The Best Financial Advice I’ve Ever Heard

July 06, 2017

That’s how the advice was characterized in the title of an article I read recently and it actually lived up to its name. After a five year study, the author found that there are two main ways to wealth for self-made millionaires (not including inheritance, marriage, or winning the lottery):

Pursue a dream.
OR
Live below your means and invest your savings over a long period of time.

Option 1: Pursuing a Dream

I’m often irked when I hear successful entrepreneurs and celebrities advocating the first path. The problem is that it requires both a lot of sacrifice and a lot of risk to achieve a dream. We see the outcomes, but we don’t often see the sacrifice or the risk. Hearing about countless hours of hard work isn’t as exciting, and no one listens to all the people who took the risk of dropping out of college and giving up on a safe career only to fail at acting or whatever else their passion was.

It’s not that this is necessarily a bad choice. Some people who pursue their dream do succeed. Just be aware of the sacrifices and risks you’ll have to take.

But it’s not always an either/or. One option might be to first try to achieve some level of financial security and independence first. For example, Arnold Schwarzenegger first made millions of dollars by selling fitness equipment and investing in real estate before he embarked on his acting career. He didn’t want to be like other aspiring actors he saw that struggled financially and were forced to take sub-par roles to pay the bills.

Option 2: Living Below Your Means

Since most people don’t have the desire to make the sacrifices and take the risks required to pursue a dream, the article’s author found that 83% of the self-made millionaires he studied became rich simply by living a very frugal lifestyle. (boring, I know) This is a path that doesn’t require immense talent, effort, or luck. The main obstacle is “lifestyle creep” or the tendency of people to automatically increase their standard of living as their income rises. As a result, many of them never get much beyond living paycheck to paycheck.

So what’s the secret? The article says the key is to maintain the “same house, same spouse, and same car” as long as possible. After all, houses and cars are two of the biggest expenses Americans have and anyone who has gone through a divorce can tell you it can be quite costly as well.

One advantage I’ve found of minimizing high fixed costs like homes and cars is that it leaves me more money not just for savings, but also for discretionary expenses like dining out, shopping, travel and entertainment. This gives you a certain level of financial freedom in your everyday life that makes you feel less constrained. Research has shown that spending money on experiences can particularly lead to happiness.

In contrast, buying a new home or car can typically only give you a temporary boost in happiness before you get used to it and need to upgrade again to get the same high. In the meantime, having less money to spend day-to-day can make you feel depressed and constrained. It’s kind of like going on a diet vs finding a way to eliminate a bunch of calories everyday so you can eat more of what you want.

So if you want to stop living paycheck to paycheck and become financially independent, you have two choices. You can either make the sacrifices and take the risks necessary to pursue a dream or you can stick to the same house, spouse, and car as long as possible. The second may not sound as exciting but as they say, slow and steady wins the race.

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