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Offense and Defense in Personal Finance: The Way to Get Rich

By Edited Jul 13, 2016 0 0
Offense and Defense in Personal Finance: The Way to Get Rich

Many people define success as rich. However, my take on it is that a certain amount of wealth is a proper goal, but wealth, like anything else, has a point of diminishing returns. Furthermore, that point arrives sooner than the non-wealthy think.

The legendary book The Millionaire Next Door uses the football terms “offense” and “defense” to describe increasing income and minimizing expenses respectively. It is a more useful analogy than the authors of that book realize since they are college professors.

The basic principle of offense is strength against weakness. That applies also to making income. You want to take your strengths and pit them against weak competition in the marketplace.

On the other hand, the basic principle of defense is strength against strength. In finance, it means you have to try to be strongest against the strongest expenses. For example, you r housing cost is almost always your biggest expense. To keep that expense down, you need to take great care in choosing your housing situation.

The good news is, you can take either route to financial success: offense or defense. In most cases, a combination of both is the best one. Offense—making more income—is the most popular path to wealth, the most glamorous, the most prestigious—but it is not the only way, contrary to what most people think.

There have been many people with modest incomes, like public school teachers or janitors or librarians, who ended up wealthy because they were extremely frugal. They saved a lot of money from their paycheck and invested it in a mutual fund or an index fund. They did not become wealthy because they made brilliant or lucky investments, rather they became wealthy simply because they saved a whole lot and invested it reasonably.

For those people, that is not harder than making more income. Rather it is easier. They lack the ability to make a higher income. But they are naturally frugal. Paradoxically, however, these people have trouble enjoying money when they finally accumulate it because of their congenital frugality.

Bottom line is, you can play both “offense” and “defense” and you should be ready to do either if necessary. It gives you great freedom of thought and behavior. People who are afraid of losing their jobs and thereby, their income, are cowards. That is no way to live your life.

Last but not least, be prepared to succeed financially either through increased income or decreased expenses. Set your goals at what you really need, not impressive, round numbers.

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