Money Skill #2. Control It
So, having said this, I want to teach you a simple, easy and extremely powerful way to think about your money. What Rockerfeller was teaching his kids was how to control their money. And that’s the second of the 7 money skills. Controlling every penny that flows through your life. Let me show you how to control your money by teaching you a theory I created called the Bathtub Theory of Economics..
Most people have one simple faucet or main source of income…their job. This income flows into the bathtub of their life and flows out through the drains at the bottom. Most everyone spends every penny their earn…and then some. They never retain any money in savings. They spend it all. Obviously, the only way to have an overflowing prosperity in your life is to plug up those holes and to turn on more faucets…to have Multiple Streams of Income.
How many leaks are there? I have simplified the many ways you can spend money into ten categories. It’s easy to remember the categories. Each one flows in order of their priority. According to Rockerfeller, where should the first dollars go? That’s right, to your partners. Who are your partners? God, first. Yourself, next. And Uncle Sam, third. Then, you can live maintain your lifestyle with what’s left over.
Therefore, the first category is called Tithing or Charity(which represents your contribution toward God, church, God, charity, others, giving, etc.) I have given this category the number of 1.
The next category in order of priority is called Self. Take the next 10% of your money and put it into the Self category…with a number of 2.
Next, comes your partner, Uncle Sam. The third category, then, is taxes…and I give it a number of 3.
What’s the next most important expense of your life? Category 4 is your shelter…in the form of house payments or rent payments. What comes next? The fifth category is for household expenses such as food, clothing, television, normal living expenses attributed to living in your place of residence. This will amount to your largest category. Then comes category 6…Auto. Gotta have a car. Every time you pay for gas, transportation, repairs to your vehicles, or car payments, you should put it in the category 6. Next is Category 7 for Fun or entertainment. Usually, whenever you spend money out of the home on movies, fast food, travel or toys, you should think of these expenditures as happening in Category 7. Seven is the number for fun…that’s how I remember it. Then, comes Category 8; for all forms of insurance; health, life, disability, liability, house, homeowners, etc.
Miscellaneous expenditures (including payments toward debt) come under category 9 Debt/Miscellaneous.
And finally, there is Category 10…for business expenditures. Let’s review:
Category 1 Tithing
Category 2 Self
Category 3 Taxes
Category 4 Shelter
Category 5 Household
Category 6 Automobile
Category 7 Entertainment
Category 8 Insurance
Category 9 Debt/Miscellaneous
Category 10 Business Expenses
Now, I want every dollar you spend to be labeled into one of these ten categories. I’ve kept the categories simple and broad because if it gets too complicated, you won’t do it. Even when in using a computer finance program, like Quicken, which I use, I have all my categories simplified into these 10 categories. You’ll see why in a minute.
So, let’s examine a money transaction…which I call a Money event. How many times a day do you spend money? 5 times? Ten times? Rarely more. Think of it. You only spend money a few times a day. And yet, those few decisions make all of the difference between poverty and wealth. Actually, the millionaire spends approximately one minute more per money event than the poor person. And that one minute makes a huge difference.
Let’s explore what I call the Millionaire’s Minute. If I could show you a simple one minute exercise that you performed every time you spent money…that would almost guarantee that you’d become a millionaire…would you do it? Let’s examine a typical money event.
Average people go to the store to buy something. They are in a rush, running late. They quickly snatch up the desired item without comparing prices. While they’re waiting in the check out stand they see a few impulse items they pick up. They pay for the items but don’t record the event because other people are waiting in line and besides, they’re running late. They rush off “a day late and a dollar short.”
