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The rule that's the base of all wealth
Thursday, 25 August 2005
Go to any bookstore and you'll see hundreds of books on making money. Financial institutions offer a dizzying range of products to make you rich. Despite this often confusing mountain of information, secret of all wealth is based on one simple rule.
That rule is: Spend less than you earn.
Without following it, it's impossible to get rich.
Sound too simple and obvious? Surely this is just common sense?
Perhaps, but it's amazing how few people follow this rule. In fact, a big chunk of the population in most countries do the exact opposite. Proof of this point is available in any statistic about credit card and other personal debt use. If spending less than you earn is the secret of wealth, many people seem determined to head down a path towards poverty.
If you're spending more than your income, your wealth is going backwards. If you're spending less, it's racing forward. The secret of wealth is as simple as that.
Of course, this doesn't mean never get into debt. Many great fortunes are built on the back on shrewdly invested debt, and few great businesses started out with positive cash flow. But all successful debt-based investments eventually return more than they cost. If they didn't, the investment would be considered a failure.
What this lesson does tell us is that consumer debt for goods such as cars, holidays and clothing is something we should never take on. If you have to borrow to buy it, it's not worth having.
As an exercise, you should calculate your income from all sources and your expenses to all sources. This can generally be done using a software package such as Microsoft Money or Quicken without too much effort. The results of doing so will give you a clear picture of whether you're following the golden rule. If you are, you've got little to worry about. If you're not, it's time to cut down some of those expenses.
With every payment you receive from any source - be it a job, an investment, or an inheritance - put at least 10% of that money into some type of savings or investment. If you're in debt to begin with, use the money to service the debt until it's paid off and you can start using it to build up your wealth.
Do this over time, and you'll soon be well on your way to wealth. This one habit will contribute more to your financial well-being than almost any other undertaking.
Spend less than you earn - make it your new golden rule of money and wealth.
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