"It takes as much energy to wish as it does to plan."

Eleanor Roosevelt

Take a moment to close your eyes and think about what your definition of “wealth” is. Have you got something in mind?

To me, wealth is freedom. Specifically, freedom of choice. When we're financially independent, we can structure our day exactly how we like and we have the means to fully experience life. It also offers the resources to contribute to the causes we care about, say, helping to find a cure for a disease that may have impacted your family.

Many people, sadly, have a negative connotation of wealth. It’s completely up to you to create your own definition, but I urge you to ensure it’s written in the positive. Reframing your mindset is one of the most fundamental steps in transitioning to being a financial winner.

Yet, we don’t teach this in schools.

Wealth does not guarantee you’ll be free of problems. In fact, for many people, building wealth creates a whole host of new problems because their same bad habits are just amplified. However, if you’ve got the right blueprint, wealth is an enormously powerful force for good in your family, your community, and the world.

With an idea of what wealth looks like to you, take another moment to think about what "lifestyle" you want. A lot of people over-complicate personal finance, but all we’re essentially doing is thinking about what life we want to live and then setting up the pieces that are going to enable us to enjoy that lifestyle.

Simple, right?

So close your eyes and fast forward to 5, 10, 20 years down the track: What does your ideal life look like?

Can you vividly describe your house, and where you are? Who are the people you’re enjoying it with? In that moment, what is making you the happiest?

Like with any worthy endeavor, we get the best results by beginning with the end in mind. With that foundation, let's explore some proven strategies you can immediately apply to achieve financial independence and become a financial winner.

1. Start now.

We see this with every goal—people have the best intentions, always promising to ‘get around to it' but never do. Make the commitment to start now:

• When you wake up, grab your 5 Minute Journal or a piece of paper and write 1-2 things you’re going to do today to save money (e.g. preparing your meals in bulk at home rather than buying your lunch each day). Being aware of what actions you need to take will help you stay disciplined. Before you go to bed, quickly check in to see why you did or not achieve your goals for that day.
• Complete a Success Plan: ensure you’ve got your specific money goal included at each interval, as well as how your life is going to change as a result of earning this money. After all, if you identify and understand your motivations, it will make it much easier for you to stay committed.
• Change the wallpaper on your phone and computer to include your financial goals so they're always front of mind.

If you’re not willing to make personal finance a priority, none of the other steps will help you. As the Chinese Proverb says: “The best time to plant a tree was 20 years ago. The second best time is now.”

2. Know where your money is going.

If you can measure it, you can manage it. In previous episodes, we’ve spoken about the importance of auditing your energy so you can stay happy, and we’ve spoken about auditing your time so you can stay productive. This is the version we do for managing your money.

Track every dollar you earn and every dollar you spend using a spreadsheet or, the old-fashioned way, on a piece of paper. (You can also use ASIC’s Budget Planner, which although designed for Australians is just as applicable globally).

Write down your:

Income:

• Net annual income: This is usually the easiest because, for most people, your salary will make up the majority. Note your take home pay and multiply it to reach a net annual income. Unless you’ve got other income (such as dividends, income from rental properties, etc.) this amount is your Annual Income—the pie you need to divide each year. Don’t worry if it’s a small pie; the key is what you do with it.

Expenses:

• Fixed: These are regularly occurring items that you cannot change (e.g. rent, loan repayments, insurances, phone bill, educational courses, etc.).

• Variable: These are items that still occur regularly, but the monthly amount may vary significantly (e.g. groceries, petrol / gas, utility bills, medical services, etc.).

• Discretionary: These are items that are nice to have but not always essential (e.g. new clothes, travel, gifts, restaurant dining, entertainment, etc.).

• Savings: If you don’t factor in an amount to save for your future, you’ll never be a financial winner. Write down your desired annual savings.

• Contingencies: These are the things that come out of left-field (e.g. car repairs, house repairs, etc.), which can be difficult to estimate, but if you do not have adequate funds allocated for this category then your entire budget will be destroyed by the first emergency that arises.

Add these five expense fields together and multiply to create your Annual Expenses.

