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Personal finance concepts such as budgeting are lauded as the way to achieve wealth or the way to get rich. Thousands of personal finance blogs hope you will read their content in your pursuit of wealth. Experts like Suzie Orman try to sell you advice on TV and through books hoping you’ll buy into the idea that managing your money better will make you rich. Well, I’m here to disagree and to tell you that mastering personal finance concepts such as saving and budgeting will not result in you being rich. That’s not to say that these concepts do not play a factor in your pursuit of wealth. I’m going to explain why personal finance won’t make you rich and discuss the right way to view these concepts, especially in your 20s.
The Path To Riches
In a previous post, I talked about how a salary will not make you rich. Today, we will expand on this concept. As I mentioned in that article, managing your income and expenditures wisely is a great thing and is important, but it will not make you rich. Our lives are built in a way that expenses rise as your income rises; therefore, most people will never have a significant surplus of money as a result of a combination of a salary and a strong money management strategy.
Having a strict budget and savings goals are important to simply stay afloat in today’s society. Without these things, you can easily fall into the crowd of those drowning in credit card debt. Simply avoiding becoming a member of this crowd is not your ultimate goal. Your ultimate goal is to build significant wealth and break the cycle (that most cannot) of make more, spend more that simply keeps you afloat.
In order to break this cycle and create a massive jump in your wealth, you need to combine personal finances with a significant jump in income. Without this jump in income, you cannot achieve your goals simply through prudent budgeting and other personal finance concepts.
Finding Your Income Jump
Simply promotions and raises in your career don’t result in a large income jump. In order to land a large income jump, you need to hit a home run (or at least a triple). This home run can come in the form of creating your own business and achieving a high level of profitability. Or, it can come from out performing in some kind of sales job (performance based compensation plus home run like performance). Or it can come through huge gains in some kind of investment. There are many ways to hit a home run and achieve a large jump in your income.
Putting Personal Finance In Its Place
As a 20-something, it is important to take note of what has been discussed so far in this article; but, it is also important to be cognizant of personal finance concepts in the right perspective. I like to think that personal finance concepts like budgeting and saving is the right approach to positioning yourself for building wealth. Furthermore, this phase in your wealth building process is typically in your 20s; therefore, learn how to budget, save and manage your money now so that you are in a position to maximize a future jump in income and maximize all future wealth building opportunities.
So, what should take up most of your time? Well, if you’re in debt and struggle staying afloat financially, then solve your current issues by focusing on establishing a budget and begin a savings plan. If you have already conquered these aspects, focus on ways to increase your income. Perhaps, you should begin working towards a second income stream that will substantially change your financial life.
Conclusion
To conclude, remember personal finance concepts like budgeting and saving are great when it comes to positioning yourself for wealth building. Past that, it won’t do much to make you wealthy. Once you are in a decent place financially, begin focusing on ways to increase your income.
@20s: I keep being disturbed by these posts discouraging people from saving and advising them to focus on income generation. I think that's because I see a culture that worships consumption and spending, and I think that any income increase is generally going to lead to a corresponding spending increase, perhaps even an increase of debt spending (more income means potential approvals for larger loans/credit card limits.)
I keep coming back to the formula for building wealth that is posited by J.D over at Get Rich Slowly - spend less than you earn. Or Income - Liabilities = Wealth. You can increase your income and it will lead to greater wealth (so long as your spending stays the same or at least doesn't increase the same amount as your income), or you can decrease your liabilities, and it will lead to greater wealth (assuming Income doesn't decrease by the same amount). Some people will make greater gains by increasing income, others by decreasing expenditures.
By promoting income so heavily, you neglect those readers who might benefit more from saving or debt reduction. That's not to say income generation isn't a good thing, I'm just trying to provide a little balance.
I'm going to ask a really dumb question: Why strive to be wealthy? Why be rich? Why shouldn't I be comfortably financially secure?
It's not that I am against increasing one's income, but why strive for wealth instead of security? I've known several individuals who got wealthy during the dot-com boom, only to have it evaporate within days of a crash. Why not just have everything you need paid for, with a diversified portfolio and a secure retirement?
I'd say that all depends on how you define financial security.
Good article.
I think that's a major difference between the generations, the increase in entrepreneurial spirit - or as the young folks say entrepreneurial need. Think of yourself as your earnings machine, and then think creatively on how you can earn.
In a world changing so quickly, new companies have to be formed quickly, to take advantage of any opportunity. If people have the skills, or at the very least the idea that they are always on the look out for a good business opportunity, then they will be much better prepared for changes.
In my own life, I've changed careers about ten times in 20 years (a lot for my generation), and there were several periods when I worked two jobs (sometimes one full-time and one part-time, sometimes two part-time). Even now, I often think about starting a small business, just for fun, and maybe to make a few bucks on the side. This is a better way to look at my time, instead of just expensive hobbies.
Sometimes it is NOT an attempt to make a million dollars. Sometimes it's an attempt to survive. When I was caring for a baby, and then toddler, part-time work meant I could be a full-time mom.
Now, part-time jobs can mean a chance for me to keep my skills up, to stay engaged in a changing world, and maybe make a little extra spending money - for the holidays - or pay off a credit card.
My full-time gig might not last forever, or the economy might tank even further, or my pension might not be enough. If it is and there's any extra? I can always find a good cause to support. No problem. (Think starving children....)
The big idea: don't put all your career eggs in one basket.
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