Transcription
If you spend $5 on a morning coffee on your way to work, $15 on a nice lunch from the food truck, $4 on overpriced transport, $2 on a sweet treat, and $140 on unwanted subscriptions every day, then that's the same as spending $10,000 every single year.
This is the reality for most people. As soon as they get paid, the money just seems to disappear, and that's because they don't have a paycheck routine. This is so important because being careful with my money in my late teens and early 20s was the thing that enabled me to become the first millionaire in my family.
So, in this video, I'm going to be talking about the five things I did every time I got paid so you can apply them too and hopefully achieve even better results. This will not only help you save extra money but also build your wealth, and the beauty of all of this is you won't have to work any harder than you currently do, right?
Let's imagine you've just been paid. The first thing you should do is separate your wants and needs. Believe it or not, this is one of the hardest things for people, even though it sounds simple. Especially nowadays, most people are used to such a high standard of living that they find it hard to cut down on their little pleasures. These might seem small and insignificant, but in the long term, these little pleasures are actually robbing you of your financial freedom.
Even if you think this doesn't apply to you, I still want you to do this exercise. You might surprise yourself with the things you uncover that are draining your money. So, grab a pen and a piece of paper and split it into two columns. So you've got wants and needs. Now, get some of your recent bank statements. It's probably best to get around 6 months' worth and start highlighting all the things you repeatedly spend money on every month. For now, let's ignore the one-off purchases unless you're repeatedly buying a lot of random stuff, then this shouldn't be a huge issue. I'm more interested in focusing on those little purchases that stack up over time.
Once you finish doing that, it's time to sort them into the correct column. Needs should be things like rent, insurance, bills, and other utilities. The rule is, if you can survive without them, then it's not a need. Your wants should be all the fun stuff like nights out, restaurants, bowling, golf, whatever floats your boat.
Once you've completed both sides, then it's time to figure out how much each column cost per month. Let's start with needs. Let's say your rent, insurance, bills, and utilities add up to $1,200 a month. This is the bare minimum you need to get by each month, also known as your financial baseline. Once you know your baseline, subtract it from your monthly income to see how much you've got left over. Many people say your financial baseline should be under 50% of your total income, but to be completely honest with you, I think it should be closer to 25%.
Now, don't treat this needs column as something you can't change, as there are things you can do to bring down the costs but still meet all your basic needs. You might need a car, for example, but it's worth asking yourself, do you need a car that costs so much? The same goes for where you live. Some apartments can be mega expensive nowadays, especially in city locations, but this is where you need to start weighing things up. Would it be cheaper to commute each day? Probably. So, consider moving somewhere that you can actually afford. I mean, if you can share a house for a year to save up some money that you can invest, which could help you buy your dream home, why wouldn't you?
Look, maybe you don't want to cut back anymore, and that's completely fine, but it's worth seeing if there are some areas you can save money without impacting the quality of your life too much. If you can't reduce your bills, you're going to have to increase your income, which is completely possible by getting a promotion or starting a side hustle. Remember, your earning potential is always higher than your saving potential.
I know making your needs cost less than 25% of your paycheck might sound a bit impossible right now, and how it might sound coming from a boomer millionaire, but I really do understand what it's like to earn very little. I didn't grow up wealthy, and it took me a considerable amount of time to boost my income to hit a financial baseline of 25% of my salary. But trust me, if I can do it, so can you, especially with all the online side hustle opportunities you can take advantage of. So, don't think I'm just saying, "If you're poor, then just earn more money." I understand there is much more to it than that. Just treat my 25% rule as a target to work towards.
Now, for the wants column, add them all up and subtract them from your wage. Ideally, this should be below 25% of your paycheck because we need a decent amount of money for the next steps to start getting you ahead.
The second place your money should be going is into a high-interest savings account. So, in an ideal world, you'll have about 50% of your paycheck left at this point. Most people would just tell you to save all of it. However, that's not going to help you build your wealth. Instead, I recommend sending 20% into a high-interest savings account. It's best to use a different bank to your everyday account, as otherwise, it's just too tempting to spend it. Some great options are Chase in the UK and Ally Bank in America. I say high interest, but that's all dependent on when you're watching this video. Currently, my savings account gets around 4% interest a year, which is definitely better than my current account, which is around 0.05%. I know some of you are already commenting, "I know a bank account with 7% interest." Don't get me wrong, this is great as long as you don't have to lock away your money for a set amount of time and the bank is reliable. The whole purpose of this savings account is to act as a safety net that you can withdraw money from in an emergency. It's not there to make you money, so locking it away for a certain amount of time actually completely goes against the point of doing this.
