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Wealth isn’t hard. But it requires discipline. It requires consistency. It requires a set of rules to follow to achieve your goal.
Most of us start to pick up rules over time. Which is natural. But not optimal.
You see, wealth is a game of time. The longer it takes for you to learn the rules of the game, the farther behind you will be. And the harder it will be to catch up.
That’s why it’s important to find a rule book early on.
And to follow it consistently.
In this post, I’m going to open up one of my secret plays in my rule book to FI. I’ll explain:
- What the rule is
- Why implement it (the 7 benefits)
- And a step by step How-to guide to help you implement it yourself.
Pay attention to this post. It changed the path of my family’s life in an incredible way. And I want the same for you.
So let’s dive in.
First, let’s set the stage…
This advice assumes a couple of things.
- You have started your professional career and are supporting yourself financially (at least making ends meet)
- You have found your special someone in this world – whether a boy/girl friend or spouse.
It this does not fit your current situation, no worries. The advice is universal. I just had to pick a scenario that I could describe it from. You’re a smart cookie. Take the nuggets of wisdom and find ways of implementing it to your own circumstances.
So what’s this fancy secret?
Finance is not difficult to understand. It’s difficult to do. This rule is no different. It is simple:
Live off one paycheck. Save 100% of the other.
Let me guess, you expected something more difficult or fancy, right? Sorry to disappoint you. But there is beauty in simplicity, and this rule is no different.
Especially for new couples just starting out in the world, it can be hard to learn good money management practices, and the benefits of this simple rule are absolutely incredible if you learn how to leverage it.
Let me walk you through the top 7 benefits I found by implementing this rule in my own family.
Even through the rule is simple, the benefits are remarkable.
1. Set the Tone for your Relationship – Money, Trust, and Respect
So often you read about pre-nuptial agreements, keeping finances separate, not trusting the other spouse with money, etc.
And we wonder why the divorce rate is so high in this country! Look at the level of trust we bring into our families! I argue that your time for due diligence into each other’s financial situation and baggage is before you say “I do.” Once you get on the same team, it’s time for you to truly team up and stop playing against each other!
This post is not meant as marriage advice, but there is a minimum threshold of trust required to make this step work. This financial structure is not about his money and her money, it’s about our money. It’s about thinking of your family as a single unit, each serving towards the common good of the family.
Novel idea, no?
This strategy forces you to combine your finances, your goals, and your future. You become a single, united front.
I have seen friends who run with separate, hidden bank accounts. And it’s the craziest thing. The woman significantly out earns the man in the relationship, but they have decided as a unit that they will not share finances.
So every time we would go out to dinner with them, you’d see the woman ordering from the $50 and up section of the menu, while the man would be looking for the cheapest thing on the menu!
The friction in that couple was palpable. Spending money was “given,” but there was a feeling of superiority every time I we would chat about our financial situations.
Relationships simply work better when there is singularity of purpose, unity in strategy, and cohesiveness in trust. In fact, 27% of Americans say they argue about finances more than kids, chores, work, friends, and everything else.
My family has taken quite the journey. We started out as equal earners in corporate America. I continued to thrive, and began to out earn my wife.
Eventually we decided to start a family, at which point, my wife’s income went to $0 as a stay at home mom.
Fast forward 2 years later, and my wife’s income has more than doubled mine through her discovery of starting successful online businesses through blogging!
Yet through all the ups and downs, we have never thought differently in terms of our contributions to the family. Your finances are one. Your family is one. There is comfort in that truth.
2. Supercharges your Emergency Fund
A good financial practice is to have saved up 6+ months of your necessary expenses in a savings account to protect you from disaster. Unfortunately, Americans are pretty terrible at doing this:
According to Bankrate, one in four Millennials have $0 saved for emergency.
What impact does saving one’s entire salary have on this statistic?
Let’s walk through some examples using this handy Emergency Fund Calculator:
Scenario 1: You each make $1,000 per month, and only require $750 per month to survive. Note: When I say survive, it doesn’t include your $6 Lattes or weekly trips to the movie theater. We are talking Rent, Insurance, Gas, and basic groceries here.
Let’s also assume that this couple has moderate risk tolerance, and wants to hold 6 months of living expenses. That means they will need $750 x 6 months = $4,500 stashed away for a rainy day. How long would it take for this couple?
In their fifth month, they would have a fully stashed emergency fund!! That might not have been surprising, given the easy math presented here.
Let’s make it a bit trickier…
Here we have a couple who is working towards the goal of saving an entire paycheck. And they are almost there! They require $2,100 per month, just over the $2,000 earned by Paycheck 1.
Because of their higher spending needs, they need a much larger emergency fund, $12,600. Additionally, of the $1,200 earned by Paycheck 2, they are able to save $1,100 towards their goal monthly. The last $100 are needed to make ends meet. That means that this couple doesn’t have any “fun money” … yet. Don’t worry, we’ll get to that later.
Even with the higher spending needs, this couple is able to fund their emergency fund in only 12 months! And once it is fully funded, they are able to move on to even better uses of their money towards Financial Independence!
