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.
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.