How to Systematically Get Rich in 3 Basic Steps

Personal finance isn’t complicated. If you have a basic education, read a few books, and follow a basic financial strategy, you should be able to become debt free, become independently wealthy, and retire early.

No, I’m not just making this up as a marketing gimmick. The vast majority of people in the West spend way too much, don’t invest correctly, and end up wasting huge portions of their lives managing their finances in an extremely inefficient manner.

On this page, I’ll be summarizing basic personal finance principles that, if followed, will allow you to maximize your savings, maximize your investments, get out of debt quickly, and find financial freedom. I’ve summarized all of the principles under three general principles that lead to financial freedom and security. Interested? Read on:

1. Stop Spending So Much.

The tips listed under the banner of “spend less” might seem extreme, but they really aren’t. Following these steps will increase your savings and investments drastically — this will lead to you being wealthier. This is unavoidably true.

• Cash to Debt.

Most people judge the risk of their debt on the basis of “debt-to-income ratio”. As in, your ratio is calculated by how much debt you have compared to how much income you have. If you have 30k in debt and make 100k per year, your debt to income ratio is roughly 30%.

I think that’s a horrible idea. Instead of comparing your debt to income, you should instead look at it from a debt-to-cash ratio. This increases your financial security — if you lose your job, you still have enough cash to pay off your debts. Yes, this means you’ll need to minimize your debts and probably have a lot more cash on hand than you already have — that’s okay, because that’s the whole idea.

I’ve done this since college, and it’s increased my financial security, as well as financial freedom — I’m not controlled by debt.

• Cheap Car.

People typically drive a car that’s worth more than they can afford — way more. The more conservative financial planners say you should keep your car’s expenses at no more than 20% than your take-home pay. I say go a little further — you shouldn’t spend more than 10% of your yearly income on your car.

That means if you make 70k per year, you shouldn’t spend more than 7k per year on your car. And, honestly, if you make less than 70k per year, your better off financially if you put as much of your money back into investments and savings as possible. This is an area that’s extremely hard for a lot of people to actually do.

I actually personally drive a car that’s been taken care of and runs perfectly well — it even has a little get-up-and-go. But it’s worth roughly 5% of my yearly income — if it suddenly burns up or something, it will barely dent my finances at all.

Don’t worry, this isn’t as bad as it sounds. If you routinely put 10% of your income toward savings for the sake of a future new car, and you make 70k per year, you’ll have 21k in savings after 3 years, which means you can purchase an extremely comfortable car — only with cash.

• Little House.

Housing is one area where I don’t think a specific expense-to-income ratio makes sense, because housing prices are so different around the country — and even around the world.

I will say that, until you are financially independent and earn a nice income from your investments, you should keep your living quarters as modest as possible. To be honest, even having a “normal” sized house for one’s income bracket is probably a little overkill — just a hundred years ago, a normal house would have been seen as an extravagant mansion.

2. Start Increasing Your Income.

Perhaps one of the biggest mistakes people make is in assuming that their income will and/or should stay roughly the same. This isn’t true — your income should increase at least a little every few months, with raises, investments, and business projects.

• Ignore Net Worth.

Net worth is overrated. The only reason a net worth can have any impact on your life is on the basis of using the valuables (like living in your house or using your car — both of which are part of your net worth) or in your ability to make money from your assets. In other words, it boils down to use and income.

You can save yourself a lot of time and achieve a rich lifestyle much quicker if you ignore your net worth and just focus on achieving a higher income.

Note: this doesn’t mean all your assets should necessarily provide income. You should have some insurance assets, like gold and other precious metals — this is for insurance, though, and is not the main focus of a strong portfolio. You should also have at least some of your money as part of a permanent portfolio so that no matter what happens to the economy, you still have something to work with. These are both insurance moves.

• Build Multiple Incomes.

Having one income source is extremely risky. Having two income sources is still risky. Ideally, you should have as many income sources as you can build — the more you have, the less likely you will be to completely lose all of your income at any particular time.

For example, if you only have your job as your source of income, if you lose your job you also lose your income. With unemployment and underemployment somewhere in the 20% range right now, the risk here should be obvious.

Create an income with dividend stocks. Create an income with a small business. Create an income learning a hobby as a trade. Create an income speculating on buying something and selling it online. Learn how to invest in stocks — though be careful with this. Find a source for creating income, and add it to your financial plan — passive income is always best.

• Fail Proof Investing.

To first step to becoming wealthy is in not going broke. Yes, this is an obvious point — and very few people really “get” it. If you want to make sure your investment portfolio is as secure as it can get — without losing profits — read the book “Fail Proof Investing” by Harry Browne. I won’t comment any more on this — you should just buy the book to learn it. I can’t recommend it enough.

3. Have the Right Mentality.

Money isn’t just about how the math adds up, or what ratios you use. It’s mostly mental. If you have the right perspective and the right mentality, you’ll end up automatically making the right choices without even having to think about it.

• Always Start Something. It’s easy to get stuck in a rut. This is a huge obstacle to achieving substantial financial success. The richest of the rich all have one thing in common: they’re always starting something. New projects, new books, new businesses, new reforms to their finances — don’t be afraid to do things differently.

• Become an Expert. This is the dirty little secret of the experts: it doesn’t take long to really become one. If you spend a year or so ardently studying a field or market, you’ll probably know it inside and out. Make becoming an expert in an industry your hobby, and spend time and resources in your education. If you’re an expert in an industry, and you’re open to starting new things, you’ve probably got all that you need to launch a business and build wealth systematically.

• Money Isn’t Everything. Don’t forget, it’s not about the money in the short term — it’s about creating value and money in the long term. Don’t focus on nickels and dimes. Instead, focus on generating ideas that have huge potential. The bigger the market you tackle, the more likely you are to become wealthy.

4. Bonus Tip: Cash is King.

Always have cash on hand. Cash is king — always has been, and always will be. The more cash you have on hand, the less likely you are to miss bills, or get driven out of business. The more cash you have on hand, the more likely you are to be able to take advantage of chance opportunities that show up. Cash helps you defensively and offensively — cash is king.

I’ll be writing more about why everyone needs large stores of cash in the next few weeks. If you’d like to stay updated to this website, just subscribe — it’s the best free investment you can make.

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