Most people find the process of buying a brand-new car exciting — stressful at times, sure. But it’s fun to shop around and get exactly what you want in a new car.
I recently went through this process myself, and found the experience bittersweet. Buying the new car also meant giving up the first car I ever owned.
My first new car meant so much when I bought it more than a decade ago. I didn’t love it because of how nice it looked or all its features. I loved that car because it was a symbol of how hard I worked to pay for it, to earn it.
At the time, I was just a couple years out of college. I had friends who were borrowing money to pay for a new couch for their apartment. I’m sure most people assumed I took out a big loan to buy the car.
But that was what gave me the most pride: paying cash for it, in an amount that cost nearly a year’s salary. That meant no loan, no debt to anyone. The car was mine.
I wasn’t able to pay cash for the car thanks to a large salary or a trust fund. I wasn’t a great stock picker, nor did I have sensational market returns. I was able to do it by focusing on what I could control and applying 3 simple investment principles.
These 3 keys to my investing success not only allowed me to buy my first brand-new car in cash, but they also set me up to build real wealth throughout my life — and they can do the same for you, too.
Starting with my first job as a teenager, my parents taught me to put some money from every paycheck into savings before spending a dime. Ever since, my budgeting process always started with an aggressive savings goal that I funded first. Then I’d see if I could live on the rest of my earnings after contributing to that savings goal.
Many investors struggle to save as much as they should because at the end of the month, there’s no money left in the checking account to put into savings. One of the reasons I love the process of paying yourself first is you do the hard work upfront. If you pay yourself first and hit your savings target, then you can spend whatever remains to your heart’s delight with no second guessing or guilt. Key #1: Decide what to save first.
It’s not easy to consistently make good decisions in life, over and over and over again. It’s difficult to make the choice to eat healthy, exercise, or save money on a daily basis. Making that choice every day for a week or a month is even harder. It can feel nearly impossible to do it for a year.
Why? Because you face temptations on a daily — or even hourly! — basis to go out to eat, skip the gym, or buy the latest tech gadget. As humans, we only have so much willpower. We can only make so many good decisions before we literally suffer from decision fatigue, and our ability to make the best choices starts to decrease.
That’s why we need to find ways to make good decisions once, not over and over again. Automating your savings allows you to do just that: make one good decision in your financial life, then set it and forget it.
Instead of having an internal struggle about whether to spend or save when you receive your paycheck, you can set up an automatic transfer to your 401(k) account, your IRA, and/or your savings account. You no longer have to make the good-but-hard choice with each paycheck, and you also save yourself the pain that may be associated with doing the responsible thing instead of the what-you-want-in-the-moment thing.
This strategy can also help you avoid the inherent traps of timing the market by having your monthly savings be invested automatically on a regular basis. Key #2: Make one good initial decision to automate your savings and eliminate the pain of making future good decisions.
As a teenager, my dad encouraged me to read the book The Millionaire Next Door. A New York Times bestseller, the book’s lessons are as valuable today as they were 20 years ago.
The author, Thomas J. Stanley, interviewed more than 1,000 millionaires to learn about their lifestyle habits and glean lessons others could apply to reach the same level of wealth. Through Stanley’s interviews and research, he found what surprised many: you would never know the vast majority of the interviewees were millionaires because they didn’t look like it.
They drove 10-year-old cars and wore non-descript clothes. They lived in modest neighborhoods and their possessions were modest, too. Most didn’t scrimp or pinch pennies to an extreme, but they weren’t lavish spenders, either. They were lavish savers, prioritizing their savings and investments to be rich instead of simply looking rich.
This book first taught me the difference between rich people and wealthy people. Rich people earn a lot of money. Wealthy people have accumulated a lot of money. Which group would you prefer to be in? Living below your means is one of the simplest ways to build wealth and achieve your financial goals. Key #3: It’s not what you earn, it’s what you keep.
How is it possible that I could talk about the keys to my investment success and not mention the market, a stock, or my portfolio returns?
It’s because all those things are outside of our control — and they’re also much less critical to our long-term financial success than the areas in which we have 100% control.
Too often investors want to focus on market returns because making money is exciting. Discussing how much you save versus spend is not only unexciting and dull, but that conversation can also be a painful one to have. It’s necessary, though, if you want to build — and keep — real wealth.
You cannot control the stock market, whether Middle East tensions continue to escalate, if a trade war ensues, or when the next recession will strike.
You can, however, decide to pay yourself first, automate your savings, and live below your means. Habits – both good and bad – are hard to break. Establishing good saving habits is a gift that lasts a lifetime.