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!

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.

Money is value-less?

A few days ago I mentioned that money in and of itself is of no value.

Consider physical money. Some cultures used beads, others used shells. The Romans used pounds of Salt (origin of the word salary). In short, money can be anything we collectively agree to use. The western world has agreed upon paper (now plastic) slips and metal coins.

Let’s contrast money against Maslov’s Heirarchy of needs.

  • Paper money can’t provide you shelter. It isn’t big enough to cover you, and it would take a lot of other materials to stitch it together to form a blanket, rug or wall.
  • You can’t eat money (for nutrition; yes you can chew paper…).
  • It doesn’t provide you safety. And if you try trading it for safety, chances are the person you are trading with will try to extract all they can through threats of violence, so making you less safe…
  • Money causes issues with Friends and Family. It changes the relationship. For friends, if you are using money to buy friendship, the friendship disappears as soon as the money does. For Family, unless you gift it, it can lead to stress and resentment when you seek to reclaim your money.
  • If your self esteem is dependent upon the money you have, what happens if your money disappears? (Spending/inflation/theft/etc)
  • An the last level in the hierarchy is self actualization. You can’t purchase creativity, morality or problem solving abilities.

Now, the world is in the midst of a transformation to virtual money (think credit cards, debit cards, e-transfers, crypto-currencies). You don’t even have the opportunity to sleep on a bed of money.

So why do we have money?

It is a medium of exchange. It replaces barter. If you and someone else have something the other wants, than a trade is possible. But what if you don’t? what if you need to broker a 3 party trade? Or worse, a trade of future goods (e.g. crop of wheat for shoes made from leather from a cow that hasn’t been born yet?). So we accept Money as the representation of our efforts in the past to be traded in the future.

But there is a risk here; the purchasing power for a unit of money (i.e. how much a dollar can buy) decreases over time due to inflation (size of money supply versus goods and services available to purchase).

How do we protect against this risk? Convert the money into Wealth (an asset). This would be an item that holds intrinsic value. It could be a physical item, or it could be rare skills (i.e. learn something not everyone knows/can do). This would put you into the later 3 stages of Money I wrote about a few days ago.

To learn more, give me a shout!

Airdrie, Alberta
Canada

Do you know the stages of Money/Wealth Accumulation?

The stages of money and wealth accumulation:

  1. I have to get some money (A kid asking their parents)
  2. I have to earn some money (adolescent or adult working a job)
  3. I have to Make some money (small business owner)
  4. I have to grow some money (Investor)
  5. I have to create some Wealth (creator of value)

Did you notice that the last stage changed from Money to Wealth? In another post I will discuss why money is not wealth.

What stage are you in? (I move back and forth between stages 3,4,5 on a regular basis)

If you are looking for someone to assist you in these stages, give me a shout!

Airdrie, Alberta
Canada

Is (the love of) “Money is the root of all evil” accurate?

“Money is the root of all evil” is an often trotted out misquote. I suspect the people who say this phrase the most are those that do not have any money.

As one of my mentors said, “If money was the root of all evil, the devil would provide you an endless supply”.

How about the full quote, “The love of money is the root of all evil”? If we examine the extreme case of “love” of the money meaning pursuing money to the detriment of all other things, then yes it could be evil.

If you “hate”* money, then you will avoid it. (Can we all name someone we know who hates money?)

However, if we look at the case of pursuing money because of what it is (medium of exchange) and what it provides (i.e. converting once asset (e.g. time) into another (food/shelter/…)) then it can not be wrong. That doesn’t mean that there aren’t unethical (i.e. evil) means of pursuing it (theft, fraud etc) but it doesn’t make the pursuit of it in itself evil.

Once we can get past the mindset that money is evil, than we have a chance at accumulating some. The next step after accumulating some is to convert excess in to wealth. But that is a topic for another post.

*Yes, love and hate are not opposite sides of the same coin but rather the positive and negative versions of the same emotion…