One of the fun features of money is that there are so many ways to worry about it. The FIRE (Financial Independence, Retire Early) crowd are worried that they aren’t saving enough to be able to pack it in at 35. And fiercely jealous of their friends who just retired at 32. Retirees are worried that they will outlive their savings. Graduates worry about paying off their student loans. CEOs worry that they will look limp when their peers outshine them on the Bloomberg highest paid reports. But the real worry happens when people live pay check to pay check and struggle each month to make ends meet and to decide which bills get paid. Studies put that number at around 50% of American households. CNBC estimates that the number has risen to 63% due to Covid-19.  And Canadians aren’t much different with 53% living paycheque to paycheque. And it happens at all income levels. Ask Nicholas Cage or Mike Tyson.

So how to stop worrying about money?

A solution lies in the new frugality movement. Over at fellow blogger, Mr Money Moustache, he reveals his annual budget for his “luxurious” lifestyle of around $20,000. Netflix has some great shows on tiny homes with couples crawling over each other to cook dinner. Or we could find stock market “hidden value gems” like GameStop and hope that the upward momentum carries on forever. (Didn’t end well.) Then there is a popular approach called “budgeting” where couples or families guess targets for each category of spending, then assign blame at month end as the targets are voraciously breached. Its a bit like the quarterly business review process at a company. But more violent.

Tell me I don’t have to give up my avocado toast

But most of us don’t want to give up our lattes, avocado toast and daily glass of wine. We want a home big enough that we don’t have to store groceries under our beds, we don’t want to gamble on risky investing ideas and there doesn’t seem to be much fun in budgeting. So how do we build wealth without BS (Budgeting and Sacrifice)?

Can you read your way to financial wellness?

From about age 25 to 30, I set a goal to read one personal finance book a month. I read about Benjamin Graham, Warren Buffett, Peter Lynch and the investing greats, loved the Wealthy Barber, The Automatic Millionaire and Rich Dad, Poor Dad. My nightstand held The Single Best Investment, The Richest Man in Babylon and How to Get Rich. The habit continues, recently reading books from some Canadian colleagues including Rich is a State of Mind, Burn your Mortgage, Beat the Bank and Wealthing like Rabbits. Which to choose? At about $25 each, the return will dwarf any other investment you will make. Go. Buy. Borrow. Learn!

Good concepts, but hard to do

Most of these books advocate a simple set of rules that take a lifetime to soak into our thick noodles. Live within your means, save 10% or more of what you make, then get that money working for you in stocks, bonds, real estate or a business. For financial investing set an investment allocation plan (stocks, bonds, real estate, cash) choose stocks or funds more cleverly than everyone else, buy and hold, minimize investing costs and be smart on your taxes. Pretty basic and incredibly powerful. But most of them run counter to our basic human instincts. Even though the advice is  sound.

• Who wants to buy stocks when prices are falling? Hmm. You don’t like it when things go on sale?
• What if the markets tank right after I buy? They may, but they are extremely likely to rise over 10 or 20 years.
• Do I keep holding? This stock has done nothing all week! Set down your phone and go for a walk.
• Who wants to own bonds when they yield next to nothing? They might be helpful during market downturns.
• Who wants to be a landlord and deal with leaky toilets? It might be a path to wealth.

Where’s the fun in saving 10% of my income?

Let’s go back to the part about saving 10%. Where’s the fun in that? So much cool stuff to buy. And the money goes so fast. Often there is nothing left after the necessary expenses, last month’s credit card bill, the car payments, the mortgage, some nice dinners out, a new iPhone and a few other splurges. And why save anyway? Who knows how long we will be here – might as well enjoy it now. So if there is no way to save 10% (or, worse, anything at all), the whole plan gets derailed and we are back to waiting for each pay check. No financial freedom and we’ll need to learn to love our jobs. For a long time. How to stop worrying about money?

Saving starts the process. It builds a flock of special geese that lay financial eggs like interest and dividends. Keep trading-in those eggs for more geese and the process accelerates. Do it right and you will get to the point of financial wellness. That’s when those financial eggs show up dependably into your bank account every month, pay for all the bills, travel, great food and smooth scotch you can handle. All while you are doing, well, whatever you want. But it all starts with saving, and that’s about as much fun as dieting. It seems like a zero sum game. Save for tomorrow or enjoy today?

Is there a way to save for the future and enjoy today?

Back in 2015, I started thinking about this problem. I discovered a couple of nifty ways to save on car washes and home alarm monitoring. Both with minimal effort and minimal sacrifice.  What other ideas were out there? I started a list. Then calculated what would happen if the savings were used to pay down debt or if they were invested. The list became a spreadsheet. The spreadsheet became a book, a blog, a newspaper column and a speaking career. Turns out the savings are material, Cashflow Cookbook includes over $13,000 of monthly savings ideas. Yes monthly. In every category like housing, transportation, food, household, lifestyle and financial. Will all of them work for you? Unlikely. But are there a few ideas that could save you $200 to $2,000 a month? Likely. Commit that money to debt pay-down or more investments and your wealth will soar.

Your money worries are fixable

The experience has changed my life and I know that the ideas can change yours. Helping others learn how to stop worrying about money feels great. But if it’s a beautiful day, I go for a bike. If it’s rainy, I get out a guitar or read a book. I rarely set an alarm and I spend as much time as I can with my wife, family and friends. Thank heavens for Zoom and free long distance. When the pandemic ends, some great travel will begin. Bills are on autopilot and money worries are long gone.

Your money worries are fixable. Now is the time to do it.

• Stop living pay check to pay check
• End the bickering about money
• Don’t sacrifice your life for money
• Cease your savings challenges
• Replace budgeting with enjoying life
• Abandon your retirement worries

In How to Stop Worrying About Money Part 2 we will look at a simple model to get started, a fun way to track your progress, the incredible power of some painless changes and the simple steps you can take right away.

