By Freddie Taylor
Regarding money, don’t be lulled to sleep and into thinking it isn’t important. Money is important, but maybe not why you think.
We must not praise the mighty dollar, but recognize its role in our life. The question to ask is, what is money?
What is money? Money is a means of exchange used by societies for centuries. It is the oil to the engine of commerce. Trading and exchanging of goods/ services has been a historical staple in many cultures throughout time. Money simplified the process by creating an easy way to keep score.
Historically, money has not always been in the paper form we use to today. Money, or the medium of exchange, has taken many shapes and forms. In “The Power of Gold”, Peter L. Bernstein explores the history of money to find that almost anything has sufficed as a medium of exchange- everything from salt to cattle, gold to goat eggs. So, it’s not the form or the medium of exchange it comes in, but what it symbolizes.
What does money symbolize? Simply, money symbolizes your time, energy, and effort. The one commonality we all have with money is that we spend, have spent, or benefit from someone who has spent their time, energy, and effort accumulating money. This energy exerted comes from working a job, building a business, going to school/ seminars/workshops, reading late at night, or networking. We put a lot of energy and effort into accumulating this stuff, this money, to make a living.
Despite the energy and effort, still too many of us are in a financial bind. In fact, odds are that the majority of people you and I know will retire broke. Doesn’t that seem ridiculous? Well, it isn’t!
Those are the facts. Most people don’t understand money enough and aren’t savvy enough to manage their 401(k) plan (which is increasingly becoming more self-managed in this country as big corporations throw off their responsibilities for employee retirement). It is a scary time for many.
Another grim reality is that many in our communities don’t have a 401(k) plan or any retirement plan at all. The society we live in is much too centered around money and commerce for us not to have a better grasp on how it works. We must begin immediately to educate ourselves to one basic money formula if we are ever going to have a chance of retiring comfortably and enjoy life.
What is the formula? I have a theory but will point you to my source. The book is “The Richest Man in Babylon” by George S. Clason, originally published in 1926. It shows how sound financial plans can stand the test of time. You must read the book to get the full effect of these rules, but they are timeless classics.
Personally, I call it the Money Machine. I have used this system in my financial dealings and when speaking to middle and high school aged children. All you must remember is 70, 20, and 10.
70% of Income on Living Expenses
20% of Income on Debt
10% of Income to Savings
70% on Living Expenses
Keeping living expenses under 70% of your income is essential if this plan is ever going to have a chance. One reason this is difficult is because people tend to mentally live life based on their gross income and not their after tax income. This plan is designed for after tax dollars. You must keep your living expenses below this percentage. This includes your mortgage/rent, food, entertainment, miscellaneous expenses, and all your purchases.
The advantage of this is the flexibility. You are not locked into a fixed routine; your expenses simply cannot exceed 70% of your income after taxes. Now, if you find this difficult to do, you have some tough choices to make. You can either make more money or buy less. Those are the only two options you have. The key here is to stay within that 70% range per month.
When my wife and I were entrenched in this plan, we were able to get our expenses down to 55% of our after tax income. If you are able to do this, you can find reaching your financial goals a lot easier than when your expenses are 110% of after tax income.
20% on Debt Reduction
The next part of the plan is 20% of income on debt. I will keep it short, but we are a debt-ridden nation. Full of more stuff than we can afford to buy, so we charge it. The country is part of the problem with the national debt approaching $9 trillion. The average American has $8,000 in credit card debt. The average college graduate has $20,000 in student loans. Debt is a major part of the American economy and what seems to be the American dream as well.
Our communities are laced with debt. However, if there is to be any hope of financial stability in your future, then you must get a handle on your debt as quickly as possible. First, you must obtain your credit report and assess the damage. You can get a free copy of your credit report by visiting www.annualcreditreport.com. This is a government sponsored program to help people control and understand their debt by allowing them to review their credit report once a year for free.
Once you have your credit situation in front of you, you must get control of this saddle of debt. It is holding you back and you must resolve to reduce your burden. When my wife and I were going to through this process, we wrote each creditor’s name, the amount we owed, and their phone numbers down on a sheet of paper. Then, we taped it to the wall in our bedroom. Slowly, but surely, we eradicated our debt-laced situation.
Twenty percent of every dime that came into our home went towards eliminating our debt. We opened a separate bank account and called it “Debt Reduction”. On some accounts, we were so far back that it didn’t make sense for us to work out a payment plan. We simply put our contribution into this account, saved and saved, then approached the creditor with an offer to pay off the debt at 30/40/50 percent of what was owed. Sometimes they accepted, sometimes they haggled, but the system worked for us and it can work for you.
10% Savings
What really makes it exciting is that the whole time we were battling to get out of debt, we were judiciously saving 10% of our after tax income in another account entitled “Savings”. In the book, Clason refers to the process of saving this 10% as fun because you will enjoy watching money grow. I am not a rich man by any stretch of the imagination yet, but I will say it is fun watching my little patch of the money grow. Ten percent will add up quickly if you are diligent and patient.
Eventually, we began investing that money to develop our plan for retirement. From this money, we have a marvelous mutual fund, which we began when we were flat broke paying $50/month into it. It has grown significantly during these last five years. The most important part of investing is not the amount, it is that you start.
The crux of the matter here with the savings is that this is your money. The idea is for you to hold on to this money forever. Society is never to gain the use of these funds, unless it is involved in further building the wealth and fortune of your savings account. Invest the money into worthy projects that will accelerate its growth.
Money is the tool we use to navigate our society that is fixed on commerce. Money is to be our slave in the realm of capitalism. If you are diligent, earnest, and studious in your quest for retirement and the good life, put Clason’s ideas to work for you at once. I call it a Money Machine because the proof is in what it has done for me and thousands of other people around the world over the past 80 years.
What could it do for you?
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Freddie E. Taylor II is the publisher of Invest With Passion!, Chicago’s real estate investment magazine focused on providing practical, relevant, and useful information for active and future investors. Visit the website for more information: www.InvestWithPassion.com
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Cool post! I’ll bookmark this page and wish to share it to all my friends and clients.
Good insight on how to stack and save your money! thumbs up on su!!