Three Simple Steps to Financial Security

Kiplinger shares three simple steps to financial security, listing them as follows:

1. Save for a rainy day.
2. Be prepared for an emergency.
3. Invest for retirement.

This is a good enough list, thought I prefer my How to Get Rich in Three Easy Steps. For those of you who don't want to click through to read it, my steps are:

1. Spend less than you earn.

2. Invest your savings regularly in good, solid investments.

3. Do this for a long time, letting the power of time and compounding work for you.

Anything to add?

Comments

[Pat]

It seems to me that Kiplinger's steps 1 and 2 are the same thing. At least from a financial point of view.

[fathersez]

Nope!

Your 3 steps say it all.

The rest is just elaboration..just a little more than blah, blah, blah!

How I wish someone had beaten me on the head with your 3 rules much much earlier.

Do you have a 4 rule....better late than never or something like that?

#1 should be Earn more than you need to live on.

If your annual income is $1, good luck spending less than you earn.

[Aaron Stroud]

Treasuring your family might belong on that list as well. If you love your family and kids when life is good, they'll likely be there to help you weather any storms.

[JD]

You are missing one of the most important steps - EARN MORE MONEY!

You repeatedly write on your blog "Its not what you earn its what you keep" -- that is 50% crap. Because it is what you earn AND what you keep. I don't care how you slice it, if you earn only $50k per year you are never going to be "rich" regardless of how much of a miser you live like. The FASTEST way to wealth is making a lot of money. If you make $500K a year putting $1 million in the bank in a few short years is child's play. If you make $50k a year it will be an extremely long and painful road. Your posts remind me of the book "Millionaire Next Door" - instead of engaging reality you simply say what people want to hear - i.e. the easy way out. I make a high income and I put away over $1 million in cash and stocks at a young age without having to live like a pauper but instead enjoying flying first class everywhere, staying in 5-star hotels, eating $400 meals regularly, buying bespoke suits, and so on. Someone with your mentality would look at someone like me and think I was spending foolishly and risking my future blah blah blah. While the fact is I've saved more by the time I hit 30 than most people save in their lives. Why? Its because of what I EARN. What you EARN is key.

[joey]

JD,
I definitely agree with you...the problem is I do make 50k a year and would love to earn more, just running into a few road blocks. Would you offer any advice on how one can increase their income to your level? Thanks!

I think the point is that people who make $50k a year need to save and invest to maintain a lifestyle of 50k a year. If people are content to make 50k a year throughtout there entire life then chances are they don't want or need a high priced lifestyle. People only need to earn more if they want the high priced luxuries in life. Most don't or won't put in the effort neccessary. High priced professions are extremely hard for the average person to break in to.
What you earn only makes a difference it you want to change your lifestyle. If you don't the 3 steps are true to save so you can maintain your lifestyle not to be flying on private jets. The original post say Financial "Security" not flithy stinking rich.

[Underpaid Doctor ?]

If find it funny that a lot of people throw around big numbers like 500 k a year and so on. What percentage of the population makes half a million dollars or more a year compared to sub 60 k . Most high powered executives and Ceo's don't pull down that much money. I did decide to earn more and went to med School. Being a doctor for the last 6 years and I don't make 500k a year. I problably could if I worked myself to death, but my family is much more important than the almighty dollar.

[JD]

Joey, I can't offer much advice on how to earn more money. For me its easier to offer advice to someone really young - high school age or so. The reason is because I didn't go through a very creative route to make money, I went the typical Ivy League "fast track" way. That is, I went to a top college and got a job on Wall Street. I probably make less than average compared to my peers but it is still a very good living. A lot of people will tell you to start your own business, and while it is true that that is how a lot of wealthy people made their money you also have to consider the risks and the true potential upside. The vast majority of small businesses fold, and of the ones that survive only a handful actually make big money, most are just getting by. A lot of it depends of course on what type of business - if you're starting a candy store the chances of becoming rich are slim as hell, if you're a successful trader starting a hedge fund or a prominent lawyer starting your own firm the chances are much better.

I agree with the Underpaid Doctor that only a small percentage of the population makes $500k or more per year (however sometimes in my business it feels like everyone is making that or much more). However the numbers themselves are not important, my point is that looking at ways to achieve wealth or even more simply "financial security" without looking at both sides of the equation is pointless. I wholeheartedly agree that saving and living below your means is important, whether you make $10,000 a year or $10,000,000 a year. But the point is the more you make the more room you have to save. A few years ago I was earning half of what I am today but my spending level hasn't really changed much at all. So my savings rate has increased by a huge multiple simply because my earnings have increased.

