My best friend, Bill King, is 11 years older than I am.
Like me, he’s a CPA and a CFP. When I was just starting out in my career, Bill gave me the best financial advice I've ever heard.
“Same house, same spouse, same car.”
Bill and I were discussing what it takes for the average individual to become financially free. Bill said that most people live paycheck to paycheck. He continued:
“The worst part about living paycheck to paycheck is that at the end of your working life, you literally have nothing to show for all of your hard work, except a small amount of equity in your home and your Social Security benefits. As a result, most people are forced to sell their home and survive on Social Security benefits when they can no longer work.”
I asked Bill why that was so, and he said people have a tendency to spend exactly what they make. They increase their standard of living as their income goes up. They buy bigger homes with bigger mortgages, bigger utility bills, higher maintenance costs, and higher real estate taxes. They buy more expensive cars. They go on more expensive vacations. They go out to restaurants more. They buy new furniture even though the old furniture looked just fine. It's called "lifestyle creep."
“So, what’s the solution? What’s the secret to being financially free when you stop working?” I asked. These were Bill’s exact words:
“Same house, same spouse, same car.”
I never gave those words much thought until I began studying the daily habits of the rich and poor. In my five-year Rich Habits study I discovered that there were two primary paths toward wealth for most self-made millionaires:
1. Pursue a dream. Pursuing a dream comes with enormous risks and enormous sacrifices. Very few are willing to take those risks and make those sacrifices, and this is why only a few brave souls take this path.
2. Live below your means. When you live below your means, you are able to save money. When you have savings, you can then wisely invest those savings. Given enough time, your wise investments can make you financially independent or even wealthy.
In my Rich Habits Study, 83% of the self-made millionaires chose Path No. 2 — living below their means. They bought a modest home and lived in it for the rest of their lives. They purchased good used cars. They ate at home, not in restaurants. They went to Goodwill stores to buy their clothes. They were frugal with their money.
Path No.2 is the path most everyone can take. It does not require enormous risks or enormous sacrifices. If you automate your savings, you can direct part of your paycheck into savings accounts, retirement plans, and investments. Once automated, the heavy lifting is done. Through automation, you put yourself on autopilot for living below your means because you will be forced to live off of what’s left. Automation forces you to live below your means.
Becoming financially independent is a process, and the path you take is the process. Which path is right for you? Only you will know. But if creating a life of financial freedom is important to you, you must choose a path. At some point, you must begin the process of creating your wealth.
Thomas Corley is the author of "Rich Habits: The Daily Success Habits of Wealthy Individuals," and "Rich Kids: How To Raise Our Kids To Be Happy And Successful In Life."
