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
