Principle #1: Make, Save, Live

“Pay yourself first” and “Spend less than you earn” are popular themes in personal finance which means savings a portion of your earnings (e.g., from each paycheck) before you spend a dime.

Practicing Make → Save → Live, in this order, is the most important habit for wealth creation.

If you only spend the money you have remaining after setting a portion aside for your future self, you will automatically develop the habit and discipline necessary for wealth creation.

If you’re like most people, there are two common barriers to this practice.

1. You are (legitimately) “maxed out”. Your paycheck barely covers current living expenses. You spend 100% of after-tax income on your present self and have nothing left over for your future self. This is a dangerous cycle. Solution: Establish a long-term plan to divert most (or all) future pay increases to savings until a more appropriate balance is achieved (e.g., 15-20% of total income in your Save bucket).
2. It’s difficult to motivate regular saving if you do not have the knowledge or skill to effectively deploy the money you save. That is, to make the money you save work for you. On the other hand, motivation to save is easy when you truly understand how to effectively deploy your savings to make more money. Solution: Make a commitment to become financially literate. You work hard for your money and have devoted years of your life learning how to make it. It would stand to reason you should devote some time learning how to use it to build a wealthy life.

It does help to create a budget to support Make → Save → Live. However, the starting point for budget creation is the money you make less your prescribed savings. Avoid a mindset where you start with your total income and determine how much you can “afford” to set aside after all of your expenses. For example, if you make $500/week and have decided to save 15% of every paycheck ($75/week), then create a budget for the remainder ($425/week). That is, start your budgeting exercise with the assumption you only make $425/week.

Make → Save → Live requires a significant amount of discipline. However, the payoff is huge. The only way to attain the wealth you desire is to spend less than you earn and to save the difference. The rich are not rich because they earn a lot of money; the rich are rich because they save a lot of money.

No matter how much money you make, if you do not spend less than you earn, you will never become wealthy.