How to Build Capital Part 2 - Mindset cover image

How to Build Capital Part 2 - Mindset

By Gavin Marsh

finance

Part 2

Mindset:

Introduction

The mind-set and actions one needs to secure the best chance of building capital to put towards a cashflow yielding investment.

If you missed part 1, you can find it here Money - Savings - Capital.

Pay yourself first

Lets be blunt, most poor people are dreamers when it comes to their wealth, they dream about being rich and about how they are going to accumulate their great wealth from this great fantastic new fad, get rich quick scheme, awesome new idea that has no relevance or benefit other than separating you from your money and lining the scheme owners pockets.

Investors in risky ventures fail to deliver and miss out on a very simple concept that should sit head and shoulders above the rest... paying yourself first.

What poor people fail to understand is that great wealth is generally built up over a long period of time - so there is literally no time like the present to start building upon your own personal wealth the correct way.

Take control of your financial destiny, don’t leave it to chance. Investing in an a fad is surprisingly similar to throwing darts while being blind folded, unless you know the con team on a personal basis (one-two-one)? You are literally throwing money at strangers. Start-up investments are inherently high risk and are better suited for established investors that already have a well balanced investment portfolio, it would be better to throw money out of the window at least there is a chance some might blow back in.

Risky assets (also known as alternative assets) including such vehicles as crypto should be the last investment addition in an investors portfolio stack, especially if you are looking to build true wealth.

It’s easy to fall into the trap of believing that you’ll live forever and that the big payday is just around the corner, whether it’s the big paying job, or the win on the lottery. All you’re doing while you wait for this, is wasting your time. Time you could spend on building your personal wealth — the, tried and tested, correct way.

Consider this — add up all of the paycheques you have ever received since leaving education and entering into employment. This figure is the amount of opportunities you have had during your life to pay yourself and build your Net-worth.

Now ask yourself, have you made the best use of each and every one of those opportunities?

This is something that you have to start doing immediately if you wish to become wealthy and financially secure. You have to, no matter what, Pay Yourself First.

Yes, I’m going to keep repeating it until it sinks in to that 'get rich quick' brain of yours.

What I mean by this is that whenever you receive income of any form you simply subtract 10% of that income and put it towards your Net-Worth, you put it towards your capital. For example you may take home £2,000 per month after taxes, which means you should immediately transfer £200 into your ‘Capital Account’ //link to Part 1 //.

Whatever your net income is you should always transfer at least 10% into your ‘Capital Account’ as a minimum. You need to do this before you do anything else with that income. Even before you pay your household bills or buy your food shopping.

Obviously if you are falling short by a huge amount to cover your household expenses then you will need to reduce the percentage until you can afford to break even.

However if you pay yourself 10% and you're falling short buy just a small amount then keep the 10% secure - it's incredible how industrious the human mind can become to make ends meet. Push yourself and you will find the shortfall from somewhere.

I am not saying sacrifice your rent or food money you should already have a budget in place for these items but if you do not pay yourself first from the remainder you will most definitely over-spend on food and household items that will potentially eat into your 10% monthly growth. Make it happen automatically by setting up a monthly standing order from your ‘Cash Account’ to your ‘Capital Account’.

Paying yourself first forces you to stick to your weekly or monthly household budget because the money will not be in your 'Cash Account'. If you do overspend and need to transfer some money from your ‘Capital Account’ back into your ‘Cash Account' - you’ll notice this action and realise that you didn’t build your wealth to its full potential during that month.

If you want to be financially free it is imperative that you do this for every form of income you receive. If you sell your car, pay yourself first. If you receive a £500 tax rebate, pay yourself first. If you receive £350 as a gift from your Mum or Gran at Christmas, pay yourself first. 10% - every - single - time… straight into your ‘Capital Account’.

This is the cornerstone of how all self built wealth is obtained.

10% monthly capital growth

You may be wondering why pay yourself a 10% skim, well the percentage amount is at your discretion but in my experience what I’ve found is that most people can comfortably afford 10%, even if you're waiting tables or busking on the street with your guitar and flat cap.

