“In all 33 years of my life, no one ever taught me how to manage money properly. Can you imagine? The one thing we all need to live and yet it’s the one thing most of us are never taught to handle.”
To some, money is freedom. To others, it’s security, power, or even stress, but what does it really mean to you?
Money can be anxiety-provoking, dreadful, and an unbearable weight to carry throughout life. But for others, it’s a tool of freedom and opportunity, something to be managed with ease and even enjoyed.
It might be hard to believe that anyone can actually feel positive about money, right? Most of us are just trying to get by.
So how is it that some people manage to build wealth and live freely? How do they navigate this “money game” effortlessly?
The answer is simple: they know how money works in the American system and that’s where true empowerment comes from.
Knowledge of how money works is power.
And guess what? You can learn the same secrets. You can be just as financially free if you start now.
What Money Means to Me
Then
I remember receiving my very first paycheck working as a bus boy at a Thai restaurant during one of my summers in college.
The rush and excitement of depositing my first check into my bank and seeing the number jump from $0 to $600 left me gasping.
I began thinking about all the things I’ve always wanted to buy for myself that I never could without asking my parents for money.
Video games, clothes, movie tickets, sushi. All the spoils I ever wanted as a young adult of 21 years.
I went from seeing $600 in the bank quickly go down back to $0.
Of course, the solution at the time was to just keep working so I can keep acquiring the things I wanted.
However, I felt depressed that the number in my bank quickly went down as I kept buying stuff.
And I was back to being dependent on my parents once the summer was done and I was out of a job.
Now
But here was a lesson I wished I had known back then.
Ramit Sethi goes through an exercise in the below video that powerfully shows you the impact of investing a little over a long period of time.
If I had set aside $100 a month into an investment like a mutual fund and let it sit there for 12 years…you would be shocked at how much money I would have in my bank right now.
Let’s declare some new variables and do some quick math:
- I have $500 in my bank starting at 21 years old for 12 years.
- I contribute $100 once a month to a mutual fund.
- I expect a 7% interest rate annually for 12 years.
- $100 * 12 months = $1,200 a year I invest into said mutual fund.
When I plug these numbers into a compound interest calculator I would have $24,094.87 saved.
That’s an insane amount of money for contributing $1,200 a year to a mutual fund.
And what’s even more crazy is that I definitely would have more than $500 in my bank account over 12 years. Plus, as I get older I would likely be earning more income. Which means I would increase my monthly investments in the long run so this will further compound my growth.
Keep in mind this is a super conservative example because the interest rate you potentially would gain annually could be over 7%.
Give it a try! Plug in your numbers in the calculator and see what number you get.
I hope you can see the power of planting these investment seeds on the side.
And the nice thing about this is that you don’t need to be rich to invest.
Anyone has the power to invest, save, and grow their wealth.
You just need to be disciplined to set aside a small percentage of what you make towards investments and you’ll astronomically increase your wealth over time.
A Profound Podcast
If you’ve never heard of The Diary Of A CEO, I highly recommend you check it out.
Lately, I’ve been absorbed and intrigued by this podcast because of the amount of valuable and free knowledge the podcast guests share.
These are long panel type of podcast episodes so I suggest listening to this on your car ride to and from work.
But I can assure you, you won’t notice how much time is passing because you’ll be too busy enjoying how much you’re learning.
One particular episode about finances caught my eye and had me on the edge of my seat for the entire time.
It was a pivotal moment where I realized I didn’t know anything about money and when the light was shined on it, it shifted my financial paradigm.
This was such a fascinating conversation and I love the way Jaspreet Singh talks about money. His experience growing up is so relatable, especially with asian parents.
I honestly felt enraged though.
I felt like I should have known this much sooner in life.
And I deserved to know this information when I was in college.
It made me question our education system and I find it hard to imagine why there wouldn’t be a course dedicated to managing personal finances.
Also, it was eye opening to understand that the American system is designed to keep ignorant people poor while the wealthiest people stay wealthy or acquire more wealth.
This truly upset me because I felt like the dream that my family and those around me painted was if I get a high paying job I would have all the wealth I need. But that’s not reality.
