There are a lot of people who may have learned a bit about chess. They might have learned how the pieces move from their dad and they learned a few opening moves and some principles even but they really aren’t very good and even a semi-decent player can absolutely crush them. I think most people fall into this category, financially. They have a vague idea of some of the pieces, some of the things they should do. They know they should probably pay into their pension. It’s a good idea in theory not to get into too much debt. They know they should be saving something for the future but it’s just too much effort to learn. They get by month to month but they are likely to get crushed if anything out of the ordinary happens (and trust me, there’s always something out of the ordinary going on).
Then you’ve got the good players and the Grand Masters.
If you take time as a chess player to learn about the tactics, the openings the endgames you can become an incredibly good chess player. These are the players who have tactics during the game. The ones who plan 4,5,6 7 or more moves ahead. They know what they are doing and they are pretty good at executing. The thing is as well with chess is that you don’t actually have to be that good to be a decent rank. I’m rated around 1000 on chess.com and I’m around the 75% percentile of people who play on the platform. And I still don’t even feel like I’m that good! I’m always playing against people who are better than me and you can think, I’ll never get to that level but you forget how far you’ve come. Similarly from a financial perspective… you can learn the rules and the tactics and the moves you need to make to become significantly better off financially which will then affect every other area of your life. (Incidentally, it can have a negative effect on your spiritual health unless you take care to keep that in check on the way up!)
You can make significant progress and then there will still be the Grand Masters ahead of you. These are the folk who know the game so well, they don’t even start thinking about what moves to make until they are 15,20, 25 moves into the game. Their prep is enough so that they build a solid position before going to battle.
Then they are playing at such a high level that the smallest of advantages can make all the difference.
These are the folk that are so far ahead financially they don’t even have to try any more!
So what are these rules that you need to know to win the money game. It’s very simple. These are the basic, kind of obvious ones which are intuitive and logical.
- Earn more than you spend.
- Use your surplus to buy freedom.
- Don’t go broke.
If you spend more than you earn then you’re going in the wrong direction. According to the ONS, the Office of National Statistics 35% of households in the UK spend more than they earn. If you’re spending more than you earn then you might be running down any savings that you have (which given the right circumstances could be something you choose to do for a short time) but more than likely you’re going into debt and the longer it goes on, the further into debt you’re going which is undoubtedly going to hinder the choices you get to make in the future and massively increases the chronic stress, the kind of stress which is always there and never stops, in the present.
If you spend everything you earn then you’re just staying still financially. You are coping with day to day living but would really struggle if anything major were to happen. Now this can happen at any income level. You can be earning minimum wage and spending everything you earn or you can be on £100000 a year and still be staying still financially if you’re spending all of that £65k that you have left after taxes. According to the UK Strategy for Financial Wellbeing, there are 11.1 million adults across the country who are classed as inadequate savers. This equates to over half (56%) of all working-age adults in the UK, and 61% of the total adult population.
If you spend less than you earn then you’re moving in the right direction financially. Once you’re doing this it becomes about how quickly you can win the game. And remember winning isn’t an end point. It’s a journey and every step you take on the journey takes you closer to where you want to be but more importantly, gives you more and more freedom and options as you progress. If you’re saving towards winning the money game this immediately starts to give you options. If you’re saving 5% of your income then you win in 60 years. If you can double that and save 10% then you can win in 50 years if you can double that to 20% then you can win in just over 35 years. But remember with every pound saved, it’s one pound worth of freedom in the future. Some people think of saving as somehow depriving themselves. I think of saving as spending on future me. I see saving as spending on giving myself options. You can go to the extreme when it comes to delayed gratification but there has to be some level of denying yourself now in order to achieve better things in the future. In fact, the biggest predictor of financial success is the ability to have a long time horizon for money. If you spend all your little tokens, your little pounds as soon as they come through the door then your time horizon is too short. When your little pound tokens come through every month in your pay cheque, if you can imagine what they can do for you in the future, it makes it easier to put them to work towards that purpose now. I understand at the moment things are tight for a lot of people and it’s all some people can think about is how I’m going to pay for food now and heating? Do you know who’s not worrying about these kinds of things? It’s the people who have the cash available or the wiggle room in their budget to cut things from their lives. Once you come through these difficult times, make a promise to yourself that next time things will be different. You’ll have some savings to fall back on and some wiggle room in the budget.