I can't even begin to tell you how important it is to have a safety net. Now, I know you've probably heard this a thousand times, but that's because it's great advice. Life isn't smooth sailing, and at some point, an emergency will come your way. This pot of gold will always be there for you when you need it. So, say you got sick and couldn't work, or the car broke down, you'd be able to cope with this situation just fine. I must reiterate that this money is only to be used in serious situations and not just something to dip into when you're running low and want that extra pint of beer. It's just shocking to me that as of May 2023, one in five Americans have no emergency fund at all. So, if something went wrong, which it will, they have no way of coping with it and would most likely have to take out a loan, which most of the time ends up with them paying crazy interest rates and falling even further behind.
So, how much should your emergency fund be? Well, I'd say your emergency fund should be 3 to 5 months of your baseline figure that we discussed earlier. Even better if you can stretch that to 6 months. So, once you've put by 20% of your paycheck for enough months to hit this figure, then you can allocate more money to the next places we're going to be talking about.
In an ideal world, you should have 30% of your paycheck left by this point. So, where should you put the rest? Well, next is the only place you'll ever get a guaranteed return on investment. Let me explain. Normally, if someone tells you they can make you a guaranteed profit, then I'd say run away as fast as you can. It's normally the grifter feeding people this garbage. However, in this instance, it's 100% true, as I'm talking about paying down your high-interest debt. I mean, why bother investing in stocks for a possible 8 to 10% return when you can have a guaranteed 25% return by paying off the debt that's constantly eating into your wealth every single day? It's kind of like someone asking you what the best foods are to eat and exercise routines to follow while knowingly having a parasite inside their body sucking away all the nutrients. Of course, a doctor's main priority is getting rid of that parasite, as it's pretty much guaranteed that you'll feel better.
So, if you have high-interest debt, then I'd recommend putting the remaining 30% of your paycheck towards paying it off. There are two really common methods that you can use to pay down your debts. The first way is the Avalanche method, and this is the most logical way to tackle debt because you pay off the debt with the highest interest rate first. So, let's see how this will work in the real world. Imagine you've got three different debts: debt A is for your credit card, and it's $5,000 with an interest rate of 20%; debt B is a loan from your family of $1,500 with no interest rate; and debt C is a car loan for $2,500 at an interest rate of 15%. If you decide to pay $500 per month towards your debts using the Avalanche method, this would firstly all go towards debt A until it's paid off, as it's the highest interest rate. This would take around 13 months, and you'll end up paying $515.22 of interest. After this, your $500 payments would go into debt C, and it would take a further five months to pay off that, which would include $98.30 of interest. Then, it would finally be time to attack debt B, as your family are probably getting a bit impatient for their money. This would take 3 months, and obviously, you'd pay no interest. So, with the Avalanche method, you'd be debt-free in 21 months and pay approximately $613 in interest.
The second option is the snowball method. This is the psychological way to tackle debt because you pay off the smallest debts first. The thinking behind this is it makes you feel like you're making faster progress. So, you'd pay debt B first, followed by debt C, and then finally debt A. However, if you use this method, it would take you around 23 months and cost approximately $1,700 in interest payments. That's 2 months and over $1,000 more than using the Avalanche method. So, if you can stick to the logical approach, it'll be worth it in the long run.
Once you finish building your safety net and paid off any high-interest debts, you can put that combined 50% towards growing your wealth. That's why place number four is a tax-advantaged investing account. When you get your paycheck, income tax gets taken out of it right away. Go to the store and buy something, and you run into sales tax. If you own a property, you'll pay property taxes every year. Even when you invest and eventually make a profit, you'll be hit with capital gains tax. Unfortunately, I can't help you with most of them, but luckily, there's a legal way to avoid paying capital gains tax on your investments. If you're in the UK, you're going to want to get yourself a Stocks and Shares ISA, and if you're in the US, you should get the equivalent, which is a Roth IRA. They both have different rules, which I've discussed in past videos, but the bottom line is, both these accounts allow you to invest without worrying about taxes.
