In Part 1 of the Millionaire Secrets Series, I mentioned that I’ve broken down the lessons I learnt at the Wealth Academy into 5 main parts, namely Developing a Millionaire Mindset, Managing Your Money The Rich Way, Increasing Your Income and Creating Passive Income, Growing Your Money, and Designing Your Million Dollar Roadmap.
Participants Tabulating Their Income Statement and Balance Sheet
Now in Part 2, I’m going to move on to the second lesson, Managing Your Money The Rich Way. This is one extremely important aspect in life you need to seriously take care of if you want to become a millionaire.
If you’ve not read Part 1, Lesson 1: Developing a Millionaire Mindset, I’d suggest you hop over to that article to read it first because you’ll get the most out of the series if you read them in a sequential order.
If you’re already done with Lesson 1, then let’s move on to Lesson 2!
Lesson 2: Managing Your Money The Rich Way
There are altogether 4 parts in this lesson.
1. Why is managing your money important?
Have you ever realised that no matter how much money you earn, you always seem to be running out of money?
When you were earning $2,000, you’d whine to your friend, “I’m broke.” But when your pay went up to $3,000, you’d still tell your friend, “I’m broke.” And that happens even when your pays went up to $4,000, $5,000 or beyond.
Have you ever wondered why is that happening?
The answer is simple. Because when you make more money, you simply spend more money! And the reason you spend more is because you think you deserve a better lifestyle since you’re making more money now!
So if you don’t manage your money, you’ll forever be struggling financially because your money will always seem to be disappearing without a trace.
Therefore, good money management is your ticket to financial security.
2. The definition of wealth.
Many people would determine whether a person is wealthy by the money he makes, the clothes he wears, the car he drives, the house he lives in and the way he lives.
However, Adam Khoo has a different way to define wealth. He says a person’s wealth is actually defined by how long a period of time the person can sustain his/her lifestyle if he/she stops working.
The longer you can go on living your life without working another day, the richer you actually are.
Therefore, your wealth is defined by three things: 1) your monthly expenses, 2) your liquid assets and 3) your passive income.
So, in order to increase your personal wealth, you have to reduce your expenses, increase your income by creating sources of passive income and invest your money.
I’ll talk more about creating passive income and investing your money in the later parts of the Millionaire Secrets Series.
3. How the Poor, the Middle Class and the Rich manage their money.
People with a poor mindset will usually spend whatever they earn, leaving little or no money to save up. They are usually the blue-collar workers and low-level executives.
They always give the excuse of not making enough money to save. They don’t understand that if they can’t save 10 cents out of a dollar, they’re not going to save at all no matter what their income.
You need to understand that you can save some money if you put your mind to it. All you need to do is to start saving small. Whatever amount it is, just start saving. Whatever you do, the most important thing is to simply get started.
If you still think it’s impossible for you to save some money, read one of my previous post, You Can Save Some Money Even If You Are Earning Peanuts.
The Middle Class are usually made up of the professionals, middle and senior executives with higher income.
They may have a bigger savings account than the poor, but their financial status is still no better. Why? Because they’re very likely laden with bigger debts as they buy bigger house, bigger car, bigger tv, branded clothes, etc, by taking bigger loans and maxing out their credit cards.
As mentioned earlier, people simply spend more money when they make more money!
Most of these Middle Classes tend to give a false impression that they’re rich because they possess finer things and live more lavishly.
In fact, they may be even less financially secured than the poor because if they lose their job or suffer a pay cut, they will end up with huge loans, large expenses and deep in debt.
They will forever be caught in the rat race, working their butts off to pay off their debts for the rest of their lives.
So how do the Rich manage their money? Rich people have a wealthy mindset. They adopt the ‘earn, save and spend’ habit instead of ‘earn, spend and save’.
Every month, when they receive their pay, they will first set aside a certain amount of their pay and put into their savings account.
They are not impulsive when it comes to spending their money because they appreciate the virtue of delayed gratifications (this has been mentioned in Part 1 of the series).
They don’t go out to buy themselves a bigger car, bigger house, or go on a more luxurious vacation.
Instead, they’ll invest their money. They’ll not hesitate to invest in themselves (this is also mentioned in Part 1) by reading more books and attending great seminars because rich people understand the need for constant learning. They understand that no person is great enough to stop learning.
On top of that, rich people will also invest their money in financial instruments or assets in order to create passive income and/or grow their money because they understand this is the only way to ensure their financial freedom and abundance.
4. Manage your money the rich way.
Now that you’ve understood the importance of managing your money, the definition of wealth and how the poor, the middleclass and the rich manage their money, it’s time YOU start to manage your money the rich way.
• Track your dollar
Rich people keep track of their money with what Adam Khoo calls a ‘Personal Financial Report Card’.
This ‘Personal Financial Report Card’ is equivalent to a company’s financial statements.
