27d • General discussion
The Blueprint
The Blueprint This is the basic pattern I use to build my wealth and grow my net worth. It’s both the process and some guiding principles I use to determine when it is time to adjust something.
You could be anywhere along the path, I hope this will help you reach the next stage in your wealth building journey. Over time I’ll document each of these steps in greater detail.
Basic Disclaimer: I’m an Accountant and CFO, not a licensed financial planner. This is about how to handle your money and not intended as specific product advice (what you should invest your money in) for an individual.
Here we go!
The basic steps are:
- Earn Money
- Manage Money (actively)
- Invest For The Future
You’re probably thinking…thank you captain obvious, I’m very aware of those.
You’re right, most people are aware of them, they just don’t do them. At least not in an active, consistent, intentional way.
Being aware of them won’t change your financial situation, only doing them will.
For example, I’m aware that my wife was in the gym at 4:00am this morning. Strangely my six pack just isn’t quite popping yet.
Last but not least, your mindset matters here. Many people abdicate (or abandon) financial accountability because they feel it is beyond their control. There are certainly external factors, but all three of these basic steps are impacted by your choices.
You can make choices that:
1) Improve or reduce your ability to earn money.
2) Actively manage or completely neglect the money you are earning.
3) Budget for future investment, or ensure there is never money left over to do anything.
Earning Money
You can’t handle what you don’t have. You need a source of revenue. You can choose from:
- Job (Employment).
- Business (your own).
- Investments.
A job is an easier starting point than a business, and investments are impossible until you’re earning money. Most people progress down this list. Starting in a job, then perhaps opening a business, then buying investments.
How do I choose what to do?
To start with, you are looking for the highest return on your time. Meaning you want to get the most out of each hour you are working.
If you have the choice between a job that earns $40 an hour for forty hours a week, and a business that you run for 50 hours a week but gives you $1800 then you would work it out as follows.
Job - $1600 a week, $40 an hour.
Business - $1800 / 50 = $36 an hour.
While the business technically makes you more money, it makes you less per hour. Either you grow your earnings per hour, or grab the job and use the spare time to pick up some other income, you’ll be better off.
Quick tips
Stay Mobile - Moving from job to job used to be considered bad for your resume but recent studies show you will earn more if you continue to actively seek out better employment opportunities. If you stay in your current job you’re likely to receive a 2-3% raise per year. If you actively seek out a new opportunity you can often lift your income by 10 – 15% which compounds over your career.
Gain Expertise - Working for someone else is the start of your journey not the end. Choose opportunities where you will gain knowledge, experience and expertise that are valued. You can use this in your future business.
The more complex problems you can solve, the more you are likely to be paid. So, get that deeper knowledge. Learn the skills of those in positions above you so you can continue to advance your employment.
Employment Limitations
Being an employee tends to limit your freedom and what you can earn for your time. Once you are in business, you can control both of those factors.
1) You can set your own hours and work as many or as few as you choose (and earn the accompanying reward).
2) You can set your value. The more value you provide (or the more difficult a problem you can solve), the more you can charge.
As a result, many people tend to move into business. This is not a requirement. There are many ways to start a business on the side and earn additional income on top of your employment income, before eventually transitioning full-time into business because it has higher earning potential.
We won’t focus on investment income here.
Ok, so now we’re earning money. Let’s look at how we should do with the money we’re earning.
Managing Our Money – The System
1) Establish a budget. Use the Your CFO Advantage Budgeting Tool and the guides that will be published soon for it.
If you spend more than you earn, it will never matter how much you make, your expenses will just rise to meet your income. Have you noticed that when you’re not paying attention your paycheck is almost always gone as your next one is due (if not sooner)?
2) Your budget should cover:
a. Essentials (70%) – Housing, Utilities, Transport, Food & Health.
b. Discretionary (20%) – Leisure, Entertainment, Kids and Miscellaneous.
c. Savings, Investment, Debt Reduction (10%) – All 3 grow your net worth.
You’ll notice that A & B keep the lights on and the engine running, but don’t actually shift your net worth (unless you are paying down a home in your housing portion, but let’s set that aside for now).
The speed at which you grow your net worth, comes down to what you do with the portion of your budget allocated to DSI (Debt Reduction, Savings, Investment).
You can save more money by limiting your spending, this will increase the rate you grow at, but it does have practical limitations. Your family will have a practical minimum budget it can survive on. To grow faster, it comes down to earning more income.
Once you have a budget that covers your expenditure, it becomes all about increasing your income. You can only save so much…at a certain point you just have to earn more (think upward job mobility, side gig or business venture).
A budget that manages to save 15% for DSI will grow wealth 50% faster than an identical income earner that only devotes 10% (assuming the same pattern of investments of course.
Invest For The Future
What do I do with my DSI?
While DSI sounds like something you might see a doctor about, it is actually the core mechanism for wealth building. You want to prioritize getting the best yield (return on your SDI). I do things in this order:
1) Debt reduction. If you are carrying any high interest-bearing debt (higher than a standard home-loan) I would devote my SID to paying this down. If you can’t settle your credit card each month when it is due, consider cutting it up and cancelling it (as it is just helping you spend more than you earn).
Credit cards charge interest rates of up to 17%. It will become obvious as we look at investing that we can’t move forward whilst being dragged backwards at that interest rate.
2) Establish a Rainy Day Fund. Money worries are a leading cause of stress which causes health issues. I start by establishing a RDF for emergencies. I aim to have 3 months of savings. If you are more conservative or prone to anxiety, aim for six.
3) Begin investing. There are a multitude of options, the key is consistency over time. Many investors are so busy trying to pick the best time to buy that they miss out on the steady growth they would experience if they just purchased their investments in a consistent, dedicated pattern.
For example if I had $1,000 of DSI each month and had reduced my debt and established my rain day fund. I would then purposefully invest my $1,000 each month. Either in:
a. Superannuation contributions (a retirement account with tax advantages).
b. Invest in my business to grow another revenue stream.
c. Purchase shares, property, ETFs or other income producing assets.
I choose based on the performance of the portfolio and my current goals.
4) Compound your returns. As your investments generate income, don’t feed this back into your budget. If you do you will spend it. Instead, budget for the tax on the earnings, then set the rest aside for investment in the next DSI allocation.
5) Rinse and repeat. Improving your financial position isn’t a choice you make once. It’s consistent repetitions of these same core actions.
That’s it for today. Almost every topic in this could be used as a basis for its own post (and no doubt will). I just wanted to get this up and pinned, along with the budget tools and build from there.
If you have any questions, let me know down below.
0
0 comments
The Blueprint
powered by
skool.com/cfo-on-demand-2197
Financial clarity, strategy, and confidence — for families and founders who want their money to work smarter.
Suggested communities
Powered by