"It takes as much energy to wish as it does to plan."
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.
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:
- 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.
- 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.
***These tips to being a financial winner will be continued in the next post How to Become a Financial Winner (Part 2).