Category: Personal Finance

Secrets of the Wealthy – Live on 20% of your income

I hear you.  It is inconceivable that someone except the wealthy could actually live on 20% of their income.

When GC goes on to say live on the 20%, he scribbles on a white board the following:

Income – 100%

Subtract Taxes – 40%

Pay Yourself – 40%

Live on – 20%

He then says that if you can afford to pay the government 40% for the in-the-present services they provide, you should be willing to invest in your future for no less!

And if you are taking 40% of your gross income for investing, that leaves you 20%!

Understanding that 85% of (American) households are spending 110% of their income (hopefully the stat is take-home income and not gross income) one can imagine the frustration at being told you should be living on 20% and not 66% of gross.  The immediate reaction is “there is no way to reduce my expenses to live on 20%”.

I am right here with you.  That was my initial reaction too.

But then something magical happened.  GC said, “Ok, you can’t live on 20% if you are making minimum wage.  So make more than minimum wage.  Take your current expenses.  That becomes your 20%.  Now, how much do you have to earn to have the 100% to live on the 20?”

Now, the magical part wasn’t my being insulted about my middle class income.  I expect you reacted the same way to that statement I did initially.  But then I had a mindset shift that said work the problem from the opposite direction.  And this is what GC was getting at.

As an aside, the Canadian Government lets you save 18% of your income tax-deferred in an RRSP so that you will have retirement income.  

This is not an overnight fix.  This may not be a quick fix.  It may take months to years.  But the first step is mindset.

Once you shift mindset, you need to determine how to increase your income.  Some jobs have capacity for extra income (pay raise, overtime, bonuses, commission).  This that don’t would require either education/training for a promotion or transfer, or a new job, or as a last resort a side hustle.

GC says a side hustle should be the last resort because it takes away from your focus on your main job to the detriment of both.  But this is a post for another day.

As always, if you want to discuss this post, or anything else, give me a shout!

Once you are ready to set aside some (or all) of that 40%, let me know and we can discuss how I can help you out.  There are multiple avenues to apply step 4!

Pay Yourself First

This is a bit of advice that many coaches and advisors provide.  But do you know what they mean?

This is related to the Secrets of the Wealthy post.

Problem 1 – You can’t save yourself rich

It’s a well known “secret” that you can’t save yourself rich.  If you take any excess money at the end of the month, and stick it into a “savings” account at the bank, the interest rate (if any) will almost always be less than the real rate of inflation.  So over time, your purchasing power decreases.

Problem 2 – No spare money!

Another issue with “saving” is that 85% of households spend 110% of their income.  Therefore there isn’t any extra money at the end of the month.

The solution?

This is not the entire solution, this is step 1.

Pay Yourself First!

What this means, is before you spend ANY of that income that came in, pay yourself off of the top.   Ways to do this:

  • Have your employer deposit a portion of your income into a different bank account.  Out of sight, out of mind!
  • If your employer refuses (or if you are self employed), the first action you take on pay day is to move the amount you are “paying yourself” into that other bank account.

And once the other bank account accumulates enough “savings”, purchase an asset (something that generates passive income). (Step 4 of the Secrets of the Wealthy)

How much to pay yourself?

If you are following the Secrets of the Wealthy posts, you will see that the recommendation from GC was to live on 20% of your income.  With that number, he is saying you should be paying yourself (i.e. saving) 40% of your income.  I will expand further on that in the related post.  I hear what you are thinking – there is no way to live on 20% of your income.  I address this in the related post!

Secrets of the Wealthy!

One of the people I follow shared today the following Secrets of the Wealthy. Of course, there is more context than just the sound bite. The secrets:

  1. Pay yourself first
  2. Live on 20% of your income
  3. Don’t lose money
  4. Invest in assets that cash flow
  5. Have more passive income than earned income.

He goes on to say:

“The most important is to be patient and invest for the long term. If there is immediate gratification, it is most likely an expense rather than an investment. Investments take time to bear fruit.”

I will expand on these points in the next few posts. So don’t get your hackles up on the live on 20% until I’ve expanded on that…

If you would like to discuss any of these, or any other topics, please reach out!

I just learned a new term – HENRY

HENRY – High Earner Not Rich Yet. High income, but even higher lifestyle.

Have you heard this term before? High Earner Not Rich Yet. This is used to describe people who have a high income, but an even higher lifestyle.

I learned the term reading an article about a couple who called into Dave Ramsey’s show. They earn 225,000 between the 2 of them, but they have almost 1,000,000 in debt (student loans, car loans, mortgage, credit cards…). Due to their debt load and rising interest rates, they are now on the verge of bankruptcy.

The difference a Year makes

It is one of those secrets of success; If you want to change, you have to make a change. If you don’t change things, and external forces don’t do it for you, then life will continue on the path it has been on. You can look into the future and reasonably predict what it will look like.

Well, a year ago, the world as we know it changed drastically.

Did you change for the better or for the worse because of it?

Now, this sounds like a judgemental question. But it isn’t meant to be. It is, however, meant to be a nudge.

I get it. At first, we all paused, waiting to see what would happen. Then the rules changed. Restrictions happened. Then they eased. Guidance changed. Restrictions came back. Now we have vaccines and easing of restrictions. But we are also being told to smarten up (OK, not quite the words Dr H used, but still). Makes it feel like more restrictions could be reintroduced.

So, did you hunker down? Pause? Change your activities?

Pretty well everyone I know made changes. Travel was out. In store shopping was/could be risky. No eating out (take out excepted). No bars/clubs/concerts/trips.

So with all the things we couldn’t do with our money, did we save and invest it?

Amazon and other online retailers reported record sales. Shipping companies are finding they have capacity problems and expansion isn’t keeping up.

One stream of my income (I have 3) ceased to exist. But my other 2 sources actually showed a slight increase. My wife’s only source of income also came to a screeching halt. She has worked on 3 alternative source.

Because of government support such as the CERB, we didn’t lose any ground compared to plan. Business owners in my social circles report 1 of 2 things – their industry was hammered and they couldn’t (or didn’t) change so took a hit. Sometimes a big hit. But other owners report record years.

I’m obviously one of the ones who didn’t change enough for any of my 3 businesses. That said, I have been attending online conferences, webinars, and the likes trying to get inspiration for ways to pivot. I have a few ideas; keep watching this space…

Enough about me.

How did the last year affect you?

Did life go according to plan? Did you rewrite the plan? Do you have a plan?

Need Assistance with a Plan?

If you don’t have a plan, or would like help reviewing your plan, you can reach out to me through either the Chat box here (it’s linked to my FB Business page so pops up on my computer and/or phone depending on what I’m logged into) or you can phone 587-600-0013 or email protect@ksfraser.ca.

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