Reflecting back onto my life and counting my biggest regrets, the most pivotal is that I did not learn the art of financial literacy any sooner.
While it is never too late to get started and I am truly grateful for the opportunities live has presented to me, there are certain rules I wish my parents would have taught me that would have accelerated my financial wealth creation exponentially.
Seeing the difficulties of many families especially now, during the downward pressures of COVID 19, it is obvious that many have fallen into similar traps as I have in the past.
As a mother of three I made a vow to pass down the wisdom of money management into their lives as early as possible.
Continue reading if you are one of the many that are living pay check to pay check, to ensure you do not repeat my mistakes and set yourself and your family up for success, right from the start.
Below are my five golden rules for financial independence.
Golden Rule 1: Pay yourself first
It is puzzling to see how most of us neglect ourselves when it comes to money matters. We slave away, 40 to 60 hours per week, yet, at the end of the month our wallets are lean, our bank accounts are empty, no matter whether we are a doctor, lawyer, manager, administrator or window cleaner.
We are not in the habit of saving and are left defenseless and exposed at times of crisis.
We are working for someone else, the landlord to pay our rent, the grocer for our groceries, the tailor for our clothes, and we neglect paying ourselves to attain our own financial freedom.
Let’s assume our average work week is 40 hours and our monthly income is AED 20.000. We pay AED 10.000 rent per month which means that effectively 20 hours per week we work for the landlord. Then we pay another AED 4.000 in school fees, AED 6.000 in groceries and suddenly we have worked the entire month for other people.
Yes, you will say, I had a place to stay, my kids received quality education and we ate good food during this month. But what happens if suddenly we don’t receive that AED 20.000 any more? Where will we stay, how will we educate our children, what will we eat?
The concept of financial freedom suggests that we are able to cover our entire living expenses from alternative sources of income that are not related to your earned income or salary.
Such income could be derived from dividends, rental incomes, income from intellectual property, business income... The list goes on. We call these forms of income ‘passive income’.
Imagine a life were we are no longer dependent on an employer to pay us a monthly salary. Were we could do whatever we wanted and won’t have to worry about how to feed our family. Sounds wonderful?
The first step to attain this goal is the concept of ‘paying yourself first.’ I was initially introduced to this concept in George Clasons book ‘The richest man in Babylon’ and have followed his advise ever since.
To pay yourself first suggests that before settling any other expenses we pay ourselves a 1/3rd or 30% of the amount we earn by setting this amount aside on a savings account for investments, to create opportunities for wealth creation.
It is so important that we do this before we start settling our utilities bills, rents, etc...
We must do this as soon as we receive our salary or any income for that matter. We take 30% of this amount and put it aside in a dedicated ‘piggy bank’ or savings account.
The power lies in consistency and building it as a habit. Let’s not succumb to the temptation of touching this amount for the Dior bag that we have been eyeing for so long, the shiny new car, or new piece of furniture that truly would enhance our living room space.
All these expenses must be covered from our 70% remaining salary that is left over after we have paid ourselves first.
Conditioning ourselves in this way, we will suddenly see that it is possible to live our live at 70% of our income. Our brain will start identifying opportunities to reduce expenses, we cut down on that unnecessary subscription, make coffee at home instead of having a starbucks daily, buy during sales, make use of coupons and discount cards, buy in bulk. Yes, it does not sound very appealing but is necessary if we wish to create a long term wealthy and sustainable life.
We pay ourselves first, always, if we don’t want to be a slave for others forever.
Golden Rule 2: Consistently feed your three piggy banks
How is it that whether our income is high or low, most of us live pay check to pay check with little or nothing left to save at the end of the month?
“Our expenses grow with our income.” - Is a universal law to which most of us succumb, unless we take action to the contrary. How many ‘smart‘ people do we know, who earn a substantial amount of income. Yet, at the end of the month, there is nothing left on their bank account. They increase their expenditures with every increase in salary. A more expensive car, better schools, a better home, fancier furniture, more luxurious travel, a yacht?
This behavior is not only foolish but risky as it completely handcuffs and ties us to our current job. If we don’t get that salary every month, what is then going to happen to us, our house, our car, our family?
