Six Steps to Make the Most of Your Finances

You've heard of the Pareto principle, right? It states that, for many events, roughly 80% of the effects come from 20% of the causes (or effort.) This holds true in all sorts of situations.

In business, 80% of the profits are usually generated by 20% of the products. At church, 80% of the serving is done by 20% of the members. At non-profits, 80% of the giving is done by 20% of the population. This example holds true in almost every case -- whether you're talking about selling cars, training for a marathon, or going to school. No matter the subject, a select few of the (sometime endless) potential steps are the key ones that generate the vast majority of the impact.

Managing your finances is no different. You don't need to know complex tax strategies, complicated investment formulas, or the legal ramifications of one estate planning strategy versus another. If you simply focus on a few key steps and apply them faithfully over time, you can become wealthy.

What are these principles that give you the most financial bang for your buck (or time/effort in this case)? Here's my list:

1. Spend less than you earn.  Many people seem to have forgotten this rule, but it really is that simple.  You must spend less than you earn if you ever hope of making any financial progress. If you don't you'll be going backwards no matter how much you make. Of course there are two parts that make this tip work: 1) make a good income and 2) control spending.

2. Grow your career. It's much easier to spend less than you earn, as well as grow your wealth, if you maximize your income -- and your career is by far your largest source of income. If you work at making the most of your career, it can mean a few extra million dollars over the course of a working lifetime.

3. Earn extra income. Many people can become wealthy simply from their career earnings. But if you want to super-charge your finances, you'll need to do better than that. You need to earn extra income that can supplement what you make from your job. Fortunately, I've listed 11 great ways to earn extra money to give you a head start.

4. Save.  The difference between what you make and what you spend is your gap. You want your gap to be as large as possible so you have cash available to grow your wealth. Your first step is to save enough for a good emergency fund, The second step is to start accumulating funds for your other life goals: retirement, college, major purchases, and so on. A great place to start is to maximize your employer's retirement match. If your employer matches your contribution up to a certain amount, invest at least that amount every year.  You are essentially doubling your money and taking advantage of a great employment perk.  Plus, you will save on taxes. What's not to love?

5. Invest wisely. Saving is not enough. Once you have saved you must grow those savings to be able to generate substantial wealth. Fortunately getting a good return on your money isn't that hard. I use index funds because they are simple, easy, and, after expenses, beat the vast majority of other investment alternatives.

6. Avoid money mistakes. Even if you take all the steps noted above, your finances can be derailed if you don't avoid the 10 worst money mistakes anyone can make. Not  having enough insurance, buying too much house, getting into debt, and a whole host of financial killers are out there waiting to suck up your hard-earned wealth. Avoid them like the plague because that's what they are -- financial plagues looking to kill your progress towards financial success.

So that's my list -- and the steps that most millionaires have taken to become wealthy -- the 20% (probably less) of the personal finance steps you can take that will get you 80% (or more) of the results you seek. And in America, 80% of the financial results means that you will be very well off indeed.

For those of you who have done well financially, did I forget anything?

Comments

[FlyerM]

Pretty comprehensive list FMF.

The only thing I would add to #6 is "Don't try to keep up with the Joneses".

Sometimes we do feel a bit of pressure to keep up with our spendthrift friends, but I just congratulate them on their success and don't let it affect my attitude towards them.

As a 30 something in a large southern city, I've seen most of my friends buy into big houses in fancy new neighborhoods. Under the surface they're barely adding any wealth. While I, who bought a much smaller home in a older neighborhood, was able to add almost 6 figures of net worth in 2013. I don't think my spouse and I are missing out on anything in life by only having a single tv, two older cars or ikea furniture.

Well I guess we are missing out on one thing, all the stress of monthly payment plans.

[Retire By 40]

I'm glad you add #6. You don't hear people talk too much about that. Some mistakes will set you back years. I think that's where poor people are different than middle class. They just keeps running into trouble and don't have the resources to draw on.

[HM]

For #5, just opened a Schwab account. Planning to invest in index funds early next year. Will take it slow and invest monthly as I get comfortable....