Next Tuesday night at 7.30pm sharp I want you to do me a favour: turn off your television.
Sure, it’s tempting to watch the latest battle between a couple of amateurs singing for their spot. Let’s face it, the Acting Treasurer doesn’t stand a chance of getting the nod from Delta and the other judges.
That’s why I’m starting my own tradition this Budget night: while Wayne warbles for 30 minutes, I want you to spend this time working through three simple steps that I promise will put you in complete control throughout the ongoing financial crisis.
A big claim I know, Mister Speaker, but here goes.
1. Stop the Shuffle
If you’re like most people, your money lives in a share house called ‘online banking’ – there’s a transaction account, a savings account, a home loan, a line of credit and some credit cards.
And every payday you shuffle money around the screen: some into your home loan, some into your credit card for a bit of breathing room, and some into your savings account for daily expenses.
There are a couple of serious problems with ‘the shuffle’.
- First, the banks are very good at marketing debt, so they make it incredibly easy to use your home loan like an ATM (after all, they’re all just numbers on the screen – and they all look the same).
- Second, all this shuffling means your financial future will be tied up in the value of your home – and I’m firmly convinced that will be a wealth trap over the next decade or so.
(There are plenty of people who call themselves ‘millionaires’ because of the value of their homes. But in order to get the million bucks they’d have to sell, and then they’d be homeless millionaires.)
To stop the shuffle you need to crush the convenience of online banking, while at the same time making the process of saving completely automatic. It’s called getting some Mojo.
"I read your newsletter religiously - it's the only one I trust" Jill, Bendigo (find out why, here)
2. Go Mojo
This month I want you to go to another institution (i.e. not your regular bank) and set up a high-interest online bank account that doesn’t have a card attached to it. Inconvenient? You betcha. But it’s a great way to stop the shuffle.
Then set up a direct debit from your everyday account for a set amount every time you get paid. How much? Ten per cent of your pay is good (for a commonsense reality check on where your money is going, check out my 60-20-20 plan at barefootinvestor.com).
I call this my Mojo account, and I’ve had it for the best part of a decade. Having an increasing amount of money set aside in case of a financial catastrophe will give you a spring in your step – a strong sense of having your own monetary Mojo.
It’ll make you feel in control, but it won’t make you wealthy. That’s where the final step comes in.
3. Get a little richer every day
Most people don’t get a little richer every day. Instead they get caught up in ‘lifestyle inflation’ – upgrading cars, houses and holidays when more money comes in.
Shuffle, shuffle, shuffle.
If they invest at all, they tend to put all their savings into the share market and then freak out when it falls, and end up selling at a loss.
Let’s turn that on its head. See, we’re conditioned to think that investing is something people with slightly greying hair do in one hit at a suburban AMP office.
But the truth is that real wealth is built over decades. You can literally become a little richer every day when you understand that your most important asset is the difference between what you earn and what you burn.
So as well as opening a Mojo account, open up an online brokerage account. Then take whatever’s left over from your daily essentials and split it between the two. And it doesn’t really matter if it’s $50 or $5,000 that’s left over, so long as you:
- Make a commitment to keep it the same (or more) as you earn more money and you take that money and compound it.
If you do, you’ll be well on your way.
Am I boring you?
I’ve given you the tools, but to make it real let me tell you my personal investing strategy. Truth be told, it’s kind of boring (it’s more Bert Newton than Matt Newton).
I have a monthly direct debit into my growing Mojo account. In the past I’ve advised only having a few months of Mojo for emergencies – but I kept going for a decade now, and last year I took a significant slab of my Mojo and paid down my mortgage. So don’t limit yourself. Cash is king.
And I have my share trading account, where around 10 per cent of my paypacket goes. Because I have my Mojo as my investment fire escape, I can honestly say that share market drops don’t really bother me – it’s not money that I’ll need in the next 10 years.
But that said, I’m highly conservative. I hate losing money more than almost anything else, and that’s why I’ll only invest in established (boring) businesses that have strong balance sheets, a history of paying growing dividends, and the pricing power to pass on any cost increases to consumers.
And when their share prices go down, I buy more. These companies, like Woolworths, Coca-Cola and Domino’s (but not the banks) are not only extremely safe because of their boring dividend payments, but they have the ability to compound my wealth over time.
On Budget night there’s always a lot of discussion on the winners and losers. But let’s be honest: Wayne’s words won’t make a cracker of difference to your long-term wealth. Putting in place this simple plan will.
Tread Your Own Path!