How to Manage Your Money and Become Rich
I’m about to embark on a new career and starting a new job is always a great time to assess things, sort of like the New Year when many of us love to set our intentions. It got me thinking about my finances and how little I really know about all things ‘financial’. I’ve always been good with my money, in terms of paying my rent and bills on time, and saving for what I want or need, but when it comes to retirement plans, investments, stocks, bond and mutual funds, you may as well be speaking a different language to me.
This is why I decided to empower myself, by educating myself and building confidence in my decision making ability in all financial aspects of my life. Below are a few top-line highlights of what I took away from my own studies that may be useful for you in yours, my biggest influence below is by the amazing David Bach. As always take what works and leave the rest. I even admit to having enjoyed learning about all of this (well most of it) and I feel excited to be taking charge in planning and saving for my future and my family’s future.
First of all you need to figure out What is important to you about money? Write it all down in a detailed list and from this you will see some clear values come through. Perhaps it’s security, peace of mind, living a fun-filled life, leaving a legacy for your children. Whatever it is, it will be bespoke to you.
Next get clear on what your goals are. List 10 goals you want to achieve in the next 3 years. Go crazy here. Right them all down. I find early morning is best, as your analytical thinking might isn’t interfering with it’s opinions/limiting beliefs as much. It can be anything from living debt free, a down-payment on a house, to starting your own business.
Now select 5 of these goals and get really clear on each one.
How much will you need to save?
Which of your values does this meet?
What is your strategy?
Who are you going to tell?
In all of the books I read, the NUMBER 1 piece of advice was always ‘Pay Yourself First’. Which if you think about it makes total sense So often we get paid and straight away we pay our mortgage/rent, credit cards, loans, subscriptions and what’s left we might ‘might’ just put some aside for savings. The suggested percentage experts recommend is to pay yourself is 12% of your Gross earnings (that’s your salary amount per month before tax) into your retirement fund.
If you think 12% sounds like a lot, then start to look at where you spend your money. I was surprised myself when I did this exercise. For one week monitor what you are spending by writing it all down, but the key is not to change your behavior the week you are tracking your spending. It will pretty soon become clear where your money leaking issues are. Another great tip to curb spending is to use cash to pay for any item over $100 and wait at least 48 hours before making a large purchase, so that you have time to think on it. Handing over your hard earned cash will be a lot harder than swiping a plastic card, which lets face it often feels like it’s not real cash anyhow!.
One concept I loved which is in David Bach’s book ‘Smart Women Finish Rich’ is by his Grandma. It’s called Grandma’s 3 Basket Approach.
Basket 1 - Security
Have you ever been caught out without the money to pay for something in an Emergency? An unexpected car breakdown, a painful root canal, a job loss?
It’s important to have a support cushion in case of emergency, an Emergency Fund. The books vary anything from having 3 months - 24 months living expenses saved. It really depends on your month cost of living.For example if your monthly cost of living is $2k, then ideally you would want to save $6k in an emergency fund. You want this money to be saved in a money market account, so a safe savings account earning you anything from 1-3% interest.
2) Having an up-to-date will or living trust is pretty much essential for most people. The difference between a Will and a Living trust is that with a living trust, your assets wont have to go through probate which is really important, as it means , no court reviews, no expensive attorney fees and you can maintain your estates privacy. For those of you who are lucky enough to own estates right now.
3) Get Healthcare Cover. It’s so important that we all have this but I totally understand that the cost of healthcare cover in some countries is straight out criminal and unjust. In Canada we are lucky with the current healthcare system. This is an area you need to really investigate depending on where you live and buy the best healthcare cover you can afford.
4) Buy Life Insurance. This one is especially for anyone with dependents, it’s pretty self explanatory but again often forgotten. An interesting point made in the book, was what if something happened to both parents, would the people you want to take care of your children, have the finances to provide for your children also? . The suggested minimum insurance amount is Income before tax x 6 100,000 x 6 = 600,000
5) Disability Insurance - It’s not so nice to think about, but important to be covered. Especially if you are the bread winner in your family or have little ones depending on you. For this policy a good tip David Bach suggests is to ensure that your policy is portable and guaranteed renewable. Ensure you buy ‘Owner Occupied Policy’ - as this covers you for your exact job. Essentially it means that the insurance company can’t claim that you are still OK to work in a different job other than your previous. For example if you are a Yoga teacher, your job is to use your body and you put your back out, the insurance company can’t tell you to get an office job and deem you fit to work.
Disability Insurance is usually 1-3% of your Gross Income.
Basket 2 - Retirement Basket
Biggest piece of resounding advice that comes across is max out your retirement fund savings and if your employer doesn’t give you one, then start your own. I didn’t fully get how important this was, until I read these books and I am guilty of cashing out my retirement funds from a previous job (ouch!)
Good questions to ask if you are with your company plan is if your retirement plan is ‘roll-over’ which means can you take it to a different account/international account without being subject to taxes or penalties. The key to having a great Retirement Fund is to invest for Growth. It is important to figure out the right mix between Growth Vehicles and Fixed Investments.
Growth Vehicles = stocks and stock based mutual funds
Fixed Income security = bonds and bond funds
A quick formula devised by Dr Harry MarKowitz, who won a Nobel Prize for Economics is -
Your age subtracted from 110 = % assets you should put in stocks and the rest goes into less volatile bonds and fixed rate securities.
110 - 36 (yrs age) = 74
74% invested into stocks
26% invested into bonds - fixed securities
Basket 3 - Dream Basket
Dreams are the catalysts for our future, without our dreams we can lose hope for our future and get caught up in the day to day monotony of life. They give us passion, fire in our belly and sparks in our eyes. It’s hard to be depressed when you have big dreams you are planning to come true for your future.
If you could make a wish right now, what would you really wish for. Think about this for a minute, if I was granting you ‘a real wish’ right now what would it be. Sometimes what we ‘think’ we want, we don’t actually want at all.
List out your top 3 dreams.
How much money is required to make them a reality?
How long will it take for you to save that much money?
In summary, what’s important …
Start your retirement savings plan asap, as young as possible and max it out. You will thank your older self and with inflation you need as much cash saved as possible.
Getting your financials into order will give you huge peace of mind. Tracking spending. Clearing debt. Maintaining a good credit rating.
Remember it’s all the small purchases that add up. Saving $8 a day, x 5 days a week = $40 x 1 month = $160 savings a month x 12 months = $1,920 a Year.
Ensure you have taken care of your Will/Living trust, Health Insurance, Life Insurance and Disability Insurance and read all the fine print.
Have an Emergency fund of at least 3 months living expenses saved.
Start your Dream Basket Savings account - saving for your long term dreams in the future.
Get informed on the different ways that you can save so that your money is working for you. Look into money market accounts, mutual funds, stocks and bonds depending on when you need the funds - short term savings, mid-term savings, or long-term savings.
It’s not what you earn, it’s what you save.
Book recommendation - David Bach ‘Smart Women Finish Rich’
Podcast Recommendation - David Bach interviewed on Rise by Rachel Hollis