Achieving true financial wealth is no easy task. Firstly, you have to generate an income. Secondly, you have to have expenses that are less than the income you generated. Finally, you have to take the difference remaining and invest it wisely. These three things are what I consider to be the pieces to the financial puzzle. I will illustrate how all three pieces are essential to creating a financial future you will be proud of.
Piece 1: Income
For the majority of us, this is generated from our job. We trade our hours for money. The best part about this piece is that there is no limit to how high your income can be. Additionally, there are many ways to generate income. Getting an extra job part-time on the weekends is an option. Unfortunately, there are only so many hours one can trade for money. This is where you must get creative. Making more money each hour is one way to generate more income. There is also residual income and ways to generate passive income one can do to expand upon this number. Get creative and don’t limit yourself.
Piece 2: Expenses
Keeping expenses low is similar to a good defense. Limiting expenses in various categories not only holds you accountable for your money, but it also can allow you to achieve certain financial goals faster. Budgeting is the easiest way to monitor your expenses. See what categories are holding you back, look at ways to reduce or eliminate them. Gym membership you’re not using but still paying for? Have you renegotiated your cable bill recently? Much like the income piece of the puzzle, a little creativity in your expense category can go a long way.
Piece 3: Investing Wisely
You make money, you spend money. Hopefully, the difference between these numbers isn’t negative. If it is, you’re digging yourself into debt. If the amount is positive then saving the remainder is often advised, but how you save that money is more important than the actual act of saving. Placing savings into low-interest savings or checking account is a good way to devalue your money quite fast. The U.S. economy has an inflation rate that is around 3% per year. This means you need to invest the difference wisely, and that means in an investment vehicle that yields return greater than 3% per year. Vanguard can make this investment strategy easy. Simply open a fund, pick an asset mix suitable to your risk tolerance and let the money compound over many years. Of course, it is always advisable to have an emergency fund on hand where you won’t need to dip into retirement or other investments.
When reviewing your financial past, your financial present, and your financial future, all three of these pieces are essential. Generate income, have expenses that are less than that income, and invest the difference wisely.
Budget Smart, Invest Wise