Also, to the Underpaid Doctor, I sympathize with doctors in some ways. I have a number of friends who are doctors and hear about how hard it is. Some of them do make great money but for the most part they could've easily made that money and much more without all the pressures of med school if they went into something like investment banking. However doctors still make a comfortable living. I'm assuming you make low six-figures, if you were making $30,000 how much do you think you could actually save? Probably not much. You might be saving more than $30,000 per year right now. Its because of your earnings.

[Underpaid Doctor?]

I think the financial amounts are all relative to age. If you are 21 years old and are making 50 k / year it is alot differnt then someone who is 48 yrs old and making 50k/yr. If a couple is just married and both 21 yrs old and both make 50-60k/year. Then the have a good chance that they can generate a sizeable nest egg as the climb there coporate ladders in there fields. I choose a different path and have no complaints about my income it allows me to save generously. On the other hand I would not say that lower income earners can't do it (maybe not as much). Yes , it is a long road sometimes, but it should not be discouraged. In regards to the millionaire next door it was not an accurate assesment of millionaires , but they were millionaires none the less.

For younger people I would say you are on the right track for success if they ...
1)Start Career with a decent starting salary, with good future earning potential or advancement( Salary Amount is irrelevant to a certain extent)

2) Save and invest wisely and limit expenses (save a percentage and enjoy the rest)

3) Be allergic to debt from day one

4) Marry a spouse who has the same financial/life goals as you
(If you have a single income of 60k . Life is alot harder then if you have a dual income of 60k each )

If these steps were followed people could easily be
"welathy" down the road and you wouldn't have to make high six figures at all. There are easy ways to generate wealth , but this one applies to anyone

[Newbie]

I have to agree with JD. While there is truth in the applehood and motherpie of not over spending, reducing debt, investing at low cost and sensibly.. you do need to concentrate heavily on generating income and then riding the compounding curve. It also provides the luxury of a very comfortable lifestyle while saving.

Over the last 10 years (I'm 30) I've learned this the hard way. I spent too long in school (though the degrees are useful there are not a prerequisite) and too little time generating income in my chosen field. I spent a few years traveling but don't regret a moment of that! I have about 500k$ cash right now, with most of that earned in the last year. Not through real estate or get rich quick schemes, but through making some breakthroughs in my work - it took 4 tough years but it happened. This coming 12 months is on track for at least 300k$ and hopefully more depending on how certain projects go. I'm confident I can sustain that and am looking at the best way to take the next step to 7 figure income. Either cross over to JD's side of Wall St (I'm on the fringes of the finance world as a software expert) or else a well staffed and funded software startup via the connections I'm building up.

To echo JD's comment on how somehow it feels like everyone around me earns more.. I couldn't agree more! I'm pretty sure I'm the poorest, though youngest, full time employee in my company. Having properly understood what's going on in my sector, its hard to imagine anyone making less than $200k a year if they are willing to do the hard work. Although, despite what people claim, most people don't seem to like to think as hard as is required..

[FMF]

I'm having a fun time watching these comments. You guys seem to think that all it takes is a willingness to work hard and you'll earn a ton of money. Ha! Anyone talking about the real world here??????

Here's my take:

1. Of course it's easier to become wealthy if you make $500k per year versus $50k per year. Simple math can tell you that.

2. Yes, I believe that you need to do all you can to make as much as you can. That's why I've written posts like this:

http://www.freemoneyfinance.com/2006/03/maximizing_your.html

And it's also why I have a whole category devoted to making extra money. You can find it here:

http://www.freemoneyfinance.com/making_money/index.html

3. That said, it doesn't matter how much you make -- you still have to control your spending. If you make $1 million a year and spend $1 million plus $1, you're doing worse than someone who makes $50k a year but spends $40k. Yes, you may have more POTENTIAL, but you can't take potential to the bank.

For some stories of people who've made a bundle of money and spend that plus some, see this link:

http://www.freemoneyfinance.com/spend_less_than_you_earn/index.html

4. You CAN get wealthy on what some of you would think is a modest income (though $50k is not modest, it's average). For examples of how to do this, see this link:

http://www.freemoneyfinance.com/spend_less_than_you_earn/index.html

5. My emphasis on spending less (versus earning more) is because it's more practical advice. It's easier for the majority of people to spend less than it is to make more. Know what I mean, JD? You talk about how the key is to make more money, but you don't have any advice on how to do it.

Again, I'm not saying to ignore the income side of the equation, but it's not that easy to increase your income. It's much easier to control your spending.

[Newbie]

> You guys seem to think that all it takes is a willingness to work hard and you'll earn a
> ton of money.

