I've said it before and I'll say it again: everyone loves money. If you don't, you're a gosh darn liar.
"Save more than you earn and invest what you save." Just ten words but it is so difficult to do it well. However, as in everything that sounds simple on the surface, the real picture is always more nuanced and requires more much more detail and thought. Here are 5 rules of building wealth that I encourage all of my clients to follow in order to build more wealth for their business, families, and persona.
1) Track what you earn and spend
I am always amazed by how most people do not know how much they spend on various needs and wants each month. If we do not track what we earn and spend, how can we possibly create and follow a financial plan? You may find it a nuisance to key in small sums. The good news is that you are not audited like a business, so you can always make a rule to only key in expenses above $10 and have the rest classified as miscellaneous or cash withdrawals. Equally important, by tracking your income from salary, rent, etc. You will also be able to accurately know how much of your income is passive and active and also project cashflow. This can come in very useful when deciding whether you have enough money to invest in an asset down the road.
2) Create a monthly and annual budget
Once you have clarity on where your money is going and what is coming in, the next step is to bring it under control by setting clear budgets on major categories. I am a firm believer in the 80/20 rule. So to avoid spending too much time, just set clear budgets on your top 5 to 8 categories. These should account for 80% or even 90% of your spend. If you are like most people, it will comprise of categories like Transport/Petrol, Insurance, Groceries, Dining Out, Entertainment, Utilities, Rent/Housing Installment, Car Installment, Education etc.
Then the next step is to monitor and make sure that on a monthly and cumulative basis, you are keeping your spending below the budget. Needless to say, your budget spending should be less than your monthly and annual income. The extra left over is your saving.
3) Educate yourself
Once you start to accumulate savings beyond your buffer, it is tempting to plunge into the glitzy world of investments and try to make your money work for you. STOP! Don’t go into investments by yourself unless you understand the fundamentals, equity vs fixed income vs alternatives macro economic factors, industry unique factors, etc. On top of all this, you need to make sure you have a firm handle on your own personality/temperament and risk profile.
4) Leave investing to the professionals
For the rest of us, I strongly suggest we leave investments to the professionals. Decide on your personal risk profile and future needs. Then find a good financial planner to help you work through what is a good portfolio allocation and invest in either ETFs or funds that give you that allocation needed. This allocation will frequently have major fixed income and equity allocations. It should also be diversified across industries and geographies. Once allocated, what you need to do is to review each year and make the necessary tweaks. I suggest you set aside a small portion of real money and use it to test your hypothesis for 1 year. If you are able to beat your professionally managed portfolio, then allocate 20% next year and so on.
Investing your money is a fun, exciting way to increase your wealth and learn a trade. Successful entrepreneurs are awesome at challenging the status quo and balancing risk with realistic goals. There are always risks associated with investing your money, so consult a professional before making any big financial commitments and risks. Have fun: it's a hell of a journey!