If I were you, I'd put 35 to 40% of your excess money into one of these accounts and invest it in a low-cost index fund like the S&P 500. Over the years, this has made me on average around about 8 to 10% tax-free per year. Of course, I'm not a financial advisor, and this shouldn't be taken as financial advice. Stocks can go down as well as up, so it's important to understand the risks involved. Just imagine if you invested $250 per month, then assuming an 8% average annual return, you'll have $1.3 million in 45 years' time, completely tax-free. Feel free to head over to the compound interest calculator website to do the math for yourself. I understand it's a pretty slow way to build wealth, however, if you're consistent, then historically, it's proven a very successful strategy.
One of my favorite investing platforms is Trading 212, as they offer Stocks and Shares ISA. Since I was planning to talk about their app anyway, I reached out to them to see if they'd be interested in sponsoring this portion of the video. They agreed and are also offering a free fractional share worth up to £100 to anyone that uses the code TILBURY when they create an account. Plus, you can get more free fractional shares by inviting your friends. Both of you get a free share as long as they fund their account. I found the best way to invest is to set things up on autopilot. The aim is to reduce as much of the friction as possible between you and your investments. We just get in the way of ourselves most of the time. That's why it's best to just set up auto-investing. It gets the money away from you, and most of the time, you don't even notice it's gone until you check your investing account and have a nice surprise.
My son has actually been doing an experiment on Trading 212. He started investing £5 a day, which is about $6.50, which is the average price of a coffee a day, into the S&P 500. It's now been almost exactly a year since he started this experiment, and as you can see, he's actually invested £1,053, and his investment is now worth £1,197, which is a 13.68% return on investment. What's even more amazing is that he completely forgot about this experiment until the other day when I asked him about it. It was a lovely surprise.
If you want to set something like this up too, then it's really simple. I'll walk you through it now. Once you've opened an account and used the code TILBURY to get your free fractional share worth up to £100, just head over to the portfolio icon and then click on Pies, and finally, create a pie. If you just want to copy what my son's been doing, then click on Build a custom pie, add instruments, and then search for S&P 500. There are lots of different ones that pop up, as there are different companies that offer essentially the same thing. I personally like Vanguard the best, as they're one of the oldest and most trustworthy companies in the game. Your grandad will probably even know about them. I also prefer the accumulation fund, which is this one here, as it automatically reinvests your dividends, which is essentially a reward the company gives you for holding their stock. So, just click on the fund, add to pie, and then this little arrow, and then make sure to select auto-invest before pressing next again. Here you can choose how many years you want to automatically invest for, how often you'd like to invest, and how much you can afford. The longer you can keep this going, the better. You won't always make a profit, however, you have a better chance if you keep your money invested for over 10 years. It also gives you a core value projection based on actual stats. My son's actually outperforming his at the moment, but of course, take it with a grain of salt, as nobody can actually predict what the stock market is going to do. You can build out more complicated pies with many different stocks, however, I think for 99% of people, it's much better to just keep it simple. I used to think of this style of investing like my insurance. Even though your capital is always at risk when you're investing, that's just how I saw it. I knew I wanted to be a millionaire one day, and in my worst-case scenario, I'd have to wait until I was old and gray. Of course, I managed to make my first million a lot sooner through different businesses, but that didn't stop me from investing for the long term at the same time as building those businesses.
The fifth place you can put your money is in high-risk, high-reward plays. Now, this isn't for everyone. So, if you're happy waiting years to make your first million, then that's absolutely fine. However, if you're anything like me when I was younger, then you'll want to make it a bit quicker. Most people online will either teach you the slow lane of getting rich, which is the investing strategy we just discussed, or the fast lane, which involves taking more risk in the hopes of getting greater rewards. I honestly sit in the middle, as I've traveled down both of these paths. So, if I were you, I'd put 5 to 10% of my paycheck towards starting a side hustle or full-blown business. You may think that doesn't sound enough, and that you should skip the investing and put all your money into this, but I have a different opinion. When you have less money to play with, especially in the early days of starting a side hustle, you actually become more creative with how you use it, which lets you find gaps in the market that most people with money just can't see.
Now, with the final 5%, I'd make the riskiest investment of them all: cryptocurrency. I've avoided talking about this in my videos for a long time, however, it's undeniable that it's gaining popularity year after year. I've got about 5% of my investment portfolio in Bitcoin and Ethereum, as I believe in the long-term potential. However, I'm very aware this is very risky and it could all go to zero at any point. So, as long as you're okay with that, then it's worth considering.
If you want to know why net worth goes crazy after you save 100K, then you can watch this video next, but don't click on it just yet. Make sure to subscribe if you want to grow your wealth. Okay, I'll see you over there.