Notice how I said earn more than you spend. Most financial gurus will say to live within your means and spend less than you earn. I’d like to encourage you to think slightly differently about the problem. Instead of spend less than you earn, earn more than you spend.
Let me start here with spending less. Spending less, for the vast majority of people, is where they should focus their energies first. For most people, it’s easier to cut back on a few non-essentials than figuring out how to make a bunch more money. Having always been fairly frugal and responsible with my money, I get a bit frustrated with some of the money-saving tips out there because I think to myself, well I don’t have $100 worth of subscriptions I don’t use and I’m not going to save hundreds of dollars by not eating out because I don’t really eat out a lot. I prefer the food that my wife and I cook at home. But to most people, they may actually well worth thinking about. I was chatting to one of my mates recently and he said he spend £600 in a month on eating out in the run-up to Christmas. Here’s a chap who I would consider to be of modest income, not minimum wage but not massive either, fairly responsible with money and yet almost a third of his take home pay went on eating out. It’s not my job to judge and I don’t judge him for doing that. If that’s the choice he wants to make then great and if it’s the choice you want to make then that’s absolutely fine. Just make sure it is something you’re consciously choosing to do rather than it be something that just happened because you’re not paying attention, as was the case with my friend. He said he only realised when he went back through his statements and saw that £10 on lunch one day, £10 on lunch another day. £30 on drinks out after work one night, £60 a couple of times for meals out, a few takeaways etc was just adding up without him realising.
I do have a YouTube video on my channel Dafydd Morse which I’ll link to in the show notes, called 9 things to stop buying NOW to save £66,323.20. I do come across as smug according to one or two people so apologies for that but there are some really good tips in there for you to check out.
In fact I’ll go into more detail on each of these rules in the next few episodes of the podcast but there are so many ways that people can cut unnecessary spending from their budget if they pay attention.
It’s a lot more fun thinking of ways to save money when it isn’t out of necessity. Having to consciously think about every purchase because money is in short supply is stressful and difficult. Consciously thinking about every purchase because you’ve got a higher purpose you’re working towards is easier and much more exciting!
I love saving a few bucks as much as the next chap but there’s only so much cutting you can do.
There comes a point where you can’t realistically cut any more because you’re already on an absolute essential budget or it’s too painful to cut back any more and you don’t want to make the required sacrifice or you decide that the relative payoff of having it in your life is well worth the money that you spend on it. Once you reach that point of not being able to cut anymore then in order to increase they amount you have available to saving and investing you have to earn more. There are many ways you can go about earning more money and I want to do a dedicated episode about that so keep listening out on the airwaves and make sure you’re subscribed on your podcast app of choice in order to get that when it comes out.
The second rule is: –
Use your surplus to buy freedom.
When you start earning more than you spend you’re going to end up with more money under your stewardship each month. If you are starting from a point of being in debt then I would encourage you to start getting back to zero. If you’re in debt then you’re a slave to whoever you’re borrowing from. You’re not free to do what you want with the money you earn. You have to earn money and that money is already accounted for before you’ve even got it. That money you’re earning, you’re earning for someone else. You don’t have the freedom that comes from deciding what to do with your money. Your freedom is being taken away by someone else. You may not be owned by someone else but your efforts and your money is. So get out of debt. It’s a serious condition. Most people listening to this podcast will have the ways and means to start chipping away at the debt. Treat it like an emergency. Using your surplus to pay off debt is an incredibly liberating first step towards buying freedom.
Another thing that you can do with your surplus in order to buy freedom is start building a freedom fund.
