I once heard Seth Godin say that after you have enough for the basic necessities such as food, shelter, providing for your family, and a few other things, money is a story you tell yourself.
In other words, once you switch from “need” to “want” the why behind the pursuit of money becomes something that you can define for yourself.
Once we have enough money to survive, we all need to ask ourselves three questions:
- How much more money do we want?
- What are we willing to trade for it?
The majority of this post is going to be a discussion of how to create a system that lets you build wealth. The reason I started it with a discussion of why is because I think you should always take the time to ask yourself the what and why questions before how comes into play.
Tim Ferriss often says that life tends to punish the vague wish and reward the specific ask. Most people have a vague wish: “I want to be rich.” You are going to be different by clearly defining what you want and deciding on an amount.
However, the what isn’t enough without a powerful why. Money isn’t an ultimate end, we only want money so that we can get something else. It could be something tangible like a nice house, or something intangible like security or freedom or the ability to give enormous sums away.
Here are some of the reasons why I want more money:
- Freedom from employment so that I can do the work that excites me and travel with my family
- To be able to buy my and my wife’s dream house
- To be able to give more each year than I did the year before
- To leave an inheritance to my future grandchildren
The last thing you need to do before moving on to how is to count the cost. I’m willing to trade the hours that I would have otherwise wasted in order to build an income, but I’m not willing to trade my health or my closest relationships.
Once you have figured out some of the big-picture stuff, it’s time to get into some of the methods that will get you there.
I’m a big believer in the fact that it’s the systems that we develop that determine our direction more than our goals, so today I want to look at a money management system that has the power to move you forward.
The idea behind this system is to be intentional about what happens to your money. Money obviously plays a critical role in your ability to design your life, and chances are you have not done an optimal ob managing this important resource.
What I like about this system is it’s simplicity and its potential to be automated. You can’t trust yourself to repeatedly make the right decision day in and day out, you want to make good decisions once, and then take them out of your hands so you don’t have to worry about them.
The system involves six categories, or buckets, that you divide your money into. These buckets act as a budget of sorts, but they are designed to put your money to good use. If you want to go anywhere in life, you need to let your money start working hard for you instead of always working hard for your money.
Here are the six buckets to put your money into:
50% of your income goes to necessities
Here we are talking about things like rent, food, utilities and other important bills. Pretty obvious why you would want to devote the biggest chunk of your income here.
The problem you’re most likely to run into initially, is that at the moment, your living expenses take up way more than 50% of your income.
That’s my biggest problem right now and I have three thoughts on what to do about it:
- Find the low-hanging fruit that you can cut back on in your expenses. Especially recurring bills that you can cut, downgrade, or negotiate a lower fee on.
- Start building your income. I’ve written before about how after you’ve cut the low-hanging fruit from your expenses it’s better to focus on income generation and ditch frugality altogether. I think one of the best ways to increase your income is to find out how to make money online. Here is my beginners guide on getting started.
- Start allocating as much as you can to the other buckets
I’ve gone through the first step listed above and am working on the second and the third.
10% of your income goes to giving
Whatever your religious beliefs are, there is one teaching of Jesus that I’m confident that you’ve heard: “it is more blessed to give than to receive.”
I love that quote because it affirms receiving (something most people suck at) while stressing the greater importance of giving.
Giving makes the world a better place while making you a better person.
Find a person organization that is doing work that you think is meaningful and support their efforts.
Part of the meaning in your life comes from your relationships, part of it comes from your contribution to the world through your work, and part comes from your contribution to the world through your generosity.
Don’t skimp on the generosity.
10% of your income goes to long-term savings for spending
This is for your emergency fund, as well as money being saved up for a large purchase such as a house, a car, a vacation, etc.
Chances are that you will want to keep this in a savings account and not touch it unless you need it.
I recommend Ally bank. Interest rates on savings accounts are terrible, but Ally is almost always at the top of the heap. Right now their savings accounts are earning 1.35% so If you deposited $10,000 today and came back to look at it in a year, you would have an extra $135 in the account. Not life changing, but way better than nothing, and way more than you will get at most banks.
