A lot of people mentally file financial plans under “things I’ll worry about later.” For some, the process seems overly complicated. For others, the idea of sifting through the mountain of books, blogs, and opinions seems overwhelming. After all, there are so many money “experts” out there — how do you separate the wheat from the chaff?
Fortunately, building a strong financial foundation starts with four simple, actionable steps. While the road to wealth is long, there are a few key things you can do today to put yourself on track. And you don’t need to take my word for it! Instead, you can draw wisdom from four of the most respected names in finance: John D. Rockefeller, George Clason, Dave Ramsey, and Robert Kiyosaki.
Below you’ll find four of their best tips; by acting on these lessons, you too can become a master of money.
#1. Budget Wisely, and Give Every Dollar a Job (John D. Rockefeller)
Let’s start with the basics. Before you know where to go with your money, you must understand where you are. No one demonstrated this better than John D. Rockefeller, who started from extremely humble beginnings and became the richest man in the world.
From a young age, Rockefeller kept a small ledger with him at all times. He recorded every dollar he received, spent, donated, and invested. Bookkeeping became a way of life, and even after making millions, he loved to pore over financial records. In his own words, from a talk given at the Fifth Avenue Baptist Church:
“Now let me leave this little word of counsel for you. Keep a little ledger, as I did. Write down in it what you receive, and do not be ashamed to write down what you pay away. See that you pay it away in such a manner that your father or mother may look over your book and see just what you did with your money. It will help you to save money, and that you ought to do.”
Your budget is where it all starts. Budgeting is not a boring chore, but a tool to help you achieve self-mastery. Instead of a basic accounting of inputs and outputs, it becomes a declaration of your priorities.
How do you start budgeting in a sustainable way? First, create a clear and concise record of where your money is currently going. The easiest method is to look at your bank and credit card statements, and record what you have actually spent in the last three months. This is the only way to realistically analyze your purchasing behavior.
Depending on your habits, this may be a bit painful, and a bit embarrassing. And if you’re doing it with your significant other, you may unearth some things you didn’t expect. However, it is crucial to your future success.
Next, you need to determine your priorities. Your past actions do not dictate your future decisions. You can in fact use your money differently.
What’s important to you? Do you want to save up for a nicer place to live? Would you like to go on a great vacation? How about tackling that mountain of student debt? The choice is yours. The point is to decide deliberately, and act intentionally. Working within a budget allows you to gain control of your financial life, and build your future in a direction of your choosing.
Fortunately, you no longer have to use a little notebook like Rockefeller (unless you want to, of course!). There are some great websites and apps to make this process much easier, and help you think differently about your money. My wife and I use You Need a Budget, and it has been a fantastic tool. Other people use Mint.com, and it works well for them. But whether you use a notebook, a smartphone, or a system of envelopes, a budget can change your life.
#2. Pay Yourself First (George S. Clason)
Now that you have a great budget to steer you toward your priorities, it’s time for the next step: increasing your ability to reach those goals. For that, we’ll turn to someone most folks may not have heard of. George Clason was a soldier, author, and entrepreneur, and is best known for parables on thrift and wealth building. While you may not know his name, you’ve probably heard of his most famous work, The Richest Man in Babylon.
First published in 1926, the book contains many gems of wisdom. However, its most famous maxim is simple: pay yourself first. Rather than paraphrase, let’s go right to the source:
“Now I shall tell thee the first remedy I learned to cure a lean purse. Do exactly as I have suggested. . . . For every ten coins thou placest within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.
Deride not what I say because of its simplicity. Truth is always simple. I told thee I would tell how built my fortune. This was my beginning. I, too, carried a lean purse and cursed it because there was naught within to satisfy my desires. But when I began to take out from my purse but nine parts often I put in, it began to fatten. So will thine.”
Sounds simple, right? It is. It also probably seems impossible. Put away the first 10% of your income, without touching it? No way. The utility bills press in, the rent is due, and the internet doesn’t pay for itself. And once your needs are met, there are lattes to sip, movies to see, and new phones to buy.
