One of the best pieces of advice I can offer investors (or aspiring investors) is if you aren’t yet doing BOTH of these, START NOW.
Depending on where you are at in life, you might already be doing these things.
Some people find these really easy.
Others find them hard.
The good news is, even if you are way behind, you can catch up quickly and start heading in the right direction.
So – what are these foundational elements to wealth creation?
Game-Changing Wealth-Creating Habit Number One:Stop Spending Money You Don’t Need To Spend
To explore this topic, let’s take some advice from George Samuel Clason’s finance classic.
The Richest Man From Babylon was first published in 1926, and offers timeless lessons on wealth-building through parables set in ancient Babylon. It’s reported to have sold 20 million copies.
The book’s core message revolves around practical and simple financial wisdom. Through the story of Arkard, the ‘Richest Man in Babylon’, Clason emphasizes the importance of managing money, seeking sound advice, and using wealth to grow through disciplined habits.
This book was recommended to me early in my wealth-creation journey, and if you’ve never read it, then it is a must-read for you, right now. It’s short but on-point.
If you have read it, you might remember the chapter, The Second Cure of A Lean Purse: Control Thy Expenditures.
(There are seven cures of a ‘Lean Purse’ in total. Again, read the book!)
This short chapter extolls the virtues of avoiding luxuries that come disguised as necessities, because if we are not mindful of this, then there is always the temptation, as our income grows, to increase our expenses, thus never actually growing our wealth.
If we are not putting enough money into our investments because we are over-spending then we won’t be getting the compounding effect we would, if we didn’t spend so much on things that aren’t necessary.
This is why this is key to learn before you can become wealthy.
It’s fine to spend money. It’s just important to manage this effectively and not let our spending deviate us from our finance goals.
If we can invest money instead of spending it, in the short- to medium-term, then later when our investments or businesses have matured, we can have that stream of income to pay for the luxuries we have deliberated delayed spending on. It doesn’t work in reverse, however.
Let’s look at this from one more angle.
Morgan Housel, best-selling author of a more recent must-read book, The Psychology of Money: Timeless lessons on wealth, greed, and happiness, published in 2020, writes:
Morgan Housel
“When you define savings as the gap between your ego and your income, you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep with others doing the same.”
Think about this for a bit.
I really like his definition of savings.
This makes sense to me. How many things are we buying, and how much are we paying in order to ‘just look good’ or because we feel this is expected of us?
Do you get the point?
If we can instead only spend what we need, then plough our remaining money into effective investments (good income-producing assets, or education) then we are on our way to creating the financial freedom we desire.
On to point two.
Game-Changing Wealth-Creating Habit Number Two: Stop Using Bad Debt
‘Bad’ Debt is bad because it erodes your wealth. Essentially, when you are using ‘bad’ debt, the interest you pay means that everything you buy is costing you more than it costs everyone else.
That can’t be good.
The difference between ‘good’ debt and ‘bad’ debt is that ‘good’ debt makes you money so you are able to be better off financially, after the transaction. ‘Bad’ debt only costs you money, there is no upside!
‘Good’ debt involves borrowing to buy an asset that then produces an income or capital gain profit. Examples of this are a mortgage on an investment property that is positively geared. The rent exceeds all the costs including the mortgage interest, so at the end of the month you have more money in your pocket.
That can be a worthwhile investment.
‘Bad’ debt might include personal debt, credit card debt, car loans, and so on.
These forms of debt might get you the goods earlier but you are buying the asset with money you don’t yet have and you are paying a premium for this opportunity.
Credit cards are fine so long as you pay them off in total every month.
But if you are paying interest, you are paying too much.
The rule is don’t take on personal debt where it costs you interest, or you will keep going backwards.
What to do if you already have ‘bad’ debt
If you already have personal debt, you need to get it under control.
Work on paying it down and commit to not taking on any more.
As you pay down your debt, work on a plan to increase your income – whether by getting a new job (which may mean going out of your comfort zone) or getting a promotion, or starting a side-hustle – and decrease your spending at the same time (refer back to the Number One Rule, above, again).
Trust me, as hard as either or both of these rules might be to follow, if you can commit to them, then start saving and then investing, then your world will start to change for the better.
Not only will your wealth start to grow (and it will be slow at first, it was for me too, and generally is for everyone).
But your new-found self-respect and confidence will help you stay on course, as you walk the path-less-travelled of becoming wealthy and more financially independent.
In summary
Before you can grow your wealth, you need to stop spending unnecessarily and you need to eliminate bad debt.
Forever.
Doing these two things will bring you a resolve you never knew you had, and this commitment will help you keep going when things get tough.
Stopping spending money unnecessarily and not taking on bad debt are the foundation on which you can start to grow your wealth.
I know you can do it.
What do you think? Do you agree?
Have you brought these habits on and seen your life change?
Or do you feel your situation is different and these are unachievable? If so, write a comment and I’ll give you my advice.
