Last night I spoke to several hundred people on the basics of personal finance success. The following post is a summary of my opening comments. If you enjoy it and would like to receive free, daily suggestions on how to grow your net worth, you can subscribe to Alltribes using your feedreader and .
Americans today are in need of financial help. And for the life of me, I can't figure out why. Ok, actually I can, but it is still puzzling to me that so many people are having so many financial problems when the keys to success are so simple. And this was BEFORE the economic downturn too, so don't think people are in trouble only because of a poor economy. Granted, the slump hasn't helped, but things were bad before things were really bad.
How bad are they? According to a survey of 5,000 people highlighted in the book by Jean Chatzky, 54% of Americans live paycheck-to-paycheck, barely getting by, and are one financial problem away from money trouble. Another 15% are what the survey calls Further-in-Debtors – people who are going backwards financially every month. So between these two groups – almost 70% of people are either struggling or going backwards financially.
And what makes these results so perplexing is the fact that the principles to succeed in managing your money are pretty simple. They are both easy to understand and few in number. You don't have to be Einstein to succeed financially -- anyone with normal intelligence and a bit of self-control can prosper.
You have probably heard of the 80/20 rule, right? Also known as the pareto principle, it states that, for many events, roughly 80% of the effects come from 20% of the causes. In finances that would equate to getting 80% of the results out of 20% of the advice or tips. But in money management, the rule is more like 90/10 or even 95/5. Following a few steps will get you almost all the results you need (and certainly enough results to make you wealthy.)
Personal financial success ultimately comes down to two very basic financial equations. There’s no doubt about it – if you master these two equations alone, you will become wealthy and be far ahead of most Americans:
- Income – expenses = sur
- Sur x many years = wealth
Yep, that’s it. It seems pretty simple, doesn’t it? In fact, these seem to be “common sense.” But remember that these are two equations that 70% of Americans can’t get right.
If you look at these equations, you’ll see that all efforts to improve your finances come down to two things: increasing your income or decreasing your expenses. The more you do of each of these, the better.
So why can't most people get these two equations to work in their favor? Many would say it's simply because they don't earn enough money. And for a small portion of the population, this is the reason. But the survey above also identified why so many people are in tough financial shape: they spend too much. They can't control themselves and they simply over-spend. So they live paycheck-to-paycheck or worse, are falling more behind every month.
I've covered all this information previously when I wrote How to Be at the Bottom of the Financial Barrel. I also posted thoughts from the book above on What Makes Wealthy People Wealthy, The Difference Between the Wealthy and Everyone Else, and How to Be Financially Comfortable. But for those of you who don't want to read all those articles, here's the short version of how to be financially successful:
- Spend less than you earn (the bigger the [positive] gap between the two, the better)
- Do it for a long time
And for those of you who want a ton of suggestions on how to make and save more money, check out Thousands of Ways to Make and Save Money.