Personal finance isn’t complicated. In fact, if you do just 6 things right, you will become financially successful. Let’s keep it simple and get started.
1. Earn a Decent Income
If you don’t make any money, you will never get ahead financially. Forget about winning the lottery, getting an inheritance, or expecting the government to subsidize your lifestyle. The only way to build wealth is to work.
Jobs with a decent income include computer programming, engineering, accounting, nursing, dental hygiene, physician assistant, and radiology technician. Notice that you don’t need a college degree for all of these professions. However, you need to be intentional about targeting a profession that is in demand and pays a decent salary. Don’t get a degree in history and expect to make a livable wage without a significant uphill battle.
I would recommend targeting a household income of six figures or higher. This will be easier if you have a two-earner household. For example, you can get to six figures with two teacher salaries.
The reason for this target is that you need to earn enough to be able to save half of your income and still have enough left over for basic needs and a reasonably comfortable lifestyle. If you’re committed to saving half of your income, here’s what you will be able to spend per year at various household income levels.
Notice that if your household income is $50,000, it will be very challenging to live on only $20,000 per year. On the other hand, if your household income is $100K, it is much more reasonable to live on $40,000 per year.
2. Get Out of Debt
If you are in debt, you are paying interest on that debt and losing money every second. You need to be gaining money every second, not losing money every second.
If you still have debt, you need to attack it and annihilate it. This is not the time to be passive. This is the time to get intense, learn how to suffer and make things happen. There’s no magic here. Take 50% of your income and throw it at the debt until it is gone. Don’t buy stuff you can’t afford. Once your debt is gone, then take that 50% and save it.
3. Save a Large Portion of Your Income
You won’t get rich by saving a measly 5 or 10% of your income. You will need to save a very large portion of your income, such as 30-50% to build wealth and reach financial independence in a reasonable period of time (see chart below). Reduce your expenses. Learn how to budget. Avoid lifestyle inflation. Fully stock your emergency fund with 3-6 months of expenses. Fill up your 401k, Roth IRA, HSA, and if you have anything left over, stick it in a good ‘ol taxable account.
4. Protect Against Liability, Death, Disability, and Health Issues
While you’re building wealth, you want to protect against a catastrophic event that could devastate decades of savings. You need the following types of insurance:
- Health Insurance
- Car Insurance
- Disability Insurance
- Homeowner’s (or Renter’s) Insurance
- Umbrella Insurance
- Life insurance (if someone depends on your income)
There’s a bunch of insurance you don’t need, so make sure you’re familiar with those as well.
5. Invest Reasonably
Just like personal finance, investing doesn’t have to be complicated. If you’re investing in a tax-protected account such as a Roth IRA or 401k, just stick your money in a target date fund, total stock market index fund, or S&P 500 index fund and you’ll do just fine. If you have extra money for a taxable account, just fill it with a total stock market index fund and some municipal bonds if needed. Make sure to choose low-cost investments if at all possible. That’s it. You can make it a lot more complicated than this, but it’s really not necessary. If you start early enough, you can become a millionaire by 40.
6. Stay Married
There’s no better way to halve your net worth than to get divorced. This is not a blog on marriage advice, so I’ll leave it at that.
You really only need to do 6 things to become wealthy. These things are simple, but not necessarily easy. It will take discipline and steadfastness. But it is worth it if you want to earn your freedom.