Becoming rich starts first and foremost with saving money. That much is clear. You have to put in the effort to set aside money for your investments. Yet, for most people, that work is tedious enough that it often never works out, unless you’re the kind of person that’s naturally super disciplined. After all, it’s very tempting to spend your available cash as your savings grow.
It can be difficult finding the right solution to prevent the assets in your checking and savings accounts from disappearing in a snap, especially since it’s so much easier to spend money than it is to save it. To decrease the impulsive desire to spend, spend, spend, you have to find a way to make yourself “poor.” And once you’re “poor,” only then can you become rich.
Make Yourself “Poor”
So, just what do I mean by making yourself “poor” to become rich?
It sounds like an oxymoron, but it comes down to managing impulses.
After paying your necessary expenses (housing, food, utilities, etc.), you’re going to want to spend the money you have on things that bring you instant gratification.
After all, you’re working long, hard hours to make all this money. Why not give yourself a little something special?
When your cash is available, and not tied up elsewhere, you will be even more inclined to spend it.
To avoid this temptation, we need to take a step back and figure out how to “pay yourself first.” When it’s no longer in your hands, you won’t be nearly as inclined to spend it.
Paying Yourself First
Making your money work for you can be difficult, especially since most of us want to enjoy ourselves now.
If you’re not taking the necessary precautions, this mindset can hamstring your ability to make real financial progress.
So how do you pay yourself first? Simply put, have a portion of your money automatically go to your investment accounts (maybe a stock brokerage, or some harder-to-access savings account for a big purchase down the line). Don’t leave that cash in a place where you can easily spend it.
And if you still have left over cash well above what you’d reasonably expect to spend, find a way to tie it up in a productive asset that will pay you to own it down the line.
In that way, you’re making you present self “poor” while making your future self “richer.” What you don’t spend now, you can grow and spend later.
By automating this process as much as possible, you can start to make serious progress towards your financial goals.
Automating the Process
By automatically putting, say, 10 to 15 percent of your income into investment accounts, you limit your accessibility to these funds while giving them the opportunity to grow.
You can setup your deposits to automatically go to those accounts so that there’s less possibility of you contemplating using the funds to satiate your desire for instant gratification.
After that, little to no thought needs to go into saving, and you restrict lifestyle inflation. Think of lifestyle inflation as that thing that happens when you want to spend more just because you’re receiving more. Impulsive purchases “just because you can afford it” will only drive you into the kind of poorness that can’t be transformed into riches.
Creating Barriers for Yourself
Once your money is invested, it will be harder to access. You’ll have to sell your holdings or otherwise take out debt against them.
Each step that’s necessary to take money out creates a barrier to prevent you from spending it. It’s another point along the way where you’ll have to reconsider the purchase.
One way to create barriers is to have the funds go into accounts that have very specific purposes or restrictions that prevent you from accessing your assets.
For example, tax advantaged accounts, like 401(k)s, IRAs, and HSAs, are common options. The more restrictions in place, the less likely you will be to spend the money frivolously. But that comes at a tradeoff of less financial flexibility.
Regardless, the harder you make it to spend your money, the easier it will be to grow your wealth. It’s really that simple.
Setting your money aside each month can still be difficult, even if you automate things. You must know why you are doing it.
What exactly are your financial goals?
This is the first question you want to ask yourself as you begin to understand where you want the money to go. You need ask what it is that you want for the long term.
Maybe you want to achieve financial independence within the next decade. Maybe you just want to quit your job or take on less hours. Your ultimate goal will provide the motivation to keep up with an aggressive savings regiment.
Whatever it is, you can break your goals down into short- and long-term goals. By doing this, you can more easily track your progress and make sure you’re constantly moving forward.
Focusing on Growth and Delayed Gratification
By making yourself poor to become rich, you increase your net worth and you build your financial future. Even if it does not feel like the money is there, the whole point is to have these decisions become automatic so you don’t have access to the money you’re earning so easily.
Thus, all of your income is going towards something productive so you can rest easy knowing you’re setting yourself up for success.
Removing the temptation to spend now will allow you to have more later. It’s delayed gratification, something that doesn’t come naturally for most people. It’s largely a learned skill.
And the more you can do to act “poorer” than you are now, the easier it will be to become rich in the future.
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