Personal Finance is the topic of my class at the Bauer College of Business at University of Houston. In fact, 3 Laws of Personal Finance is a short video I like to send my students before each semester of Personal Finance.
Every college graduate can become a millionaire by age 50 by obeying 3 laws of personal finance.
The 3 laws of personal finance are:
- Personal Finance Law #1: The Law of Spending and Saving
- Personal Finance Law #2: The Law of Tax Advantaged Investing
- Personal Finance Law #3: The Law of Purpose and Commitment
Some people think this is a very bold claim; every college graduate can be a millionaire by age 50.
When you obey these 3 laws of personal finance, you discover the truth. Saving a million dollars in 30 years is really not mission impossible.
The first law of Personal Finance is the law of Spending and Saving:
The law of spending and saving, is the most fundamental principle and personal finance. It's also the most disregarded law of personal finance in American history. Spend less than you earn, and save more for what matters most.
Ben and Frank became friends at age 19. Ben started saving and investing, in a well-managed, low-fee, diverse mutual fund that earned an average return of twelve percent annually.
Ben saved two thousand dollars a year for eight years and then he stopped. So he invested sixteen thousand dollars; 8 years times x 2 equals sixteen thousand dollars. By the time Ben was 65, his investment grew to $2,288,996.00.
Frank, on the other hand, decided he wanted to spend his money on entertainment, dining out, Starbucks and a nice new BMW.
Frank didn't start saving until nine years later. So by the time Ben stopped investing, Frank was just getting started. Frank, like Ben, saved two thousand dollars a year. That's $167 a month, or $42 a week. Frank invested his $2,000 every year in the same mutual fund as Ben.
Frank continued his spending and saving plan until he turned 65; at that point he had a total of only $1,532,166.
Ben, saved and invested to thousand dollars for eight years from age 19 to 26. Ben, saved and invested a total of $16000.
Frank started his spending and saving plan at age 27 and kept doing it, until he was aged 65. Frank saved and invested seventy eight thousand dollars and he never caught up to Ben.
The law spending and saving, is the most fundamental law of personal finance; spend less than you earn, and save more for what matters most.
The Law of Tax Advantaged Investing:
The IRS makes the law – your job is to take advantage of the law, by investing in tax advantaged accounts like…
- 401K, the most common,
- Simple IRA for small business
- SEP IRA- best for sole proprietors or employers with no employees;
- Tax deductible IRAs
- 403B for teachers and nonprofits;
- 457 for government workers and
- Tax-free investments, like the Roth IRA.
The Roth IRA is a great way to save for you, your spouse, or your kids (when they earn money in your cottage industry).
The law of tax advantaged investing, lets you spend less on taxes and save more for what matters most to you.
The Law of Purpose and Commitment:
The most important law of personal finance is the law of purpose and commitment.
When it comes to managing money, life, work and relationships, and did I say MONEY? There's no law more important than the law of purpose and commitment.
Most Americans, don't spend time thinking about their true purpose; so most Americans never connect their resources to what matters most.
Every college graduate can be a millionaire by age 50.