The purpose of the financial statements is to keep track of all the income, expenses, cash flow, assets, liabilities, and net worth of the company so that its shareholders know the financial health of the company.
You too, as an individual, need to keep track of all your income, expenses, cashflow, assets, liabilities, and net worth in order to understand your own financial health.
Your ‘Financial Report Card’ will be made up of your ‘Personal Balance Sheet’ and your ‘Personal Income Statement’.
What your ‘Personal Balance Sheet’ will tell you is how much you own (your assets), how much you owe (your liabilities) and how much is your net worth (Net Worth = Assets – Liabilities).
On the other hand, your ‘Personal Income Statement’ will tell you how much you are earning (your income), how much you are spending (your expenses) and how much you have left to save and invest.
However, you need to have 2 sets of income statements. One is your monthly income statement, and the other being your annual income statement.
At Wealth Academy, all the participants were given the balance sheet and income statement spreadsheet templates so that we don’t have to compute them on our own.
If you’d also like to have these templates, you can get a copy of Adam Khoo’s Secrets of Self-Made Millionaires. The templates will be included as one of the bonuses.
Alternatively, you can choose to compute your own statements.
• Pay yourself first
As mentioned earlier, rich people adopt the ‘earn, save and spend’ habit. This is also called the Pay Yourself First habit.
The rich never fail to put aside 10% – 20% of their income and live off the rest of the 80% – 90%. Some of them even put aside 50% or more of their income for savings and/or investment!
A good way to do this is to set up separate accounts for savings and investing. And you should tell your bank not to issue you an ATM card for these accounts.
• Eliminate debts
You should always make it a point to reduce or eliminate your consumer debt so that you’ll reduce the interest expense you pay on your debt.
Reducing expenses is the first step to take to increase savings and interest expense is the first expense to reduce or eliminate.
While it’s inevitable to take on a loan when buying a house or a car, you must avoid taking on too much loan and too long a period because even a low interest rate of, say 5%, may add up to a huge amount over an extended period of time.
If you’re already tied down with a huge loan, such as a mortgage, then you must set aside at least another 10% – 20% of your monthly income every month (besides the 10% – 20% for savings) to reduce your principal amount owed. This is in addition to the required monthly instalments you’re already paying.
This will help you to greatly reduce the amount of interest you’ll pay on the loan over the entire loan period. And also it’ll help you to pay back faster so that you’ll get out of the debt quicker.
From now on, besides your house and your car, NEVER EVER borrow to spend! Drill it into your mind!
The worst debt you could get yourself into is credit card debts. A credit card debt is a real killer. This is because banks charge a 2% monthly interest on your outstanding amount owed.
This figure may seem small, but that works out to be 24% interest a year! If this doesn’t kill you, I don’t know what does! Your mother-in-law perhaps??
Let’s do a quick calculation to tear apart the smiley masks of the banks to reveal their true colours.
Let’s assume your outstanding credit card balance is $2,000 and you pay only the minimum sum of $60 (3% of outstanding). How long do you think you need to pay off the whole sum assuming you do not charge another dollar to your card?
The answer? 4.5 years! And the total amount you’d have paid is $3,300. That’s $1,300 in interest! In other words, you’d have paid an actual interest rate of 65% off your balance!
So now you know why you become your bank’s best friend when you pay just the minimum sum every month because in the long run, you’re in essence paying for their extravagant resort retreats just like what the AIG executives did recently after they received the US$85 billion rescue package from the US government.
So you MUST bear this in mind. If you’re going to use your credit card, you MUST pay off the total balance every month or risk paying the exorbitant interest expenses. Don’t be a sucker.
• Reduce your expenses
By now, you could be wondering, “If I were to pay myself first and clear my debts at the same time, what is left for me to spend?”
If you can remember, I mentioned in ‘Eliminate Debts’ that reducing your expenses is the first step to take to increase savings.
And I also mentioned that credit card debt is the worst consumer debt you could take on. But am I saying that you should not use your credit card at all? No! Why? Because, when used properly, credit cards are a very powerful wealth building tool!
You may be confused, as I may seem to contradict myself here. Well, let me explain.
Whenever you make a purchase with your credit card, the bill comes only at the end of the month. And you’re given another 2 weeks to make payment. Therefore, if you pay off your total balance, you’d have effectively gotten one and a half month interest free loan.
Here is the best part about a credit card. Each purchase you make on your credit card(s) will earn you bonus points, which you can use to redeem for free products and services like retail shopping and dining vouchers, helping you save money!
Personally, I use all my bonus points to redeem for fuel vouchers as I rarely dine at restaurants, I rarely go shopping and I don’t go on vacations much because I practise what I preach – delayed gratifications.
However, you MUST ALWAYS PAY THE OUTSTANDING BALANCE when your credit card bill comes. Don’t become your bank’s best friend.
