Make your money work for you: "Rich people buy luxuries last. Poor and Middle class people buy them first".
Hey Champ,
I want to introduce you to the world of ‘real life’ finance. The current education system doesn’t actually teach you how to look after money. It doesn’t teach you how to make money and become financially free. Instead, it teaches you to become a good employee and how to get paid whilst making other people rich. This path is good for some people, but not for others. However, yet again, the British economy is in recession. It is therefore really important that I teach you about money, so that you never have to suffer financially.
We will talk in more detail about this, but wealth can come in many forms. One form that i'll talk about today, is that of ‘employee’. I hope you get a job early in your life to see what it's like to be an employee. Then, like I did for your brother, I will help you set up a small, fun business to show you how you could either work for yourself, or get other people to work for you.
An employee could be typically described as someone who sees security within their job. For example, you may hear them say “I want job security; I want a pension; benefits”. Success and wealth for these people comes from climbing the corporate ladder. However, their success often comes with the consequence of poor health due to stress and an increase in workload. There are pros and cons of being an employee:
Pro’s
- Always have the same basic amount of money coming into you every month
- Pension
- Holiday Pay
- Sickness Pay
Con’s
- Success means more work
- Your performance will probably be higher than your salary - I.e. working all the hours in a given day.
This article is going to teach you a way of dealing with your money early on in life (probably from being an employee at first), so that you don't have to be an employee if you don't want to. I want you to be financially stable enough to make an informed choice: do you want to work your whole life, or is there a way you can make a passive income.
The 50-30-20 rule.
I was never taught this rule in school, nor by my family. I came across it later in life (opsimath dad), and I think its a really great way to create the financial foundation from which to build upon.
The rule states that you split your monthly pay in the following ways:
- 50% on your needs.
A need is something that you cannot live without - e.g. food, warmth, shelter. Some needs may be:
Mortgage | £510.00 |
Petrol | £120.00 |
Food | £100.00 |
Car Insurance | £35.79 |
Life Inurance | £19.21 |
Dentist | £19.10 |
House Insurance | £9.69 |
Grand Total | £813.79 |
- 30% on wants.
A want is different to a need, but I think people get confused. A want is something you desire, but you can live without - gym, mobile telephone, Netflix, dinning out. Too many people think they “need’ a new car, posh clothes. That’s wrong. Anyone paying for a massive house, brand new car and all the best clothes, is spending their wealth and are probably not very well off (because they are spending it and are probably in debt because of it). Remember, there’s nothing wrong in being average.
A want may be:
|
|
|
|
Gym |
£35.00 |
|
Phone |
£10.00 |
|
Grand Total |
£45.00 |
- 20% on savings.
I hope that you do not get yourself into debt for things that aren’t important. Your mother is amazing with money and she taught me so much about this subject. So, I know you’re in good hands. So I know she will support me in saying that you should never have something that you can’t afford without paying for it in full. The word “Credit” actually means “Debt” and you have to pay to use that money. It's crazy when you think about it.
Out of that 20%, I suggest you first start paying off any debt you owe.
Following this, start paying towards an emergency fund of £1000. This will keep you covered if something goes wrong in your house or with your car.
Then, begin saving towards a fund that you can live off if you ever lose your job. I suggest saving enough to maintain your lifestyle for 3-6 months. This is really important because I’ve lost a job before and it was awful. Plus, they say the average person is only two pay checks away from bankruptcy.
Finally, with any money left over, start to invest. We will talk about this more in the future.
This little guide should be a good introduction into finance. We will do it together, I promise.
It would be good for you to create a monthly budget and see what your needs wants and savings are costing you. I wasted 200 quid on eating out!!
Here are some great books to get you started:
- Cashflow Quadrant - Kiyosaki
- 50 Economic Classics - Butler-Bowden
- A - Level Business: AQA Year 2 Complete Revision & Practice (CGP)
Love you,
Dad
