The Three

Becoming a millionaire is simple, but it ain’t easy. –Anonymous

If you don’t read any other article on this website, this is the one you read. Maybe you just stumbled upon this section of the Blogosphere and were intrigued by what you saw. Maybe you were referred. That’s great. But I know you like your information easily accessible and quick. So here are the three keys to financial success:

- Spend less than you earn.

- Save more that you spend.

- Put what you save into an interest-bearing account.

That’s all you need to know. The rest is just details. The next thing is to know how to write. Can you form letters with a writing utensil? Or can you tap letters on a keyboard in sequence to form common words and phrases? If so, you have the talent required to become wealthy. You’re already in college pursuing a career. That’s a good first step. But many college grads leave without getting The Three in order. But hopefully, you won’t. Here’s how you get started:

1. Spend Less than you Earn.

“Well duh” may be your reaction. But let’s take a look at the numbers. How much income are you pulling in? How much do you spend, including bills, transportation, food, and entertainment? Many people spend more than they think. As income rises, so does spending. We call this the Marginal Propensity to Consume, or your MPC (check Wikipedia for more info.) If you spend more than you consume (for example, if you use credit cards and don’t pay off the balance in full, every month, your MPC is greater than 1, and you’re overextending yourself. And no, economics dictates that you don’t “grow out of it.”

For one month, write down the typical expenses you have in a month, and add them together and measure it against your income. Or you can do what I did and estimate how much you think you spend and use cash envelopes to see how close you are. Most people go over. I know I did.

2. Save More than You Spend.

Oh, now this one is hard. Census estimates tell us that the average American family spends about $40,000/yr in disposable income. Unfortunately, people have taken this term too literally—disposable income does not mean “money you can pretty much throw away.” It’s the amount of money available after taxes, social security, etc. You should consciously put away 10-15% of your pay towards savings and retirement as soon as you’ve eliminated your debt (discounting your home mortgage).

3. Put What You Save into an Interest-Bearing Account.

This is probably the easiest thing you can do. Rewards come to those who take risks, and you can be rewarded if you’re careful. You should fully fund your 401(k), or if your company matches, you should put enough in to reach the match. The rest should go into a Roth IRA is you’re single and make less than 95,000/yr or if you’re married, 150,000 . Otherwise, it goes into the regular IRA.

Here’s how I’m set up. I have a Wachovia savings account for short-term savings (which are for things I am purchasing in the next 2-3 months). My long-term savings are in an ING account, where my emergency fund is growing and money for long-term future purchases (like a nice used car when I move back down South). Then retirement savings are just for, well, that. They will be mostly through my companies 401(k) and IRA plans. I start that in July. However, you have to develop your strategy based on your age and sensitivity to risk. Generally, the younger you are, the more risk you can take because you can climb out of it. More on this some other day.

Well, that’s all for now. See you next week.