3. Teaches you FI Superpowers Early On
Financial Independence as a concept isn’t broadly talked about in Corporate America.
People live paycheck to paycheck. They inflate their lifestyle with each raise they get. They take out loans to pay for the majority of their large purchases. And holding a credit card balance is just part of life.
Retirement happens at 65… or later. And they pray that our children are competent with money, because looking at their sad 401(k)… they’re just not sure how long it will last.
However, when you make this one small tweak to your lifestyle, you begin to see a new side of life. A new opportunity. Freedom.
The habit of saving is a gift that keeps on giving. In the beginning, yes it can sting. But as you find out that material possessions don’t lead to all happiness and you start to experience the benefits of financial security, you will never look back.
4. Reduced Stress in your Relationship
As we discussed earlier, so many arguments revolve around money. For couples living paycheck to paycheck, a single flat tire or broken window can be an incredible source of stress without the safety of an emergency fund.
And losing your job? Forget about it! That can lead to panic attacks as you can no longer afford your home, your car, or any other large purchase you are paying off.
If one of these disasters occurs, you have no choice but to put it on high-interest credit cards.
But because you’re living paycheck to paycheck, you’ll now struggle to pay off those credit cards. And the balance carries. And the debt continues to mount. And you grow complacent with the debt and the interest you are paying. And the cycle continues.
I have been blessed in my relationship to have a like-minded spouse. We have both been diligent savers well before meeting each other. And as a result, money rarely becomes a stressful topic in our conversations.
There is so much in this world to stress out about – your job, kids, schedules, chores, activities, side hustles…
Why would you add money to it if you can avoid it?
5. New Opportunities are Now Available
Have you had dreams of being a stay at home mom, or supporting one?
Want to try your hand at a risky entrepreneurial venture?
Want to take a year off to travel the world before settling down?
These are all common desires for young working professionals, but their money spending habits keep them from becoming reality!
But if you got into the habit of religiously saving half of your regular income, so many of these opportunities become totally possible!
Become a stay-at-home mom? No problem! You will have already tightened your belt to support a single income, so the transition will become seamless for you! (In fact, you’ll actually save MORE money from some of the hidden costs of working parents!)
That’s not to say being a stay-at-home parent is easy! Far from it… I don’t know how my wife does it! But I digress…
Starting out as an entrepreneur can be incredibly risky. Your income is rarely stable. You may have multiple months with barely any income at all! If you are trained to live paycheck to paycheck, this simply won’t work! You would be upside down in no time.
But with a fully stocked emergency fund and a single income covering your necessary expenses, you are free to pursue your passion and start your own small business! Any income is a plus, and those dry spells will never impact the inner workings of your family!
What passions have you been dreamt of following, but never have because you were afraid of how you’d make ends meet?
6. Your Recreation will Become more Creative
Looking back at the spreadsheets above, you’ll notice there can be little room for “fun spending.” Unfortunately, when you are just starting out, that comes with the territory.
Your income is sure to grow in the future, and you will be able to slash your unused expenses – but that can hurt in the short term.
There’s a silver lining here, though!
Relying on spending money to create fun, memorable experiences is a sign of weakness
Not every night requires $100 bar tabs, or fine dining.
There are an infinite number of ways to create lasting experiences with your family without breaking the bank. Train for a race together, learn a new skill, cook delicious meals at home, work on a side business together. The list goes on! Trust me, I am a father of 3 under 3 years old, and we genuinely prefer our creative nights at home as compared to going to a Disney park. We can focus more on the kids instead of the public. We can find creative ways to work on skills that need developing. And we just feel safer and less judged when we are making fools of ourselves!
By creating barriers on your spending, you force yourself to put forth a tiny bit of effort in creating your own recreation. This is a good thing! Take advantage of the opportunity to be the “weird couple,” that always has a crazy story to tell of how they made $50 stretch an entire weekend and have hundreds of photos to share from it.
7. Enable you to take more Risks at Work
There are risks and costs to action. But they are far less than the long range risks of comfortable inaction.
~John F. Kennedy
You have great potential. Seriously. You wouldn’t be reading this blog about improving your situation if you didn’t have the gears turning upstairs.
I’m sure you could take your company far, if you just stuck your neck out and risked it all for what you believe in.
But sometimes due to our reliance on that steady paycheck, we avoid risks and stick to the letter of the law. We literally can’t afford to take the risk, because if we guessed wrong, we may be out of a job. And if we have no savings and haven’t formed good financial habits… that’s simply not an option.
The CEO of your company didn’t get to where he is by not taking risks.
The entrepreneur making millions per year had to take risks every day to grow his company. Had to make decisions. Right or Wrong.
If you grow into the complacency of taking orders and carrying them out without your own input, analysis, and initiative – how hard would it be to replace you with someone younger, cheaper, and quicker?
You have to take risks in life. Yet so many avoid risks in Corporate America because they either
- Lack accountability, passion, or skill – or
- Can’t afford to take risks because of their complete reliance on their paycheck
But once you have diligently saved up an emergency fund, and learned how to live and thrive on less, you become able to truly take intelligent risks at work to leap frog your success.
