If Third World Success Guide was a two-story mansion Steps #1, #2 and #3 would be building the foundation of our mansion. It would be dug in a solid rock, deep and immovable. Step#4 which I introduce and will discuss today would be the ground floor of success. This step would be building on those three foundations and would form the basis on which we will build upwards and expand our mansion. Read on if you have found value so far in the first three steps. This step, step #4 will literally change your life for the better. It will be the turning point at which you will look back and remember the moment when you started to build real wealth.
Step #4 – SAVE
What is the definition of save and saving? – A basic definition of save is to keep and store up something for future use. The Merriam-Webster Dictionary gives one of its definition as ‘to keep (something) from being lost or wasted’. The word saving can be defined preventing waste of a particular resource, it is income not spent. It is the portion of disposable income accumulated or invested.
Building on the foundation – So now that you have been tracking your income and expenses for two months (Step #3), you now have an idea of what is coming in and what is going out. Most people will find that they are spending exactly the amount that is coming in or even more than what is coming in; meaning they are spending more than they are earning! The strange thing you will find is that when you earn more in a particular month, every last cent is spent. But yet, when you earn less another month you still survive and the world didn’t come to an end. This is because we have great desires and earning a little bit more in any month magically vanishes, fulfilling these desires whether we are fully conscious of it or not. So logically, if we want to save money, our expenses for the month must be below our income for that month. There are two ways of accomplishing this: 1) Increasing your income 2) Reducing your expenses. However in this step I will be focusing on reducing your expenses.
Ricky, why focus on reducing expenses rather than increasing income at this point? – Most people believe that if they were earning more, all their financial troubles would be over. It seems like a fair supposition doesn’t it? If I am surviving on what I am earning now, although it’s a struggle, if I was earning two or three times what I am earning now I would be ‘set for life’, my financial problems would be over… seems like a logical argument doesn’t it? Well the truth of the matter is, without following these 10 steps for success that I am outlining every week, you will always find yourself one paycheck away from being broke no matter your increase in income. As human beings we have many desires. Many, if not most of our desires goes unfulfilled, constrained by our income. As we earn more we fulfill a little bit more of our previously unfulfilled desires up to the point at which our new and increased income can manage to fulfill. The sad thing is we do this unconsciously, without even noticing that we are now earning twice what we were earning last year but yet we are still living paycheck to paycheck. We then confuse these desires for needs as they get more intertwined in our daily lives. Thus setting us up to get trapped in the rat race.
Studies have shown that as individuals’ income rises their expenses rise in tandem and sometimes greater than the rise of the income. You have people who on appearances seem rich, but are just one paycheck away from being broke just like that majority of people in the rat race. They have a bigger income but they also have the expenses to match. Without the habit of monitoring and controlling your expenses then a rise in income will not save you from financial failure. That is why in this step TWSG is focusing on reducing expenses rather than increasing income, which we will discuss in a later article. Studies have shown that over 70% of lottery winners go broke within 2 to 7 years after winning. Those whose winnings survived past the 7 year mark were either already good money managers or they sought the advice of qualified professionals who could help them manage their new-found wealth properly. Also some were fortunate enough not to have taken the lump-sum and are receiving payments every year for a very long time. It is not only lottery winners who end up broke after being very wealthy. The often untold story is that many athletes and other famous people around the world, who were once living the life of opulence, are within a few years after retirement broke, often resorting to substance abuse. According to moneycrashers.com the vast majority of athletes, actors, musicians and other celebrity personalities do not earn the top dollars that you see the super-famous earning. And are often broke just a few years after retiring or when the 15 minutes of fame is up. I am pointing out all of this to show that having or having had a high income stream is no guarantee of long-term financial success. Also do not just rely on winning the lotto one day or becoming famous, which also is no guarantee of building long term wealth. TWSG will provide you the best and proven platform to build long term wealth no matter your income level.