So when our boss tells us to develop the same useless report, that we already know no-one is going to read for the third time; Instead of telling him to ‘beeep’ we think about our house, our car, our family and tell him “Yes sir, right away”.
No matter who we are or what degrees we have earned. Everyone must obey to the law of Income - Expenditures = Savings.
No matter if we are a doctor, lawyer, engineer, cashier or window cleaner. This law will not change, but our attitude on how we manage our costs of living must.
Wealth is a function were expenses are the most important variable, not income! It’s a fundamental paradigm shift.
In golden rule number 1 “paying yourself first” we committed to take a third off the top of any money that comes in, consistently every month and live off the remaining 70% of our salary. Yes, this includes travel and luxury goods.
The three piggy bank principle tells us to distribute the third that we have just paid ourselves across three accounts:
Meet the Savings Account:
We pay 10% of the third that we paid ourselves first, into our Savings account.
Our savings account is a cushion for unforeseen emergencies or special opportunities that improve our lives. A good measure is to establish a savings account that sustains our living expenses for a minimum of 6 month, so that in case we loose our job, are faced with an unforeseen long term illness or calamity we have a financial cushion to fall back on.
It is not an account to draw on to pay for the next holiday, the new car, or the new Christian
Meet the Investment Account:
The next 10% goes into our Investment Account. These funds are allocated to take advantage of an investment opportunity and develop our financial independence over time. We will come back later to this account.
And the rest goes to Charity:
The final 10% are for charity. Charity is a wonderful tool with many benefits for all involved. Charity teaches us gratitude, humility, is a vital contributor towards personal happiness, and yields great returns on many fronts. As the saying goes, “give and you shall receive.” It is very gratifying to share what we have and be of service to others. It also serves as a great reminder that there are always less fortunate beings than ourselves. In Islam we believe that whatever is given in charity will be returned to us by 10 folds either in this life or the hereafter. In financial terms a 1000% Return on investment is something the fewest investment opportunities provide. Why would anyone pass on such an opportunity?
The true magic of this entire plan reveals itself only by diligently and dutifully committing to doing this with every single Dirham and sticking to the plan every month. It is very easy to slip back into old habits and dip into that 30% that you paid ourselves first, from time to time.
Do not engage! Do not skip the investment and buy that new TV, the new couch or go on that fancy vacation. Do not increase your living expenses in relation to your latest pay raise. Stick to the plan! Always, without compromise. However difficult it may be. Remember the formula : Income - Expenditures = Savings with expenses being the variable.
Once we reduce our dependency on our salary and attain financial freedom, then, and only then, can we can increase affluence and style. Read on to see how.
Golden Rule 3: Grow your Passive Income
Yes, we have fully embraced rule number 1. We are paying ourselves first every time, consistently and see our investment and savings account growing. While this already feels great on it’s own, there is something better to come.
It is now time to start to put our hard earned money to work. The good thing about money is that, unlike us, it never has to rest. Our money works for us while we workout at the gym, while we pursue our day job, while we play with our children and even while we sleep. This is the perfect employee everyone would love to hire, it’s modern day slavery and it is 100% legal. If we decide to keep our newfound employees.. they will breed, and even their children will breed eventually. This will cause our money to grow exponentially. The good thing about exponentials is that they multiply over time and earning money becomes easier, and easier, and easier, and easier. This is what we refer to as passive income.
Let me visualize this through a simple example. Assuming our net monthly income is AED 20.000. We have diligently paid ourselves first and deposited AED 2200 monthly into our investment account for a year. After 12 month, our account has now grown to AED 26.400. With this money we are able to pick up shares during COVID19 economic down turn. 2 years later, the economy has stabilized and our share profit has doubled. We have sold our shares with a 100% profit and are now in possession of AED 105,600 (2 years savings, plus our initial investment plus the share income).
Nice! With this amount we are able to settle the down payment for a studio apartment at a value of AED 500.000. We pay the 20% down payment, totaling AED 100.000 and mortgage the remaining AED 400.000 over a period of 20 years at a rate of AED 2200 which is equivalent to our monthly savings, remember?
