The core of any successful personal finance strategy can be boiled down to nine simple words: “Spend less than you earn. Invest the rest. Repeat.” People who follow that guidance are far more likely to wind up as successful investors than those who either cannot or do not.
It sounds simple, but it is incredibly powerful. Indeed, I’ve said it before, and I’ll say it again. In fact, I’ll share this investing tip until I’m blue in the face, because it is simply that fundamentally important to anyone trying to improve their personal financial situation.
Why it’s so powerful
The reality is that successful investing can be an incredibly simple process. Simply sock away what you can every payday into a broad-based index fund, and chances are really good that you will beat the vast majority of professional money managers over time. The hard part of building wealth isn’t the act of investing, it’s coming up with enough money to invest on a regular enough basis to make real progress toward your goal.
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After all, no matter what rate of return stocks earn, $0 invested in the market will always compound to be worth exactly $0. Yet investing just $5 a day throughout a career can potentially be enough to get you from $0 to millionaire status by the time you retire. You don’t need to be a financial genius to make it work, but you do need the discipline to make tough priority calls and the patience to stick with it for decades.
Especially in today’s era of high inflation, coming up with even a little bit of money to invest each month is something that’s easier said than done. Still, those inflationary pressures make it that much more important to try to find ways to squeeze costs from your monthly expenses. After all, every dollar in your current spending budget is a dollar that remains exposed to future inflationary cost pressures. By figuring out how to live without it, you also eliminate any future escalations it would otherwise bring.
How to get your costs down
When it comes right down to it, there are only a small number of ways to get your costs down. You can:
- Pay off debts.
- Eliminate discretionary expenses.
- Substitute cheaper alternatives.
- Find ways to share costs with others (such as sharing rent with a roommate).
Everything else is just some combination of those, perhaps paired with an up-front investment to buy a more efficient version of something to save operating costs over time.
The most efficient way to pay off debts is a process known as the avalanche method. Basically, you line up your debts in order from the highest interest rate to the lowest interest rate. On all debts except the one with the highest interest rate, you pay the minimum. On that highest interest rate debt, you throw every penny you can against that debt above and beyond that minimum until it is paid off. Then, repeat that aggressive pay down approach on each subsequent highest interest rate debt.
Eliminating discretionary expenses might mean making lifestyle choices, but you might also be paying for things that don’t really matter to you. For instance, if you are paying for streaming services or a gym membership you no longer use, costs like that are among the easiest to cut. Whether it comes from finding and stopping those completely unused expenses or deciding to make priority calls within your lifestyle, every dollar you free up is a dollar you can potentially invest.
When it comes to finding cheaper alternatives, you might be able to do things like shift to home-brewed coffee instead of buying it from the local coffee shop. Other popular approaches include using a programmable thermostat, buying generics instead of name brands, and brown-bagging lunch a few days a week to save on the costs of eating out. This line of cost-savings ideas often has the most fertile opportunities, since you can frequently find ways to cut back without cutting out.
Finally, while finding roommates or renting out a room is one of the most time-tested approaches to sharing costs, there are other opportunities. For instance, car-sharing services now exist that can provide access to a car at a lower total cost than owning it. Similarly, if you can’t justify shopping in bulk on your own due to your household size, you might want to alternate bulk purchases with a friend and split the large packs. That way, you get the bulk savings without the excess clutter.
Get started now to improve your chances of building a great nest egg
That nine-word powerhouse strategy — “Spend less than you earn. Invest the rest. Repeat” — works wonders, but only if you’re able to actually follow it. With inflation rearing its ugly head, it’s tougher, yet more important now than it has been, to get your spending down to have the chance to invest. Make it a reality, and the investing part can be as simple as making regular purchases of a broad-based index fund.
The longer you wait, though, the deeper a hole you’ll likely find yourself in. So, get started now and improve your chances of benefiting from this simple, yet powerful investing tip.
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