Seems to work for people around me in the software world. I see the majority of people in it as being unwilling to engage their brains and put some effort in. For example take Oracle skills. Some people want to do their job with the minimum knowledge (googling questions as they need to) and get out the door at 4.55pm. Others go the extra mile and learn top notch plsql and RAC skills. RAC, in particular, is a gateway to $1k a day income. There are many many technologies like this and a desperate need for people who have the knowledge in these areas.

That doesn't mean that there is not a glut of mediocre technologists that will struggle to reach 100k$ a year. The "average salaries" are pretty misleading as there is a world of difference between grunt roles and hardcore roles. I know of several open positions - that have been open for months - and its proving difficult for the people doing the hiring to find anyone worthwhile at all. They get many applicants but few who have made the effort to be experts. Some companies I know have gone as far as cutting projects due to lack of suitable man power.

Your "skills" are entry level Java knowledge and a smattering of buzzwords? Tough market and you're ripe for outsourcing. I on a large Java project for 3 years that made this blindingly obvious. We interviewed close to 500 programmers, hired 30 and _always_ had 10 more open positions available but found quality to be lacking in the candidates.

[underpaid doctor?]

I think that people don't realize that no matter what field or income bracket you are in there are always going to be two different kinds of people. Ones who save and invest and ones who are leveraged beyond belief. It doesn't matter if you are a doctor ,Lawyer,Carpenter,plumber,etc. This is always true. People who say that it seems like everyone else is making much more prove this. They problably don't make more,just spend more.You can never judge a book by it's cover. Just because someone drives a $175000 Porsche doesn't meen they are rich and just because someone drives a 10 year old honda doesn't meen they are broke. Income doesn't matter if you are not smart with youre money.It takes hard work to make alot of money. However, there are many other factors like wheather or not your skills are in a high earning field
just because you work hard dosen't always relate. If your work hard you may be better than your peers in the same field but it doesn't meen high six figure income. Also, location people are not going to make as much in Toledo as NYC.
FMF's comment about cutting expenses is universal. Anyone can use these skills and instantly be better of in the long run. To increase you income is alot harder. It could require schooling and more debt. If you are in your thrity's or later this may not be the best route to go unless you like undo risk.
Most people don't have the skills to make 300 k/yr plus. So suggesting that they can if they work hard is crazy.Money is not everything, life is about maximizing happiness and currency doesn't always do that for everyone.

[DR. ARTFREDO C. ABELLA, Ph.D. - WHITTTIER, LOS ANGELES, CALIFORNIA, U.S.A.]

The three Simple Steps to Financial Security seems to appear to be so simple but they are indeed serious steps that we have to undergo to maintain our financial equilibrium as well our financial security. These steps are like taking the bitter pill for our own financial health and wealth. Let me point out and elaborate:
1. Save for a rainy day.
This is a step that we have to anticipate when we will have our financial lows in life. When we have our windfalls, bonuses, anniversary cash gifts, rebates and perks, it is always smart to save at least 80% of these benefits for the rainy days. We have to save and then access and lay ourselves into the arena of investments. This is the only way to enable us to secure our own financial security. There are many ways to save, one is to join the 401K fund policy which necessitates that at least ten percent of your earnings goes to automatic savings. You can allow your company to deduct in your earnings also for mutual fund or stock investment - short or long term. If you are not risk taker, you can just save in time or savings deposit where it affords a regular and moderate interest earnings for you to earn. Let the wonder of compound interest work wonders for you. The concept of compound interest could be simplified by saying that the the original principal amounts you have invested will earn interest and the interest that it has earned will also earn an interest in the ensuing periods of time. Is this not a wonder? The seeds that you have sown will bear more fruits and seeds and its seeds will also bear more seeds for you to harvest in the future. This is what the financial wizards are saying that money is like a seed, save and propagate it so as to afford more growth and multiplication of breeds to afford more harvest in the future. Remember you reap what you sow. Save for the rainy days so that when the rainy days come you don't need to build the Noah's Ark, you just have have to ride in it. Secured financially and possibly seeping Margaritas inside your Ark.
2. Be prepared for an emergency.
Life is full of sudden unexpectations, the more we anticipate that emergencies will incur the better it will be for us. We can only do this if we are prepared and we are only prepared if we avail ourselves of an insurance policy. Insurance was created for the simple reason to share the risk of emergency that might occur in your life - death, car accidents, divorce, fire, earthquakes, floods, storms and the like. If you insure yourself and your love ones, you will not regret when sudden and fortuitous events creeps in because it will be the insurance company that will shoulder the major part of your overhead expenses. The insurance company is designed to share the financial risk with you and your love ones if you are insured.
3. Invest for retirement. In life you will not always be productive. The law of diminishing returns will eventually overtake you. You must save now so that during the years when you are no longer productive it will be your retirement pensions that will sustain you. He who fails to plan, plans to fail. Save now and pay promptly your retirement gratuities to your insurance company and it will be your retirement pensions that will feed you when you reach your olden years. If you have retirement policy you will not be going to the salvation army for your meals or beg to the social institutions for old age wage compensation and always asserting your 10% discount right as a senior citizen. You can just rest at home, do some gardening, go to church, do your chores and join civic cause for the benefit of your locality. However, the golden rule in financial prosperity is never retire. Even if you are already in your twilight years always search for means to earn more. You can still afford to buy stocks, why not? The state has never passed a law or ordinance banning older persons from engaging in business, the restrictions is imposed personally by the individual themselves. Statistics will show that the 2008 world's billionaires are full of rich people whose ages ranged from 40-85 years old. Never retire but never expect perfection to yourself either is the thumb rule for financial security and well being. Well, at least these are just my holistic views regarding the three simple steps towards financial security. I am not saying you have to follow all of my views and comments to the letter, you have to act rationally according to your unique financial situations in your own environment.

