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Get Rich(er)

Get Rich(er)

Get Rich(er)

    It is true that no one can serve two masters, and slavish devotion to unrighteous mammon is indeed a road to misery.  Ambition to produce and “be rich” is not necessarily a bad thing, though.  And if you’re reading this, you’re likely among the richest 1-2% of people who have ever lived.  Historically speaking, you’re not just rich.  You’re super-rich.

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    This means a couple of things.  First, it means that foregoing generations have left us with the capital, technology, and institutions we need to produce staggering amounts of wealth (which isn’t just “stuff;” wealth is whatever people value).  They have done this by establishing legal systems conducive to trade, by establishing an ethic of inquiry, and by refraining from consumption so as to leave us with plenty of resources that we can use to produce current and future output.  How, then, in this environment, should one grow wealthy?  And what are the social implications?  Here, I will relay some of the best advice I have gotten and discuss some of the social implicaitons of “getting rich.”  First, here’s how to do it:

    1.  Stop renting and buy a house. Homeowners build equity while renters line their landlords’ pockets.  This require a few important caveats.  First, don’t buy a house you can’t afford by agreeing to terms you can’t meet embedded in a mortgage you don’t understand.  Second, it is better to rent than to buy if you are only going to be somewhere for a very short period of time.  We bought our first house about a year ago, and we bought conservatively: we bought in a nice, semi-urban neighborhood based on the assumption that we would have to pay for the house on a single income.  We’re happy, we’re building equity, and we aren’t over-extended (yet–we have a six-week-old!!).

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    2.  Step away from the latte. The Automatic Millionaire author David Bach refers to what he calls “the latte factor,” which consists of the money we spend on small, incidental purchases: a $3 latte here, a $15 lunch there.  It all adds up.  Of course, there is something to be said for having your morning coffee, and for some of us, it is more efficient to get our fix from Starbucks.  A first step might be to size down–Starbucks does sell a “short,” though it isn’t on the menu–or to go with a regular coffee that costs $2 rather than a $4-5 specialty drink.

    3.  If you’re being paid $50,000, do $55,000 worth of work. One of the best ways to ensure job security is not to do the bare minimum necessary to get by, but to do enough that you are competitive for another job.  In academia, our brass ring is tenure, which gives us wide-ranging freedom to explore the world of ideas.  Last summer, I heard it put this way: “don’t worry about being competitive for tenure.  Worry about staying marketable.”  If you’re marketable–and you may be perfectly content wherever you are–then you shouldn’t have to worry too much about job security.

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    4.  Save. If you aren’t contributing to your 401k or your 403b and you don’t have an excellent reason not to (we didn’t during my first year at Rhodes because we were saving cash to buy a house), you’re throwing money away.  A Roth IRA is a fantastic deal if you’re young, and a 401k can reduce your tax liability considerably while giving you room to grow your capital in the future.

    5.  Bank the raises. What do you do with those little boosts to your income?  Do they go straight down the drain on a bunch of stuff you don’t need?  Or do you put them in the bank?  We have a system that has worked reasonably well in our house.  Whenever, we get unexpected shocks to our income, we split it four ways.  The bank gets 25%, the kids get 25%, my wife gets 25%, and I get 25%.  This has proven to be a somewhat reasonable and easy way to splurge every so often while making sure that we are wise stewards of what has been entrusted to us.

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    6.  Be a cheapskate. This is something we have some trouble with.  When your income goes up, it’s fine to splurge a little.  My wife and I both have iPods, and we have a nice TV.  However, we had one car for our first four years of marriage, and we bought a deeply-used second car last summer from a Rhodes graduate who was advertising it on Craigslist.  We’ve never had cable, we just switched from cable internet to AT&T (slightly slower, much cheaper), and we try to take advantage of cheap entertainment (our church library, for example, has a ton of stuff).

    7.  Go with equities if you’re young. The younger you are, the better it is to invest in stocks because you have plenty of time to take higher volatility in exchange for higher returns.  As you get older, you will want to make your portfolio more conservative, but now is the time to take on risk.  Even in the current crisis, there is reason for optimism because it’s a great time to buy.  After you’ve salted away two or three months’ income in order to deal with unanticipated emergencies–like the new kitchen floor we had to get last month–you should begin investing in equity-heavy mutual funds.  Many companies offer funds that rebalance toward greater conservatism over time, substituting bonds and safer securities as you approach retirement.

    8.  Get educated. The market is screaming “stay in school!”  Wages for low-skilled occupations have stayed flat while wages for high-skill, high-tech occupations have risen dramatically.  If you’re serious about it, college is a great investment.  Strange as it may sound, the increasing cost of college is another reason to be optimistic.  Higher costs for higher education suggest increasing productivity in other sectors as well as general expectations that there are great opportunities in the future for the educated.

    9.  Be generous. Finally, it is important to remember all the cliches about wealth.  All that glitters is not gold.  George Bailey was the richest man in Bedford Falls.  It doesn’t profit a man to gain the world and yet lose his soul.  Ebenezer Scrooge, for all his wealth (which produced higher incomes for many people, by the way), appears to have had a miserable and wretched life.  Money cannot buy happiness or love, but it can buy a lot of things that contribute to happiness–such as the ability to help people who truly need it.

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    Art Carden

    Art Carden is an Assistant Professor of Economics and Business at Rhodes College in Memphis, Tennessee.

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    Last Updated on September 2, 2020

    How to Set Financial Goals and Actually Meet Them

    How to Set Financial Goals and Actually Meet Them

    Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

    In this article, we will explore ways to set financial goals and actually meet them with ease.

    4 Steps to Setting Financial Goals

    Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

    1. Be Clear About the Objectives

    Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

    It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

    Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

    2. Keep Goals Realistic

    It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

    It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

    3. Account for Inflation

    Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

    Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

    For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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    4. Short Term Vs Long Term

    Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

    As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

    By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

    How to Achieve Your Financial Goals

    Whenever we talk about chasing any financial goal, it is usually a two-step process:

    • Ensuring healthy savings
    • Making smart investments

    You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

    Ensuring Healthy Savings

    Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

    This is the focal point from where you start your journey of achieving financial goals.

    1. Track Expenses

    The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

    Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

    If you’re not sure where to start when tracking expenses, this article may be able to help.

    2. Pay Yourself First

    Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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    Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

    The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

    Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

    3. Make a Plan and Vow to Stick With It

    Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

    Nowadays, several money management apps can help you do this automatically.

    At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

    Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

    You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

    4. Make Savings a Habit and Not a Goal

    In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

    Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

    • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
    • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
    • If you go shopping, always look out for coupons and see where can you get the best deal.

    The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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    5. Talk About It

    Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

    Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

    6. Maintain a Journal

    For some people, writing helps a great deal in making sure that they achieve what they plan.

    If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

    When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

    Making Smart Investments

    Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

    1. Consult a Financial Advisor

    Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

    Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

    2. Choose Your Investment Instrument Wisely

    Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

    Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

    As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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    3. Compounding Is the Eighth Wonder

    Einstein once remarked about compounding:

    “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

    Use compound interest when setting financial goals

      Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

      Start saving early so that time is on your side to help you bear the fruits of compounding.

      4. Measure, Measure, Measure

      All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

      If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

      Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

      The Bottom Line

      Managing your extra money to achieve your short and long-term financial goals

      and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

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      Featured photo credit: Micheile Henderson via unsplash.com

      Reference

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