In personal finance we always say that financial success starts with saving. It’s a good start, but it isn’t entirely right. And yes, spending less than you earn is one of the principles of good money management, just as staying out of debt can boost our capacity to save and make our capital grow.
That’s when we invest the money we’ve saved, compound interest starts to fatten our capital, and one day, in the long run, BAM! We’re genuinely rich. Put like that, even a monkey could do it, but the truth is that very few people pull it off, for a simple reason: this view of personal finance is wrong, and if you focus only on saving, you won’t get there.
In fact, living frugally is often confused with living comfortably poor while we build wealth. Put that way, that’s not my life, and it’s not the road to financial freedom either.
(Read: This is the best question for measuring the health of your personal finances)
But you do have to save, right?
Of course, but just as in business and even in politics, there are two types of strategy:
- The defensive strategy.
- The expansive (or attacking) strategy.
Any person, company or government that chooses a defensive strategy when it comes to money or the economy is simply entering a process that drags out an inevitable death.
I always compare it to a boxer facing a stronger opponent who decides to cover up and retreat into the corner to protect himself from the punches. Sooner or later, the opponent’s punch gets through. In fact, you can’t win a boxing match by protecting yourself. You have to throw punches to win.
The same happens with companies that, when they enter a crisis, decide to pull back instead of moving forward: they lay people off, sell assets and cut investment, leaving the way open for another company to take an expansive stance and end up crushing them.
And it’s the same for people who focus only on saving. Saving 10 cents on a coffee and 5 euros on your grocery bill, or using some of the extreme saving measures we described, won’t make you rich if you don’t look for other sources of income. Sooner or later, the saving strategy runs into some unexpected setback that throws years of saving effort overboard.
If you’re given the choice between saving and earning more money, choose the second option.
Real frugality means not feeling the need to accumulate things we don’t need, not spending money we don’t have on something that, if we think twice, won’t make us any happier, and, of course, living within our means, which basically means spending less than we earn.
Spending less money is actually the easiest option, and perhaps that’s why most people choose it: anyone knows how to save money by having coffee at home instead of at a café, or by drinking at home instead of having a couple of drinks out with friends.
We could even borrow the strategy of the young man who, to pay off $32,000 of debt, lived in a van for two years until he’d paid back the last cent.
The hardest option, but by far the most profitable, is to earn more money. Wealth doesn’t come from saving but from finding ways to generate more income and build more assets, businesses included, unless you’re an executive at a big company pocketing more than a million euros a year.
In other words, I’d split the financial advice into two sentences: 1. To generate wealth, you can’t live like the rich. 2. To build wealth, you can’t live like the poor. Sounds contradictory, doesn’t it?
Of course, sometimes, and only temporarily to get through a rough patch, extreme saving is advisable, which is what I call the financial prison.
As my friend Altucher likes to say, the rules of personal finance are neither personal nor financial. In fact, financial education is often useless if it doesn’t come with a change of mindset.
I can teach you to multiply your money through investments, I can advise you to ask your bank for interest on your money and to keep inflation from eroding it, but if we’re talking about you managing, with a lot of effort, to save €2,000 by the end of the year, that won’t get us anywhere.
See also: 7 people who have succeeded working from home
Rules of financial education
- Don’t focus on saving; focus on making more money.
- Start working and/or creating sources of income (businesses, assets…) as early as possible.
- Avoid debt for life’s biggest expenses: a house, a car on credit and a lavish wedding.
- When you’re starting out, avoid investing in things you don’t understand or can’t control. In other words, avoid putting your money in the hands of others, at least at first.
- No ignorant person makes money managing their own money. So prepare yourself financially before you step into the ring with the bull.
- If you make a mistake, don’t cry or feel sorry for yourself. Learn the lesson, get up and go at it again.
- Follow these 34 money lessons we shared a few months ago.
But you’ll need other skills
As we said above, most people make a mental separation between business, sales, leadership, investing and financial education.
And it’s all connected. In fact, financial education is only 1% of your financial success, because if you don’t have money, all the financial education in the world won’t give you financial freedom.
So you’ll need sales and negotiation skills
As we’ve said hundreds of times, we’re all salespeople. We’re all selling all the time, because we all have our own business, our own brand. Whether you succeed in business or get hired by a company depends on exactly the same thing: your skills and your personal image.
So if you can’t improve your sales and negotiation skills, you start at a clear disadvantage these days.
You’ll need the ability to create “whatever it takes”
If you’re an employee, you already have the one ingredient needed to lose your job, because nobody can fire someone who’s unemployed. Most people aren’t aware of the need to look for alternative sources of income while they’re employed. They only remember once the problem has arrived, and racing against the clock is a great destroyer of creativity.
People skills
When we talked about the 50–30–20 rule, we saw how people skills will always count for more than how hard you work. In fact, when it comes to career success, working harder is what counts least.
Be very good at something
They say that if you have a talent, it’s easy to make money. And we’re not talking about being the best at something, although being the best would obviously make things easier. Often, people who are mediocre in their field have managed to build a strong personal brand and use their people skills to promote it.
Almost everyone knows how to do something that some people would be willing to pay for. And if you don’t have any special talent, that’s not a problem either.
(Read: How to know what to do with your life: the perfect business or job for me)
And finally, avoid copying other people’s lives
I’ve often found that what worked for some people didn’t work for me, and vice versa. That’s why you need to be very observant and pick ideas from here and there, both from people who have succeeded and from those who have failed, because you can learn equally from both.
Finally, and even if it still sounds like a cliché, most people will make mistakes at some point, and what separates the successful from the losers is the attitude they bring to that failure, and the energy with which they’ll try again as many times as it takes.
That’s why financial education is one of the hardest subjects of all: what it probably has least to do with is finance.
Further reading
- The 8 beliefs of successful people
- 21 things young people and university students should know and accept in their twenties
- 10 ways the rich think differently
Featured image: Unknown author, Public domain, via Wikimedia Commons.
