Why are Some People Rich and Others are Broke?

We have known a few people who made us scratch our heads and say, “I don’t get it. That person makes so much money but always seems to be broke!" We have concluded that it is not difficult to spend beyond your income, even if it is a large income. It is just a matter of more zeros at the end of the balance sheet.

On the other hand, some people with modest incomes have built great wealth. How did they do it? They knew the secret: It is not your salary that makes you rich—it is your saving habits.

Sam keeps reminding folks: It does not matter how much you make—or do not make. "It's not how much you make—IT'S HOW MUCH YOU KEEP."

How do you manage your money? Saving money is a day-to-day process. Small, daily decisions add up to huge, long-term results. What is your savings goal? Do you have a savings account that would provide for your needs for three to six months? Do you have enough for a down payment on a house?

Can you manage your money better? Here is a little quiz to find out. Take a moment to answer the twenty questions below.

1.Do you take advantage of tax benefits, such as 401(k) s, IRAs, etc.)?
2.Do you avoid using check cashing machines or ATM machines?
3.Do you usually pay off your credit cards each month?
4.Do you save at least 10% of your gross income in an emergency fund?
5.Do you avoid late fees and overdraft charges?
6.Do you usually pay with cash instead of credit cards?
7.Do you feel secure about your finances?
8.Are you a comparison shopper who shops with a list?
9.Are other things in life more important to you than shopping?
10.Do you balance your checkbook?
11.Do you buy gifts in an appropriate and cost-effective way?
12.Do you have a plan for supporting yourself with your investments?
13.Do you have control over your budget?
14.Do you make more than you spend?
15.Do you know your total debt? Is it a small amount?
16.Do you resist the temptation to use a debit card?
17.Do you handle your own finances?
18.Do you agree with your children and spouse/significant other on how the handle money?
19.Do you know how you are going to afford retirement?
20.Do you have enough insurance to protect your health, your possessions, and your loved ones?

What do your answers mean?

If you answered "no" to two or more of these questions, you need to find out more about financial independence!

You are financially independent when you have enough income from your investments to live the lifestyle you want without working another day in your life. This amount depends on your location and your lifestyle. For example, if you live in Manhattan, you will spend more than you would if you live in a rural area of Montana. If your lifestyle requires a penthouse, you will spend more than you would if you just need a cabin. Other factors to consider are your age, your health and how long you expect to live. Calculate your location, lifestyle, and lifespan and add in variable factors, such as inflation.

Fortunately, financial independence can happen on a relatively small income. You simply need your monthly income to exceed your monthly outgo—for the rest of your life.

Financial independence is not just a matter of saving and being disciplined. It is also a matter of investing well.

Before you learn to invest, you have to learn to save. Some people get confused about this. You cannot invest unless you get out of debt, stay out of debt and save enough extra funds to invest. This is the path to financial independence.

Samuel K. Freshman and Heidi Clingen are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com