10% of your income is reserved for play
This is money to be enjoyed on leisurely activities and on purchases of your choosing.
The surprising thing about this category in the book is that he recommends you force yourself to spend all of it every single month.
At first I was against this idea. Surely you should have 10% as a cap and try to come in as low as possible each month so that you can save more.
More recently I’ve started to realize that it’s important to remind yourself that money is a renewable resource and that spending 10% of your income on enjoyment isn’t going to kill you. In fact, I think it will actually help you stick to the system. You won’t feel deprived. You won’t feel like you are doing some lame budget, you’ll feel like you’re living fast and loose with your money.
Making sure you spend 10% of your income on pure enjoyment is a great way to start to shift to a mindset of abundance instead of a mindset of scarcity.
10% of your income goes to financial freedom
We are talking here about using your money to make money, investing your money into money-making vehicles. Stuff like stocks, real estate, or starting your own business count here.
This is similar to the popular notion of “saving for retirement,” but I don’t believe in retirement, I believe in financial freedom. Retirement implies that you stop working, but work is something that is foundational to being human. I don’t think you should ever stop working, but when you reach financial freedom, you have the benefit of getting to select work that is meaningful to you and to dictate the terms of when and how often you work. You are no longer controlled by someone else’s agenda and subject to the soul-crushing toil that is most 9–5 jobs.
The habit of investing money to reach financial freedom is absolutely critical because it lets your money grow without you actively having to work on it.
The more you put away, the faster you will reach financial freedom.
If you want to put more away, I recommend working on increasing your income. If you keep contributing 10% but double your income, you double your contribution.
If you want to really be a superstar at saving money, try to increase your income while keeping your living expenses constant. This means that your living expenses will go from 50% of your income to something lower since you are spending the same dollar amount but with a higher income. You can then use that surplus to put more money into pursuing financial freedom.
10% of your income goes to your education
This money is for things like books, online courses, hiring a coach or a mentor, etc.
This bucket is a game-changer for me and is the biggest reason why I first thought this system was something special.
How many people do you know you routinely invest a sizable chunk of their income into their own education after they are done with college?
Almost no one does this, yet this an investment in yourself is one of the best investments you can make.
Yes, there is a lot of good information available for free online that you can use to educate yourself (you are reading this post for free after all), but paying for your education offers several huge advantages.
- Most of the time, people make sure to put their best stuff in their books and courses, which is how they justify charging for them. The side effect is that it saves you time scouring the internet for the information. Books and courses are dense sources of quality information.
- Paying for something signals your commitment and makes you more likely to stay the course
- Paying for something also makes it less likely that you will skip over advice that pushes you out of your comfort zone. If you read a piece of advice in a blog post, it’s easy to ignore. If you learn it in a course you paid for, you think you had better apply it to your life in order to get your money’s worth
And those are really just the advantages of books and courses, the advantages of coaches and mentors exceed even those benefits.
I mentioned earlier that I am making steps toward adopting this system and this year I am trying to move towards spending more on my education. My goal this year is to take at least four paid online courses (which I have already paid for. A good way to make sure you follow through is to pay in advance), and I have resolved to implement Ramit Sethi’s rule for book buying: if I’m considering buying a book, I’m going to buy it.
Designing the life you want is not for the faint of heart. It takes courage to define exactly what you want and it takes discipline to create systems that move you towards your goals.
This money management system is a great way to get your finances headed in a direction that supports your goals and ambitions.
If your serious about chasing your dreams, willpower won’t work. You need an unbeatable system to keep you consistent over time. Take enough steps forward and you’ll get where you want to go.
This post lays out the financial blueprint. If you want more help implementing systems into your life to help you achieve your deepest goals, I wrote The Ultimate Daily Checklist: 13 Steps to Winning the Day with you in mind.
Get it for free here: http://thematthewkent.com/the-ultimate-daily-checklist/