There are three laws of wealth and they’re essentially just like the laws of physics, the same laws that guide our universe. And they are indeed laws, not suggestions in any way, shape or form.
These three Laws of Wealth are actually surprisingly simple, but they’re not easy and they demand discipline from those adhering to them. And because they are laws, you can also make predictions based on their workings just by using math.
By the way; I didn’t invent these laws. They come from wisdom developed over 7,000 years. In truth, you’ve probably heard some of these laws recited to you hundreds of times over your life.
Believe me, none of this is really new and the first time I heard of these laws was in a book entitled “The Richest Man in Brooklyn.” I can’t recommend that book enough, either.
Ready? Okay, here goes: the First Law of Wealth is to pay you first.
At least 10% of all you make. Pay yourself even more if you can afford it. That doesn’t mean, however, that you can go out and buy a fur coat or some fancy doodads or trinkets, because what we’re going to do is put that money to work.
Everyone who’s ever worked to grow their money knows the following time-tested, true saying:
“Poor people work for money while rich people have their money work for them.”
The problem with this saying, though, is that no one teaches people how to make their hard-earned money work for them or, at any rate, very few people do and they usually have more students than they can handle. But this is exactly what I do, and what I can do for you.
Albert Einstein, one of the greatest intellects of the 20th century, once observed that the most powerful force in the universe was compounded interest. Using mathematics, I can show you that even if you work for minimum wage, as long as you follow the laws of wealth you can’t help but to become wealthy.
Even Einstein realized, however, that it’s much easier to keep track of the money you’re going to make work for you by making use of relatively simple calculating tools. No need for an Einstein-like super brain, in other words, to track your money.
For now, let me tell you that there are many retirement calculators freely available on the Internet. They can show you how much you need to invest, at any given rate of return, to accumulate one million dollars through simple investment. That’s right: $1 million.
Ensure you also make liberal use of the retirement calculator of your choice, because it’ll show you the true unvarnished value of your money, including both the principal balance you invest and the interest you’ll earn at a given rate.
Okay, let’s move on to the Second Law of Wealth. It, too, is simple to understand: Never touch your principal.
Now, if you need to buy a new heart from the principal balance you’ve invested, I’ll cut you some slack. But even if your car blows up, and you have to hitchhike to work, you simply must find another way to fix that problem without touching the money you’ve set aside as your principal.
Think of your investment principal in this way: it’s an orchard or garden that’s going to grow money trees. When you follow the First Law of Wealth you’re planting seeds and watering your garden. The Second Law of Wealth allows you to grow trees in your garden. And money actually does grow on trees, but only on money trees.
As I said at the beginning of this post: the first two Laws are very simple to understand but not easy to put into practice because they require you to exercise discipline with your money. And here’s an example that can explain why the first two Laws can be difficult for most hopeful investors:
At first, when you save $100 as part of your wealth building routine, a new $100 expense will always somehow “magically” appear. Inevitably, with money being saved you’ll suddenly find you need something like a new tire for your car. That’s just the way our minds think, which is sometimes unfortunate, especially when it comes to money we perceive to just be sitting there waiting to be spent.
Sorry, but you’ll have to figure out a way to pay for your car’s new tire without touching your principal and to do it in a manner that doesn’t involve you not paying yourself. Here’s another way of explaining what I mean by all this:
There’s a reason government takes taxes from your check before you get your hands on that money: they know you’ll spend it before you get around to paying your taxes.
This is why the First Law is so important. You simply will never be able to have your garden if you keep eating the seeds. Pay yourself first and NEVER touch your principal balance. The principal is what’s going to go to work for you and generate your wealth, after all.
Everyone has what we call a “latte factor.” I learned about this factor myself in the book “The Automatic Millionaire,” and I recommend you read it because it’ll help you put the Three Laws of Wealth to work.
I also promise you that $45 pays the same bills as $50. And that $90 pays the same bills as $100. And it will only hurt for the first three paychecks. After that, you’ll be used to be used to putting money aside, and don’t tell me you don’t earn enough.
In truth, ANYONE can set aside 10%. Your “latte factor” will shrink and you WILL adjust. I did it when I, myself was earning $6.50 an hour job, and I had a teenage son living with me. I still had time to spend on entertainment, too. True, I wasn’t eating steak every night and I wasn’t going to the movies every night, but I wasn’t living on cornflakes either.
Now, once you have mastered Law One and Law Two we can look at the third Law. This one also requires discipline and consistent effort:
Never withdraw more than 49% of the growth resulting from your investments.
The other 51% is automatically reinvested. This is called a DRIP, or “Dividend Reinvestment Program.” For example, if you earn $100 you can spend $49 on whatever you’d like. The other 51% grows your garden. Using this reinvestment method, you’ll be richer next month than you are this month.
The above is why the rich get richer, too: they keep doing the things that made them rich and are STILL making them rich even as you sit here reading this.
Think of it this way: the book you don’t read can’t help you. And if you don’t take action you will never get anywhere, simple as that.
The best time to start following the three Laws was 20 years ago, true enough. But the second best time to begin following these Laws is NOW, right this very second.
It’s your money, though, and I can’t force you to save it nor can I force you to put it to work. Really, what you do with it doesn’t affect me in the least.
But if you listen to me, in 10 years you’re going to have a big pile of money generated from passive income. And you’ll probably have some bills, mostly because almost everyone has bills of one sort or another, even if they’re only temporary in nature.
Unfortunately, if you don’t listen to me, in 10 years time you’re pretty much just going to have those bills and not much in the way of passive income, if any at all.
Remember this: the limited is more valuable than the abundant. You can always earn more money, so it is abundant. Once you spend a minute, it’s gone forever and you don’t know how many minutes you have in your lifetime. They are limited and they are finite. And they’re actually infinitely more valuable than anything else.
Simply put, these are the Three Laws of Wealth:
- Pay yourself first.
- Never touch your principal.
- Never withdraw more than 49% of the growth gained from your investments.
There are other minor laws that can make your journey shorter and quicker. But those can wait for another day. For now, stick with these three Laws above all else.