Another way to reduce your expenses is to IGNORE the sales and discounts that you encounter so very often.
Sales and discounts DON”T help you save money unless you plan your purchases and buy only what you need! If you don’t plan and buy only what you need, you’re just gonna end up spending more.
Human beings (especially the ladies) fall prey to SALES easily because the word sale connotes ‘cheap’, ‘save money’ or ‘I can buy more with the same amount of money’.
However, people fail to realise that most of these purchases are dispensable expenses they buy on impulse to enjoy a short moment of gratification, which it would not make much difference to their lives after a while.
So even if the item you buy is on sale, if it’s not something you really need, you’re just spending EXTRA money.
(This is especially true when girls meet sales because GIRLS + SALES = MADNESS. I’m still having a hard time trying to make my girlfriend come to her senses)
Next time, before you buy anything, stop and ask yourself:
“Do I really need this?”
“How many hours do I have to work to make back the money?”
“How much will this cost me in future dollars?”
On the other hand, if the supermarket is on a storewide sale and you buy a bulk of toothpaste to stock up till the next sale, then that’s a smart move. This is what Adam Khoo calls plan your purchases.
• Buy Assets
A key ability of the rich is their ability to manage their cash flow. They understand the importance of creating positive cash flow through their investments. That’s why they buy assets because assets bring in income. But first, you have to understand what’s an asset.
If you’ve read Robert Kiyosaki’s Rich Dad Poor Dad
According to Kiyosaki, an asset puts money into your pocket, while a liability takes money out of your pocket. Therefore, your house which you’re living in is a liability rather than an asset because every month, you have to take money out of your pocket to pay the instalment.
However, I prefer Adam Khoo’s take on what’s an asset.
According to Adam:
Assets are physical or intangible items that you own. They can be classified into Positive Cash Flow Assets (Assets Cash+) or Negative Cash Flow Assets (Assets Cash-).
Sometimes to purchase an asset like a house or a car, you have to take a loan from the bank. When we borrow money, we incur a liability. As you know, liabilities incur the extra expense of interest payments you must make.
Positive Cash Flow Assets (Assets Cash+) are assets that provide you with positive cash flow and/or capital appreciation even after deducting interest expenses from liabilities incurred.
Examples are stocks, bonds, profitable small businesses, properties with positive yield, intellectual property, fixed deposits and so on.
Negative Cash Flow Assets (Assets Cash-) are those that depreciate in value and/or incur additional expenses such as maintenance or interest payments for liabilities incurred.
For example, if you bought a house and rented it out for $2,000 a month but had to pay a mortgage interest of $2,200, it would be a negative cash flow asset.
And a house which you buy to live in, or a car which is purchased for personal use will obviously not generate any form of income. They only incur negative cash flow and should be considered Negative Cash Flow Assets.
Here you can see that Adam defines your house which you’re living in as an asset as opposed to Kiyosaki’s defintion of it as a liability.
Although it is a negative cash flow asset (takes money out of your pocket and/or depreciating in value), it is an asset after all because you can still convert it to cash when you sell it.
So if you want to achieve financial freedom and abundance, you have to invest in assets that will bring you positive cash flow. Working in a job (single income source) is not going to help you achieve that.
I’ll talk more about creating different sources of income and investing in the later parts of this Millionaire Secrets Series.
By the way, I have an earlier post, A Practical System to Managing Your Money, which you should read as well.
As mentioned earlier in ‘Pay Yourself First’, you should set up separate bank accounts for savings and investing purposes. This post talks about the exact system – different bank accounts – I’m using to control my expenses, pay my bills on time, save for rainy days, and save to invest.
I believe it’ll be helpful to you.
With that, we have come to the end of Part 2 of the series. I hope you find this post useful and start managing your money the rich way today.
Cheers~
P.S. If you reside in Singapore, you might want to find out more about Wealth Academy. If you decide to go for the free preview, contact me prior to that. I’ll tell you how you can get a S$100 rebate should you decide to sign up for the programme during the preview. My email is mark[at]thebigdreamer.com.
However, if you live outside Singapore, don’t worry. You’ll still be able to learn all the millionaire strategies from Adam Khoo. Simply hop over to his website, Secrets of Self-Made Millionaires to get a copy of his audio programme.
Whatever is taught at Wealth Academy will be included, except the millionaire game, personal email mentorship, WA forum membership and Adam’s updates of his investment portfolio.
Don’t procrastinate. Start right now.
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I must say this is a great article i enjoyed reading it keep the good work
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Hi Susan,
Thank you for your comment. I’m glad you enjoyed reading this post and hope to see you around often.
Cheers~
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Hi Mark,
I must say great information and tips on managing money. Though most of us are aware of some of them, but hardly follow them. I will certainly try to follow these steps and take a step forward in achieving financial abundance. And hope people would do the same.
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