Most of us “know” certain strategies for wealth building. Save X amount of dollars each month. Invest 70% of your income in stocks, 30% in bonds, and 10% in real estate. Pay yourself first. Avoid debt. Have full coverage car insurance. Diversify your assets via the stock market. But do we implement such strategies?
The average American household has a net worth of $97,300, according to the latest U.S. Census Bureau data. But that number is heavily skewed by the nation's wealthiest households.
The median household net worth is only $64,700. If you're familiar with statistics, you probably know that the median is a better measurement of "the average" than the mean (average) because it's not skewed by a few extremely large values (i.e., wealthy households).
If you have $64,700 or less in net worth, you're in the majority and your financial life is fairly typical. But if your finances are fairly typical, it's likely that you're not on track to achieve your financial goals.
You Don’t Try to Gamble Your Way to Wealth
Don’t try to gamble your way to wealth. It’s not going to happen. You can go to Vegas and try to win the big one, but in reality, the odds are stacked against you. The casino makes money and most everyone else loses money.
There are some people who have beaten the system. One such lucky individual was able to make a claim for their gambling fame: “After 10 times of losing $1,000 each time, I figured it out and won $10,000.” Does that sound like a fun way to spend your time? He is good at what he does, but that doesn’t mean it is an easy way to get rich quickly.
Your best bet is to put your money into something that will grow over time. Investing in the stock market will help you build your wealth over time if you have patience. Every American millionaire became one by investing their money in the stock market through mutual funds or portfolios of stocks and bonds.
You Don’t Buy Items You Can’t Afford
You Don't Buy Items You Can't Afford. Further, you don't charge things you can't afford to pay off each month. If you can't pay cash for it, you can't afford it. Period. (And if you don't understand why that is, check out The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness).
You Don't Spend More Than You Earn. This is the foundation of The Total Money Makeover by Dave Ramsey and we would argue that this is the most important rule in all of personal finance. If you spend more than you earn and depend on credit cards to balance your budget each month, then your finances are a ticking time bomb waiting to go off.
You Don't Gamble with Money You Can't Afford to Lose. Gambling is not investing, nor should it be viewed as such. Gambling with money you can't afford to lose will only lead to regret—no matter what happens with the stock market or whatever bet you place at the blackjack table .
You Don't Fall Victim to Lifestyle Inflation . If your lifestyle increases when your income increases, then how will your lifestyle ever be able to catch up?
Windfalls are for Buying Freedom, Not luxuries
When you get a windfall, whether a tax refund, an inheritance, or a big bonus at work, it's tempting to start thinking about all the ways you can spend it.
There are times when spending money is important, of course. For example, paying off debt is usually the right move (though there are exceptions), and if you have an emergency fund shortfall, that's the best use of your money. But after that?
Pay yourself first: Investing in index funds should be your first move with any windfall.
It's tempting to think that once you've paid off debt and funded your retirement accounts for the year, you should start thinking about buying that big thing you want. But in reality, if you're buying things with money from your windfalls instead of using that money to invest for the long term, you're doing it wrong.
If you want to buy something nice with your windfalls instead of investing them in index funds, go ahead. But realize that this means trading "freedom" down the line for short-term pleasure. And while there's nothing wrong with some short-term pleasure now and then, it shouldn't come at the expense of future freedom!
Unfortunately, the single biggest obstacle when it comes to becoming wealthy is not the difficulty of making a lot of money; it's the mental barrier that keeps you from doing so. A large part of overcoming this barrier is to dispel the myths about wealth and personal finance that society has instilled in us from our earliest days. The simple truth is, there's nothing inherently difficult or complicated about being wealthy. It just takes a little bit of time, practice, education and fortitude to gain the knowledge needed to do so.