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"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 âwealthâ 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. Itâs completely up to you to create your own definition, but I urge you to ensure itâs written in the positive. Reframing your mindset is one of the most fundamental steps in transitioning to being a financial winner.
Yet, we donât teach this in schools.
Wealth does not guarantee youâll 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 youâve 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 weâre 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 youâre 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.
We see this with every goalâpeople have the best intentions, always promising to âget around to it' but never do. Make the commitment to start now:
If youâre not willing to make personal finance a priority, none of the other steps will help you. As the Chinese Proverb says: âThe best time to plant a tree was 20 years ago. The second best time is now.â
If you can measure it, you can manage it. In previous episodes, weâve spoken about the importance of auditing your energy so you can stay happy, and weâve 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 ASICâs Budget Planner, which although designed for Australians is just as applicable globally).
Write down your:
Income:
Expenses:
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 youâre 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 itâs much better to be aware now so you can take steps to fix it.)
Now, weâve 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 threeâŚ
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 weâre 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 youâre not sure what it means to 'keep up with the Joneses', itâs trying to match the social status of your neighbors and friends by doing foolish things with money you donât 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 thereâs 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 youâre 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 youâve 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.
Itâs human nature to spend all that we getâthatâs why tax agencies like the IRS and ATO tax your employer first before you receive your wages. Yet, funnily, if we donât have it to spend, we donât 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 âsave at least 10% of everything you earn.â 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 youâve enjoyed the week, make the commitment upfrontâthe moment you receive your payâand 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.
Too many people ignore the benefit of good money management because they believe they arenât earning enough. âIâll do it when I get my next pay rise,â they say. Only they never get around to it.
Regardless of how much youâre 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:
Generally, you should follow this order when you receive your pay:
Get into good habits as early as you possibly can.
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 youâve set aside to invest.
Letâs look at a few countries to inspect their interest rates and compare them to inflation:
| Country | Interest Rate | Inflation |
| Australia | 1% | 1.3% |
| Canada | 1.75% | 2.4% |
| Japan | -0.1% | 0.7% |
| United Kingdom | 0.75% | 2% |
| United States | 2.5% | 1.6% |
Source: Trading Economics (July 2019)
In many cases, inflation is higher than interest so youâre 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 returnâensuring 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 âtiming the marketâ 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 â 2019), you would experience the usual volatility but enjoy a strong overall average annual return:
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:
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 (weâll touch on this more later).
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.
Letâs use an example. In 2009, Jennaâs 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 couldnât touch for everyday purchases. Jennaâs 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 Jennaâs account would be worth:
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?
Albert Einstein once said: âCompound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.â Itâs the key to understanding how small sums add up, leading to enormous gains for financial winners and extreme losses for financial losers.
Letâs reflect again on Jenna in the last example. The longer she left her investment, the quicker it multiplied. Letâs add two more periods:
Thatâs 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, letâs think about Jennaâs friend, Luke.
In 2009, Luke didnât 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 thatâs why they seem happy to lend indiscriminately. Luke learnt the hard way that âCompound interest on debt was the banker's greatest invention, to capture, and enslave, a productive societyâ as Albert Einstein said.
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 âamazing opportunityâ 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: âIf itâs too good to be true, it usually is.â
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 itâs regulated by the authorities such as the SEC or ASIC. If one company on the index fails, youâre 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 youâve 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 youâve 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 youâre willing to lose.
I love the Zig Ziglar quote: âRich people have small TVs and big libraries, and poor people have small libraries and big TVs.â 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 mightâve felt satisfied in the short-term thinking you had avoided further disaster. However, if you had invested in yourself too, you wouldâve 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.
Approximately 50% of marriages end in divorce (divorce rates by country), and if youâve ever been involved in a divorce or witnessed one firsthand, youâll know itâs 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:
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 heartacheâand potentially tens of thousands of dollarsâdown the track.
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.
Whatâs the best way to find a good financial planner?
