The Mindset Shift for Building Long-Term Wealth

When I graduated college, I didn't know much about managing my finances. Sure, I knew enough to make rent and pay my bills, but I was always stressed. I felt like I was always one emergency away from being broke.

The problem with lacking financial literacy is that you don't know what you don't know. You don't know how to help yourself. And you don't know who can truly help you.

Unfortunately, there are financial "advisors" that will take advantage of your knowledge gap to sell you "investments" that won't serve your goals.

Because there are many bad-faith actors in the industry, it's hard to discern the good recommendations from the bad.

Escaping The Paycheck to Paycheck Trap

I've always been a saver. And yet, for the longest time, life found a way to drain even my savings account. Thanks to years of hard knocks, I learned that I wasn't saving enough for emergencies. In time, I figured out how to save for rainy days. I'll now show you how I got started so you can have a financial "umbrella" of your own.

You've probably heard a few times that it's important to save or invest a part of your income. Even though this is common knowledge, 40% of Americans are unable to cover a $400 emergency. Why? Maybe because we don't see how saving $50 or $100 at a time can make a big difference? Or maybe because we didn't learn the importance of building a financial "buffer" for ourselves?

Wealth is built with consistent habits. It takes years of consistently saving and investing to reach financial independence. But small changes have a massive impact. And the most important part is to get started. As the saying goes, showing up is half the battle.

Let's say you set $100 aside each month. And let's imagine you put that money into an investment (such as an index fund) that grows 8% per year. After one year, you'll have $1,353. You'll have earned $153 on your $1,200 investment. Not bad!

After five years, your investment will be worth $7,500. In another 5 years, you'll have $18,500. This is how you turn $100/month into nearly $20k.

There are two ways to speed up the growth of your net worth. The first way is to find an investment that grows faster or pays higher dividends. The second way is to increase the amount of money you invest.

The first way requires that you know how to weed out scams or Ponzi schemes. Fortunately, the second way is easy for anyone to do. Let's start there - increasing the money you set aside each month.

A few years ago, I read the book, The Richest Man in Babylon. This book taught me a critical lesson. By saving 10% of your income, you can build wealth and escape the cycle of living paycheck-to-paycheck. It's as simple as that. It's not a quick path, but it's the real deal.

It only takes 10% of your income. Thanks to the power of compounding, that 10% will create a mighty nest egg. As long as you're consistent, you're going to multiply your net worth to levels you may not even think possible.

Imagine the freedom you'd feel knowing that no matter what life throws at, you're prepared. You'd probably be less hesitant to "fire" the job you hate. Or maybe you'd travel more or spend more time with your family. The most important things that money can buy are time and freedom of choice.

The Next Three Steps

The first step is to find expenses you can reduce or eliminate. You'll use the extra money to pay off any debts. If you don't like reconciling your accounts by hand, give Purple Aviator a try. This service helps you identify expenses you can eliminate. Purple Aviator sends you a simple PDF statement via email twice a month. It summarizes all your income and expenses. Ideally, your income should be 10% greater than your expenses so you can save that 10%. Building long-term wealth starts with escaping the paycheck-to-paycheck trap.

Purple Aviator is free right now and it only takes a few minutes to sign up.

2) Put that 10% to work. Pay off any credit card debt you have. If you don't have any credit card debt, go straight to saving. Save 10% of your income in a savings account. Each time you get paid, make it a habit to move that 10% into your savings account.

After you do this consistently for a year or two, you'll have a sizable emergency fund. This fund will ensure that you always have money ready for an unforeseen circumstance. You'll no longer go into debt when you have an unexpected expense. This is the first step in escaping the paycheck trap.

3) After learning how to save money consistently, you're ready to learn to invest. There are many ways to invest, so I'll leave this as a study exercise for you. When I got started, I searched for the most popular investing books and read a bunch of them. By consuming a ton of content on a particular topic, you can quickly learn the fundamentals. This applies to anything in life, not just finances.

Open Your Horizons

If you're able to imagine a brighter future, you can build it. The purpose of the economy is to create quality-of-life. It's our duty to ensure that we're benefitting from our participation in the economy. Be an active participant and take responsibility for your finances. In doing so, you'll make your dreams come true.

If you have any questions, feel free to contact me!