So TWSG what is the goal? – The goal is to save one tenth or 10% of all income earned. If you were an egg farmer and everyday your chickens lay ten eggs. Each day you gather the ten eggs in a basket, you take out nine to distribute to your clients and leave back one egg in the basket for your savings. If you do this every day for 10 days, how many eggs will you have as savings after ten days? You will have 10 eggs. And you barely sacrificed much to leave back an egg a day. Now imagine these were golden eggs and you do this every day for a year, how many golden eggs would you have? How big of a basket would you need to hold all of your golden eggs? Now imagine you do this for five years and from time to time one of the egg hatches and produces a golden chicken that lays golden eggs only for you and your savings. How many golden eggs would you have after five years? A lot! And you would need a very big basket to store all your golden eggs. And all
you did was keep back one a day instead of spending it all. This is the same concept I need you to use in order to save one tenth of what you earn every month. If you earn USD $1000 every month take out $100 as your golden egg and put it into a high yield savings account that is not easily accessible to you. You might say that you need the whole $1000 to survive, you can’t live on the $900 that would be left. But if tomorrow the government implements a ten percent increase in income tax, sure there would be protests but at the end of the day when it is automatically deducted from your pay you would find a way to live off the remaining $900. The reality is sometimes bills and prices go higher and we still live off the $1000 sometimes barely noticing until it gets really bad. For example sometimes your electricity bill is higher than other months and you still find a way to pay the higher bill and survive off the rest of the $1000. The same goes for fuel expenses and food produce prices, which fluctuates depending on whether there is a scarcity or glut on the market. The problem is we prioritize all our bills and expenses over our own savings. Your creditors or billers won’t die or go broke if you delay paying in full in order to Pay Yourself First (PYF). A good book to read regarding Paying Yourself First is The Richest Man in Babylon by George S. Clason. Since we love paying bills so much, and we prioritize paying all the bills instead of building our golden nest egg basket. Pretend that you yourself are a biller, and you have to pay yourself 10% of all income earned for the month. Now you are a no-nonsense biller and are you should not even dare trying to owe yourself. The first thing you should do is take out that 10% and PYF!! All the other creditors and billers must tremble at the feet of this your first and most important biller, and they get what’s left after you have deducted the 10%. So 90% of your income is going toward building the wealth of all your other billers and creditors and only 10% is going towards building your personal wealth, seems like a reasonable deal to me. If it was me I would pay myself more but we have to start somewhere right?
Ok Ricky I am convinced, but how do I save 10%? – Well, the answer is a simple, but yet profound concept; Live below your means. If you earn $10, decide to live off $9 and save $1. If your salary increases to $100, decide to live off $90 and save $10. You would think that this would be an easy decision since you use to live on $9 before. However as I stated earlier our desires are great and our expenses tend to rise as our income rises. Suddenly the studio apartment you were quite happy with before the increase in income feels too small. You now move into a three bedroom for which you pay rental and yet you only occupy one of the three bedrooms and everywhere else is just wasted space. But you justify this move because “I’ve always wanted more space”, and now that your salary can ‘afford’ it you are not willing to live in anything less. But whether you earn $1000 or $5000 per month you will be in the same financial position at the end of the year if you never lived below your means. Remember you were not born into a large inheritance, if you are going to build wealth and become a Third World Success (TWS), the money has to come from somewhere – it has to come from living below your means and saving at least 10% of all income coming in. Without developing this discipline, no amount of increase in income will be able to save you from financial failure (no pun intended). That is why over 70% of lotto winners are broke and often worst off than they were before, just seven years after winning.