Once youâve 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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âCompound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.â â Albert Einstein
ââA 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.â â George S. Clason (The Richest Man in Babylon)
âToo often, a vast collection of possessions ends up possessing its owner.â â Warren Buffett
âItâs good to have money and the things that money can buy, but itâs good, too, to check up once in a while and make sure that you havenât lost the things that money canât buy.â â George Lorimer
âBuy when everyone else is selling and hold until everyone else is buying. Thatâs not just a catchy slogan. Itâs the very essence of successful investing.â â J. Paul Getty
âThe power of compound interest the most powerful force in the universe.â â Albert Einstein
âNever spend your money before you have it.â â Thomas Jefferson
âWe make a living by what we get, but we make a life by what we give.â â Winston Churchill
âIf 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.â â Henry Ford
âYou only find out who is swimming naked when the tide goes out.â â Warren Buffett
âThe individual investor should act consistently as an investor and not as a speculator.â â Ben Graham
âNot everything that can be counted counts, and not everything that counts can be counted.â â Albert Einstein
âIt takes as much energy to wish as it does to plan.â â Eleanor Roosevelt
âSuccessful investing takes time, discipline and patience. No matter how great the talent or efforts, some things just take time. You canât produce a baby in one month by getting nine women pregnant.â â Warren Buffett
âAn investment in knowledge pays the best interest.â â Benjamin Franklin
âHappiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.â â Franklin D. Roosevelt
âLife 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.â â Noel Whittaker
âSomeoneâs sitting in the shade today because they planted a tree a long time ago.â â Warren Buffett
âEmpty pockets never held anyone back. Only empty heads and empty hearts can do that.â â Norman Vincent Peale
âBefore 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.â â William A. Ward
âTo 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.â â Noel Whittaker
âA successful person is one who can lay a firm foundation with the bricks others have thrown at him.â â David Brinkley
âHow many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.â â Robert G. Allen
âDonât keep knowledge trapped in your head or your money stuck in a savings account.â â James Whittaker
âThe stock market is filled with individuals who know the price of everything, but the value of nothing.â â Phillip Fisher
âMoney is a terrible master but an excellent servant.â â P.T. Barnum
âBecoming 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.â â Noel Whittaker
âWhat we learn from history is that people donât learn from history.â â Warren Buffett
âWealth is the ability to fully experience life.â â Henry David Thoreau
âIf you understand compound interest, you basically understand the universe.â â Robert Breault
âWealth is not his that has it, but his that enjoys it.â â Benjamin Franklin
âBe fearful when others are greedy, and greedy when others are fearful.â â Warren Buffett
âIf youâre in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.â â Warren Buffett
âIâm a great believer in luck, and I find the harder I work the more I have of it.â â Thomas Jefferson
âEvery time you borrow money, you're robbing your future self.â â Nathan W. Morris
âIâm only rich because I know when Iâm wrongâŚI basically have survived by recognizing my mistakes.â âGeorge Soros
âCompound interest on debt was the banker's greatest invention, to capture, and enslave, a productive society.â â Albert Einstein
âToo many people spend money they donât have to buy things they donât need to impress people they donât like.â â Robert Quillen
âRich people have small TVs and big libraries, and poor people have small libraries and big TVs.â â Zig Ziglar
âSometimes a very expensive life lesson can be worth every penny.â â Noel Whittaker
âIf you donât value your time, neither will others. Stop giving away your time and talents. Value what you know and start charging for it.â â Kim Garst
âI just sit in my office and read all day.â â Warren Buffett
âUnderstanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.â â Charlie Munger
âThe four most expensive words in the English language are, âThis time itâs different.ââ â Sir John Templeton
âLong ago, Ben Graham taught me that âPrice is what you pay; value is what you get.â Whether weâre talking about socks or stocks, I like buying quality merchandise when it is marked down.â â Warren Buffett
âGood and evil increase at compound interest. That's why the little decisions we make every day are of infinite importance.â â C. S. Lewis
âIt is not necessary to do extraordinary things to get extraordinary results.â â Warren Buffett
âThereâs always a way if you look hard enough.â â Noel Whittaker
âA journey of a thousand miles must begin with a single step.â â Lao Tzu
âThe asset I most value, aside from health, is interesting, diverse, and long-standing friends.â â Warren Buffett
âYou can make more friends in two months by becoming interested in other people than you can in two years by trying to get people interested in you.â
Dale Carnegie
The two most defining self-help books of the last century are, arguably, Think and Grow Rich by Napoleon Hill and How to Win Friends and Influence People by Dale Carnegie. Remarkably, they were released within one year of each other: Carnegieâs in 1936 and Hillâs in 1937. Both dominate âbest bookâ lists and continue to forge lasting legacies around the world, guiding innovators and changemakers from generation to generation.
