First of all, let me say that I’m NOT a financial advisor. I’m not an expert with personal finances. I just like reading and learning about finances. The below “strategy” is not financial advise to anyone. It is only my current way of thinking about how I want to save and invest my money.
In The Richest Man in Babylon, they say that all people should pay themselves first and save 10% of any income they earn. I say, why not more? If you can optimize your life, it’s very possible to save more money without feeling deprived.
It all starts with having the right mindset (being grateful for what you have and not feeling like you have to “keep up with the Joneses”). You aren’t depriving yourself when you save at least 10% of your paycheck. You’re paying yourself and investing in your future. The first part of the saving should go towards your emergency fund. Once you have that, the savings should be invested (see where I like to diversify my portfolio below).
Second, you need to be intentional with where your money goes. It’s very easy to let your lifestyle creep up to the amount that you make. I remember when I got my first job out of college. I really didn’t make much. It was probably the equivalent of $35,000 for a year. But I felt RICH! After increasing my income, it would have been easy to increase my expenses too. But if I could live happily off of $35k per year, why should I not be able to bank the balance of the money when I make $50k, 80k, or more than $100k? Control your expenses and aggressively pay off all of your debts (with the possible exception being your mortgage).
Third, you need to beef up your investments. Have real, liquid cash for your emergency fund. Obtain credit lines if you don’t have a 3-6 month emergency fund, but keep in mind that credit lines are more like fake liquidity and can be removed at anytime. As far as investing is concerned, if you’re not an expert in a field (where you have a leg up on the competition), I think it is wise to diversify…
1. Some money in the bank (money market accounts, CDs, high interest savings accounts, no fee checking accounts)…this is your “emergency fund” and your everyday spending money. Don’t worry about optimizing your returns here. This is about convenience/accessibility.
2. Keep some money in stocks (primarily index funds…and cover different spectrums of aggression/conservatism, different countries- U.S. vs Europe vs developing nations, different categories – tech vs medical vs natural energy, different timelines, S&P 500, etc.).
3. Keep some money in real estate (your home and rental properties)…this is tangible. People always need to live somewhere. It would be nice to own these free and clear, but as long as they are cash flowing after all expenses are paid (including paying the principal, interest, taxes, insurance, and withholding money for capital expenditures, repairs/maintenance, vacancy, and property management).
4. Keep some money in bonds if you are more risk averse or getting closer to retirement (only in governments that you feel are strong and can repay the debt)…have a lower percentage of your money here.
5. Some money in a small business that you own/partially own (self storage, laundry mat, car wash, pizza chain, property management company, blog, or other “side hustle”).
Finally, after you’ve controlled your expenses, and invested what you can, try to increase your income by earning a raise at your current job, changing jobs/careers, or earning income off of a side hustle.