Ok so let’s break it down – You know what your income is and you know what your expenses are (Step#3). Now we need to get these expenses below the income by at least 10%. Start by writing down all your income as described in Step#3. Minus all the fixed mandatory expenses. For example if you take home $1000 after taxes and other deductions, and you have a personal loan with the bank that you pay $100 per month and a car loan that you are paying $250 per month. Deduct these two fixed expenses from the $1000, which would leave $650 to spend on your variable expenses and save your 10%. Now look at your variable expenses to see where you can cut cost. Do you need to rent that three bedroom house? So that your relative or friend who only visits once or twice a year has somewhere to stay? Can a two bedroom or even a well-designed single bedroom do for now, until such time as your family grows etc.? Are you doing all you can to save on electricity (I will write an article in my blog section on how to save on electricity and other variable expenses)? Do you need to have Cable, Satellite, Netflix and internet subscriptions all at once? Are you using mobile data and credit wantonly? – You will be surprised how much you spend on mobile credit once you start recording it. Review your health/life insurance to make sure you are getting maximum value. Shop around, you may find a better deal out there. Are you spending too much on petrol? Plan your trips and don’t just drive up and down the place indiscriminately! Can you leave out earlier in the mornings so that you won’t have to call an expensive cab but will be able to catch the bus to work? Also if you drive, less traffic = less gas, which is equal to savings. Leaving out earlier may avoid the traffic. Can you save money on food by eating out less each week? Cook on the weekends if you are too busy during the week. Cook a variety and freeze it for the upcoming week. Do you need to purchase lunch and breakfast at work every day? Can you have days when you know you are going to bring your lunch and breakfast instead? Can you make your own juice on the weekends, freeze it and bring some to work each day instead of buying juice or soda at work every day. Besides this will have the side-effect of being healthier. Apart from health reasons do you need the most expensive soap for your shower? For cleaning and laundry do you need the most expensive products? Do you know a little bleach and also vinegar is better at cleaning and killing germs than many of the fancy cleaning products that is full of all kinds of chemicals to make it smell good? Do you need to buy the most expensive shoe for your growing baby boy/girl? When in six months they will outgrow it and need another pair? Are dependents pulling their weight? Is there a way to economically feed your pet/animal? Do you need the gardener to attack the lawn every three days? After all, we all like a good-looking lawn but we are not the Queen of England or the Prince of Whales, we don’t need perfectly manicured lawns if it is going to cost us our financial freedom. Do you absolutely need a live-in helper right now? Can you have a professional helper come in once per week instead? Do you need to see every movie that comes out in the theater, and attend every party that pops up on the map? Learn to say no to people who habitually beg just because…. Are you getting the best deal on your car insurance? Did you shop around? Are you eating healthy enough and getting enough exercise and rest so that you are not spending time and money at the doctor? Do you re-purpose clothing to ensure its maximum use? Do you still need that amazon prime and shipping company membership? Does everybody and their uncle deserve a holiday gift from you? Can a small token do instead? Reserve gifts for those truly special persons. It’s now 2018, interest rates are falling here in Jamaica. Review your long-term liabilities such as your Mortgages, Leases, and Loans to see if you can get it refinanced at a lower interest rate. Cut and slice until you carve out this 10% for saving. You might even find that you have carved out more than 10%. Now go about your life for two months, saving this 10% every month. A funny thing will happen, you will not see your lifestyle drop. It will be as if this 10% was not missing from your monthly expenditure.
Congratulations! You are now in the top 40% – Now this is only four tenths or 4 out of 10 or 40% of the way to completing TWSG 10 steps and you will have already accomplished being in the top percentile among your fellow countrymen. Being guided by these four steps so far, you will have done better than more than half of your country’s population. Put the money from this 10% savings in an account that is not easily accessible, lest temptation bids you to ‘dip’ into it just to ‘borrow’ a little from yourself. This is you building your nest egg. This will eventually become your golden goose. Remember this stage when your goose was not yet born. It will be good to think back and remember where it all started when you are sipping on a piña colada on a beach somewhere – financially free.
So what are some of the key things we should take away from this step?
- Our desires will always be greater than our ability to fulfill them.
- Therefore we should not try to outspend our desires, instead ALWAYS live below your means
- Increasing your income won’t guarantee financial success
- PYF!!! Pay Yourself First!
- Save one egg from every ten eggs your chickens lay. Save 10% of your income!!
- Step #4 is building the ground floor of our Mansion. Next week Step number five will provide reinforcement so that we can start building the upstairs of our mansion which are steps six through ten of TWSG.
You have made it to the end of yet another TWSG article. You are already showing that you are willing to do what it takes to become a TWS. Please leave a comment below saying ‘I am building my golden nest’. Let’s see how many persons are currently building their golden nest.
Stay tuned next week as I will publish step five of the ten steps on how to make it in the third world.
Our actions now will determine future results.