Next, take your Annual Income and subtract your Annual Expenses. How much is left? This answer will show whether you’re trending in the right or wrong direction. (Warning: This might be confronting, especially if you discover that your expenses are more than your income, but it’s much better to be aware now so you can take steps to fix it.)

Now, we’ve got a clear idea of where your money is going. Just remember: the aim is to have as much money working for you as possible, rather than the other way around.

That paves the way for step three…

3. Spend less than you earn.

One of the easiest ways to give yourself a pay rise is to spend less! Just as one of the easiest ways to give yourself a pay cut is to spend more. This is one of the most painfully obvious and simple tips, yet it eludes so many people.

The digital world means we’re constantly bombarded with advertisements, while at the same time getting hammered with posts on social media that fire up our human drive to keep up with the Joneses. If you’re not sure what it means to 'keep up with the Joneses', it’s trying to match the social status of your neighbors and friends by doing foolish things with money you don’t have, such as buying a new luxury car, just to impress them.

When you make a habit out of spending less than you earn, you have more money at your disposal to create greater wealth in the future. For example, if a bill arrives, you can pay it now without incurring an additional interest charge. If there’s an essential purchase you need to make, you might find there are favorable terms for an upfront payment, or a penalty for paying in installments.

If you’re currently in debt, do everything you can to pay off bad debt (i.e. debt that is not tax deductible) as quickly as possible, making sure to prioritize items that have the highest interest rate (e.g. your credit card). For example, if you’ve got $1,000 available, it would be better to put it towards a credit card bill that is incurring 18% interest, rather than a student loan that might only be incurring 5% interest. Aim to reduce and then eradicate your reliance on credit cards altogether.

(Note: some people can do well out of the bonus points assigned to new credit card recipients; however, it often requires a lot of research, an in depth knowledge of the fine print, and an ongoing focus to avoid penalties, so my preference for most people is to avoid credit cards altogether if possible.)

Again, the aim is to have as much money working for you as you can.

4. You don't miss what you don't get.

It’s human nature to spend all that we get—that’s why tax agencies like the IRS and ATO tax your employer first before you receive your wages. Yet, funnily, if we don’t have it to spend, we don’t miss it.

Personal finance classic The Richest Man in Babylon by George S. Clason suggested that one of the key wealth creation tips was to “save at least 10% of everything you earn.” You might think that losing 10% of your income would be unlivable, but if the government introduced an additional 10% tax on income, most people would be able to adjust their lifestyle to accommodate. You might even be motivated knowing that 10% will be returned to you at a later date … with interest.

Rather than seeing how much is left in your bank account after you’ve enjoyed the week, make the commitment upfront—the moment you receive your pay—and save at least 10% of everything you earn.

There are even apps out there, like Acorns, that round up to the nearest dollar from everyday purchases and invests that tiny amount into a diversified portfolio recommended for your risk profile. For example, if you bought a $3.25 coffee, $0.75 would be invested into the portfolio. That might not sound like much, but you would be amazed at how much it adds up over a year, especially when you are able to harness the power of compound interest (more on that in the next post) and have the option of adding more anytime you like.

5. Make it a habit.

Too many people ignore the benefit of good money management because they believe they aren’t earning enough. “I’ll do it when I get my next pay rise,” they say. Only they never get around to it.

Regardless of how much you’re currently earning, get into the habit of good financial decisions.

If you struggle with change, technology is here to help! There are services out there nowadays that make the process automatic, so the habit is done for you. Previously, we spoke about apps like Acorns that enable you to contribute a portion of everyday purchases into an investment account. However, here are two other simple options to help:

• Speak with your employer about having a portion of your pay go to a different account. Ideally, you don’t have the ability to withdraw from that account for everyday savings so you can remove that temptation and allow it to grow. Once it reaches a significant amount, you can then invest that money into an index fund and watch it grow.

• If your employer is unable to do that, speak with your bank about setting up an auto debit to coincide with when you receive your salary. This process would transfer a portion of your pay, say 20%, to a separate account that you cannot access for everyday purchases. As with the option above, once it reaches a significant amount, you can then invest that money into an index fund and watch it grow.

