The 4 Rules of Money That Will Make You Wealthy
I used to think that the rules of money were super complicated, but over the last couple of years have come to realize that in the end, the rules of money are actually really simple.
I stressed for years about budgeting, paying off my debt and managing my money. I spent hours trying to get it all right. I wish I could go back to my younger self and tell her that in the end, it would come down to prioritizing myself in the equation.
Money rules need to be simple, simple, simple to be effective. These 4 Rules of Money are as simple as they come and if you follow them it will change your life!
1. The number one rule of money is to pay yourself first.
Everyone wants some of your money, your number one goal should be keeping your money by learning how to pay yourself first.
Every single time you get paid you need to be putting aside 10% of your income for your future goals.
I know this sound impossible, but I challenge you to try it for the next three months. If you stick to it, you’ll be surprised at how little it actually affects you (in a good way).
Somehow, you’ll still find the money to pay the bills, but at the end of three months, you’ll have a decent amount of money in your savings account.
I’m going to be super blunt here, if you can’t do this step then you are never going to consistently save money for yourself.
You’ll have moments where you do really well and put money away, but ultimately if you don’t draw a line in the sand and decide you are going to stick with it, there is always going to be an expense that makes you decide to cheat.
Some of the expenses are probably even legit and your not sure how you’ll survive without that extra 10% of income.
You have to decide today that from here on out you are putting yourself first and following the rules of money.
I was recently working with a client who makes around $30,000 each year and is a single mom. This lady is barely making it, she has a legit excuse not to pay herself first.
She is doing it though! She as saved $300 per month for the last three months.
What an amazing story when you sit back and look at the numbers.
Here is the most amazing part though, when I talked to her later, her comment was “my life hasn’t changed.” It took me a second to realize that she meant that in a good way.
She cut costs and watched her spending, but at the end of the day still paid her bills, but now had almost $1,000 in her savings account. She had never had that much money in her life.
Hearing her story really made me reassess myself and my spending.
I practice what I preach and put aside 10% of my income every month, but I wasn’t taking it a step further and increasing the money I was paying myself. So this next month, I decided to increase my “payroll” to 15%.
I know it isn’t a huge increase, but it is the thought behind the action that matters.
The number one rule of money is to pay yourself first which means that you need to be constantly finding ways to pay yourself just a little bit more.
If you can ask your boss for a raise, why not ask yourself for a raise as well.
2. The second rule of money is to use the power of exponential growth and compounding interest.
K – so I’m going to get a bit deep here for a few minutes. You are going to be tempted to let your eyes glaze over and ignore the math, but please take a few minutes to actually read and think about this section.
Albert Einstein is credited with saying that exponential growth is the 8th wonder of the world.
I think is should be the 1st wonder of the world.
When you can finally tap into the power of exponential growth your money is going to grow faster then you have time to spend it.
The formula for exponential growth is
Y = a(1 + r)x
Y = the exponential growth you want to see happen to your money
A = initial value of your money – what you put into retirement
R = Growth rate of your money – Think interest rate
X = Time
The typical theory is that the higher the interest rate and the more time you have the more your money will grow.
I don’t know about you guys, but I want my money to grow. My goal is to put my money into secure investments with a high rate of return and then let time do its work.
I’m not into get rich quick schemes or anything like that, I just want steady uphill growth.
However, this formula doesn’t take into account risk. Which brings us to the 3rd rule of Money
The Third Rule of Money is to Protect Your Investment
This one is a little bit more difficult, there is always a risk in investing, but you can’t really optimize compounding interest without some form of investing.
I’ve finally found a product that I love that allows me to protect my money – talk about life-changing.
Think about how much quicker you can accumulate money if you can take risk out of the equation.
Graph of the exponential growth chart.
This graph is the exponential growth chart. Where do you want your money to be invested?
It is kind of a stupid question because everyone is going to say the red line with the exponential growth.
The problem is that virtually everything that you’ve been told to invest in like 401k’s, real estate, bit coin, the stock market – all of them are good investments, but they all have to factor in risk which is on the linear growth line.
Until you can get rid of risk in your investment growth you are always stuck with linear growth rather than exponential growth.
I think that this graph explains it best.
Photo Credit: Graph modified from Macrotrends.net
Every time you see a dip in the stock market you are experiencing the negative side of risk. Every time your account dips it takes you 3-5 years to break even.
Think about the numbers. If your account value drops by 50% then you have to go up by 100% to get back to where you were before the dip.
For example, if you have $10,000 in the stock market and the market dips by 50% you now have $5,000 in value.
To get back to $10,000 you need to have 100% growth.
Smaller drops don’t look as crazy with the math, but it still takes time.
