The concept behind defense, in regards to financial literacy, is instead of preventing the other team from getting more points on your basket or goal, but to KEEP what you earn. Your opponent is previous versions of yourself. Can you earn more while keeping what you earn? Let’s start with income.
We all do different things for income, but we all have income. It is in different amounts based on what you do with your time. Financial literacy is the same for everyone regardless if you are an individual, household, small business or a giant corporation, and where you live. Your income should match or exceed the cost-of-living expenses for where you live. Generally speaking, the more specialized your labor is, and your ability to do things few other people can do, your income will be higher. Likewise, if you are being paid to do something that is easy to train the vast majority of people to do, your income will be on the lower side.
If you spend 20 years going to school to become a neurosurgeon, learning everything there is to know about the human brain and how to perform lifesaving surgery for patients will pay you magnitudes more than learning how to be a janitor or a taxicab driver. It takes mere hours to learn the ropes of being a janitor or a taxicab driver, but it literally takes years to become a neurosurgeon.
As you start to earn more money, your expenses typically follows. A bigger paycheck will lead to a bigger house and maybe house payment, a bigger car and car payment, maybe additional cars. The house will have to be filled up with things so it isn’t empty, and the cars will need to be driven (why pay for something if you aren’t going to use it?) No point in purchasing more cars just to have them collect dust in your garage and only be driven once a year. But you’re still paying for it being there every month.
That isn’t keeping your income. That is giving it to others in exchange for their product, service or thing. That is the exchanging part of money. What is being alluded to here is the collection of your money, by you, so that you can keep some of all the money that flows through your hands throughout your life. This is usually achieved by managing your income on a percentage basis. Of course your house or rent payment will be a set amount, your car payments will be a set amount and everything else you purchase will be a set amount, but the amount you pay yourself will be set by a percentage. In a perfect world, the steps taken should look like this:
- Income received (whatever you set your income at).
- Pay yourself first and foremost at least 10% (regardless of your other bills, you as an individual is your most important bill to pay. Pay yourself first). This money can be deposited into any account that you like. One with a higher interest rate or an account that allows you to invest it and put it to work for you 24/7 is the ideal type of account (Robinhood, Acorns, Stash, high-yield savings).
- After paying yourself at least 10% (nothing wrong with a higher percentage, 10% should be the minimum). Fund any kind of retirement accounts that you are maintaining and funding yourself, such as IRA’s and small business retirement benefits. 401K’s are funded by your employer and the money never sees your personal checking account, the money goes straight into your 401K that is being maintained by your employer and whatever financial services company they are working with. Since this is money that you don’t put your hands on until retirement, it shouldn’t be included in your budget for your regular take-home pay. Take advantage of all the 401K benefits your employer offers, because it is additional pay and value that you get to take ownership of once you hit retirement age years. This is one part building wealth and keeping it, the defense. Acquiring additional money to work for you in addition to your regular income.
- Structure the size of your bills that will best allow you to pay yourself first. Meaning, don’t not pay yourself first because you have a massive house payment to pay or car payment obligation. If you find yourself in that situation, then a reduction in bills or an upgrade in your income is needed to right the ship and get back to building A Wealthy You.
- A generic structure that has been useful is;
- Pay yourself 10%
- Fund retirements. The rest is treated as 100% of a pie is left. No one has eaten from it yet.
- 30-40% housing expenses (mortgage payment, insurance, anything associated with your home).
- 10-20% transportation expenses (debt payment, insurance, oil, car repairs and maintenance).
- 10% utilities (gas, electricity, internet).
- 30-40% for food and groceries.
- 0-10% for wants, luxuries and giving’s
- 0-10% for credit card and debt expenses (not house or car payment).
These are all ranges those respective expenses should be in relation to your income. I realize it doesn’t exactly add up to 100% in this example, but your income is 100% and those percentages offer a window or wiggle room for you to adjust to your income. Maybe you live in an expensive city and your rent or mortgage is higher, but you can afford this by dropping transportation costs by not having your own car and just using public transportation. No car payments, insurance, gas, and maintenance gives your house fund a bigger percentage of your income. Same thing with food, do you eat a lot or eat out a lot? Do you eat just the right amount but eat whatever you can grow and spend very little money at grocery stores? Those are different shaped windows for structuring the size of your bills.
The main theme I am trying to nail home here is to PAY YOURSELF FIRST before you pay others so that you can KEEP what you earn your entire working life. This is the DEFENSE of Becoming The Wealthy You.
Next week, it is irrelevant how much you earn.
Become The Wealthy You