[DR. ARTFREDO C. ABELLA, Ph.D. - WHITTTIER, LOS ANGELES, CALIFORNIA, U.S.A.]

The three Simple Steps to Financial Security seems to appear to be so simple but they are indeed serious steps that we have to undergo to maintain our financial equilibrium as well our financial security. These steps are like taking the bitter pill for our own financial health and wealth. Let me point out and elaborate:
1. Save for a rainy day.
This is a step that we have to anticipate when we will have our financial lows in life. When we have our windfalls, bonuses, anniversary cash gifts, rebates and perks, it is always smart to save at least 80% of these benefits for the rainy days. We have to save and then access and lay ourselves into the arena of investments. This is the only way to enable us to secure our own financial security. There are many ways to save, one is to join the 401K fund policy which necessitates that at least ten percent of your earnings goes to automatic savings. You can allow your company to deduct in your earnings also for mutual fund or stock investment - short or long term. If you are not risk taker, you can just save in time or savings deposit where it affords a regular and moderate interest earnings for you to earn. Let the wonder of compound interest work wonders for you. The concept of compound interest could be simplified by saying that the original principal amounts you have invested will earn interest and the interest that it has earned will also earn an interest in the ensuing periods of time. Is this not a wonder? The seeds that you have sown will bear more fruits and seeds and its seeds will also bear more seeds for you to harvest in the future. This is what the financial wizards are saying that money is like a seed, save and propagate it so as to afford more growth and multiplication of breeds to afford more harvest in the future. Remember you reap what you sow. Save for the rainy days so that when the rainy days come you don't need to build the Noah's Ark, you just have to ride in it. Secured financially and possibly seeping Margaritas inside your Ark.
2. Be prepared for an emergency.
Life is full of sudden unexpectations, the more we anticipate that emergencies will incur the better it will be for us. We can only do this if we are prepared and we are only prepared if we avail ourselves of an insurance policy. Insurance was created for the simple reason to share the risk of emergency that might occur in your life - death, car accidents, divorce, fire, earthquakes, floods, storms and the like. If you insure yourself and your love ones, you will not regret when sudden and fortuitous events creeps in because it will be the insurance company that will shoulder the major part of your overhead expenses. The insurance company is designed to share the financial risk with you and your love ones if you are insured.
3. Invest for retirement. In life you will not always be productive. The law of diminishing returns will eventually overtake you. You must save now so that during the years when you are no longer productive it will be your retirement pensions that will sustain you. He who fails to plan, plans to fail. Save now and pay promptly your retirement gratuities to your insurance company and it will be your retirement pensions that will feed you when you reach your olden years. If you have retirement policy you will not be going to the salvation army for your meals or beg to the social institutions for old age wage compensation and always asserting your 10% discount right as a senior citizen. You can just rest at home, do some gardening, go to church, do your chores and join civic cause for the benefit of your locality. However, the golden rule in financial prosperity is never retire. Even if you are already in your twilight years always search for means to earn more. You can still afford to buy stocks, why not? The state has never passed a law or ordinance banning older persons from engaging in business, the restrictions is imposed personally by the individual themselves. Statistics will show that the 2008 world's billionaires are full of rich people whose ages ranged from 40-85 years old. Never retire but never expect perfection to yourself either is the thumb rule for financial security and well being. Well, at least these are just my holistic views regarding the three simple steps towards financial security. I am not saying you have to follow all of my views and comments to the letter, you have to act rationally according to your unique financial situations in your own environment