Millionaires, on the other hand, take a few extra steps which take less than a minute. First of all, before they enters the store they decide only to buy the planned item and nothing else. Life is full of things to buy. They can’t allow their impulses to derail their decisions or to control their life. Then, they spend a few extra seconds to compare prices and to pick the best value. If appropriate, they locate a sales clerk and ask if there is a possibility of obtaining a discount in price. They make a quick mental calculation of their savings. This makes them feel good. Then, they take the item to the check out stand. Once again, they are not sidetracked by impulse buying. They select one of the three methods of payment: cash, credit card or check. They exchange the money for the items, collects their receipt, examine it for accuracy and put it in their wallet or purse for filing later. Then, they make the most important step…they record the event by writing down the purchase, determining which category of spending it was made in, calculate the remaining balance in their account. Later, at home that day, they file the receipt in a well organized manner for easy retrieval.
All told, on average, the millionaire spends about an extra minute per transaction than the poor person. But look at the savings in time and money. The millionaire saves from 10-20% in comparison shopping. (What if you could lower your annual spending by 20% without a lot of sacrifice?) Then, by investing an extra minute to record the transaction and to file it properly, she has at her fingertips a vast source of information. She knows her current account balances. She can compare he spending to previous months and notice trends. She is more aware of her actual spending which gives her much greater control of her finances. She can calculate her tax consequences in minutes not days. She can back up her tax decisions with instant documentation. In a case of dispute, she knows where, when and how she spent her money and has the receipt to prove it. She is in control. And the resulting peace of mind creates a feeling of power. This increases her confidence, creativity and judgment. She makes fast, correct, decisive decisions. This gives her that secret millionaire’s advantage.
So, from now on, every time you spend money take an extra minute to do these simple things…
1. Plan your needs and procrastinate your wants
2. Shop for value
3. Ask for and expect a discount
4. Examine your receipt. Categorize your receipt. Actually write a number from one to ten on the receipt…so that you mentally decide which area of your life you are spending money on.
5. Balance your accounts…whether it’s cash, check or credit card. File your receive when you get home.
It’s simple. Get ten manila folders and number them from one to ten. Don’t throw your loose receipts into a shoe box. File them daily. This will get you in control of your finances in a few short weeks. Now, there are lot of advantages of doing it this way…but let me give you one big one. Taxes. Most of us don’t get receipts, and when we do, we forget what it was for. Suppose you buy a box of pencils for your small business…and everyone in America should have their own small business. This is a tax deductible expense. Uncle Sam lets you take this expense off the top before you calculate your taxes. Well, if you’re in the 30% tax bracket, then every dollar you categorize as a tax deduction gives you a 30% return on your money. Did you get that? Hello? Where can you, today, get an instant 30% guaranteed return on your money? From Uncle Sam. When you get and keep the receipt for a tax deductible expense and then deduct that expenditure on your taxes, you’re making 30% on your money…30% return on your money is the kind of return that makes millionaires…fast.
I heard once, I don’t know if it’s true but I believe it, that because of tax deferred or tax free investments the billionaire Ross Perot only pays 6% of his total yearly income in taxes. He understands the value of money and how to plug those leaks…and that’s why he’s a billionaire and you and I aren’t…yet.
The key to financial planning is cash flow management. You’ve not only got to get the cash to flow into your bathtub. You have to manage the leaks so that there is money left over at the end of the month (profit.) With this profit you buy stuff…assets. You may also buy stuff by going into debt. The object of the money game is to accumulate enough assets so that eventually the income from your personal assets will support you instead of your personal skills.
Are you good at turning on faucets? Gotta get those multiple streams of income flowing into your bathtub.
Are you good at plugging leaks? Gotta plug those leaks.
Are you good at getting stuff? Are you accumulating assets?
Are you good at repaying debts? Gotta stay out of debt.
The better you are at managing and controlling these four activities, the wealthier you’ll become.
Wealth Skill #2. Control your money. Start today to gain a greater control over your money by doing the millionaire minute…you’ll be amazed.
(Continued in Prosperity 7 Secrets Pt 5…)
Authors Details: Robert G. Allen – Prosperity, 7 Secrets.
His colossal bestseller Nothing Down established Robert Allen as one of the most influential investment advisors of all time. Also the author of ‘The One Minute Millionaire’