Stay safe. Enjoy life.

Gordon

Photo credit Pixabay

Yes, you can start today!

One of the most common questions I get during speaking engagements is about how to get started. What can they do today? In other words, is there a simple first step to build wealth?

Often I ask my audience is to think about their current wealth – the difference between what they own and what they owe. Their faces give them away. It is clear that most of them have never thought about that number. They know the amount of their pay check, and some of them know the value of their debts or some of the things they own. But they haven’t put it together to know their actual wealth. Wealth is often called net worth, but many would take the position that our net worth is more than just the sum of our finances. So let’s call the number our Wealth Number.

There are lots of numbers to look at…

When people talk about getting rich, sometimes they talk about the stock market and spend time watching it go up and down. Often every few minutes on their smartphone, leading to unnecessary mood swings. Others set up a budget and try to track expenses, leading to spirited spousal arguments about who caused the biggest budgetary miss, or can one partner claim a credit for the savings from a 1/2 price beer and wing night? (answer: no) Some focus on paying down a debt, even as new debts spring up like bad weeds. As a result, they build frustration, not wealth.

While all of these numbers can be helpful, the most important is your overall wealth number. The difference of what you own minus what you owe. To calculate it, set up a simple table with everything you own at the top. Include things with real value, like a house, cottage, car and registered investments like an IRA, 401(k) or a 529 Education Savings Plan (or TFSA, RSP and RESP for my Canadian friends). Add up everything you own. Then make a section below that for everything you owe. Mortgages, student loans, car loans, and the line of credit you took out to pay for the dog’s new hip. Sum up the debts, everything you owe. Finally, subtract what you owe from what you own. This is your Wealth Number. You can do this on a cocktail napkin, in a spreadsheet or download the Net Worth Tracking Sheet here.

OK I have a wealth number, so what?

That number is a simple first step to building wealth. Why? What does the number mean? It is a measure of your financial wellness. Once it is big enough, your money can make enough money to take care of you. How fun is that? If the number is small, you may have a lot of debts that are cancelling out the value of the things you own. The monthly interest costs of those debts are pulling you backwards. If the things you own, like real estate and investments are growing, they are pulling you forward and helping you to build wealth. Sometimes people face a negative wealth number. Their debts overwhelm what they own. They need to work hard just to cover the interest on all their debts. Not fun, but solvable, read on.

What gets really interesting is tracking that wealth number each month to see what it is doing. If it is rising, you are moving in a great direction. If it is stagnating, or worse, declining you will be able to retire, well, never. Set up your cocktail napkin, envelope back or spreadsheet to track it every month and see what happens to it. Look as well at the sum of what you own. Is it rising? Awesome, how can you make it grow faster? Look at what you owe. Is it falling? Is there a way to pay things down faster? If you have an addictive personality, thinking about this will get your finances in shape just like your Fitbit or Apple Watch force you to get moving on your health.

Tracking your wealth number changes everything

Your wealth number is the simple first step to building wealth since it changes the way you think about money. The act of calculating it every month helps you build awareness of whether your wealth is actually growing. Updating it will take about 30 minutes a month using your paper or online statements. You got this.

Tracking your wealth number makes you start to think about the things you own:

• Are my investments growing?
• Am I getting value for the investing fees that I am paying?
• Can I own more investments that will grow and build my wealth?
• Have I bought a lot of things like cars, clothes and dinners out that lose value and lower my wealth?
• Are there ways of lowering costs on the expenses that I pay for every month?
• Can I use that freed up money to invest and build more wealth?

It also makes you think about what you owe:

• Can I find more savings and use that cash to pay down debts more quickly?
• What are the interest rates of all of my debts and which ones should I pay down first?
• Have I been borrowing money to buy things that go down in value? (a double threat since the thing loses value every month, and lowers what you own, but the interest costs slow down your ability to lower what you owe)

Show me an example

Here is an example of tracking wealth. Interesting to lay it all out there. Be brave, you can do this at home. Looking at the green section, the house and 401(k) are moving up nicely, while the two vehicles are losing value each month (I depreciated them at 15% annually). Still the Total Owned is rising and slowly building wealth. Unfortunately, rising credit card debt in the orange section is working against the pay down of the mortgage and the car loan, as a result, the Total Owed is staying about the same and wealth is rising only slowly each month. Depressing.

Let’s try making a few changes and see what happens:

In this case, we have increased the 401(k) contributions by $200 a month, which will cause it to accelerate its growth over time. On the credit cards, we have curtailed spending and paid down each card balance by $500 per month. As a result, this family’s wealth is now growing by more than $4,000 a month and will accelerate as the investments grow and debts shrink. Nice!

Wait, where did the money come from?

It came from getting smarter about monthly costs and aggressively reducing monthly recurring expenses using ideas from Cashflow Cookbook where I lay out ideas to reduce monthly expenses by up to $13,000 monthly with minimal effort and sacrifice and from my blog posts. Lots of other blogs have great ideas including Barry Choi’s Money We Have and the classic, Mr Money Mustache. Some of the savings come from being smarter about spending, sometimes its about learning the joy of having fewer things, letting the Jones pull ahead and staying out of malls. Once you start tracking your Wealth Number, you will begin to find lots of ways to reduce expenditures and apply the savings to building the investments you own and reducing what you owe.

Summary

To build wealth, start by tracking your wealth. To accelerate it, focus on ways to free up monthly cash flow and immediately use those savings to pay down debts (especially high interest ones) and increase investments. Over time, what you own will accelerate and what you owe will drop. Work becomes something you do for fulfillment, bills go on autopilot, stress dissolves and life is fun. Welcome to financial wellness.