We live at a wonderful time, when you can bank from anywhere as long as you have your phone or laptop around. However, that does not mean we have to do something with our finances everyday. In fact, I prefer if everything is automated, and no need to do anything. Why? The less ad-hoc decisions you make around your finances the better off you are. Should I pay the full amount on this credit card this month or the minimum is sufficient? Do I put away a certain amount for my next car purchase, or there is no urgency there? How much can/should I invest this month? It’s easy to see that these questions does not make life easier. If you need to make decisions daily, you might not make the right ones or they might not be in synch with your long terms strategy or goals. Not to mention it does not help our daily stress level…
The best way to prevent that is to set everything on autopilot, which nowadays is not that complicated.
Pay yourself first. Decide how much you put away for long term investments (for Financial Freedom) and set it up that it gets taken from your paycheck right away and transferred into a brokerage account (ideally a tax-free account like TFSA). That will ensure steady growth in your Financial Freedom account, sheltering it from your day-to-day, sometime hectic life, and possible impulse spending, kind of a protection against yourself.
Investments. On the brokerage account set up an automatic investment plan into a low-cost index fund or ETF, so your monthly set amount gets to work for you without delay. Dollar-cost-averaging into the market is a wonderful thing; you invest a fixed amount regularly, reducing the impact of volatility by spreading out your purchase price over time. In other words, no worries if the stock market drops, just smile: you are buying great stuff ‘on sale’. Additional benefits include: consistency, i.e. ensures you invest regularly without having to remember to do so; and emotion-free investing, i.e. removes emotional decisions from investing, potentially leading to better long-term results.
Set up your credit card(s) for automatic, monthly ‘full balance’ payment from your checking account. Benefits include avoiding late fees, which in turn helps maintain good credit scores; and lowers stress level via reducing the mental load of remembering due dates.
Set up your charitable donations (to your church or favorite charity) from your account automatically, so you never need to worry about it, but you can feel proud every month when you review your bank statements.
Save Without Thinking: Set up your automatic transfers for an emergency fund and for your big-ticket item savings (new car, vacation, etc.) on separate saving accounts. They will just miraculously grow (via compound interest), and allows you to buy the item before you know it.
All utility, insurance and other bills also need to be setup for automatic deduction, so they just get get paid without you ever occurring any late payment or penalty.
Once all these transactions are on Autopilot, you can relax, as you can be certain your personal finances are on the right track. They don’t need a lot of attention, you are just effortlessly drifting towards your goals and dreams. No need for day-to-day decision making (that has a chance to knock you off-track) and as additional bonus, your credit history is also on autopilot for steady improvements for years to come. By setting these systems in place, you create a foundation for financial stability and growth with minimal ongoing effort. However, it’s crucial to periodically review your automation settings to ensure they align with your current financial goals and situation.
One of the most important financial concepts we mentioned earlier was the mental modelling or ‘compartmentalizing’ our finances (here). Imagine that all your income is distributed into six buckets or jars as shown below.
All your income should be distributed in one of the jars. (Bear with me, most of the time these are not physical jars, but various banking or investment accounts at financial institutions.) So, here are the ‘rules’ we need to remember.
Living Expenses include everything from shelter, food, transportation and other necessities of life. Most people allocate the highest amount here, but it does not need to be the majority. The important thing here, that you need to live off of this funds. No additional borrowing, from credit cards, banks, or other jars.
Financial Freedom account is arguably the most important jar, it’s purpose is to build up your assets (wealth) long term, in order to get to the point that the accumulated assets generate enough passive income to cover your living expenses. At that point work becomes optional, hence the name Financial Freedom. There are two rules: A) invest the funds for the long-term, and B) never take money out until FF is achieved.
Long Term Savings jar is to collect for big ticket items, such as a car or a vacation. These are typically not mandatory living expenses, but too large to be covered from the PLAY jar. You can make a list what you want to collect for, and as you see your funds steadily growing from every paycheck, you will inevitably get to the point where the item(s) could be purchased one after the other. The rule: only spend on stuff you declared before in order to avoid impulse purchases. (You can even setup multiple saving accounts for multiple purchases. Even better if tax sheltered saving accounts are used.)
Education jar is for anything that helps you grow. Continuous, life long, never-ending education is important, and often costs money. It could be post secondary education, or other formal or informal learning experiences (such as seminars, books, online courses, coaching, or mentoring).