Generally, you should follow this order when you receive your pay:

1. Investment.
2. Essential fixed expenses.
3. Essential variable expense.
4. Contingencies.
5. Whatever is left can be made available for discretionary expenses.

Get into good habits as early as you possibly can.

6. Put your money to work.

Due to fear about losing all their money in the stock market, many people opt to leave their money in a savings account. However, this is about one of the worst things you can do with money you’ve set aside to invest.

Let’s look at a few countries to inspect their interest rates and compare them to inflation:

Source: Trading Economics (July 2019)

In many cases, inflation is higher than interest so you’re actually losing money keeping it in the bank.

Financial winners invest their money wisely. An easy way to get started is to invest in an index fund, which provides low fees, diversification, and a decent annual return—ensuring you opt to reinvest all dividends and stick with it over the long-term. The stock market has one or two volatile years each decade, but historically has returned around 9% per year.

You can also use dollar cost averaging, which is a strategy to smooth out any volatility. The idea is that you continue to buy X number of shares each month, no matter what. When the market is performing strongly, your portfolio will be doing well, and when the market is weak, you can buy more shares at a cheaper price. This strategy protects against the futile task of ‘timing the market’ and over the long term you will have a lot more money working for you than you would have otherwise.

For example, if you invested in the Nasdaq-100 Index Fund in the US 10 years ago (between 2009 – 2019), you would experience the usual volatility but enjoy a strong overall average annual return:

• Best 1-year return: 55%
• Worst 1-year return: -42%
• 5-year return: 15.4%
• 10-year return: 18.6%

Source: Yahoo Finance (July 2019)

If you invested in the Australian All Ordinaries Accumulation Index for that same 10-year period, the average annual return would be 10%, again assuming dividends are reinvested. Performance will vary based on the fund you choose and at what time you start, but remember:

• Investing progressively over the long-term smooths out volatility
• Quality index funds will significantly outperform the interest the bank will pay you on a savings account.

For most people, keeping your money stuck in a savings account is far from ideal. Just remember that obtaining professional advice for your unique situation is extremely important because it can vary significantly depending on your circumstances, investment goals, and risk profile (we’ll touch on this more later).

7. Spend money on items that appreciate in value.

Financial winners build a diverse portfolio of quality assets that appreciate. In contrast, financial losers spend all their money (and then some) on items like jet skis and new cars that depreciate.

Let’s use an example. In 2009, Jenna’s after-tax salary was $50,000/year, and she decided to setup an auto debit for 20% of her pay each fortnight (equaling $10,000/year) going to a new account that she couldn’t touch for everyday purchases. Jenna’s skills increased in that time, and so did her salary, but she kept her contributions at $10,000/year.

The funds were invested into an index fund that averaged 9%/year. Prior to tax and inflation, here is what Jenna’s account would be worth:

• $152,000 in 2019
• $511,000 in 2029
• $1.36 million in 2039
• $3.4 million in 2049

Remember, this is just from 20% of her take-home pay from 10 years ago! Imagine if Jenna held the commitment of 20% of her income as her salary increased?

8. Harness the power of compound interest.

Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” It’s the key to understanding how small sums add up, leading to enormous gains for financial winners and extreme losses for financial losers.

Let’s reflect again on Jenna in the last example. The longer she left her investment, the quicker it multiplied. Let’s add two more periods:

• $8.1 million in 2059
• $19.5 million in 2069

That’s the power of compounding!

Financial losers spend all their pay, and often borrow even more on credit cards, for items that depreciate, such as travel, clothing, and new cars. To illustrate the power of compound interest working against you, let’s think about Jenna’s friend, Luke.

In 2009, Luke didn’t listen to Jenna and decided to borrow $20,000 for a European holiday and some new clothes. Luke made these purchases on a credit card because the bank, who he trusted, said his financial history was good. The interest rate on the credit card was 20%.

Luke returned from holiday and noticed that each bank statement said he only needed to pay 2% of the balance ($200/month), which he did diligently. He met with Jenna who informed him of the problems with spending money on credit cards, so Luke cut up the credit card and never used it again.

However, the statements kept coming.

