I used to believe that working hard will bring me a comfortable life and the stock options I receive would bring me even more money if I work for a good company. I have been working for nearly twenty years but I didn’t get rich, not even close.
If you have been living and working under the assumption that income from your job is what will lead you to true wealth, like I used to believe, then you have been misled. Living in the Bay Area, most people go through their hectic lives believing they will find the next Google, or Ebay, or Yahoo so it’s the stock options that will make them rich. Yes, that does happen, and you may be fortunate to make the right moves and be in the right place at the right time. In fact, that goal is what drives quite a lot of the Bay Area. However, when I review the path taken by most multi-millionaires to get to the point where they are quite wealthy, it’s not their job that got them there – it’s their investments!
My parents have never taught me about the values of the money or how to manage it and I didn’t learn that while I was in school either. Fresh out of college, I was so into my job and building a career that the only thing I did it right was saving some of the money that I made. And then I started learning how to use my savings to invest in stocks. Overall, I did make some money over the years but not enough to make myself rich. As time went by, I gathered all my saving and the money I made from the stock market to buy my first home — which was another good move I made. Not until I started reading books like “The Millionaire Mind”, “The 5 Lessons a Millionaire Taught Me”, and “The Richest Man In Babylon”, etc or the workshops and seminars that I attended over the past few years did I discover the real path to true wealth.
The definition of “True Wealth” — the point at which your passive income is at such a level that it can be used to support your life’s mission without the need to work at a job. “Passive Income” is the income generated from investments, not from your job; and “Life’s Mission” is the motivation and passion that drives the reason why we work to make money today.
First and foremost, save, save, save. This may sound simple — or maybe it even sounds impossible. It is non-negotiable. If we want to get to true wealth, we must start and continue to live off less. The rule we MUST live by is 70-30. Out of our gross income each month or week, we need to live off of 70 percent (used to pay housing, food, entertainment, etc) and save 30 percent.
There are different theories as to what to do with the 30%. Depending on your beliefs, you may want to give 10% to charity or the church; 10% to aggressive investments; 10% to stable investments. Another theory is to put 10% into savings for a rainy day; 20% to all types of investments. It’s really up to you but my key point here is that we need to adjust our personal living standard to only use the 70%. Make it a habit. This is a rule – no matter how much money we make. Even if you are making a lot of money, the rule stands – live off 70%, save and invest 30%.
I would like to share a story of a multi-millionaire that I know. He and his family had saved enough to move up to a huge multi-million dollar home. Usually the first thing people do after getting a new home is go out and buy a bunch of new furniture! Of course, his wife wanted nice, expensive furniture – but they had a deal, as long as they were sticking to their budget, they would not buy anything now so they could save money for the furniture she really wanted. Here we have a guy worth millions of dollars, making millions of dollars, and even he has the constraints of a home budget. He and his wife stayed within their budget plan. For months they would have friends over to entertain and show them around the big new house, but everyone would comment – “why are so many rooms empty, are you guys can’t afford furniture?” Then the day came – an entire freight container arrived with one-of-a-kind custom made furniture from Europe. Their budget allowed them to save for the day when they could buy exactly what they wanted.
Next time I’ll post some ideas about the basics of Home Budget to help define living off the 70%. Don’t worry, we’ll get the part where we are investing the 30% – after all, we are in the Real Estate business!