The PLAY jar includes any fun, entertainment, leisure and recreational activities for you and your family. The two rules: you have to have fun, and the jar needs to be emptied (fully spent) every month.
GIVE jar is about getting into the habit of, well, giving away cash to help others less fortunate. Charity is not the privilege of the rich and famous, and there is no reason to hold back your giving until you become wealthy. This is a bit counter-intuitive, as some people tend to think giving away money slows down your financial progress. It’s exactly the opposite. Giving away money confirms to your subconscious that you have ‘more than enough‘, you are wealthy, hence setting your invisible financial thermostat higher. And you start to think and act more like wealthy people do, which naturally result in more wealth. But even if this does not register, nevertheless, just get in the habit of giving: the world will be a better place and you will feel proud that you did your part.
The actual percentage values for allocation are just guidelines, everyone’s personal situation is different. My university student son (who lives at home) allocates very little to Living expenses, and the majority of his income goes for Education (tuition), and of course, the Play jar. Small kids can also start this kind of mental ‘compartmentalization’, which could help them in their entire life. My own kids started to distribute their weekly allowances into 5 jars when they were 6 years old. (No need for Living expenses in their cases.) Nowadays that kind of thinking comes naturally to them.
If you are new to this, start setting up jars/accounts, and assign the desired percentage allocation. I am sure you can figure it out for yourself. Try to live off 70% or less of your income for starter (in other words, allocate less then 70% for Necessities), put at least 10-15% into your FF jar and the rest of the income allocated somehow to the other four jars. If you give only 1% to charity, that is OK, as long as you give something. You can work it up as you go. If your Play jar covers only one movie ticket a month, that’s fine too, assuming you picked the right movie and you had fun. You can always increase later. Just don’t ‘borrow’ from other jars to blow it on something silly.
Remember, only the money you don’t spend will make you wealthy one day. The FF jar is yours to nurture, invest and let snowball into unimaginable riches as compounding interest does it’s thing.
Before we discuss the technical details of Wealth creation, it probably makes sense to talk about the psychology behind. It is hard to become wealthy if you just don’t believe it is possible for you, or even worse, you convinced it is just the result of sheer luck or illegal/unethical behavior. Luck does play a role (hey, life could be unfair:-)), but there is no doubt there is a long list of ethical, legal and moral activities that can lead to significant wealth. In fact, creating value to society is possibly the sure way to get there. Businesses adding value to our life (via providing valuable product and services) usually strive, as we have no problem parting from our hard earned cash.
So what is in your head regarding money and finance? What is your experience so far? Where do you see yourself in the poor-rich continuum? Everyone has a place visualizing him/herself, both in the present and the future. And subconsciously we know where we belong. And that is the scary part. If you think you are (and always will be) poor, or middle class, or any other group, it is very hard to collect a certain amount of money or maintain a certain level of wealth that is inconsistent with your subconscious believe. We have all heard of average Joe winning $Millions in the lottery, just to get back to where he started a couple of years later. Or the Millionaire entrepreneur who managed to get back into the big game after a bankruptcy detour, no problem.
We all have a money ‘thermostat’, something that T. Harv Eker called ‘money blueprint’. That works exactly as a thermostat: when our circumstances become ‘colder’ (poorer), we start to work incredibly hard to get back to the comfort zone, and if they become ‘warmer’ (richer), we turn off, start spending non-sensibly, or even losing money in order to get back to the same comfort zone. That is the essence of Mr. Eker’s book (Secrets of the Millionaire Mind) and his seminar (Millionaire Mind Intensive). I suggest picking up the book and join the (free) seminar when it becomes available close to your city.
So how to raise the setting on your financial thermostat? I am not a psychologist, but it seems there are several ways including reading, seminars, meditations, or even identifying emotional triggers. Every person is different. Yours truly experimented with all the above and more, so I cannot tell which one will work for you. Seeking out the advice and work of people with proven track record certainly helps, and there is no shortage of material on Amazon or Audible (if you prefer audio format).
We would like to highlight three very important concepts, mental models, we found helpful over the years.
Compartmentalize!