These two books reinforce the timeless principles of success, complementing each other with practical tips and strategies that can be applied by anyone, irrespective of circumstances, such as:
Carnegie understood, better than most, how powerful the knowledge of high performers strategies can be in oneâs own self-development. Through thousands of hours of purposeful practice, he became a revered orator and began teaching others how they could learn people skills that would create enormous success in business. His lessons catapulted aimless but ambitious people into titans of industry.
Two crucial components of his philosophy were that:
Many of those I interviewed for Think and Grow Rich: The Legacy noted that Carnegieâs book was the other guiding blueprint in their life. Even legendary investor Warren Buffett once stated:
âIn my office, you will not see the degree I have from the University of Nebraska, or the masterâs degree I have from Columbia University, but youâll see the certificate I got from the Dale Carnegie course.â
Despite passing away in 1955, Dale Carnegie is regarded as one of the worldâs foremost authorities on personal development, leadership and communication. On 24 November, Carnegie wouldâve been 130 years oldâyou can enjoy some of his most famous quotes below.
May his legacy live on through the ongoing pursuit of our potential and thinking the best of others.
Onwards and upwards always,
James W.
In case you missed it: âThe Greatest Lessons and Best Quotes from Napoleon Hill.â
âIt is not necessary to do extraordinary things to get extraordinary results.â
Warren Buffett
Two things make sensational news headlines more quickly and prominently than anything else: first, trouble in financial markets, which impact peopleâs investments and retirement savings; and second, the prospect of war.
As news outlets splash doomsday headlines as boldly as they can, many buy into the hype, acting as willing participants in spreading fear to anyone who will listen â and the poverty consciousness grows like a weed.
But not everyone buys into the hysteria. Some remain focused on what they want to achieve, ignoring what is out of their control, and in doing so can stumble across opportunities that others only dream of.
During the US Savings and Loan Crisis of the 1980s and 1990s, interest rates were raised to curb inflation and numerous financial institutions sought deregulation to enable them to innovateâtheir very survival depended on it. As financial companies struggled, bank stock prices were hammered, including the stock of Wells Fargo, which plummeted almost 50%.
One investor, Warren Buffettâwho was then in his fifties, and known for his keen sense of rationalityâdecided to investigate the intrinsic value of these companies himself, rather than reacting to everyone elseâs fear.
At the time, Wells Fargoâs market capitalization was around $2.9 billion. Through his research Buffett concluded that the company would not only survive the crisis and return to its former but might one day even surpass it. Buffett backed his judgment and bought a significant stake in the renowned US bank.
His analysis and instincts were correct. Today, Wells Fargo boasts a market capitalization of more than $270 billion, giving Buffett a return of over 9,000%on his investment.
In a 2004 letter to his Berkshire Hathaway shareholders, the legendary investor offered an insight into how he feels about how most people think: âBe fearful when others are greedy and greedy when others are fearful.â
With each downturn, recession or financial crisis, Buffett does not throw up his hands in despair or cower under his desk. Rather, he views it as an opportunity to consolidate his wealth, buying deeply undervalued companies and setting up operational efficiencies and synergies that lead to enormous returns over time.
Those who are well advanced on the path to self-mastery, like Warren Buffett, are NOT extraordinary people. Instead, they consistently and purposefully apply a proven formula of simple actions that lead to extraordinary achievement over timeâstarting with getting crystal clear on what they want.
While others drift with whatever gust comes their way, winners use their calm, focused minds to identify and take advantage of opportunities to achieve their goals faster.
On 30 August, Buffett turns 88. Happy birthday to one of the greats of our time.
Onwards and upwards always,
James W.
PS â With USD $30+ billion donated, Warren Buffett is also regarded as the second greatest philanthropist of all time.
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