Some financial gurus will say save an emergency fund. This is a pile of money that you can use if an emergency comes up. Your boiler breaks and it costs £5000 is the classic one. The render on your extension starts to crack and you need to spend £3000 to fix it. Your car fails the MOT and you need to buy a new car so you spend £6000 on a new car. You crash your bike and need to spend £500 on fixing that. You lose your job. The main earner in the family becomes sick. Anything could happen. In fact there will always be something or another that sucks our money. I saw in a study from PEW research that 60% of households faced a financial emergency in the last 12 months. 1/3 of families experienced more than one. This is an excellent idea, (although I’m sure I could come up with arguments why you don’t need one but that is next level stuff. We’ll leave that for now.)
If you have 3-6 months cash saved up in an easily accessible place then fantastic. 6-12 months, even better!
But what this find can also do is provide an opportunity to do something different. To make a change in your life. To take a risk that you just couldn’t justify without that runway. When I decided to retire from teaching and pursue my creative dreams, the decision was made a bit easier by the fact that I knew I could earn nothing for a year and we’d still be ok. Having a freedom fund allowed me to change my life in a way that would have been much more difficult to do without that safety net.
When I was a teenager, after my A Levels I went on a camping trip with my mates to New Quay, Cornwall for a week. When I was there I met a group of electricians who would work until they had saved up enough money to go surfing for a couple of months at a time and then when the money ran out they’d go back to work and do it again. Although I didn’t think much of it at the time, this was the first time I’d encounter this idea of financial freedom. I’m not saying that you should do exactly what they did but it opens your eyes to a different way of thinking other than, get a job, get a high cost of living lifestyle and then be stuck in the job you’re doing because you can’t afford not to work.
I am saying that having 1 month of expenses saved up can allow you to start thinking about doing something exciting and different. Maybe you do want to take a month off and go surfing every day in Portugal. If you have that financial buffer in order to do it, it becomes a possibility rather than something you automatically dismiss because you can’t afford it.
Having some amount of savings in a freedom fund can allow you to start a business that has the potential to make more than you earn at your job. It gives you the flexibility to start living on your own terms.
This is of course only one type of freedom and this is the Life to the Full podcast so it needs to be mentioned. There are certain freedoms that are far more important than financial freedom. Freedom from anxiety. Freedom from physical ailments, freedom in time. Spiritual freedom. But that’s a topic for another day.
The number one best thing that you can do with your money to maximise future freedom is buy stuff that goes up in value and makes you money rather than something that goes down in value and costs you money. If you follow that rule, you won’t fail to win in the long run.
This is otherwise known as investing. We can do a more in-depth episode on investing at some point but that simple definition of buying stuff that you expect to go up in value and that makes you money is a good place to start. That can be stocks and shares, it can be property, it could be a business. This is what people who want to be successful financially spend their money on. When I was a teacher, I earned a modestly decent salary. It was above the median wage but certainly not the kids of sums of money people normally think of as being rich. I chose to spend my money on buying freedom for myself in the future but buying property and stocks and shares and I was able to step out of teaching after 14 years to do something different that I wanted to do. Most of my colleagues did not do this and when I announced that I was leaving were full of questions of how I could afford to do that. They had chosen to do something different with their money. Some had been teaching for many years longer than me but had nothing to show for it in terms of assets. I’m not saying this to throw them under the bus but merely to point out that taking ownership of your financial life can give you options not available to others.
As I said, I’ll go into a bit more detail at some point in the future on how to invest but for now I’d love you to commit to joining me on the journey to financial health.
Rule number 3 Don’t go broke
The last thing you want to happen is to make all the right moves financially and then have your plan completely destroyed by an event that may or may not be beyond your control.
If you have a propensity for gambling and you bet it all on red and you lose then you’ve just destroyed all that work you’ve done over the years.
But it doesn’t have to be gambling. You could lose it all if you invest in the wrong thing. Investing in a company that goes broke can be bad. It means you lose all the money that you put into that company. If you put all your money in then you lose all your money! You can avoid this by not putting all of your eggs in one basket, which is the definition of diversification. According to legendary investor Warren Buffet diversification is protection against ignorance. I don’t know about you but I don’t think I am the world’s best investor. I don’t think I’m the world’s best anything! I know that there is a lot that I don’t know which is why I’m invested in lots of different things, property, index funds, individual stocks (not recommended!) Bitcoin, gold. I don’t think I’ve got enough of an advantage over the average investor so I invest in pretty safe things, in general.