For example, if you have a 10% drop then your stock is now valued at $9,000. To get back to your starting point you would need to divide $1,000 by $9,000 which means you need a gain of 11.1% to get back to $10,000.
For quick reference check out these numbers, to really see how much a drop in your market value affects your growth:
• 10% Drop – 11.1% Gain to get back to your original balance.
• 20% Drop – 25.0% Gain to get back to your original balance.
• 30% Drop – 42.8% Gain to get back to your original balance.
• 40% Drop – 66.6% Gain to get back to your original balance.
• 50% Drop – 50.0% Gain to get back to your original balance.
As you can see from the graph, when you add in the risk factor and straighten out your line, you are experiencing linear growth.
You have to get rid of risk to really see your money grow.
When I finally found a product that got rid of risk, I was ecstatic. I’m in the process of dumping my 401K and moving over all of my money.
The fourth rule of money is secure leveraging.
This money rule really surprised me. I’ve always been very debt adverse, but if you securely leverage your own money then all of a sudden the possibilities are endless.
The problem in the past has always been the when you leverage your money you are investing it into real estate, stocks, bit coin or any other number of “risky” investments.
To me, this seemed like a really stupid idea.
I busted my but to get out of debt (except my mortgage) and wasn’t about to put myself in financial danger by leveraging my money in risky investments.
However, it goes back to the third rule of money. If you are leveraging your money to invest in secure, no risk investments then all of a sudden it completely changes the equation.
Just for the record for those of you like me who absolutely hate debt you can still earn a really great retirement income without taking the fourth step.
The fourth step will bump up your efforts significantly, but even without the leverage aspect when you follow the first three rules of money you are still going to end up with significantly more money than 90% of your peers.
I just made up that stat, but I do think it is pretty accurate, most people never even follow the first money rule and don’t ever start saving for themselves.
The thought of taking on debt intentionally really really bugged me when I first began following the four rules of money.
I couldn’t get past the concept of adding more debt to my list.
However, once I started doing a bit of research and realized what a difference a correctly structured leverage meant then I was all in.
Keep in mind too that when I’m talking about secure leverage, I’m talking about using your money in a secure investment (following rule #3). The interest returns are actually minimal, but the extra little bit of money it makes really helps takes your financial goals to the next level.
Why the rules of money work
If you search google for the rules of money you are going to find thousands of posts with slightly different rules. Everyone has their own way of managing their money.
Here is the deal though, most of the time, the rules of money aren’t built for exponential growth. Most money rules are built for linear growth.
Linear growth is great, it is slow and steady growth that will help you put money aside year after year – it is better than nothing!
Exponential growth is the same, it is slow and steady growth, particularly in the first 7-10 years. However, once you get past the first few years, all of a sudden the power of compounding interest (without the negative effects of risk) really takes over and that is when you really start to make money
If you look carefully at the chart, you’ll notice that true exponential growth doesn’t pick up right away and is actually slower to start growing then the linear line.
If you follow the 4 rules of money and can really optimize your growth then all of a sudden everything in your life changes.
Money doesn’t buy happiness, but it does buy security. Once I really began to understand the rules of money I’ve been amazed at how much easier managing my money has become.
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I used to think that the rules of money were super complicated, but over the last couple of years have come to realize that in the end, the rules of money are actually really simple. I stressed for years about budgeting, paying off my debt and managing my money. I spent hours trying to get it all right. I wish I could go back to my younger self and tell her that in the end it would come down to prioritizing myself in the equation. The number one rule of money is to pay yourself first. Every single time you get paid you need to be putting aside 10% of your income for your future goals. I know this sound impossible, but I challenge you to try it for the next three months. If you stick too it, you’ll be surprised at how little it actually affects you (in a good way). Somehow you’ll still find the money to pay the bills, but at the end of three months you’ll have a decent amount of money in your savings account. The second rule is to use the power of exponential growth and compounding interest. I spent years focused on paying off my debt (because of interest), but forgot about the positive side of interest for my financial growth. I wish I had focused a little bit more of my energy on paying myself first rather then just reducing the debt. The third rule is to protect your money. This one is a little bit more difficult, there is always risk in investing, but you can’t really optimize compounding interest without some form of investing. I’ve finally found a product that I love that allows me to protect my money – talk about life changing. The fourth rule is secure leveraging. This rule surprised me. I’ve always been very debt adverse, but if you securly leverage your own money then all of a sudden the possibilities are endless. Money doesn’t buy happiness, but it does buy security. Once I really began to understand the rules of money I’ve been amazed at how much easier managing my money has become. #wealthbuilding #exponentialgrowth #compoundinginterest #everyoneendsuppoor #dailysuccessfulliving #retirement #retirementplanning #payyourselffirst #payyourself #10%savings #financialgoals #moneymatters #rulesofmoney