We all dream of becoming succesful some day, at least 98.5%
of us do, and being able to buy all those things we've always dreamt of, but could only see on TV (be they Rolls Royce cars, Gucci shoes, private jets, exotic hotels and resorts)...or may be so just want to stay above the poverty line ($1.5/day).
The truth is, you'll find several people on the internet who would give you general advice like work hard, be puctual..., rarely do you get advice which is as specialised as the one given below. And meanwhile it would mostly be applicable to those in the Western world at this point in time, it is good to remember that the world has now become a small box due to the internet and due to the interconnectivity of financial markets. In that light, those in non-western nations should also take this advice seriously. You can do most of the things below if you have a credit card.
Over at Quora, one of our members posed a question: How can young adults plan to be a millionaore? The responses he got were all fascinating; but one particular response caught my eye and the eyes of many others. It was the response given by Eric Scott, another one of our members. Here's Eric's answer.
Four Steps:View Answer on Quora
- Live below your means
- Build a cash buffer for the unexpected
- Pay off debt
- Invest
The above shows one possible path to $1M in just under 26 years assuming a $50k base salary, annual cost of living raises, investing 20% of your gross salary, and 7% investment returns. You can also download the Lifetime Investment Returns Google sheet and play with all the assumptions yourself.
Live Below Your Means
First you’ve got to start generating as much free cash flow as possible. Free cash flow = monthly money you earn and don’t spend . A solid goal for everyone is saving 10% of their gross salary, monthly. I know a few college grads that focus on it and free up 20% to 30% of their gross or more. 20% isn’t bad if you haven’t grown accustomed to spending your after college income yet. 30% requires a bit more dedication and sacrifice.
Average US college grads earn $45k. Assuming 15% for taxes, you’ll need to live off of roughly $2800/month at 10% saved, $2500 at 20%, and $2000/month at 30% saved. Example: You earn $45k. You pay 15% in taxes. You have $38,250 left. You invest 20% of your gross = $9k. You’re left with $29,250 which works out to $2438/month to spend on everything from rent and food, to laundry, vacations, and beers with your friends.
Build a Cash Buffer
Once you’ve freed up a chunk of money you’re not spending, you’ll want to save up until you have 3 - 6 months of cash on hand. Bad things happen. You’ll break your car, break your leg, or find out what “right sizing” means first hand. You need cash laying around so you can handle those bad things without panicking and liquidating investments.
Pay Off Debt
Mostly this refers to high interest rate debt. What qualifies for “high interest rate” can be a matter of discussion. With interest rates where they are today, anything over 7% like credit cards, and some car and school loans should be paid off before investing. Those loans are equivalent to high yield, no risk investment, which are tough animals to find in the wild. Catch them when you can. The middle ground loans in the 3% - 7% range I’d probably advocate putting a little extra towards to pay them off early. Anything under 3% is probably best paid using whatever minimum you can that still pays them off in 10 - 30 years.
Invest
Once you’ve created free cash flow, used it to save 3-6 months for a rainy day, and paid off your high interest rate debt with it, all of a sudden you’ll have a stream of money you need to do something with. Now it’s finally time to invest.
Take free money first. Many companies have some sort of 401k or retirement package where they match some portion of your contribution. Matching funds are FREE MONEY. Take that money by maxing out whatever your employer will match on.
It’s highly likely that after you’ve collected all your free money, you’ll still have a stream of free cash every month to invest on your own. There are three keys to wealth creation:
- other people’s companies (stocks and other equity deals)
- real estate
- your own company
Stocks are the easiest to get started with using small, monthly amounts.
- open a low cost brokerage account like Scottrade or Fidelity
- invest in a broadly diversified, low fee fund like SPY or VTI
- invest regularly and don’t touch it - try to keep your trading fees around 1% which means with Scottrade’s $7 trade, you’ll invest every time you accumulate at least $700 - usually monthly or every other month
The main key here is to stick with it, through the stock market ups and downs, and don’t touch the money. Understand that earning a strong return often requires that money to be left alone for 20 or 30 years.
While you’re getting all this rolling, I’d also recommend reading a few books on investing. Start easy with The Millionaire Next Door, The Wealthy Barber, and Rich Dad Poor Dad and if anything strikes your fancy, dig into those topics deeper. Rental properties, commercial buildings, individual stocks, and starting your own business can all be strong wealth builders and fun too. Once you’ve got a solid base using the above 4 steps, you should have a reasonable amount of investing knowledge, and a growing pool of capital to start branching out with.
As a final note, the above assumes a fairly average, college grad in the US. The averages certainly favor getting a college degree, and there’s a lot to be said about not getting into too much debt without a good reason while in school. Both seem like solid prerequisites to the above 4 step plan.
Sounds very much like easy advice to follow, eventhough vit may get a bit tough during the process.
My final jusdgement is that all in all, it's great advice that all of us young people should follow.
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