Taking control of your personal finances and getting rich is simple, but it's not easy.
And that's not a play on words.
It's simple if you know how, but not easy because of our bad money habits.
New York Times columnist, author, and financial planner Carl Richards regularly had his articles published on Property Update.
I asked him for permission to publish them after reading his book “The One-Page Financial Plan: A Simple Way to Be Smart About Your Money,” and saw how he boils down his wisdom in table napkin sketches which have made him famous.
Here are a few insightful lessons and sketches from his book and from his many blogs.
To become rich you'll need a financial plan - but it can be as short and as simple as 1 page
We're living longer.
That means there’s a lot more life to enjoy.
How prepared are you?
Do you have a plan to become rich?
There are a number of reasons why we are hesitant to spend time planning for our financial future, but the biggest one is that we have confused the process of planning with the end product, a plan.
Richards believes Financial Plans are worthless, because they are based on a heap of assumptions that are likely to be wrong.
But the process of planning is vital.
Once you have a general idea of your own destination, the focus should shift to what you can do over the short term to get there.
Focus on the next three years.
Thinking in shorter time frames inspires us to act instead of worrying about all of the things that are out of our control.
So set a course quickly realise that you will be wrong, and plan on making course corrections often
By the way...
Doing nothing isn’t a financial plan
Richards explains that uncertainty has a way of paralysing even the smartest people.
If we don’t know exactly what we’re doing or when we’re doing it, we tell ourselves we’re better off waiting until we do know.
The problem with this logic is that we’ll never know everything.
Life will happen, plans will change, and the unexpected will occur.
Richards recommends that instead of beating ourselves up for not being able to predict the future, we should commit to the process of guessing.
And over time, we'll adapt as needed and keep moving towards a future that looks more (or less) like the one we envisioned.
But first...
You need to understand your "why"
You really need to understand why money is important to you.
If you don’t know the objective of your personal financial planning, this question will help reveal your values and help you gain the clarity you need to that will help you delay gratification and develop financial discipline, because...
Saving without a purpose isn't going to work
According to Richards, your one-page plan reminds you of 'why' you're saving money, helps you weigh the different options, and makes it easier to identify the best path for getting you where you want to go financially and develop essential financial skills.
Your starting point is your current net worth
When it comes to money, what we don’t know can hurt us.
Richards has seen this time and again when people tell him they want to get serious about their finances.
They want to invest.
They want to take control of the financial future.
But when asked about their current financial position, they don't really know what's going on.
Yes the dreaded "B" word - but when you budget, you build awareness.
Awareness of where you've spent your money in the past and more importantly how much and where you should spend your money in the future.
Richards says that most of our problems do not come down to lack of income, it's due to poor money habits.
Spending mindlessly, without even thinking about it, has become a national bad habit.
And we all know how hard it is to break habits. So we make the same mistakes over and over again.
So, it’s important to control your budget.
There is a simple rule you must follow...
Spend less than you earn and save the difference
Richards recommends you should start by saving as much as you reasonably can.
Your definition of reasonable may not match your neighbour's and that's O.K.
Instead of stressing about a random percentage, focus on what you can save given your commitments.
What's reasonable in your thirties probably wasn't reasonable in your twenties.
It's never too late to get smart with your money
According to Richards, it's never too late to begin setting up your finances and start saving or investing.
He suggests you should stop dwelling on what you didn't do in the past and focus on what you can do today with your current salary and other incomes.
And stop waiting for perfect.
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I've said it before, but it's so important I'll repeat it...
Start by saving as much as you reasonably can. Spend less than you earn, and don't lose money.
You'll be better off tomorrow than you are today, and even better the day after that.
However...
Investing is NOT the same as speculating
Greed and fear kill Investment returns
Richards believes that most of us make the same mistake with our money over and over again.
We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea.
I know that it's easy to say "I'll be greedy when others are fearful and fearful when others are greedy", but it's really hard to do.
That's human nature.
Why you need a financial adviser
It's their job to stand between you and your big mistake.
Richards says our odds of avoiding the Big Mistakes caused by the human emotions of fear and greed go up dramatically when we have an adviser standing between us and a decision we'll regret.
It's your financial advisor's job to protect you from making mistakes.
They should get you off the emotional roller coaster and remind you of all the reasons why shouldn't buy high and sell low.
Beware of fake experts
There are two types of experts in the world: real experts, and fake ones.
- The real experts are the people who spend many years refining their knowledge and skill set in a particular area and becoming masters of pattern recognition.
- The fake experts keep filling your inbox with unrealistic promises. You know - 7 properties in 7 years or 10 properties in 10 minutes. No money down, or cash flow is all you need.
You know...all those get-rich-quick schemes.
Warren Buffet cleverly said: "Wealth is the transfer of money from the impatient to the patient."
Richards says you can also become an expert through repeated exposure to similar patterns.
Having a financial plan minimises the errors you can make
To get rich you'll need a repeatable system with guardrails in place to keep on track says Richards.
This starts with your goals. Then, based on where you want to go, you need to build a plan that gets you there.
Finally, pick investments that fit the plan.
I've explained all you need to know in my international best-selling book: Michael Yardney's Guide to Investing Successfully. Why not check it out here and get your own copy
For example, at Metropole, we use proven systems to find investment-grade properties:
The problem is my system of long-term investing looks too simple for intelligent people - they fiddle with it, and they complicate it. And then they say it doesn't work!
I've found that having a system takes the emotions out of your investing - investing should be boring so that the rest of your life can be exciting.
Richards obviously agrees as he explains that sometimes … no … OFTEN the path to success in any activity is boring and hard, at least in the short term.
- It’s boring and hard to find an extra $50 a month to save.
- It’s boring and hard to get up an hour earlier to write something to share with the world.
- It is boring and hard to pass on the food you want to eat, and instead eat what you know you should eat.
He says:
I often make the mistake of thinking that if something is not fun and easy for me to do, then I should automatically have someone else do it.
This comes from the idea that the things I’m good at are fun, exciting, and easy for me.
I should focus on those things and outsource the rest.
Just because I’m good at something doesn’t mean it will always be easy.
In terms of boring, this is especially true when it comes to money.My best work shows up when I’m doing things that are hard
Investing correctly IS BORING!
In fact, if the way you’re investing is a source of excitement for you, be careful.
Progress towards your goals is exciting, but the actually process of investing is boring.
Saving an extra $37 a month is boring, seeing your account 10 or 15 years later is exciting.
Learning to find those things that are short-term boring but long-term exciting might be one of the money habits of the rich and the keys to success.
Many of life’s choices fall into two categories:
- Option A: Exciting and complex and quick, but the action rarely works.
- Option B: Boring and simple and slow, but it works nearly all the time.
The trouble is most of us pick option A
That's why you need to...
Learn to focus on what you can control
Over the years Richards learned not to worry so much
He explains: I would bring his worries to my business partner (also known as my wife.)
I would go on and on about “What if….” And when she seemed annoyingly calm, I would say, “Aren’t you worried?!”
She would simply say, “I could be worried if you want me to, but I don’t see how it would help.”
It might feel like worrying helps.
But as Shantideva said:
“If you can solve your problem, then what is the need of worrying?
If you cannot solve it, then what is the use of worrying?”
I’m going to resist the temptation to offer suggestions.
