This is the second part in my Minimalist Guide to Money and Investing. You can read Part I here, which explains my views on Motivation and Environment, and Mindset and Education.

This post will be about:

3—Accumulating Capital and Allocation

So you’ve decided that you want to be an investor. You’ve worked hard to change your pre-existing views about money, and you’ve been reading and learning a tremendous amount about investing.  You want to have a life of freedom, but it doesn’t come cheap. How do you get started?

Well, either you save money to get started, or you make money to get started.

Saving money to invest—How much money you have depends on this simple formula:

Money You Have = Money earned – Money Spent

If you want more money at the end of the day, you can either earn more, or spend less. That’s it. But if it’s so simple, then why do so many people get it wrong? They don’t earn enough, or they spend more than they earn, which means they have little or no money left by the end of each month.

Even worse, if the money leftover is negative for long enough, people get into debt, which can spiral out of control. I understand that it’s not easy for everyone. Some might not be able to find a job, others have family to take care of. I never said it was going be easy, but most of the time there is something that can be done—downsizing, reducing purchases, eliminating entire bills/subscriptions/memberships, anything!

One of the great side effects of living a minimalist lifestyle is all of the extra money you save from deciding that you don’t need so much junk in your life. Not only that, but if you use those savings wisely, it can buy you things worth way more in the future.

I like to call this reducing your life overhead. Overheads usually refer to the costs of running a business, but there’s no reason why it can’t apply to your life. Keep your overheads low and even if you don’t earn a lot, you’ll have some ‘profit’ leftover.

I had a very average salary when I worked full time. I chose to live in a city where rents were reasonable and I didn’t need to drive a car. I had a capsule wardrobe of work clothes, only went out occasionally, and I ate well but not expensively. By the time I quit my job, whereas most people would barely have enough money to make ends meet, I had nearly a year and a half worth of savings that I could fall back on to pay the bills. If I was even more frugal, I could have lasted two years or more.

But I didn’t want to just live off my savings. My intentions were to use my savings to buy freedom. I wanted to use at least a chunk of my funds to generate a passive income with so that I didn’t have to work again. I will go into more detail about how I did this below, and in a future post.

Making money to invest—On top of your existing savings, you can always try to earn more money to invest. Generally, the more money you start with, the more quickly you will reach financial freedom, if that’s your goal. This doesn’t mean that if you have a million dollars you can just do nothing, it can quickly run out if you don’t use it wisely to generate more dollars.

Even after leaving my job I continued to earn money via various online jobs. A quick Google search will show all the different ways you can make money online.

There are so many ways to make money if you keep your eyes open for the opportunity. Even within the realm of property, there is a lot of advice on how to start investing even if you don’t have a penny. For example, you can do something called ‘rent-to-rent’ (google it) or you can build a network (free), source deals (free or nearly free), and package and sell them to money-rich/time-poor investors for a fee (usually in the region of a few thousand dollars). This is just one example to prove that if you are resourceful enough, you can definitely make money in this world. 

Okay, enough about savings. Once you have some money, how should you use it?

Capital Allocation

What you decide to use your money for is absolutely crucial. It’s what differentiates you from the Scrooges and the spenders and it determines whether you succeed or fail.

Firstly, if you have any expensive debts, you must get rid of them first. Any returns you make in investing are not likely to cover things like credit card debt, pay day loans, or anything with a very high interest rate.

It would be like trying to fill a tub with a huge hole at the bottom. You have got to close the hole(s) first. Some cheaper debts such as student loans may be okay to keep as long as you calculate that the yields you’ll get with investing will outweigh the cost of the loan. This may depend on your personal circumstances.

You may end up having to work extra hours, take on a second job, or be very frugal for periods of a year, or two years, or more. However long it takes, it’s worth the peace of mind to become debt-free.

Secondly, after covering your debts, you need to have enough earnings and savings to cover your living expenses and then some, so that you have a nest egg for emergencies. Some people suggest one or two months, especially if they have specialised skills where they can always find a job, but I would recommend having at least three or six month’s contingency for expensive emergencies.

Finally, only when you have some money left over after all that (it can be as little as a few dollars) you can start investing.