While there are exceptions, for the most part this applies across income levels. Your standard of living will be remarkably similar when you start living on 90% of your pay, and you will finally have the capital to make progress toward your other goals. Don’t believe me? Run an experiment, and test it for yourself for just three months.
Again, modern tools can aid you in your noble quest. Set up transfer rules with your bank, so the money automatically moves to a less accessible location. Or use one of the budgeting tools above to immediately allocate at least 10% of your gross income to a different category. While it’s tough for the first couple months, you will immediately notice a positive change in your accounts.
#3. Live Below Your Means (Dave Ramsey)
Now that you’re sticking to a budget, and saving the first 10% of your income, it’s time to make choices about where to spend the rest. And for advice about using the remaining cash, let’s turn to a financial expert of modern times: Dave Ramsey.
Ramsey, just like all of the folks on this list, embraces some ideas I don’t personally believe in (or follow). But when it comes to encouraging frugal living, he is a standard bearer. Here’s but a sample of his wisdom, from The Money Answer Book:
“We live among a bunch of people who are deeply in debt and have no money saved because their emotions were tricked. Just like drug addicts, people have been conned into believing that happiness will come with the next purchase. You probably think I am writing about someone else, but I’m not. I am writing about you. I know because I am suffering from the same disease — but I am recovering and so are many of you. The human spirit was not created to attain peace, contentment, or fulfillment by gathering more stuff.”
Cuts pretty deep, doesn’t it?
Unfortunately, we have been marketed to since birth. Commercials, billboards, and pop culture have told us over and over again that happiness is something that can be purchased. But deep down, you know the truth. That new car, bigger house, or new iPhone cannot, and will not, bring long-term contentment.
By changing our mindsets, we can choose to live more frugally, and be happier as a result. If driving a 10-year-old car reduces your monthly bills by hundreds of dollars, it’s probably worth it. If you choose a smaller home, but don’t get cold sweats thinking about your payment, that’s a worthy trade. If no one ogles your new cell phone, but you have enough money for your dream vacation, you’ve made a wise choice.
Be thrifty and thoughtful about where your money goes. Remember, it’s a lot easier to spend it than earn it.
#4. Understand the Difference Between an Asset and a Liability (Robert Kiyosaki)
If you’re following along, and implementing these tips, you are off to a wonderful start, and probably ahead of 90% of the population. This last key is for folks who want a bit more. Perhaps you’re looking to retire early, or move into full-time charity work. Maybe you want to save your kids from the burden of student debt, or have additional income streams outside of your job.
It is possible to reach those goals through smart budgeting, solid saving, and frugal choices. However, Robert Kiyosaki, of Rich Dad Poor Dad fame, recommends an additional step if you want to become wealthy:
“You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.”
Kiyosaki recommends you keep your day job, and work hard to be a great employee. However, he also champions “minding your own business” by taking control of your own financial future. Instead of putting your retirement in the hands of your company, a financial planner, or the government, he suggests you buy assets and take care of yourself.
So how does he define an asset and a liability? Rather than using complex jargon or advanced accounting methods, he keeps it simple:
“An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.”
So, things like income-producing real estate, stocks, bonds, royalties, and mutual funds are assets. These things have value, produce income, or appreciate (and have buyers that want them).
Other stuff, like your personal house, your car, big screen TV, boat, and student loans are liabilities, because they take money out of your pocket.
These are not the definitions according to strict accounting principles. However, they help simplify a complex topic, and act as practical guideposts for your purchasing decisions.
Finding the right balance is crucial. When a dollar comes in, how do you utilize it? Do you have the discipline to use your money to your advantage? Or will you let it put you further in the hole? That decision is yours to make, and it will determine your financial future.
These are four of the best tips from four of the most well-regarded financial experts in our recent history. It’s remarkable to note the striking difference between something simple and something easy. Each of these keys is simple at heart. Budget your money. Pay yourself first. Live below your means. Buy things that put money in your pocket, rather than things that take money out.
However, none of these keys are easy. They require tough choices day in and day out, and the ability to delay gratification. So now, the choice is yours. Becoming a financial stud is within your grasp. Will you make it happen?