One of the most common questions I receive from solowealthers is: “I don’t get it, how do I save (or invest) if I don’t have enough money remaining after all of my bills are paid?”
In other words, I’m assuming you completed Phase 1: Financial Assessment: soloanalysis of the 10 – STEP solowealth financial plan and you’re wondering how to proceed with Phase 2: Income Allocation: soloinvest. No worries! The answer is the solowealth SAVING & INVESTMENT STRATEGY. Sure it’s a lot of info, but I’m going to make it easy-to-understand because quite simply…IT WORKS and in my opinion, once mastered it’s a strategy that should be passed on generation to generation!
Phase 2: Income Allocation: soloinvest is probably the most exciting phase of the solowealth financial plan! Imagine going to work every day just to pay your bills with little or nothing going towards building your wealth. What a miserable existence as you drag your feet to work, because that’s all you’re doing is existing.
Now imagine with every paycheck, you’re using a portion to pay yourself first, as your wealth continues to grow, albeit small chunks at a time. I bet you’ll actually have a bounce in your step on your way to work, knowing that you’re setting yourself up for ‘living’ with financial security, rather than just ‘existing.’
Alright, enough with the motivational speech! Solowealth is about arming yourself with knowledge that actually works to build, protect and preserve your wealth. You can apply the solowealth Financial Plan whether you earn a modest income or you’re a multi-millionaire. The financial rules don’t change, just the numbers will! To make it fun, think of it like a game to be played seriously as you build solid financial habits to accomplish specific goals. Now let’s get on with the HOW…
solowealth HABIT # 1
Deposit your paycheck into your CHECKING ACCOUNT. Before spending a dime, take 5% from it and transfer it over to your SAVINGS ACCOUNT. The SAVINGS ACCOUNT will be your EMERGENCY FUND which you don’t touch unless there’s a real emergency ie. a vehicle or home repair. It’s your safety net, so shopping for new shoes or a set of golf clubs doesn’t qualify.
Example:
Suppose your Monthly Net Income (after-taxes & deductions) = $4000
EMERGENCY FUND to be deposited into the SAVINGS ACCOUNT (5% of $4000) = $200/month
Assuming you don’t have a ‘valid’ emergency for 6 months: $200 x 6 = $1200. In 6 months you will have accumulated $1200 and in 1 year, $2400.
You see what’s happening here? You’re starting to build financial security. If you need to tap into it for a valid emergency, that’s fine but just make sure you do this with every single paycheck without fail in order to refill your EMERGENCY FUND.
solowealth Tip:
There are 3 levels of an emergency Fund:
LOW EMERGENCY FUND: Enough money to cover 2 months worth of expenses
PARTIAL EMERGENCY FUND: Enough money to cover 4 months worth of expenses
FULL EMERGENCY FUND: Enough money to cover 6 months worth of expenses
How can you determine your monthly expenses? It’s easy! Complete STEP 3: CASH FLOW of the solowealth Financial Plan and in the ‘Results’ you’ll see your TOTAL OUTFLOW. This number will give you a good idea of your total month’s worth of expenses.
Example:
Assume after completing STEP 3: CASH FLOW , you determine your monthly TOTAL OUTFLOW = $3000 (give or take). This means to work towards your goal of having a FULL EMERGENCY FUND, you would need to save $3000 x 6 months = $18,000.
Remember, the 5% contribution to the EMERGENCY FUND (& 15% contribution to the RETIREMENT INVESTMENT ACCOUNT to be discussed next) are simply ‘minimum’ recommendations. Feel free to contribute higher amounts to those accounts in order to reach your goals sooner. For example, if you receive a bonus at work, you can add it as an additional contribution to reach your goal of a ‘fully funded emergency fund’ in less time.
Why 6 months? You want to ensure that you’re able to cover your household expenses in case your employment is disrupted for any reason. This should provide you with enough leeway time to find a new job or figure out a solution.