Reality is the money you make today doesn’t have the same leverage in the future. Because of increasing inflation every year and the rising prices of literally everything to live (i.e., houses, groceries, education, etc.), $1 you make today will have much less buying power in the future.
To gain true wealth, you need to invest in the stock market, real estate, or whatever investment vehicle suits your lifestyle and preferences.
The stock market has shown over its history that typically there will be a 7-10% rate of return each year. And that’s on the conservative side, you could be earning even more each year.
This interest rate always beats the interest rate in your bank’s savings account.
And compounding interest will have a higher yield than you saving a couple of hundred dollars in your savings.
Don’t get me wrong, it’s still good to set aside liquid cash because you’ll need it in many scenarios and for rainy days, but to steadily grow your wealth you should set aside a percentage from each paycheck and consistently invest.
Jaspreet also shares his view of what creates happiness and it really resonated with me.
Basically, there are 4 areas that make a person happy:
- Mental health
- Physical health
- Spirituality
- Financial wealth
Some people are fortunate to excel at all of these.
And some of us are good at 1 or 2 of these and working on the other 2.
Regardless of your situation, I truly believe that all 4 of these areas will make you a more wholesome and happy person.
Managing personal finances is one of those keys to happiness.
All of a sudden this lit a fire in me and I felt like I had to take immediate action to better understand my money and how I can grow my own wealth.
Assets vs Liabilities
One of the distinctions that Jaspreet talks about is assets vs liabilities.
It’s important to understand this framework when handling money. Because it determines your paradigm.
How you see money will determine the choices you make in life.
To put it simply, any decision you make that takes money out of your pocket is a liability.
For example, let’s say you love buying Gucci hand bags. When you go to the store and buy that bag, money is coming out of your pocket.
When you buy a hot dog at Costco, money is leaving your bank.
Regardless of how much the expenditure is, any time you are paying for something and money is leaving your wallet, it’s a liability.
Another way to think about this: you are making Gucci rich. You are making Costco rich. You are making everyone else around you rich, except yourself.
Conversely, any decision you make that puts money into your pocket is called an asset.
For example, you invest in mutual funds and gain a profit every year, that’s money going back into your pocket.
You buy a rental property and rent the bottom and top floors to tenants, that rent money is going into your bank.
You are building personal wealth and growing your own assets.
So why is it important to understand assets and liabilities?
Because in America, we live in a society that encourages everyone to be what Jaspreet calls “fake rich“.
Some people encourage you to buy that car you’ve always wanted, those designer clothes, and the biggest house you can get.
Real wealth is boring.
Wealth is slowly acquired and built over time.
But we’re in an age where people want instant gratification.
Now, I’m not trying to say you shouldn’t live your life. It’s perfectly ok to want these things and if they contribute to your happiness then by all means buy those items.
My point is you need to be intentional with your decisions.
You shouldn’t be buying things because everyone else around you is influencing your lifestyle or convincing you of some standard to conform to.
It’s your life and you get to decide how you want to be financially free.
To be truly free of financial stress, you should try to build wealth. And you build wealth by acquiring more assets, not liabilities.
The key takeaway here is there should be a balance. You shouldn’t hoard all your money, but you shouldn’t spend it all either.
A Simple, But Effective Rule
So how do you grow wealth?
Jaspreet mentions a rule that I myself have been following for awhile now ever since I learned about it:
The 75/15/10 rule.
This rule is great because there’s very little thinking involved. It’s a template. It’s a framework with “batteries-included”.
Each number here represents a percentage that covers 3 needs: daily living expenses, investments, and savings.
75% of your monthly income is how much you can spend at maximum.
Let’s say you make $3,000 a month.
$3,000 * 0.75 = $2,250
This means each month, you can only spend up to $2,250.
15% of your monthly income is how much you should invest.
Investments comes in many different forms: 401k, Roth IRA, Mutual Funds, Stocks, etc.
$3,000 * 0.15 = $450
With $450, you can diversify this amount to a variety of investment vehicles. For example, you could contribute $200 to your 401k and $250 to a mutual fund. There’s endless combinations.
What’s also great is once you set this up to be automatic. It’s a “set it and forget it” type of deal.
