“Daddy, can I have some money?” asks a 6-year old Blue Lobster.
“Sure – let me go pick it off the Money-Tree,” Daddy replied, in a tone I can now identify as sarcastic.
“Wait! What? There’s something called a Money Tree?” Little Blue Lobster thinks to herself. “I need to get one of those.”
And that, Gentle Readers, is when the wheels started turning…
Every tree starts from a seed. Your money tree is no different. The seed is your first nickel.
I read an interesting article this week about the distinction between “rich” and “wealthy”. Apparently, rich is when your have a high income. You can do what you want so long as the money continues to roll in. Once the money stops, so does the status of being rich. Rich is living a paycheque-to-paycheque lifestyle but the paycheques are simply much bigger. By contrast, wealthy is a status that is independent of income. Wealth is achieved when you have a cash flow sufficient to fund your lifestyle without having to work. You can work if you want to but you have sufficient assets to fund your lifestyle when you’re no longer enchanted with paid employment.
You can’t get wealthy without first having some money. In other words, you’ll need to find a seed in order to plant your money tree.
Step 1 – Get an income
I don’t mean to be an ass but I want to be exceedingly clear. You will need some kind of income in order to acquire the money to be invested at a later step.
How you make this income is entirely your choice. You can work for someone else, or you can be self-employed. It matters not whether you’re chained to a desk, or a digital nomad, or sitting on your couch to earn an income.
All that really matters in this step is that you have found a legal way to acquire money.
Got an income? Great! Now set up at least two bank accounts – a chequing account for your day-to-day living expenses and a savings account for the money that will be poured into your investments. This is the money that is going to feed your money tree for many years to come.
Again, to be perfectly clear: an empty savings account is utterly useless.
Step 2 – Set up an automatic transfer
Your automatic transfer is one of the most important tools in your arsenal if you want to become wealthy. This tool is second only to having an income when it comes to ensuring your money tree thrives.
Ideally, you will set up an automatic transfer to move at least 15% of your income into a savings account.
Is 15% too much right off the hop? Okay – start with less. You know your numbers better than I do. Start small and commit to working your way up to 15% as soon as you possibly can.
Do you want to save more than 15%? Then go for it! Pick whatever amount you want, so long as you won’t be required to use credit to fund the rest of your life.
In my perfect world, I’d already be saving 50% of my income but, alas, I’m not yet able to do so.
Step 3 – Plant your money tree
Learn about the various ways to invest your money.
Your money tree is meant to create cash flow for you. You’re going to be investing for a long time. In the beginning, you feed your money tree and, then later on, your money tree will feed you.
There are so many investments to choose from. I use exchange traded funds and index funds. They’re less expensive than mutual funds and they invest in the same equity markets.
Never invest in anything that you don’t understand. Don’t let anyone talk you into investing your money if you don’t understand the risks and volatility of the proposed investment.
Once you do find an investment that your understand, get your money into it as fast as you can to give your money tree as much time as possible to grow big and strong.
Step 4 – Keep learning about investments
Why are you surprised by this step?
I hate to break it to but your learning doesn’t stop just because you’ve invested some money. You have a responsibility to Tomorrow You to do the best you can to ensure your money tree is properly planted in fertile soil. The better your investments are, the better your money tree will grow.
Twenty years ago, I was huge fan of guaranteed investment certificates (GICs) because they are paying more than 5% interest. Woohoo! Guaranteed money – how could that be a problem?
It was a problem because inflation was more than 5%.
The purchasing power of my money was decreasing every day that my money was locked into my GICs.
As soon as I learned about inflation and purchasing power, I started investing in mutual funds. I knew they were more volatile but I also knew that their higher long-term returns would likely outpace inflation. Mutual funds would protect the purchasing power of my money.
And then I learned about exchange traded funds and index funds. They would deliver the same or better returns than mutual funds. ETFs and index funds would be volatile too, but I already knew that I could live with that. They offered the same benefits as mutual funds but at a fraction of the price.
So I started by investing in dividend exchange traded funds. I love the monthly cash flow. Lately, I’ve made a tweak to my investments in that future contributions will go towards a global equity fund.
If you don’t know where to start, might I suggest Quit Like a Millionaire by Kristy Shen & Bryce Leung and The Simple Path to Wealth by J.L. Collins? (I am not getting paid for endorsing these books.) Both books are easy to read and they lay out the concepts of personal finance in easily-digestible chunks. You won’t go wrong if you follow the path laid out in either of these books.
Step 5 – Grow your money tree.
Here’s where the steak starts to sizzle.
The more money you save to invest, the faster your money tree can grow.
Ignore the talking heads in the media. They don’t know the future – recessions are normal – daily gyrations of the stock market don’t matter very much when you’re investing for decades.
Step 6 – Repeat steps 3-5
Unless you’re ridiculously lucky, it’s going to take a good long while before your money tree is producing enough of a cash flow to fund your life.
Until that day arrives, you owe it to yourself to save a portion of your paycheque for the purpose of investing. You also owe it to yourself to continue learning about the various investment options that are out there.
You can do this, but your money tree won’t plant itself. Instead of waiting for some mythical “right time” to begin, plant your money tree today.