We are now in possession of our first property and can call ourselves ‘landlord’. Has a nice ring to it, doesn’t it? We rent out the apartment for AED 27.000 annually, which we will re-invest into our investment account. The apartment pays for itself and we still retain our monthly savings.
After two years a buyer comes along and offers us AED 550.000 for our apartment as property prices have increased. We accept the offer and are able to book AED 50.000 profit from the sale of our apartment in addition to AED 54.000 of rental income for the two years. We have also reduced your liability to the bank by AED 54.000 by paying back our mortgage for 2 years. We receive our AED 100.000 of initial down payment as well. Over a period of 5 years your investment account as now grown to a healthy AED 204.000. Compare this to the AED 132.000 which we would have now saved without the investment of funds. This is now enough income to buy two apartments at AED 500.000 each and repeat the process. Two years later we have already generated AED 408.000. We now continue the process with 4 apartments. 2 years later we own AED 816.000. We are now well off becoming a first time millionaire.
At this point we may decide to keep two apartments and add the rental income into our overall income to improve our standard of living. Our passive income has just increased by AED 52.800 annually and we have just issued ourselves a 22% pay increase. Disclaimer, this is a very simplified example for illustrative purposes only.
I call for caution though and would like to draw attention to the universal law of golden rule number two : Income - Expenditures = Savings with expenses being the variable. We should refrain from increasing your living expenses as much as possible unless and until, our passive income fully covers our earned income. When this happens, we have attained financial freedom and effectively would no longer need to work. We can tell our boss good bye and fully focus on wealth creation as we have now become fully financially independent.
Golden Rule 4: Hustle
If we compare the lives of the rich and famous, movie stars, singers, sports champions, business men/ women,...many of us view their success as blatant luck, being at the right place at the right time.
Easily forgotten are the countless hours of practice, exercise, learning and failing, the risks that they have taken, the sacrifices they made to get to the top.
The people at the top took action with purpose. They believed in a goal, they hustled to attain it, usually over long hours, practicing skills, taking risks, loosing it all, trying again.
In the following example, a procrastinator and a doer are faced with opportunities. For simplicity purposes we assume that both of them are faced with the same amount of opportunities. The percentage of succeeding with an opportunity can only be influenced by one variable. In our example, the procrastinator and the doer have the same talent and the same chance to thrive. What separates them though is the number of opportunities they try out. The procrastinator will come up with excuses. I am too busy, my health is not good, I am too old/ too young, I don’t have the right talent, skill, the economy is not supporting, ... Meanwhile, the doer takes many of the opportunities that are offered to him. This significantly increases the chances of the doer to succeed at some point far beyond that of the procrastinator. This had nothing to do with luck and everything to do with taking action.
Set up time for hustle, operate from the space of uncomfortable, get up early, try out new things, take risks, big or small, fail fast and often. Adopt the Thomas Edison mindset :
“You must learn to fail intelligently. Failing is one of the greatest arts in the world. One fails forward towards success.”
Golden Rule 5: Timing is everything
Great opportunities are rare and should never be missed out on. For personal finances and investing, sometimes that means that we must cut our expenditures a little more than usual.
If we have diligently paid ourselves first we will have created a cushion to take advantage of such great opportunities when they come along.
For instance, during the financial crisis and the following collapse of the stock market in 2008 & 2009 such an opportunity emerged.
For those who were willing to increase their savings and investing during that time great profits were to come. Build your muscle to identify and take advantage of such opportunities. COVID19 may be another one to take advantage off. Eventually COVID will subside either via mass immunity or through a vaccine. The economy will pick up. For those of us who have recognized and taken advantage of investing into stocks (the right stocks of course), real estate, businesses,... great profits may lie ahead when the market recovers.
Develop your investment strategy. Focus on what you understand and eventually wealth will find you.
Would you like to know more about how to improve your financial situation, don’t know were to start in building your wealth, learn about investment strategies that will help you succeed or simple ways to optimize your personal expenses? Get in touch with one of our trained purpose consultants at www.beljaflah.com.
Comentarios