10 March 2016 –
Ok, so tell me. How do I get started?
The concept behind becoming financially independent is deceptively simple. It’s the putting into practice that takes the hard yards and dedication.
Once you stop impulse buying endless, unnecessary consumer goods, buying your lunch every day instead of making it, and wasting your hard earned income in countless other ways, you will start to notice how the excess builds up in your bank account week after week.
Then, and here’s the bit where you start getting really smart, you put this excess cash to work for you. Not leaving it in a bank savings account earning next to nothing (dumb), or risking it at the betting shop (really dumb), but somewhere that either pays you a great interest return, or somewhere that reduces the amount of interest you are already paying, such as credit cards or car loans for example.
I’ll let Mr Money Mustache take it from here…
Your goal every two weeks or so will be to count up all this extra cash, figure how much you need for upcoming bills, and sweep the rest to somewhere useful. Somewhere that either pays you interest, or saves you money by reducing the interest that you pay.
Note that there’s a powerful double psychological trick going on here:
You are keeping your bank account very low, which makes you really think twice about impulse purchases. “Hmm, I can’t buy this $1500 television set, because I’ve only got $300 in the bank and there’s only one paycheck coming before my credit card statement will come due”.
Plus you are keeping the money as active as possible. Every dollar is actually a little employee that will work for you, 24 hours a day, for as long as you keep it. But you don’t want your employees hanging around eating donuts in the smoking lounge of your zero-interest checking account. You will simply sweep these green paper employees to wherever they will work hardest for you.
For most people, those places in order are:
- paying off any high-interest debt like credit cards
- making sure all your deductions for your 401K (superannuation) plan* at work are set to their maximum level, especially if they have employer matching
- paying off any other debts like car or student loans
- paying off extra principal on your home loan
- buying a conservative dividend-paying stock index fund – go to Vanguard.com and start an account to buy some units of the VFINX fund, or if you have a brokerage account you can buy SPY shares**
- last resort: just putting the money into a cash account that pays the highest level of interest you can find – Vanguard’s Prime Money Market fund or ING Direct’s Orange Savings Account.
So there you have it. Save this posting. It is simplistic advice, but if you go out and read 50 books worth of financial and investing advice and distill them into only a few paragraphs, you’ll probably end up at the same place. Mr. Money Moustache actually reads these books every night, since they are part of his unusual idea of fun. He also follows Warren Buffet as if he’s a sports hero and read his 800-page biography over two red-eyed days as soon as it came out. I encourage you to get more into investing too if you find it interesting, but if you just want the cheat sheet of what countless millionaires do with their money, just follow the points above and you are good.
These techniques will keep your employees working for you at a rate of between 5 and 12% per year. If we average it out to 7%, that means for every $100,000 you put to work, they will kick back $7,000 per year to you forever, with no work on your part.
So if you have 700,000 employees, you get a lifetime golden parachute of $49,000 per year, forever, with no thought or effort. Hopefully you are already starting to see the blinding and obvious light at the end of the tunnel. You are now saying, “Damn, I want those 700,000 employees working for me as soon as possible. How can I get them!? When can I start!?
And that boils down this blog to one simple idea – getting rich in the only way that is pretty much fool proof, as quickly as possible.
[Mr Money Mustache, www.mrmoneymustache.com]
*Same applies to your own superannuation or Kiwisaver plans. Just be aware that once you have deposited the funds, they can only be withdrawn in exceptional circumstances in most cases.
**Mr Money Mustache and myself are great fans of Vanguard for their ethical approach to business, their great returns, and low fees. Plans and investments will vary by location but visit Vanguard Australia for more information.