I will talk more about how specifically to invest in the next blog post, but the basic premise of most investments is that you are investing for income and/or capital growth.

What this means is that some of your investing will be to make a short term return (yield) and some will be to make money in the future (capital). A lot of investments are a bit of both, such as shares which give you a dividend and hopefully go up in value over time, and property, which will hopefully give you rental income in the short term, and capital income in the future.

You will need to allocate your investments so that you earn some of both—enough short term returns to cover some or all of your monthly expenses, and enough in future capital growth so that you will have (sometimes a lot more) money in the future as well.

So what did I do in the end? After making sure that I had my basic needs covered at least for the next few months, I ended up investing a chunk of my savings into property. I chose property because it’s one of the only things you can borrow money to invest in. Also, the short term yield (the rent) will help cover my monthly expenses to live, and the long term capital growth will help me grow my income and wealth in the future. I also chose it because I live in Manchester, an amazing city that is booming at the moment and a great place to invest in property, for now.

On top of my own money, I managed to borrow some money from family, and I took out a mortgage after carefully calculating that the apartment(s) I wanted to buy would return a profit after expenses. I will go into the details in the next post, including examples of my income/expenditure/profit figures.

A brief note about borrowing money and where to allocate your debts—there is such a thing as good debt and bad debt. ‘Bad debt’ costs you money, like when money is borrowed to buy depreciating assets or liabilities, such as a car or a holiday. When you use money in this way, it costs you. ‘Good debt’ on the other hand is money borrowed to buy assets that generate money, such as property that has a rental income higher than the cost of borrowing. The property can also be sold with a healthy margin over how much you borrowed. Overall, this means you’re making money.

The key here is to have a plan. Know your numbers—how much money do you earn? How much money do you spend? How much do you have to/want to invest? When can you start?How much do you want to earn from your investments? When by?

A lot of people don’t think about these sorts of questions and go plodding along in their working life, and shopping every other weekend without stopping to think about what they are doing. Both time and money are a limited resource. They can be foolishly wasted, or they can be invested wisely to generate more free time and more money to spend.

I will write more about my specific property investments in my next post, and how you can get started with investing even if you can’t afford to buy a property yet.

Resources

The Complete Guide to Property Investment — Rob Dix

I will refrain from recommending more than one property book. This is one of the best ones I’ve read, and it will give you a good idea of how making money in property works from beginning to end. I also recommend all other books by Rob Dix, and their Property Hub website. I go to their UK meetups every couple of months to discuss property and network with other entrepreneurs.

The Compound Effect: Jumpstart Your Income, Your Life, Your Success — Darren Hardy

A great book about how small actions can lead to big results. If you think you can’t be a millionaire one day, it’s because you’re thinking about millions of dollars right now, not one or ten dollars, which will compound into hundreds and then millions in the future if you make the right decisions. This book isn’t just about money, but also about how all of the life choices you make today will affect you in the future.

The Magic of Thinking Big — David Schwartz

If you want to make it big, you have to think positively, optimistically, and proactively—in other words, think big. My copy of this book is full of notes and bookmarks. Containing inspirational stories and phrases like “When you believe, your mind finds ways to do” and “In everything you do, life it up,” I’ve read this book more than a couple of times and can’t recommend it enough.

A lot of people hate talking about money. One of the most annoying things I hear is that “there are more important things in life than money”, and while I agree to some extent, it should be more like, “there are more important things in life once I have enough money”, because the kind of people who say the former tend to be those who can’t sleep at night worrying about the bills, dread Monday mornings, are working 40+ hour weeks, can’t afford to do the things they really want to do, or don’t have enough time to spend with their friends and family.

Accumulating money for the sake of it isn’t the point. Money is a tool, like a boarding pass, it is your ticket to where and who you want to be. With it, you can get away from the long office hours with the boss you hate, the debt collectors or the mortgage hanging over your head and towards a life of freedom and fulfillment.

