Financial planning–the most basic of basics

I’m going to save you a lot of money. You won’t need my advice at all if you just follow three simple steps to get wealthy:

1. Spend less.

2. Make more.

3. Invest the difference.

Um, well, simple but not easy. So maybe you do need a little more detail? Welcome to the wonderful world of financial advice, for all the labyrinthine complexity of financial advising really only untangles the details of one or more of these principles. But let me unravel these a little bit more just to get you started.

Spend less

This principle applies whether you’re a basketball superhero or a mail carrier. Working at either job guarantees nothing—in either, you can wind up a millionaire or you can wind up broke. It’s how much of what you make that you’re able to hold on to that counts. Promise me you won’t start snoring if I tell you to save at least 10%. Wait! That’s not enough! It only works if you’re in your 20s or early 30s. Save 10% a year and you’ll end up with enough to retire. If you’re starting later, or have a job where the gravy train might end unexpectedly or you ever tapped that retirement plan for a loan, you probably need to save more (maybe way more) than 10%. In any case, plan your spending so that you never exceed 90% of what you make. Yes, we really need to sit down and see if 10% is going to “do it”. The more you save, the more you have to invest (I’m getting to that).

Make more

Even in this land of giant screen TVs and SUVs on steroids, some people still can make a penny squeak. Strenuous deprivation, however, may be more difficult than figuring out a way to make more. Only you know if it will be easier to cut $1,000 from, say, your grocery bill or to negotiate a raise that pays you $1,000 more. It’s important to find a job (and a college major) that is meaningful to you, but within your personal range of possibilities, it makes sense to choose the category within that range that might pay the most. Negotiate for pay raises.

Have a side gig—write, teach, tutor, sell a product or a service. Reaching a market, even a very specialized market, has become far easier in the past 10 years via the internet. Even the skills you learn to market your own efforts might be able to be monetized for someone else. Also, a side gig is good insurance in case you ever get canned, partially disabled, or just want to quit being a lawyer and become a shaman.

And the really big bucks? Well, based on my experience as a real estate broker, I’d say the surest route is to inherit it. Nice work if you can get it. Other great ways to accumulate a chunk of change are winning a big settlement for a client as a personal injury attorney; or starting, then selling a successful business. Is that side gig starting to look better?

Invest the difference

Again, it’s not only what you make, it’s what you hold on to. But no pain, no gain. Stuff it in your mattress and you’ll have exactly what you started with. You have to assume some risk if you want your money to work while you sleep. Frugalistas in particular may have trouble with this step. After all, if you’ve scraped and scraped and controlled your spending, putting your stash out there and exposing yourself to something you can’t entirely control can be really terrifying. I can yammer on about compound interest, efficient frontiers, appropriate asset location and allocation, and the risk/reward possibilities of various “investment vehicles” (no, not Jaguars). All these techniques can control risk, but they can be complicated. Okay, I WILL yammer on about all of these, but you’ll have to stay tuned to further blog posts…