Lastly, 10% of your monthly income is how much you put towards your bank’s savings account.
$3000 * 0.10 = $300
Set up an automatic bank transfer of $300 from your checking account to your savings account.
Not bad right? Simple, yet effective.
And you’ll be amazed at how much you’re saving.
Just don’t check your mutual fund or whatever your investment is every day. Remember, your brokerage account for investing is not your checking account.
Therefore, don’t treat it like one and leave it untouched for as long as you possibly can.
Check it maybe every 6 months and hopefully you’ll wake up many years later and see how much your assets have grown.
Track Your Spending
You’re probably feeling anxious and stressing about how to apply this 75/15/10 plan.
But here I’ll simplify it for you:
Budget on a monthly basis.
If you’re not already budgeting every month, I highly encourage you do.
Just like you go to the doctor every year to check on your overall health in your body, you should check up on your finances in the same way, but on a monthly basis.
What does budgeting mean exactly?
It’s simple, you basically manage your income vs expenses in each month.
Hopefully your income will exceed your expenses, but if you’re living paycheck-to-paycheck or your expenses exceed your income. You are in a sinking boat my friend.
You need to stop the bleeding and plug the holes in your boat so that you don’t drown. -Jaspreet Singh
The way I budget every month is using this wonderful Google sheet that a generous Redditor shared:
https://docs.google.com/spreadsheets/d/1rx6fEsm-fj_fNRPJ3szSr4oryXtVSQwahxUy3IcT-jo/template/preview
It has a sheet for budgeting on a monthly basis which I highly encourage you to use.
But you’ll also notice there’s a daily tracker sheet.
The way I track my expenses is every Friday morning I log my expenses for the past week into the daily tracker sheet.
I find this is a helpful way to have transparency of your financial health on a weekly basis.
By seeing what you spend each week and how that affects your 75/15/10 template, you’ll find opportunities for yourself to manage your finances in a way that helps reach your goals.
Invest in Mutual Funds
I’m a lazy investor.
I don’t have the time or energy to do stock trading and keep up with the latest trends to maximize my profits.
I just want to automatically invest 15% of my money into one or a few investment vehicles and forget about it.
And I want a professional financial manager to oversee my investment so I can sit back and watch the numbers increase.
This is why mutual funds are perfect for this if you’re like me!
With a mutual fund that invests in large cap stocks such as the S&P 500, you’re already diversifying your portfolio because of how widespread the stocks are across the top companies in the US.
And a lot of the famous investment companies allow you to automatically invest into a mutual fund directly from your bank such as Vanguard, Fidelity, etc.
It doesn’t matter which investment company you pick, but to get started I recommend Fidelity.
Fidelity has a bunch of mutual funds with low expense ratios and $0 minimum investment requirements.
One of the best funds is FXAIX.
You should absolutely do your research because there’s tons of funds out there, but if you’re someone who is just wanting to “set and forget”, then start investing in FXAIX.
There you go, your first investment vehicle to get you started and to plant your first investment seed!
Conclusion
What’s something everyone has in abundance, yet few make the most of?
Time.
Time is your friend. The longer you can let your investment sit in the stock market, the more wealthy you will be later.
The formula is easy, but most people don’t execute on this because life can throw you many curveballs. I get it, it’s tough.
There’s so many distractions, hardships, and the American system trying to take money out of your pocket.
Jaspreet Singh mentioned something in the podcast episode I linked earlier that really struck me:
We live in a credit based economy in America
This means, if you can’t afford a Gucci bag, a yacht, or a house, guess what?
You can take out a credit or a loan from the bank and buy what you can’t afford.
This is one of the most exploitive tactics in the money game.
The system is rigged because it encourages you to have more debt, have less assets, and put a hard stop on your wealth gains.
Wealthy people know this and play these money games all the time behind closed curtains.
You’re encouraged to spend your paycheck as soon as you get it and leave no savings yourself.
This has to stop. You have to make yourself rich, before you make everyone else around you rich.
If you follow the 75/15/10 rule and educate yourself on all the topics in this blog, you are on track to being wealthy.
Stick to it, learn to be disciplined, and foster patience.
Your future self will thank you.
And my hope is that you will live a free and wealthy life.
