Ever wondered what happens to your monthly income? Doesn’t it miraculously evaporate by the end of each month? This happens to all of us. No matter how much we earn, somehow we manage to spend it all by the end of that month.
This happened when you received a small paycheck and you believed that somehow getting a bigger paycheck would solve this problem, but no. Even after you are promoted or when you get a higher income, still you managed to spend it all!
If you haven’t saved a single rupee in your life, don’t blame yourself. There is a reason for this. It’s called the Parkinson’s Law. This is a productivity law which was first published in The Economist in 1955 by famous British author Cyril Northcote Parkinson.
Work expands to fill the time available for its completion – Parkinson’s Law
This law can be used equally in the financial context. Expenses will always rise in direct proportion to income. So what does it mean? It means that no matter how much you earn, your expenses will also keep on increasing. If you have been dining out from restaurants, once your income increases, you want to have dinner at 5 start hotels. The person who was happy to wear an unbranded denim goes for Levi’s when the salary is increased by Rs. 5000. There goes your increment!
That is why most engineers, doctors, athletes, actors and even accountants are broke. Because no matter how much they earn, they will always find ways to spend it all.
If the expenses rise in direct proportion to income, what can you do about it?
Difference between rich and poor
There is a clear difference between the way rich think and the way poor or middle class thinks. When poor think about money, they always think in terms of working income. Working income is the money you earn from active work. It can be a paycheck from a day-to-day job or for entrepreneurs; the profit earned from their business. Poor and middle-class measure one’s success from working income. How much do you earn? Or what is your salary are some of the favorite questions among poor and middle-class.
But the rich don’t talk about their salaries or income. They play a different ball game. Their measure of wealth is net worth, not working income. Simply put, net worth is the financial value of everything you own. When you add up your cash, investments, the value of your house, the value of your car and any other asset and reduce what you owe, you will know your net worth.
Rich people always find ways to increase their net worth. That is why they acquire real estate, bonds, stock, and accumulate assets. But poor and middle class only think in terms of their paycheck. They nag and complain until the company increases their salary. If the salary is increased by few thousands, they think that they are rich.
So how can you become rich?
According to T. Harv Eker’s The Secrets of a Millionaire Mind, you need pay attention to 3 important net worth factors if you want to be rich.
- Income– There are two forms of incomes. Working income is the income you get by actively working. It can be a paycheck or profits if you’re an entrepreneur. The second stream is passive income. If you are earning money without actively working, then you are earning passive income. Unfortunately most poor and middle class only pay attention to working income. Many don’t consider the option of earning money without working.
- Savings– Poor and middle-class always have great goals to save their money, but they never do. We always plan to save in the “next month” but in case if you haven’t noticed, “next month” will always be the “next month”. Rich will always start saving before spending while poor will start spending and save later when there is nothing left.
- Investing– Rich people always invest their savings in real estate, stocks, bonds, mutual funds etc. While poor are so good at instant gratification. We tend to spend and buy unwanted crap while rich spend their days learning about investing and actually doing something to get rich.
- Simplification– This is the principle that even rich forget sometimes. You need to start reducing your cost of living. How do you do this? You need to consciously create a lifestyle where you need less money to live on.
Following these principles can dramatically change your lifestyle but the question is will you follow them?
I know for a fact that in your mind, you “know” that it’s important to save and invest your money. But you never do it. The reason is simple. You have made saving and investing a “decision.” Let me explain. Humans are bad decision makers. That’s proven by science. Most of the time, we know the right thing to do but we never do it. You know that you’re supposed to save some money but you never do. You know that you need to exercise regularly but you never do. See what I mean?
Why do you brush your teeth every morning? Or wash your face? Because they are no longer decisions. They have become habits. You don’t make the decision to brush your teeth when you wake up every morning. You walk like to zombie to the bathroom without even thinking about it.
The trick to saving and investing more is simple. Make it like “brushing your teeth or washing your face.” Don’t make it a decision that you have to take every month. Make saving and investing a habit so that you don’t have to consciously make the decision.
I have prepared a checklist for you to take actions this week. This will help you to make savings and investing a habit. Remember, your financial freedom depends on the actions you take. You have taken the first action by reading this post. Now follow through.
- Download this Net worth Calculation sheet and calculate your net worth. (It’s a simple Excel sheet. All you have to do is enter the amount and it will automatically calculate your net worth. This will provide you a snapshot of your financial life. You need to understand where you are so that you can plan where you want to lead.)
- Create a new bank account and save 5% – 10% of your income at the beginning of every month. I highly recommend you to create a standing order (an instruction given by you to your bank to send a certain amount to your preferred account) from your bank so that as soon as you receive your salary, a certain amount would go to the relevant bank account automatically. Do not withdraw a cent from this account to spend on anything. Save this for future investments. Having a standing order would take you out of the decision-making process.
- Read Rich Dad Poor Dad by Robert Kiyosaki. If you have not read a single book about finance or investing, start with this. This will open your eyes to simple but profound concepts of personal finance. This is also considered as the #1 Personal Finance book in the world. You need to educate yourself and get excited about money and this book can definitely help you. Buy Rich Dad Poor Dad book online from Jump Books. We do Free Delivery Islandwide.
That’s it for now. Most of us wish for more money and more freedom but most don’t realize that wishing doesn’t make you rich. To reach any goal in your life, you need to take actions. Actions are the only path to a rich life and financial freedom. So take actions today.
If you liked this post and if you found any value in this comment below and let me know. If you know a person who spends too much, share this post with them. You may be doing them a favor.
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