💰️ Wealth's Secret Formula

Paul felt his iPhone vibrating in his pocket;

the call was from an unknown number. Cautiously, he answered—it was the hospital. His grandfather only had a few more hours. Pulled by the gravity of the call, Paul rushed to his grandfather, who lay on his deathbed. Despite the old man’s condition, he seemed determined to defy death. At least long enough to share some wisdom with his favorite grandson. Paul could hardly keep himself from breaking into tears. So he dove in, asking his grandfather questions. Paul asked about friendship, happiness, regret, love, and anything that he could think of. His grandfather opened up completely, offering any insight he could come up with. But there was something Paul hadn’t asked yet. Something Paul has to know.

Noticing his grandson’s sheepish change of pace. His grandfather inquired, “Is anything else on your mind?” Embarrassed yet curious, Paul asked, "Grandpa, how did you get so rich?" His grandfather glanced towards the door, flagging Paul to come closer. As Paul moved his chair near, his grandfather insisted, "Closer," ensuring their privacy. Paul leaned in. His grandfather repeated, "Closer." Paul was now so near that their faces almost touched.

Cupping his hands around his face, the old man whispered, "Spend less than you make." Paul was so disappointed he was livid, “Jeez Grandpa, everyone knows that!" The old sage reached out and grasped Paul’s hand. "Paul, people try to save after they spend. That’s idiotic. They’ll spend every cent. The secret is to spend after you save.” He paused, “Paul, pay yourself first.”

Why:

We need to change the way we think about saving. Let’s be honest, if an enormous pile of money is sitting in front of us, we’re going to spend to the last penny. So let’s ensure the pile we are looking at already has our savings safely stored away from our hungry eyes.

The traditional savings formula is “Income - Spending = Savings,” forget that use Grandpa’s secret formula:

Swapping the location of savings and spending turns savings into the priority. Spending only happens after the priority of savings occurs. So, if you are spending money by definition, you have saved.

How this works:

🛠️ Automate - Redirect a percentage of your paycheck to another account. You can add another direct deposit, a contribution to your 401K, and/or set up automatic transfers to another account.

🗜️ Constrain - Budgeting is hard because it is abstract. What isn’t abstract is staring at a checking account with a certain dollar amount. There are no excuses you have to work with the dollars that remain. Forcing you to budget. Suddenly, cost cutting becomes more obvious.

⚙️ Optimize - Be pragmatic and start with a modest percentage, like 5%. Increase the amount as you get comfortable within your new bounds. As your pay increases, increase the amount you are saving (or even better, increase your savings rate).

🔎 Position - Where do I put the savings? If you have debt, check this out. If you have no debt other than a mortgage, try this.

🏢 Business - You can apply this to a business you own. Redirect or draw what you expect your profit margin to be and operate with the remaining cash. This is even better if someone else operates your business. You force them to budget and you protect your profit margin.

In 9 years I have gone from a savings rate of 0% to 31.235% just by increasing the amount of money I redirect away from my checking. I don’t have a sophisticated budget. I don’t even know how much I spent at restaurants last month. But I’m saving more and more of my income every year.

Thank you so much for reading this week.

Talk soon,

— Kevin

P.S. - If you like what you’re reading, let me know by reply.

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