Eventually, after nine years, Luke was free of his credit card debt. Paying more than $23,000 in interest alone had taught him a valuable lesson. He realized that banks know compound interest better than anyone, and that’s why they seem happy to lend indiscriminately. Luke learnt the hard way that “Compound interest on debt was the banker's greatest invention, to capture, and enslave, a productive society” as Albert Einstein said.

9. Don’t put all your eggs in one basket.

At a recent haircut, the hairdresser, Michelle, was telling me how her life was going to change. A friend-of-a-friend had approached her about an ‘amazing opportunity’ in Las Vegas where they were going to pool their money, borrow some additional funds from the bank, and buy property that was guaranteed to return 15% per year.

Michelle was young and inexperienced with investment, and clearly too trusting of this acquaintance. Alarm bells should ring if anyone comes to you with an opportunity that boasts guaranteed returns, especially high ones. As the adage says: “If it’s too good to be true, it usually is.”

Previously, we have spoken about investing in an index fund. For the average investor, this is a reliable strategy because it provides good exposure to the market (i.e. diversification) at a low cost. You can sell all (or part) of your investment at any time, and it’s regulated by the authorities such as the SEC or ASIC. If one company on the index fails, you’re still protected by the strength of the other companies.

On the other hand, if you invested all your money in a single company, you might wake up one day to find that the company has gone under and you’ve lost all your money. A parcel of many companies has much smoother returns and less risk than a single company.

For most people, buying a home is the goal. A benefit of this is the forced saving commitment as you work to pay off the loan. However, if you need to access funds quickly, you cannot sell the kitchen. If you’ve got a background in building or property, buying a house can be lucrative but, for the average person, starting with an index fund is often the better option.

If you do buy property, remember that most of the value is in the land, which should dissuade you from buying brand new apartments off the plan, lest you find yourself in a situation like this.

For speculative investments, such as cryptocurrency, only use money you’re willing to lose.

10. The best investment is knowledge.

I love the Zig Ziglar quote: “Rich people have small TVs and big libraries, and poor people have small libraries and big TVs.” The best investment you can make is in yourself. A commitment to your ongoing education will help you not only identify opportunities but recognize potential danger too.

For example, if in 2008 when the stock market crashed, you paid attention to the doomsday news stories and sold your index fund investment, you might’ve felt satisfied in the short-term thinking you had avoided further disaster. However, if you had invested in yourself too, you would’ve understood that the stock market is driven in large part by greed and fear, and that all you did was crystallize a loss. After all, the index fund was invested in real companies who have come through these downturns before. As a result of selling, you missed the growth that has happened since, which likely far surpassed the point where you sold.

The right book or podcast could be worth more than a million dollars to you, but most people would rather watch TV. The best investment you can make is in yourself.

11. Communicate with your partner.

Approximately 50% of marriages end in divorce (divorce rates by country), and if you’ve ever been involved in a divorce or witnessed one firsthand, you’ll know it’s definitely one of those things you want to avoid.

Financial issues, which in most cases can be alleviated through communication and planning, is the leading cause of relationship stress and marriage breakdown. Here are some interesting statistics:

• 86% of the marriages that lasted less than five years started in debt.
• 94% of people who believe they have a “great” marriage discuss their financial goals with their spouse, more than double the amount of those who say their marriage is “okay” or “in crisis.”

Schedule time regularly to ask your partner about their goals, and then share your own thoughts. It might feel like an awkward conversation at first, but it will save you a lot of heartache—and potentially tens of thousands of dollars—down the track.

12. Seek professional advice.

This is an extremely important one. I strongly urge you to seek professional advice where your unique circumstances, goals, and risk profile can be evaluated, and an investment plan prepared for you after taking all that into account.

What’s the best way to find a good financial planner?

• Ask for recommendations from friends who are happy with their financial planner. Ask questions to get a deep understanding of what they like or don’t like about them.
• If you use another professional, such as an accountant, solicitor, or mortgage broker, ask them for a recommendation. Again, get a deep understanding of why they’re a good fit for your circumstances.
• Look up the relevant industry association in your country, such as the FPA in Australia, and find someone who has the necessary qualifications (e.g. CFP).
• Find a financial planning company that charges on a fee-for-service model. This means they charge on how complex your situation is, rather than as a percentage of your investment.

