Would you trade grinding for five years to be rich for life? Would you be willing to sacrifice upgrades and luxury to improve the chances of financial freedom and becoming wealthy? What would you do to become rich for life?
I have a few big questions for you:
- what do you think you’d have to do for five years to become rich for life?
- are there any steps you could take in the next five years to drastically improve your financial situation?
- what would life be like if in five years you could wake up rich – compared to where you are today?
The answers to these questions are very important.
You have the power to drastically improve and impact your financial situation with the right choices and strategy.
For me, since graduating college a little more than five years ago, I’ve lived within my means, exploded my income, and worked to build wealth.
Now, I’ve saved up a solid amount in my retirement and investment accounts, paid down my debt, and have a strong emergency fund.
Even without the investments, just by having paid off my debt and having an emergency fund, this gives me an opportunity mentally to take more risk at work and look to further my career and hustles.
For you, you can do this too.
It will take time, but it’s not too complicated and will be totally worth it.
In this post is to talk about the math, the mindset, and the strategy you can take to do this in the next 5 years.
Becoming Wealthy is Determined by a Simple Equation
Becoming wealthy and saving more money is determined by a simple equation:
(Income – Expenses) * Time = Increase in Savings and Net Worth
If you make more than you spend, and do this for a number of years, you will build your net worth and grow your savings.
Add to this equation, investing wisely, making good financial decisions around your savings, and learning about personal finance over time, and you have the potential to drastically improve your financial situation.
In my opinion, time is the most important variable in this equation.
If you do the right things financially for a month, sure things will get a little better, but rarely will a big month have a huge effect on your overall financial situation.
If you do this right for a year, you can get to an even better situation, but again, in my experience, things don’t really change.
To experience the biggest effects, you need to dedicate at least three to five years of your future life to living within this equation.
Overnight success doesn’t exist, but over three to five years, it is certainly possible and attainable.
Winning with your money is within your reach and you can do it.
How Living Within Your Means for Multiple Years Can Lead to Having More Money
Everyone’s situation is different, but just to illustrate the potential of this simple equation, let’s do some math.
If you make $50,000 a year, and spend $40,000 a year, you will have $10,000 left over to put towards your financial goals (investing, emergency fund, debt payoff, etc.).
$10,000 might have a big impact on your financial situation, but in terms of becoming rich, this won’t go too far in today’s world.
However, take this and throw it in our equation.
($50,000 – $40,000) * 1 Year = $10,000
After one year, we get $10,000. But let’s look at five years (yes this is basic math but I’m getting to the point).
($50,000 – $40,000) * 5 Years = $50,000
What would you do if you had $50,000 more in the bank? This would certainly be a change in your financial situation – I know an extra $50,000 would be great for me!
Now, what happens if you start making tweaks to the other variables?
What if you could eliminate $5,000 in expenses per year? What would this look like?
After one year:
($50,000 – $35,000) * 1 Year = $15,000
After five years:
($50,000 – $35,000) * 5 Years = $75,000
An extra $25,000 because you were able to trim your expenses by $5,000.
What about if you increase your income as well by $5,000 a year?
After one year:
($55,000 – $35,000) * 1 Year = $20,000
After five years:
($55,000 – $35,000) * 5 Years = $100,000
Again, $20,000 is a lot, but not enough to drastically impact your life. $100,000 on the other hand? That’s a great start to financial freedom.
Obviously there are many combinations and ways to play around with this equation to start to see how much you could save in five years.
But with these examples, I hope I’ve shown you the potential of this simple equation and how you can improve your financial situation in a big way over a few years.
How to Become Wealthy and Rich
Now, let’s talk about how you can actually take advantage of our equation and build wealth for the future – starting TODAY.
Below are seven steps you can take to start your path to financial freedom and success.
- Determine Your WHY
- Develop a Mindset to Avoid Lifestyle Inflation
- Track Your Income and Expenses
- Cut Unnecessary Expenses
- Focus on Exploding your Income
- Learn about the Basics of Investing
- Stay Consistent Over Time
Let’s dive into each of these steps in greater detail below.
1. Determine WHY You Want to Become Rich
Here’s a fact I’m sure you know: money doesn’t bring happiness.
However, money can be a tool which allows you to live a life you want to live.
Why do you want to improve your financial situation?
For me, I want to improve my financial situation to provide a stable, secure and stress-life for my future family.
It’s not about having nice cars, clothes and a big house for me – I don’t need these things to be happy.
I want to be able to spend time with people I love and do the things I want to do with my time.
This is why I want more money.
What’s your why?
- Do you want to spend more time with your family?
- Get out of debt to live stress-free?
- Go out to your favorite restaurants?
- Travel to exotic places?
- Buy your favorite cars?
- Live in a big house?
Any of these could be your why and it’s up to you to figure out what makes sense to you.
If you have a why, you will figure out a way.
