
Entry – How hard is it to start doing business in your niche. How much time and capital do you have to put in and how big are your competitors? If want to compete with Google, it’s probably not going to work out.
Control – How much control do you have in the business. Do you own the business 100% or are there other partners you have to work with? Does your business heavily rely on one service that could wipe your income out overnight? If Google disappeared how much income would you lose?
Scale – You must create a business where you can service an unlimited amount of people. Owning a barbershop creates a limit on how much money you can make. Even if you owned 1000 barbershops, there will still be a limit. You can solve this problem by starting a business on the internet.
Time – How many hours are you putting into your business? Does your business only make money when you work? If you want to reach real wealth, you must separate your time from your income. You might be working long days at first, but all of that time should eventually be converted into passive systems. You could take a month off and still get paid from your previous work.
E. Real Estate
And lastly, the heavy hitter; Real Estate. This is where the majority of America’s wealthy make their money. Real Estate is hands down the best asset class to invest in for a few reasons:
Appreciation – Overtime the value of any given property is likely to go up. When the time is right, you can sell for a big payday.
Cash Flow – Even if a property doesn’t appreciate, a good property will be cash flow positive – meaning you’re earning an income by sitting back and collecting rent.
Leverage – Real Estate is very unique because banks will give you a loan equal to 70-80% of the purchase price. This high leverage allows you to generate much greater returns than alternative investments.
Tax Benefits – There’s another very lucrative benefit in Real Estate called a 1031 Exchange. The 1031 Exchange allows you to avoid paying capital gains tax on a sale, as long you use those funds to purchase another property within 180 days. Saving 35% in taxes each time you sell a property is huge.
If you want to get started in Real Estate, the easiest and most practical thing to do first is to buy a quadruplex. A quad is a 4 unit apartment complex that is still considered residential real estate. This means that you can take advantage of a special loan called a FHA loan.
A FHA loan is very helpful to new investors because you only have to put down 3.5%.
You can buy a $200,000 apartment complex for only $7,000 down!
What you do next, is live in one of the units and rent out the other 3. You will receive more than enough rent to pay all of the expenses and you will be effectively getting paid to live.
With an FHA loan you have to live in one of the units for at least a year, but why wouldn’t you? You will be saving money by not paying rent at some other place.
You can passively collect rent for as long as you want and then sell when the property appreciates. You can then take advantage of the 1031 Exchange and buy a bigger apartment complex. Repeat this formula indefinitely, and make a lot of money doing so.
That’s just the basics, but you get the picture. And that’s only one of many ways to make money in Real Estate. However, it’s the easiest place to start as you get to live for free and save up a lot of money to deploy in future ventures.
You now have a roadmap for financial success. There’s no excuse to be poor. You can be as rich as you want, it all depends on how much you save and invest.
Like with everything, make some sacrifices at the beginning, and you will be greatly rewarded in the end.
Do you really need a brand new car? Or would you be better off buying something cheap off craigslist and investing the rest.
You have to start looking at the opportunity cost of every purchase you make. Every piece of bullshit you buy could always be put to better use – a use that overtime will start making you money.
Why work for money when your money can work for you?
And don’t forget the people that save 0% of their income and rent an apartment their entire life. They end their lives with 12 cents in their bank account and the most it ever gets up to is $500. They work all week and spend it all in two nights.
How sad is that. If this is you, is that how you want to live for the rest of your life?
Go write down a budget to get you saving 50% of your income and start sticking to it. Open up some new accounts and divide your savings into the 5 categories I mentioned earlier – Safety Money, Fun Money, Retirement Money, Business Ventures, and Real Estate.
You now have the knowledge to be successful; it’s all up to you.