Once you’ve done the above, make a list of 3-4 people, or companies, that you think would be a good fit, and then take an initial consultation to see who takes the time to understand you. One of the best ways to judge the merits of a prospective financial planner for you is by the questions they ask and how attentive they are to your responses.

Onwards and upwards always,
James Whittaker

In case you missed it:
11 Tips to Supercharge Your Productivity

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50 Best Personal Finance Quotes

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” – Albert Einstein

“‘A part of all I earn is mine to keep.' Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it to yourself until the words stand out like letters of fire across the sky.” ― George S. Clason (The Richest Man in Babylon)

“Too often, a vast collection of possessions ends up possessing its owner.” – Warren Buffett

“It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.” – George Lorimer

“Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing.” – J. Paul Getty

“The power of compound interest the most powerful force in the universe.” – Albert Einstein

“Never spend your money before you have it.” – Thomas Jefferson

“We make a living by what we get, but we make a life by what we give.” – Winston Churchill

“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.” – Henry Ford

“You only find out who is swimming naked when the tide goes out.” – Warren Buffett

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

“Not everything that can be counted counts, and not everything that counts can be counted.” – Albert Einstein

“It takes as much energy to wish as it does to plan.” – Eleanor Roosevelt

“Successful investing takes time, discipline and patience. No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett

“An investment in knowledge pays the best interest.” – Benjamin Franklin

“Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” – Franklin D. Roosevelt

“Life is full of uncertainties. However, I can guarantee you one thing: those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.” – Noel Whittaker

“Someone’s sitting in the shade today because they planted a tree a long time ago.” – Warren Buffett

“Empty pockets never held anyone back. Only empty heads and empty hearts can do that.” – Norman Vincent Peale

“Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.” – William A. Ward

“To attain emotional maturity, each of us must learn to develop two critical capacities: the ability to live with uncertainty and the ability to delay immediate gratification in favor of long-range goals.” – Noel Whittaker

“A successful person is one who can lay a firm foundation with the bricks others have thrown at him.” – David Brinkley

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

“Don’t keep knowledge trapped in your head or your money stuck in a savings account.” – James Whittaker

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher

“Money is a terrible master but an excellent servant.” – P.T. Barnum

“Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do … it is a matter of managing your money properly.” – Noel Whittaker

“What we learn from history is that people don’t learn from history.” – Warren Buffett

“Wealth is the ability to fully experience life.” – Henry David Thoreau

“If you understand compound interest, you basically understand the universe.” – Robert Breault

“Wealth is not his that has it, but his that enjoys it.” – Benjamin Franklin

“Be fearful when others are greedy, and greedy when others are fearful.” – Warren Buffett

“If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.” – Warren Buffett

“I’m a great believer in luck, and I find the harder I work the more I have of it.” – Thomas Jefferson

“Every time you borrow money, you're robbing your future self.” – Nathan W. Morris

“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.” –George Soros

“Compound interest on debt was the banker's greatest invention, to capture, and enslave, a productive society.” – Albert Einstein

“Too many people spend money they don’t have to buy things they don’t need to impress people they don’t like.” – Robert Quillen

“Rich people have small TVs and big libraries, and poor people have small libraries and big TVs.” – Zig Ziglar

“Sometimes a very expensive life lesson can be worth every penny.” – Noel Whittaker

“If you don’t value your time, neither will others. Stop giving away your time and talents. Value what you know and start charging for it.” – Kim Garst

“I just sit in my office and read all day.” – Warren Buffett

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” – Charlie Munger

“The four most expensive words in the English language are, ‘This time it’s different.’” – Sir John Templeton

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett

“Good and evil increase at compound interest. That's why the little decisions we make every day are of infinite importance.” – C. S. Lewis

“It is not necessary to do extraordinary things to get extraordinary results.” – Warren Buffett

“There’s always a way if you look hard enough.” – Noel Whittaker

“A journey of a thousand miles must begin with a single step.” – Lao Tzu

“The asset I most value, aside from health, is interesting, diverse, and long-standing friends.” – Warren Buffett