2. Develop a Mindset To Avoid Lifestyle Inflation and Live “Poor”
Lifestyle inflation is one of the biggest traps people fall into regarding their personal finances.
Essentially, lifestyle inflation can happen in the following way: as a person’s income increases, then their expenses increase.
As you can see from our equation above, it doesn’t matter how much money you make if you spend it all.
Avoiding lifestyle inflation can be done with by making a conscious decision to limit luxuries, live like a college student, buy used, etc.
For me, this is easy – I wear shirts I’ve had for 10 years, shoes I’ve had for 5, bought a used car, and only replace something if it’s broke.
This somewhat goes back to my why as well. I’m happy by doing things which bring me enjoyment – not by the clothes I wear, the place I live in, or the car I drive.
To me functionally is more important than the glamour, and for this reason, I’ve been able to keep expenses low.
Over time, as your financial situation improves, it is totally okay to spend more money, but until that point, keeping expenses low will be important.
3. Track Your Income and Expenses
Before focusing on improving your income and expenses, you need to KNOW how much you make and how much you spend on a monthly and yearly basis.
What gets measured, gets managed. – Peter Drucker
Tracking your income and expenses is the first step to becoming better wit
The four personal finance metrics you need to know for personal financial success when it comes to tracking finances are:
- Net Income
- Gross Expenses
- Savings Rate
- Net Worth
For our purposes, net income and gross expenses are the two which apply to us most and are the focus of this article.
Net income is what did you make in income, after taxes, for a given period? You can find this out by looking at your paystubs.
Gross expenses is the total amount of money you spend during a month.
After you have these two numbers, you can then start to budget, identify spending weaknesses and get on the path to financial success.
4. Cut Unnecessary Expenses
The fastest way to improve your financial situation is to cut unnecessary expenses.
One thing I will say though is you should focus on the BIG expenses of housing, transportation and food first, and then look at other expenses.
While yes, subscriptions, coffee and other expenses do add up, if you can reduce your rent or mortgage payment by $200, this will have the same effect as cutting your daily Starbucks.
Or if you decide to take the bus to work instead of driving, this could save you $400 a month in parking and gas – again, a much bigger impact than cutting a streaming subscription.
For me, I take the bus to work, I house hacked for four years, and I don’t have too many subscriptions.
While I could improve on eating out, I eat in and cook quite a bit.
Looking at where you are spending your money can help with reducing expenses, and then taking action will help you save more.
5. Focus on Exploding Your Income
Next, you should focus on increasing your income.
Five years is a long time, and you can do a lot with your spare time to make more money, get a promotion, or start a side hustle.
During the last five years, I’ve nearly doubled my salary. With this, and by keeping my expenses essentially flat, I’ve been able to increase the (Income – Expenses) piece of the simple wealth equation substantially.
Increasing your income is all about providing VALUE and being unapologetic and unafraid to ask to be compensated for that VALUE.
Examples of providing more value could be:
- taking on more responsibility at work
- changing jobs to a more lucrative position
- gaining a certification and applying it
- starting a side hustle
- investing in real estate
- or flipping things
All of these can lead to more money coming in each month.
It’s up to you to figure out which strategy is best for you, and while it might not be easy at first, I know you can do it.
6. Learn about the Basics of Investing and Keeping Your Money Safe
Finally, learning about investing is important for building long term wealth.
At the beginning of your journey, investing won’t bring as many gains as focusing on your income and expense. But after five years, your investments will play a big piece in your overall wealth.
During this time, you can learn about investing through reading books and blogs, build an emergency fund, and start to put money away into:
While I’m someone who likes to try and hit home runs with my investments, starting off, it’s important to invest wisely and assess your level of risk tolerance.
Once you understand your relationship with your savings and money, then you can start to invest more with a purpose and in a way which makes sense for your goals and future.
7. Stay Consistent Over Time
As we talked about above with our math calculations, time is the multiplying effect which can supercharge your progress.
While time goes slow, it is incredibly powerful.
If you decide to put your head down for the next five years, I can almost certainly guarantee things will be different for you and you will be in a better financial situation.
Five years is a long time, and by putting the principles of personal finance to work, I bet you can only dream of the progress and success you could make over time.
The power of compound interest does not just apply to investing – it applies to everything in life.
By adopting a mindset which favors intentional planning and action, you can and will find success in your life.
Are you going to be consistent and grow your money?
Are You Going to Be Rich in 5 Years?
After reading this post, you have a great resource and strategy to go out and make the next few years count.
While the progress might come slow, trusting that time will bring success will make all the difference.
Over the last five years, I’ve been successful with my finances and now I’m living a great life.
I don’t really worry about money anymore, but this wouldn’t have been possible if I didn’t sacrifice and live within my means for the last five years.
Now, I want this for you. I’ll look forward to seeing you become successful over the next few years and on to living the life you want and deserve.