‘Spend below your income’ is one of the worst kept secrets in the personal finance world. Everyone seems to know it but very few seem to really engage and run with it.
The intent of this principle is to leave yourself some seed capital to invest and get to the point whereby your money works for you instead of you working so hard for money. When you are working for money, you may not have many options. Since your survival is at stake, you can do almost anything, including leaving your family to live in another state or country etc. When you have money working for you, you get to the point whereby you do have a choice – to keep doing what you are doing or to go and do something else with your life. Money is a very humble servant but a very cruel taskmaster.
One sure way of making your money work for you is learning how to pay yourself first. By paying yourself first, you ensure that a part of your income is set aside every month to work for you. When this habit is eventually in place, you have a steady growing army of employees (your money) working for you, so that one day you can be financially independent.
The main question becomes ‘how?’ To get to this point, a minor mental and procedural adjustment is required. Paying yourself first involves a three-step process:
1) Having a financial goal
2) Saving before spending
3) Investing the money (so that you don’t get to spend your savings).
Having a financial goal
This is the mental aspect and requires a shift in mindset. If you don’t have a clear financial goal or mission, you cannot save and invest in a sustainable way. Imagine a football match without goal posts or a game without a system of keeping score. It becomes aimless motion that soon tires you out. If you meet a match at the middle, the first thing you want to find out is the score. A game where scores are not tallied becomes uninteresting no matter the array of stars in the field.
A large army of people leave home before sunrise and return after sunset playing a game they have no clue what the score is. They keep kicking the ball round and back to where they started from. Hence it is no surprise you find someone who has been working for more than 10 years with nothing to show except perishables like phones, cars, TV and clothes etc – things that are here today and gone tomorrow. You see tenants who look richer than their landlords. They are playing without a clue what the score is.
A financial goal gives you focus – something to aim at. It allows you to keep score. It is clear, measurable and has a deadline. Achieving financial independence at a certain date backed by a target monthly income is a good example of a financial goal an employee or small business owner can have.
Having a financial goal forces you to see your primary income as seed to be invested not harvest to be consumed. You can then judge your efficiency by percentage of income invested rather than how you measure up with your colleagues in consumption.
Saving before spending
With a clear compelling goal, it is easy to give your savings the same priority as taxes – it leaves your salary before you get to spend. You can set up a system with payroll (direct debit) to have it remitted to your fund managers (for example) before you get to see it.
If you are disciplined, you can also make the transfer yourself – moving the money out the same day you get a credit alert, before you start to spend. This way your savings will not be part of your disposable income. Just as you don’t pay your taxes after receiving your salary (as an employee), or borrow from your taxes, your saving becomes off limits.
Since you have been able to cope with current salary which is not enough, saving a part of it will not kill you. You can start with as little as N500 per month. The issue is not how much you start with, but that you are consistent and building momentum. While most people do not save because their income is not enough, you can choose to save and invest because your income is not enough, so that you can generate additional streams of income; two ways of looking at the same challenge.
Your income not being enough is another call to action – to think of how to generate more income with what you already have but is being left idle. Examples include household appliances, cars, lands, skill sets etc.
Investing the money
Until the money is safely invested, you have not paid yourself first. The money is still at risk of being spent. It has to be sent far away, beyond the reach of your long spending arms. You are better off staring at close to zero risk – investing in the money market where the interest and sum invested is guaranteed. If you cannot leave the money alone, invest in products with a heavy penalty if you break the investment prematurely. This will teach you to leave it alone to grow over time.
If you can do this consistently, you will start to see your money working for you, up to the point whereby it can take care of your needs. When you get to this point, you have achieved financial independence.
You need political will
Everything rises and falls with leadership, which is why having a clear and compelling goal is very crucial. Where there is a (political) will, there is a way. The ‘how to’ as important as it is, becomes useless when the will to go the whole way is missing. Peak performance experts claim that success is 80 per cent psychology (will) and 20 per cent mechanics ‘how to’. The internet is awash with tons of ‘how to’ articles but when push comes to shove, very few have the will to actually do.
The moment you set a goal, opposition shows up; needs spring up from virtually everywhere. People will make demands on you. Your will is being put to test. You have to decide which matters most to you – freedom or image.