It doesn’t even have to be anything you do. You could be incapacitated from work due to having a drunk driver run into you. You might have a child who gets ill and the only way you can save them is by paying for cutting edge medical services that aren’t available on the NHS. Or if you’re in the US your child gets seriously ill and you have to go into medical debt.
You can do things to make sure you don’t go broke, like diversify your investments or make sure you’ve got the right health insurance, life insurance, critical illness cover etc. This means that if disaster does strike, there will be plenty of other things to stress about but money isn’t one of those things.
There are a few extra rules that are especially for you wonderful people who have listened so far into the podcast. These are some money rules that are not so intuitive and obvious but if you internalise them and live them, they are the real life transformers. These are the ones that I want you to consider.
Bonus rule number 1. Educate yourself.
Learning the rules for the money game can’t be done in a single podcast episode. It probably can’t be done by just listening to one person’s advice. I would encourage you to listen to podcasts, watch YouTube videos, read books. Reading the book Rich Dad Poor Dad fundamentally changed the way that I think about purchases. Listening to the Property Podcast is what gave me the courage and inspiration to start investing in property. Be a learner.
Bonus rule number 2. Do the thing.
I love teaching people about money and finances. I’ve thoroughly enjoyed making this podcast for you with the three money rules. But if you don’t take action then you’re worse off than if you hadn’t listened at all to the podcast. You need to do the thing and take action to take the next step with your finances, whatever that may be for you. Why do people not do this? The same reason people don’t go to the gym. They know they should but there are any number of reasons why they don’t. You could say I’m worried about what other people will think about me. I don’t know what to do when I get to the gym. I don’t like the gym. Doing the thing is the only way you’re going to actually change your situation.
I want you to become the kind of person who takes action in your life. I want you to become the kind of person who values your future self. I want you to be the kind of person who does the thing even when it’s hard.
Bonus Rule number 3. You’ve got to control money or it will control you.
A word of caution. Becoming financially healthy is important but if you focus too much on it it can consume you. It’s like physical health. You can start on the right path of weight loss and eating healthy but it can become an obsession. You can lose too much weight and you can lose your physical health. You can get too obsessed with eating healthily and it ruins your mental health. The same is true with financial health. You’ve got to control money or it will control you.
One way to make sure that money doesn’t get too strong a hold on you is to give it away. How can giving your money away help you financially? I have never come across anyone who gives away 10% of their income and is not to some degree healthy financially. You might say that of course, those people who are doing well for themselves are able to give away 10%. I would argue the other way around. I would say that the discipline of giving away 10% of your income is the cornerstone of taking control of your money and telling it where to go. If you have to manage your budget after giving away 10% of your income then you have to really be on top of things and paying attention. In fact the act of paying attention is the first step towards any sort of positive change.
I have some cynic friends who say “Ah, the church, they’re always after your money.”
But it’s actually good for your own wellbeing to give money away. People who give money away will know of the joy that it brings and a sense of contribution to the wider society. There was a study conducted by the Harvard Business School back in 2009 which shows the benefits of giving money away and the good feelings that charitable behaviour can induce. I’d love to do an episode on that in the future too so stay tuned.
Finally, bonus rule number 4. Be content with what you have. Wherever you are on your journey towards financial health there will always be someone ahead of you. Unless you’re Bernard Arnault, who as far as I’m aware doesn’t listen to the podcast. He’s not part of the Life to the Full community. There will always be someone ahead of you. In fact even if you are Bernard Arnault, it’s still possible to be discontented with what you have. Get in touch Bernard to let me know your thoughts!
Learning to be content whether you have a lot or a little is one of life’s hidden secrets.
The word enough is an important one to embrace. I tell people that one of my superpowers is the ability to both be absolutely content with where I am in each area of my life whilst simultaneously holding a desire to improve in every area of my life. Having that contentment brings an incredible sense of peace even when things are not as good as I want them to be.
I want to leave you with a reminder of bonus rule number 2. Do the thing. I want you to identify one area in your financial health that you want to do to improve. Now do the thing.