It is useful to mentally categorize the available funds, putting them into buckets, or labeling them for their intended purposes. That ensures a certain level of organization and mental clarity around money. It does not matter much what buckets you define and how the funds are allocated. But it matters that you do. Let me give you an example based on the concept of Mr. Eker’s ‘Jar system’. He defined buckets or jars for Investments, Savings, Necessities, Play, and others. (For those who interested, we will describe it in detail in a separate blog article.)
The important take away is that the all incoming funds are earmarked for specific purposes (e.g. investments, necessities, etc), and once the allocation is done, funds are never to be used for other purposes. In case you are wondering that could be done by exercising some good old-fashion discipline and personal restraint. The allocation is our decision of course (after all it’s our money), but once the strategic decision about allocation is done, there is no need to make day-to-day decisions about it. Which makes life quite simply (although not necessarily easy), as it leads to our next key mental concept: automation.
Set it to Autopilot!
We live at a wonderful time, when you can bank from anywhere as long as you have your phone or laptop around. However, that does not mean we have to do something with our finances everyday. In fact, I prefer if everything is fully automated, and there is no need to do anything. Why? As mentioned above, the less ad-hoc decisions you make around your finances the better off you are.
Should I pay the full amount on this credit card this month or the minimum is sufficient? Do I put away a certain amount for my next car purchase, or starting it next month/year is fine? How much can/should I invest this month? It’s easy to see that these questions does not make day-to-day life easier. If you need to make decisions daily, you might not make the right ones or they might not be in-synch with your long terms strategy or goals.
The best way to prevent that is to set everything on autopilot, which nowadays is not that complicated.
Pay yourself first! Decide how much you want to put away for long term investments (for your Financial Freedom) and set it up that it gets taken from your paycheck right away and transferred into a brokerage account (ideally a registered account like TFSA).
On the brokerage account set up an automatic investment plan into a low cost index fund or ETF, so your monthly set amount gets to work for you without delay. No worries, if the stock market drops, just smile: you are buying great stuff ‘on sale’. Dollar-cost-averaging into the market is a wonderful thing.
Set up your credit card(s) for automatic, monthly payment from your checking account. Oh, and pay the full balance, for g@d sake (never, ever the minimum).
Set up your charitable donations (to your church or favorite charity) from your account automatically, so you never need to worry about it, but you can feel proud every month when you review your bank statements.
Set up your automatic transfers for your big ticket item savings (new car, vacation, etc.) on separate saving accounts. They will just miraculously grow, and allow you to buy the item before you know it.
All mortgage, rent, utility, insurance, and other bills also need to be setup for automatic deduction/transfer, so they just get get paid without you ever occurring any late payment or penalty.
Once all these transactions are on Autopilot, you can relax, as you can be certain your personal finances are on the right track. They don’t need a lot of attention, you are just effortlessly drifting towards your goals and dreams. There is just no better way to swim. No need for day-to-day decision making that has a chance to knock you off-track and as an added bonus, your credit history will also be on autopilot for steady improvements for years to come. (More on that topic later.)
Your money should work for you!
Every wealthy person knows that. Not the other way. You, working for money is temporary (by design and by nature’s laws), however, your money working for you is never-ending. Your investments are your little ’employees’ who supposed to work hard for you day and night. From the moment you set aside money for your Financial Freedom account and start investing them, those employees start to work hard for you, and it just a question of time until that tiny stream of passive income grows into a river of cash. Don’t underestimate the power of compounding interest. And never let those employees rest on an account (or under the pillow) not producing value for you.
+1, You can’t out-train a bad diet!
Fitness savvy people know, bad diet cannot be made right by more training. The same is true of our finances. You cannot out-earn bad spending habits. Well, maybe, theoretically you can. But the long list of athletes and celebrities, who somehow managed to go broke even after earning $Millions, suggests it does not make sense to try. And let’s be real, most of us will never earn $Million in a given year, so we better focus some attention on our financial habits.
Luckily that is not that hard, especially if we have a certain level of awareness or at least some common sense around money. The above described concepts with the compartmentalization and automation helps a lot to develop good habits, like paying yourself first or paying our credit card fully every month.
Also keeping an eye on your bank accounts / statements once a month is probably a good habit, not only to keep an eye on your spending, but also detecting possible fraudulent activities on your accounts.