So what is an intelligent risk? Here are some ideas:
Volunteering on a stretch project. If you are secure in your personal life, you begin to feel more capable in your professional life. Take opportunities to challenge yourself and build up equity with your boss by taking on risky projects. You will rarely be penalized for missing the mark, as your boss will know it was a stretch, and you can be handsomely rewarded if you succeed!
Saying “no” when they push your boundaries. We all have boundaries in life. Yet it seems in corporate America today, boundaries are meant to be broken. Weekends are for email catch up. Nights are filled with hours of report creation just for a 30 minute meeting the next morning. You are given a company issued phone, which means you are now available at all hours of the day and night.
When you have financial security, you have the ability to be bold. The ability to reject an order and replace it with a wiser decision is often seen as leadership potential, and can actual yield better results than if you just did what was requested.
So grow bold.
Negotiating a raise. If you have 6+ months of savings, and are in-demand in the marketplace, you should periodically position yourself for negotiating a raise. Because you’ve done some of the previous points, you’ve proven to accept challenges. You’ve shown you have grit, rules, and morals. You are who the company needs to keep on staff. They need you just as much as you need them.
So, You’re Interested. But how should you Get Started?
You’ve got credit card accounts. Multiple bank accounts. An old CD that was a gift from Gramma. It would take hours to calculate it all up and see exactly where you stand.
That’s where Personal Capital comes in.
In a matter of minutes, you can sync all your accounts, and see your full financial picture, both spending and earning.
Once you’ve signed up, you need to do the following:
1. Understand where your money is coming from, and set your goal
In Personal Capital’s dashboard, you can easily see the income you are making on a monthly basis. What you need to do is determine where the income is coming from, and what your monthly savings target is going to be. Select the income from the lower-paid partner and start with that as your savings target.
Over time, don’t be afraid to attempt to save even more. But this is a critical step in making progress towards your FI goal!
2. Determine where your Expenses are Coming From
Once you have your target, you have to figure out what is getting in the way from you achieving it.
Personal Capital makes it super simple to see all your expenses by category, automatically.
Once you know where your expenses are coming from, you’re ready to start eliminating those expenses from your life.
But which ones? It would sure be nice to have a system to follow. Oh wait, there IS!
3. Visualize your Expenses with the Value vs Cost Method
Not all expenses are created equal. Paying your Mortgage ranks a little higher than that fourth round of golf you played last week, right?
Before you start slashing expenses, you need to rank them out to determine which ones belong in the crosshairs first. I suggest you use the following method:
Value vs Cost. They are not the same. Let me explain.
Value is the utility, benefit, or enjoyment you get from the activity. For example, your home provides you a LOT of utility. A place to sleep, raise children, work. There is a LOT of value in it.
But the fourth movie night of the month? Less value.
Cost is the amount of resources something requires to have. Resources could be money (obviously), but could also be time, energy, and a myriad of other things.
Paying your rent or mortgage is one of the highest expenses for most families. But a movie night may not even rank in your top 10 expense categories for the month.
So if we are following the template above, we would place our home in the top right quadrant II: High Value, High Cost.
The movie night would probably fall in the bottom left quadrant III: Low Value, Low Cost.
Using Personal Capital as your guide, go through all your expense categories. Yes, ALL of them. Put each expense type on the 2×2 matrix so you have a clear picture of your financial life.
3. Set Monthly Goals to Eliminate the Lowest Ranking Expenses first.
Once you can see all your expenses on one sheet, you can be more strategic about your path forward.
It makes no sense to eliminate an expense that is low cost high value when you have tons of high cost low value expenses still on the chart, right?
So set a target for the month ahead. One or two expense categories should be enough to focus on. You want to make progress, but not so quickly that it shocks your system. Continuous Improvement is the name of the game.
Agree with your partner what your priority is for the next month, and set a game plan for how to achieve it.
For example, if you want to eliminate “movie nights,” from your week, brainstorm some other alternatives that can take its place. In my experience, doing something active always trumps sitting passively for 2 hours and forking over $50 for the privilege. But I’m probably biased 🙂
4. Finally, Keep Track and Celebrate the Small Wins
You have started a journey. You won’t know when you’ve arrived unless you track your progress and reflect on it. I personally track all our finances in Personal Capital, but a good old spreadsheet works fine too.
Set a monthly review period where you take a look at how your expenses of the current month compare to the previous. Personal Capital makes it very easy:
When you notice you’ve made a dent in one of your spending categories, find a way to celebrate! The path to Financial Independence can be a long and tough path if you’re naturally very spendy. So it’s good to recognize the progress as it’s made.
Phew, all that from such a Simple Strategy!
If you’ve made it this far: congratulations!
You’re taking your financial future seriously. Taking it into your own hands. It’s Simple, but not Easy.
Since I met my wife, we have been following this strategy. And because of it, we were able to effortlessly transition from dual income no kid status to stay at home mom status.
And because my amazing wife had the bandwidth to experiment with entrepreneurship at home, she discovered blogging, which is earning us over $200,000 per year in profit!
And none of it would be possible without following this simple rule. So what are you waiting for?