It’s not how much you make, but what you do with the money you have that counts.
Morgan Housel, a senior analyst at financial services company The Motley Fool, made just this point in a recent newsletter on the basic tenets of successful investing. One of his golden rules: Most financial problems are caused by debt.
If you don’t spend your earnings carefully, even a six-figure salary won’t safeguard you from money troubles. As Housel writes:
“I have a family friend who earned several hundred thousand dollars a year as a specialist in an advanced field. He went bankrupt a few years ago and will probably need to work for the rest of his life. I know another who never earned more than $US50,000 a year but retired comfortably on his own terms.
The only real difference between these two friends is that one used debt to live beyond his means while the other avoided it and accepted a realistic standard of living.
Just as saving gives you options in the future, debt takes options away. Not having the option of flexibility is the root of most financial problems. You can be a brilliant worker (or investor) and find yourself in financial ruin if you don’t respect the power of debt. Income, wealth, and standard of living aren’t as correlated as people think.”
Whether you make a modest living or bring in millions, you’ll always do well if you live below your means, save the difference, invest it wisely, and wait patiently. It’s pretty basic advice, but as Housel says, sometimes simple is better than smart.
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