The usage of a personal finance software makes tracking and possibly tax time a lot easier, it enforces good habits around money. You can purchase a number of softwares for personal (non-professional) use, and there are several good online tools/apps as well. Mr. SWimmigrant used MS Money in the past and currently uses Quicken to keep an eye on his family’s sprawling financial empire, which at this stage includes an operating business, several investment properties, a retirement stock portfolio and the usual family finances. Someone, starting out in a simpler financial scenario, might be better served with a free online app like MINT (also by Intuit) or something similar. It’s very easy to setup, it can be (securely) linked to all online bank accounts, and automatically categorize your transactions with minimal hassle, and let you review a long list of pre-built reports about your savings/spending’s/etc. It provides the so needed oversight for your own financial ’empire’.
These are probably the most important concepts you need to keep in mind when you think about your finances. They served Mr. SWimmigrant very well during the last two decades.
Keep on swimming, my friends!
With Love,
Mr. SWimmigrant
Suggested reading: The Secrets of the Millionaire Mind by T Harv Eker and The Wealthy Barber by David Chilton
But I am a fresh immigrant. Can I still become wealthy?
I heard several comments stating that being an immigrant puts you at a disadvantage compared to the local born citizens. No local experience, no network of connections, often no supporting families, and sometimes not even proper language skills, etc. What a load of cr@p!! It’s the exact opposite!!
A fresh immigrant has a long list of ‘unfair’ advantages. Benefits of being a SWimmigrant includes:
Already got used to live at a lower standard;
Not having a pile of debt (to get out from under);
Not influenced by preconceived notions or local ‘currents of complaints’;
Being able to start with a blank slate;
Motivated, ready to work very hard;
Having international experience;
Speaking foreign language(s);
Higher level of risk (and pain) tolerance then locals;
Being a ‘dreamer’ helps to overcome obstacles.
The facts confirm our theory. If you look at the Top 10 Ancestry groups of American Millionaires, it shows that in several immigrant groups the concentration of Millionaire households are 3-4-5 times higher then the expectation based on the overall average. E.g. Hungarian, Scottish, Russian immigrant households have over 15% Millionaire rate vs. 3.7% overall American households*. (And for the skeptics, no, there are not 750,000 households in the mob.)
Or look at the Ancestry groups that own/occupy $Million homes. Only 2.8% of those of English ancestry own homes valued at $1 Million or more. That figure is over 10% for several immigrant groups (like South African, Iranian, Iraqi, Israeli, Taiwanese).
Being an immigrant indeed do seem like an unfair advantage to me. (But just between us: there is nothing unfair about fighting harder for your future, as most immigrants do.) And once we are here, disassembling false notions, let’s attack one more.
I can already hear some comments stating that getting wealthy requires some kind of special talent or luck or most likely both. Nothing can be further from the truth. A person with average intelligence can go through this process and be successful. I call it the slow, boring way to riches. As long as you are mindful about money, diligent about saving and investing, you will get there before you know it.
The best example is yours truly, Mr. SWimmigrant, who never started a blockbuster business, never attained the glory of top executive positions, was not smart to invent something revolutionary and never lucky enough to hit it out of the park with a small mining stock. However, he always kept an eye on money, how to earn it, how to spend it and most importantly, how to invest the difference. And there are some very important principles that could be distilled from the two decades spent as an immigrant. If you follow these principles, we can promise you will not be disappointed. Your Dream will come to pass sooner than expected! We are here on this blog to walk you through these principles step by step.
Swimming with the new school of fish
We like the symbolism of our favorite pass-time: swimming, and the analogy it provides for Immigrants.
First of all, for new comers, like for those who get thrown into a lake, there are no other options; you have to swim or you will sink.
Financial ‘smarts’, just like swimming is a simply, not too invasive habit you can build into your day-to-day life, without interfering with other areas, but almost certainly guarantees significant long-term benefits, such as (financial) health, energy and vitality.
While swimming could be quite boring (just like saving/investing), you can always find variety in different strokes, experimenting with different technics, perfecting your movement and posture, trying different bodies of water, not to mention listening to music and other fun stuff.
It’s all about the journey, not the destination. Most of the pleasure is derived from the act of swimming, and not from the ‘arrival’, not unlike living as an immigrant. Keep on swimming, my friends!
With Love,
Mr. SWimmigrant
*Data comes from The Millionaire Next Door by Thomas Stanley and William Danko.
How to swim the treacherous waters of finance, …. so you can arrive safely at the shores of Financial Freedom.