It’s not difficult either. There is a very simple formula. The money you have is the difference between what you earn and what you spend. That’s it. So logically, there are three main ways to get rich:

1. Spend less. Want fewer things, and you’ll end up spending less. Care less about what other people think and stop trying to keep up with the neighbours and you’ll end up spending less. Have some discipline and care more about your future self and you’ll end up spending less. You don’t need to live a monk-like existence, but everyone has something they can cut. It’s a matter of thinking before you spend and prioritising what’s really important to you over what only seems important to you right now.

2. Save more. First, and most importantly, make sure you have a rainy day fund that will pay for all of your essential expenses for at least 3-6 months in the event that you lose your job, or can’t work temporarily. Unfortunately, too many people live pay check to pay check, unprepared for things like illness, or a downturn in the economy, or any number of things that are outside of their control. You should also prioritise paying off the most expensive debt(s) that you may have, starting with the ones that charge the most interest, leaving the least expensive debt until last. You might consider not paying very low interest debt off yet if a potential investment yields more than the interest charged, but more on that below.

3. Earn more. Another way to get more money is to simply earn more. Ask for a raise, take on another job, or start something on the side. Don’t fall for lifestyle inflation, which is when you spend more because you’re earning more. Although the occasional treat is fine, too much normally results in very little net difference in savings. That’s how you get people on £60k salaries relying on each paycheck to cover their inflated bills.

Now, once you’ve saved your emergency fund and have accumulated a little extra, what do you do with it? Money isn’t made for collecting, you need to put it to work…

4. Switch your earned income to passive income. Most people think that the only way to make money is to earn it by doing some sort of office or labour job. This is simply not true. There are plenty of people who continue to make money even after they stopped work. Like the singer who earns royalties for a song she made years ago, the writer whose book continues to sell, or the business owner who leaves the day-to-day running to a manager. These kind of people put in an initial amount of work that took some time, effort, skills, and knowledge, but were rewarded with a passive income long after they stopped working. They had the freedom and income to do what they liked, move onto other projects, or to do nothing at all. You can switch your earned income (the money you make by working) to passive income (the money you make by not working) over time, by investing (see below), or starting a side business or income generating hobby. Eventually, you might be able to reduce or stop working, but even if you don’t get rid of your earned income source, at least your passive income can provide an extra layer or security, or luxury, that you otherwise wouldn’t have had.

5. Invest. Apart from inheriting or winning the lottery, investing is the only way to earn money outside of conventional work. All investing can be boiled down to a return percentage with a certain amount of risk. From low risk/low yielding bonds to high risk/high returning startups, there are thousands of way to invest, and it would be outside of the scope of this blog to explain and review individual methods. However, I have found property to be a good investment (in my city/country) in various forms including buy-to-let and crowdfunding. An important thing to remember is that inflation is eating away at your savings at a rate of between 2-6% per year or more, depending on which country you live in, so if you do nothing, you are essentially losing money. Make your money work for you, in the form of immediate/short term returns, or long term capital growth. Which you choose, or how you balance these is up to your own financial situation and goals.

There is a lot more I have to say, which I will detail in a future post. I am not a financial expert, and you should always consider any financial advice carefully. However, some things are common sense, and yet there are so many people stuck in debt, living on their paychecks, or in jobs they hate because they wouldn’t be able to pay the bills if they left. Worst of all, they complain yet do nothing about it, or they resent people who do have money. As a child of immigrant parents, I was not given anything more than most kids my age. I had exactly the same opportunities that were there for anyone who could identify them to take, and I worked extremely hard for them. I’m very grateful for the knowledge and experience I’ve accumulated, and I’m proud of how I was able to steer my finances to where they are now.

Finally, the more I earn, the more I’m able to give, which is one of the only reasons why I would want to earn above my means. I’m not interested in fast cars or fancy shoes, if I have more than I need, I would give it to the people who need it most, so that they could have some of the opportunities I was so lucky to have.

Resources

Ever wonder how people become millionaires and how lottery winners manage to lose it all? If there’s one book that helped me see things with a better perspective, it must be Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker which talks about our money mindsets. You can learn all you want about investing, but unless you have a rich mindset, you’re unlikely going to be able to succeed, and even if you do, you might not keep it for long. Having the right ‘money blueprint’ is the first and most important step to becoming truly rich.