ALERT:
The EMERGENCY FUND is NOT TO BE TOUCHED even if you find a better place to invest it, wish to loan it out to a friend or get that shiny, new truck you always wanted. The idea here is to avoid cashing out your investments and to prevent penalties & withdrawal fees in case money is needed for a legit emergency.
Let’s put it this way. If you’re contributing to a life insurance policy , it’s not paid out to your loved ones until you’ve passed. In other words, you don’t get to touch your contributions which are meant to protect your assets and your family. So why would you tap into your EMERGENCY FUND? Think of it as a “self-funded insurance policy.”
solowealth HABIT # 2
Still without spending a dime and after you’ve stashed away 5% towards your EMERGENCY FUND, take an additional 15% from your paycheck in your checking account and transfer it over to your RETIREMENT INVESTMENT ACCOUNT which is STEP 4 of the solowealth Financial Plan. Please visit here for more details.
If you prefer to have your investments professionally managed on your behalf, consider opening your investment account with Wealthsimple.
Example:
Suppose your Monthly net income (after-taxes & deductions) = $4000
EMERGENCY FUND deposited into the SAVINGS ACCOUNT (5% of $4000) = $200/month
Money to be deposited into the RETIREMENT INVESTMENT ACCOUNT (15% of $4000) = $600/month
This now leaves you with:
$4000 – $200 (EMERGENCY FUND) – $600 (RETIREMENT INVESTMENT ACCOUNT) = $3200/month available to help cover your TOTAL OUTFLOW (total monthly expenses).
I call this number, $3200 in this example, the SPEND NUMBER (S#) which is the total amount of ‘after’-taxes money available to spend, but ONLY after you first contribute to your EMERGENCY FUND & RETIREMENT INVESTMENT ACCOUNT.
Every major purchase you make, for example a house or a vehicle, along with all of your other expenses included in the solowealth CASH FLOW calculator, should be made with your SPEND NUMBER (S#) in mind.
solowealth Tip:
If you have children and would like to add an EDUCATION SAVINGS PLAN as an additional investment account, then you can consider dividing up the 15% reserved for investments as follows:
10% for the RETIREMENT INVESTMENT ACCOUNT:
10% of $4000 (Monthly net income after-taxes & deductions) = $400/month
5% for the EDUCATION SAVINGS PLAN:
5% of $4000 (Monthly net income after-taxes & deductions) = $200/month
Even though you divided up your INVESTMENT ACCOUNTS into a retirement account (10%) and a separate education savings account (5%), you’re still contributing a total of 15% ($600) toward your investments. So your SPEND NUMBER (S#) doesn’t change and remains at $3200 per month.
If you’re adamant about keeping your RETIREMENT INVESTMENT ACCOUNT contribution at 15%, then you would need to contribute an additional 5% for the EDUCATION SAVINGS PLAN on top of the 15% for the RETIREMENT INVESTMENT ACCOUNT & 5% for the EMERGENCY FUND for a total of 20%.
Example:
Monthly net income (after-taxes & deductions) = $4000
EMERGENCY FUND deposited into the SAVINGS ACCOUNT (5% of $4000) = $200/month
Money deposited into the RETIREMENT INVESTMENT ACCOUNT (15% of $4000) = $600/month
Money deposited into the EDUCATION SAVINGS PLAN (5% of $4000) = $200/month
This now leaves you with:
$4000 – $200 (EMERGENCY FUND) – $600 (RETIREMENT INVESTMENT ACCOUNT) – $200 (EDUCATION SAVINGS PLAN) = $3000/month available to help cover your TOTAL OUTFLOW (total monthly expenses).
This reduces your SPEND NUMBER (S#) but it’s a small price to pay for giving your child the greatest gift of a well funded education with little or no burden of debt. In the long run, it actually saves you money by investing to grow their education fund now, rather than scrambling for money last minute when they’re ready to go off to college or university.
solowealth HABIT # 3
Make all item purchases with CASH. Avoid borrowing or financing to buy items. Don’t fall for gimmicks like “Pay No Interest for 6 or 12 Months,” or “90 Days, Same As Cash.” More importantly, avoid purchasing items on credit cards other than minor mandatory expenses that can be paid off in full following each statement ie. paying your cell phone bill or booking a flight or hotel. Why?
