I recently wrote about how life is a game of probability, not luck. Money, like life, is also a game of probability. While there is nothing you can do to guarantee financial success, you can do things that will greatly increase your chances.
Before getting into the strategies that will swing the odds in your favor we need to define what I mean by financial success. Although this is a personal finance blog I don’t believe that you have to become rich to be financially successful. For me financial success means:
- Providing for your needs.
- Providing for some wants.
- Saving enough for the future that you can maintain your current standard of living when you are no longer working.
- Having enough to help others by giving back.
Using this definition puts achieving financial success within the reach of most of us. All we need to do is to learn the rules governing financial success and develop the habits to make it happen. Here are some strategies that will get you headed down the right path.
Top 10 Ways to Increase Your Odds of Financial Success
- Get a job; any job – Okay, not just any job; the best job you can find. However, when you are first starting out nothing should be beneath you. Learn to show up on time, work hard, and solve problems.
- Get a better job – Scott Adams, the creator of the Dilbert comic strip, tells about flying across the country to California for his first job after graduating from college. He sat next to a businessman who gave him some great advice. The businessman told him the number one goal for any job he has should be to get a better job. This doesn’t mean you should neglect your current job. On the contrary, your best chance to get a better job is to learn everything you can and do the best work possible at your current job. When you do that, and keep your eyes open, opportunities will open up for you.
- Don’t have children until after you are married – Poverty in America is largely a problem of single parents and their children. The Brookings Institution reports that, “For families with children, 32 percent are poor if the family is headed by a single parent but only 7 percent are poor if the family is headed by two married parents.” Many people find themselves as single parents through no fault of their own, but if you have a choice, having children before marriage is not a wise one.
- Get as much education as possible – Economist Ronald M. Schmidt, a professor at the business school of the University of Rochester, looked at the earnings of average males who graduated high school in 1980 but made different choices with respect to education. Schmidt looked at the earnings of the average high school graduate, the average college graduate, and of someone with a graduate degree. In 1987 the high school graduate earned $22,595, the college graduate earned $31,631, and the holder of a graduate degree earned $36,667. 20 years later, in 2007, the numbers were $46,667, $88,242, and $120,391. The differences not only persisted over time, but became greater. Getting more education undeniably increases your chances for financial success. As Warren Buffett says in his cartoon series The Secret Millionaires Club, “The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn.”
- Live on less than you earn – In other words, live The Micawber Principle. In his classic book The Richest Man in Babylon, George S. Clason wrote, “Now I will tell thee an unusual truth about men…. It is this: That what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.” The way we “protest to the contrary” is with a budget. No matter what you are currently making, use a budget to control your expenses and learn to live on less than you make. There is no other path to financial success.
- Avoid credit card and other high-interest debt – When super-investor Warren Buffett was given the chance to speak to a group of high school students, he offered just one piece of financial advice. Buffett instructed, “Avoid credit cards. Just forget about them.” He added that it is very difficult to make financial progress while paying 18 percent interest on credit card debt. He then told a wonderful story about his partner, Charlie Munger, who likes to say, “All I want to know is where I am going to die, so I will never go there.” Credit card debt kills more financial dreams than anything else, so make sure you “never go there.” If you are already there, get out of there as quickly as possible. Buffett concluded, “If you can’t pay for it, don’t buy it.” That is great advice for improving your odds of financial success.
- Automate savings – Craig Matters, when he was Editor of Money Magazine, instructed readers to “use technology as a substitute for willpower by having funds automatically deposited into retirement or other savings and investment accounts.” If you rely on yourself to manually make deposits into savings and investment accounts each month you will either forget to do it, or decide some months you don’t have enough money. Once it is automated it will happen each month and you probably won’t even miss the money. Automating your savings is one of the easiest and best methods to increase your chances for financial success.
- Increase savings over time – Once you have established the habit of saving, the next step is to increase your savings rate over time. Commit now to dedicate a percentage of all future raises to saving or investing. Some companies have a formal program called the “Save More Tomorrow” plan that will do this for you automatically. If you are not lucky enough to have this program at your work you can still do this on your own. Using future raises to increase your savings rate is a fairly painless way to ensure you are ready when the time for retirement arrives.
- Learn the magic of passive investing – In his fantastic book How Not to be Wrong: The Power of Mathematical Thinking, Jordan Ellenberg writes, “Stocks, at least in the long run, tend to get more valuable on average; investing in the stock market, in other words, is a positive expected-value move.” This is especially true if you invest in the market as a whole, rather than trying to pick individual stocks or market segments. Therefore, passively investing in low-cost index funds that provide returns similar to the entire stock market will greatly increase your odds of achieving investing success. As an added bonus passive investing doesn’t take a lot of time or knowledge, thus giving you the freedom to do the really important things in your life.
- Make learning a life-long pursuit – Albert Einstein stated, “It’s a miracle that curiosity survives formal education.” If you can keep your curiosity alive while you are in school you will find that the best thing about completing your formal education is that you are free to learn anything you want. If you are not learning and growing, you are not changing, and in a sense not living. Get a library card, pick a topic, and never stop learning. This will not only increase your chances of achieving financial success, it will make life much more interesting and enjoyable.
How many of these successful money strategies are you already doing? What areas do you need to improve in? Pick one or two strategies that you are not currently doing and make them part of your life. Once you have mastered one, move on to another.
As you practice these strategies over time, financial success will follow. Others may attribute your success to luck but you will know the real reason.