Supporting a wife and two toddlers on a $31k salary was not easy.
Owing more than we owned didn’t make it any easier.
Over time, my salary increased gradually, but was at best barely over average for Maryland, where I lived most of that time. By this time, my net worth was better, but that was entirely due to a lucky break, with my house doubling in value in 5 years.
Then, I changed careers, which let me break into the 6 figures. However, my employer had to let me go after less than 2 years. That’s when I realized that job security was a myth, and that nobody would be as motivated and effective as me at marketing my skills. That’s why I decided to open my own consulting practice and build it from the ground up.
It’s been a long road, and success wasn’t predictable.
Here are 7 lessons I learned from trying and failing, then trying again and succeeding.
When to Invest and When to Pull Money out of the Market
My investing philosophy throughout has been to invest as early, as often, and as consistently as I could. With a notable exception this year, as I describe elsewhere, I pull money out of the market only when I need it to cover an expense or buy a major asset such as a house.
How to Increase Savings Rate Painlessly
Especially when my income was low, it was hard to routinely set money aside. However, I always knew I needed to do it.
What I soon realized was that the easiest way to increase savings rate (and investments) was to do it when my income went up. This could have been due to a raise (with or without a promotion), when I got a significant cash gift (or bonus if you’re in the right industry), or when my profits went up once I had my own business.
By investing at least half the extra money (I try to make it at least 2/3), I accelerate my portfolio growth painlessly because I don’t have to cut my budget.
Note that I don’t try to invest 100% of it, because I want to balance future benefits with enjoying my life today. This because you never know if you’ll live long enough to reach retirement, and because living an overly frugal life isn’t sustainable for most of us.
(Excessive) Lifestyle Inflation Is Dangerous to Your Financial Health, Especially in Non-Discretionary Expenses
When you let your spending increase, you’re hurting your future self twice.
First, your portfolio isn’t growing as quickly as it could otherwise. Second, you get used to that higher spending, so you need a larger nest egg to cover it.
This is especially true if your increased spending is the result of taking on more (or larger) non-discretionary expenses. This could be a more expensive home with a larger mortgage payment, a fancier car with a larger auto loan payment, etc. Once you take on such increased spending, it’s harder to dial it back if you have to cut back. Spending more on experiences or other discretionary items can be changed back if needed.
Invest, in the Right Things
Setting money aside is all well and good, but it isn’t enough.
If you keep that money in a savings account, it may not even keep up with inflation. That’s why I always prefer to invest most of my money in things that appreciate and/or bring in significant income. For me, that’s the stock market and rental real estate.
However, I’m not one of those who think they can beat the pros at their own game. I don’t have the time, education, experience, expertise, or analyst support that the best financial firms out there have.
This is why I’m a big believer in using mutual funds or exchange-traded funds (ETFs). I’ve also learned how to pick good active mutual funds, so I don’t believe in index funds.
You Are Your Best Investment
Unless you’re already wealthy, your greatest asset is you.
Your ability to make money.
That’s why you are your own best investment. This includes:
- Keeping your skills up to date in a changing marketplace (e.g., continuing education)
- Learning new skills that help you keep your job when your employer is cutting their workforce or gets you promoted over your peers
- Learning how to run your own small business and how to market your services and/or products.
Invest in Your Health
None of us has a guarantee that we’ll continue to be healthy and able to work. In fact, serious medical conditions or accidents are responsible for countless Americans having to declare bankruptcy.
That’s why investing time and money in your health is so important.
This could mean buying a treadmill to stay active when the weather is bad or when there’s a pandemic raging around you. It could mean going to a gym, assuming you can do that without endangering yourself and others. It could also include doing yoga, stretching, meditation, etc. Whatever will keep your mind and body healthier.
Some of the Worst Financial Advice to Avoid
Ben Carlson, CFA, correctly says, “Ultra-successful people typically offer some of the worst financial advice. They’re simply too out of touch with normal people to provide useful advice… [they] say stuff all the time that they don’t actually act on. You have to watch what they do, not what they say. And even then, these people don’t know your financial circumstances. How can they possibly offer you actionable advice? And billionaires have the ability to make huge mistakes with their wealth and they’ll still be fine. If you make a huge mistake it’s going to hurt a lot more.”
Even so-called “financial gurus” often offer advice that’s at best moderately useful, but often not relevant to your personal circumstances, or even out and out harmful.
The Bottom Line
The above are the top 7 financial lessons I learned over the decades it took to go from negative net worth to being financially successful.
Following them may not, by itself, make you financially independent since there’s a lot that’s outside our control. However, I’d be very surprised if it won’t help you do better than ignoring them.
This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a relevant professional before making any major decisions.