- The majority of people don’t pay off their balance within the agreement term, which means you’ll get hammered with interest charges thereafter and good luck paying off your balance at that point.
- By financing, you’re more likely to spend beyond your budget. If you saved up enough cash to buy a $2000 TV, financing may trap you into spending more since you’ll make “small, easy-to-manage payments,” and walk out with a $5000 TV you can’t really afford.
- Anyone who claims, “but I use my credit card to get points/rewards” is actually saying, “I’m a victim of clever marketing.” According to recent data from the ABA (American Banker’s Association), nearly half of Americans don’t pay off their credit card bill in full every month. As one of the leading causes of consumer debt in America, that’s an outrageous amount of financial waste in accumulating credit card interest. Given a typical reward program offers only $10 worth of value for every $1000 dollars spent, you’re saving much more money by forgoing credit card debt than you’re receiving in rewards.
- If it’s already too late and you’re drowning in credit card debts, consider obtaining a lower interest loan to pay off your higher interest credit card debts. This strategy alone can save you hundreds if not thousands of dollars, as well as protect your credit.
solowealth Tip:
If you have a major purchase to make, such as a $20,000 vehicle, avoid financing and save for it in advance by planning ahead and creating a PLANNED PURCHASE FUND (PPF).
Example:
Option #1: You can walk into the dealership and purchase the $20,000 vehicle immediately with approved financing.
Option #2: Wait 1 year and during that year, you save aside $1000 per month over 12 months as a PLANNED PURCHASE FUND. Then purchase a used, certified vehicle with low mileage that just came off a lease, for $12,000 cash.
Benefits of the PLANNED PURCHASE FUND (PPF):
- You save money by paying cash and avoiding interest charges associated with financing, which ultimately would have resulted in paying more than the sticker price. Remember, the $12,000 vehicle will take you from point A to point B the same as the $20,000 vehicle.
- By paying cash, it allows you more negotiating leverage to pay less than the sticker price for a vehicle. Who doesn’t want to close a deal with cash fanning their face rather than see it walk out the door?
- By saving up and paying cash, you’ll end up purchasing a less expensive vehicle without the cloud of new debt hanging over your head. NO DEBT? Imagine how amazing that would feel.
- With the money you save, you can add additional payments to your EMERGENCY FUND or RETIREMENT INVESTMENT ACCOUNT as a bonus payment towards building your wealth…another amazing feeling!
What’s your SPEND NUMBER? Do you think it’s too low? Do you feel it doesn’t allow enough wiggle room for a bigger house, fancier car or luxury vacation? There’s only 2 ways to raise your SPEND NUMBER (S#):
- RAISE YOUR INCOME
- CUT FINANCIAL WASTE – use the STEP 3: CASH FLOW calculator of the solowealth Financial Plan to find financial waste.
Start a business or a side hustle, rent out real estate or cut out wasteful spending. It’s totally up to you but the greater your income and the more you save, the more you’ll be stashing away for emergencies & investments. While simultaneously, you’ll have more to spend on the pleasures of life.
If you think you can’t save enough money to establish solowealth Habit #1 & solowealth Habit #2, then consider this scenario: What if someone you love has 6 months to live, unless you can pay $6000 that you don’t have, for a life-saving medication. Come hell or high water, I bet you’ll find a way to come up with the funds within 6 months. That’s how you should prioritize your SAVING & INVESTMENT accounts to avoid a broke retirement.
If you act on these 3 simple habits with enough patience over time, you’ll feel a sense of euphoria, knowing that you accomplished something that’s difficult for many. Sort of like how a marathon runner feels when crossing that finish line.
It’s your move…
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