For years I’ve talked about what I call “the guaranteed secret of wealth”, which in essence boils down to appreciating that everybody, irrespective of income, tends to pay their commitments, spend the balance, and end up broke on payday.
This is why the easiest way to get ahead is to take on some sort of a commitment. It may be buying your own home and paying it off, committing to a regular savings plan or borrowing for investment. No matter which way you go, there’s still a commitment involved. And it works best if it happens automatically.
When I wrote the first edition of Making Money Made Simple in 1987 I recommended that home borrowers change their mortgage payments from monthly to fortnightly – the banks all scoffed at the time because they did not understand how it works. If your mortgage payments are $4000 a month, and you switch to $2000 a fortnight, you pay $4000 a year more because there are 26 fortnights, but only 12 calendar months. And the great thing about it is that you don’t feel the strain because it happens without any effort on your part.
A great way to understand how effective my guaranteed secret wealth is, is to open a RAIZ account – it was formerly Acorns. You can run the account in two ways – have an automatic investment made each time you get paid, and also join their roundup scheme whereby every time you make a transaction on your credit card, a tiny portion is added to the debit and credited to your RAIZ account. They have a brilliant app which means you can keep track of your savings on your phone.
This is why the way to wealth is to focus on accumulating assets, not accumulating more income. When your income increases, tax takes a larger and larger proportion of it, and human nature being what it is, you’ll tend to spend at least as much as the extra you earn. However, when a major part of “the income” coming into your home is by way of capital growth, or reinvested income on your investment portfolio, you are not tempted to spend it, as it involves cashing in precious assets. Best of all, the sum gets larger and larger as time goes by. This reinforces your decision to continue to leave it alone.