Wednesday, April 04, 2012

Earn Large, Live Small

Here's my simple strategy to building wealth quickly: maximize and grow earnings; live at least 20% below those earnings.  Building wealth is all about earning large and living small.   To me, many people make the mistake of doing the opposite: earning small and living large.   In the spirit of having a provocative discussion, I'll share some hypothetical numbers, which I usually don't do.

Earning Large
To me, earning large is a minimum of $80,000 per year and preferably over $100,000 for a household.  These numbers are well within reach of many households, if they choose to strive to achieve them.   Here are some of the opportunities: 
  • Education.  Get a degree in a field that leads to a high paying profession.  For example, starting salaries for engineers at top corporations are about $70,000.   Degrees in chemistry have starting salaries around $50,000 with large companies.   Avoid interesting degrees that lead to low paying or no jobs.

  • Dual income.  $80,000 a year is a $40/hour paying job for one person.  However, a $40,000 a year job is a $20/hour paying job for one person.  Two times $40,000 is $80,000.   The day after my spouse and I got married, we became an "earning large" household due to combined incomes.

  • Longer hours.  Working overtime has been an option during the economic recovery.  I've seen people boost their income 20-30% at time and half and double time rates.

  • Multiple jobs.  A simple option is to work multiple jobs.  At minimum wage, working 80 hours a week is about $30,000 per year.   For reference, when I was a manager, I worked 60 to 80 hours a week and in my case, working OT meant working on my "own time."  :-)

  • Work for a large corporation.  Having worked for a large corporation, I know employees are paid well to live with the corporate rules and bureaucracy.  In my company, new hire college graduates are being paid a minimum of $40,000/year and all new hires are probably averaging $60,000 a year or more.
  • Of course, all these options are about making a "harder choice," which some, perhaps many, people are not willing to make.

    Living Small
    To me, living small means putting $10,000 to $20,000 in savings every year in 401Ks, IRAs and taxable savings accounts.  If a household is earning $80,000 to $100,000, saving $10,000 to $20,000 should be possible.  Here are some approaches:
  • Pay oneself first.   The first payment from every paycheck should go to savings. Once this obligation is met, the rest can be spent.

  • Avoid debt.   With the exception of a home mortgage and an education that leads to a high paying job, debt should be avoided. 

  • Focus on what's necessary.  I need basic food, transportation, clothing and shelter.   Everything else is an upgrade or discretionary: TVs, cable/satellite, cell phone, many electronics,  newspapers, Internet and entertainment.  One doesn't need to eliminate all upgraded or discretionary items.  For example, we do have the Internet, a prepaid cell phone and have a DVD player. 
  • Living small is not about being deprived.  Again, it's about making choices. One can't have everything when just starting to build wealth.

    To me, earning large and living small can be done by a significant majority of Americans who are willing to make the extra effort and the additional sacrifices necessary to build wealth.

    For more on  The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2012 Achievement Catalyst, LLC


    Kurt @ Money Counselor said...

    Excellent advice, and far too rarely followed it seems. Delaying gratification and avoiding lifestyle inflation are key to long-term financial security and prosperity.

    Brent said...

    My advice on what to study in college -- major in what you like and what will earn you a living. Minor in what you love. It will also make you a more well rounded person.

    Rye @ PPI Claims/Reclaims said...

    I have been meaning to do just that - live small. Struggling but making progress. I still haven't been able to save first before anything else. But this is definitely on my checklist of things to accomplish.