If you are having problems affording 10% then part 3 (Growing your wealth) in this series will help you. It will also help to put you on the right side of investment and free up some of your liquid cash flow.

Now obviously as your lifestyle and wealth improves you will become more financially comfortable and even though the increased income (or a decrease in your expenditure) could be put towards building capital - I would still recommend taking a percentage skim rather than a whole chunk as there has to be an ongoing balance between enjoying money and building personal wealth.

Budgeting

Separating Needs from Wants

Calculate your actual spendable income (net wages after all Tax), you can now analyse how that remaining money is being spent.

Now get organised and sort your expenses into three categories: needs, wants and everything else (everything else is things like luxury items). Or if it makes it easier, you can name these three categories A-items, B-items and C-items.

How do I distinguish between the three?...

These days, what qualifies, as a ‘need’ can very often be distorted and blurred, due to the constant bombardment of advertisement, but us humans actually have very few real ‘needs’ and requirements — shelter, clean water, food (and a way to prepare it), clothing, and warmth. These are the only five essentials our human bodies actually need to survive.

Of course, it isn’t realistic to expect a person to thrive or to be happy with just these five items. If you have a job, you need to be able to get there for starters — you can't just run there in your flip flops, unless you're a surfing instructor, then what do you want money for? You’re already living the dream my friend.

You may have a family that also depend upon you which has to be taken into account. However, I can guarantee that not everything you feel you currently need actually is a ‘need’.

Unless it’s required for your job, believe it or not, you don’t actually ‘need’ a mobile phone, Satellite TV, high-speed internet access or designer clothes.

Before creating a budget for yourself, you should take a long, hard (and probably, uncomfortable) look at what you need verses what you want. Before you carry out this task I suggest that you find somewhere quiet with no distractions so you can really ask yourself, “How much do I really want to become wealthy?"

Now, can you sense how strong that desire is? That gut wrenching want to be financially free. That internal desire is what will be in direct conflict with the ‘needs’ and ‘wants’ that you currently have.

If you have no wealth then it is very likely that up until now your desire for personal wants has been much stronger than your desire for personal wealth. It is this desire that we will work on and sharpen by budgeting — budgeting will become your financial leverage tool.

Calculating Your Essentials (needs):

Your monthly essential expenses, or needs, must come first out of your available income after you have.. that’s right… paid yourself first. To make it easier for you to figure out what your essential needs are, take a pen and paper or fire up an Excel document and do that now. Simply write down all of the absolute necessities that you have to purchase each month.

Sorry, no enhanced phone services, mobile tablets, satellite TV, or top-speed Internet, unless you need it to do your job.

If you have a surplus after you’ve met the required essential expenses, go ahead and create a new list titled ‘Desires’ which can be purchased from your surplus money (Savings) to be spent on your ‘Desires/wants’.

You should now know exactly how much money your monthly essentials come to and how much you are able to place into your Savings account each month, to fund your desires and wants.

Set up a monthly standing order to transfer your monthly savings from your ‘Cash Account’ to your ‘Savings Account’ – as soon as you receive your salary (make it so it’s “gone” before you even notice you’ve been paid) - this will prevent you from over spending and dipping into your savings by mistake.

Assessing your wants:

Now that the 'needs' are out of the way, it is time to consider your ‘wants’. Hopefully you will find yourself with some “extra” money for this. If not, stop crying - I’ll cover how you can achieve a healthy surplus in the next part of this series //link building capital//.

You can now ponder over a cuppa tea your ‘Desires’ list to figure out your wants and how much you’d like to spend on them each month.

After you add up all of your ‘needs’ with the list of ‘wants’, you’ll probably discover that you have little or no surplus cash. If it turns out you have negative cash flow, you should prioritise your expenditures so that you don’t spend more than you bring in.

Reducing your shortfalls and negative surplus:

If you have a shortfall obviously something has to give. Consider the following suggestions:

  • Don’t completely cut out any of your required expenditures. You may be tempted to consider dropping insurance cover or money you save for a “rainy day”. Don’t! You won’t be doing yourself any favours by skipping these items, and the decision will come back to bite you sooner or later.

  • Review each ‘need’ category and cut down on necessary expenses. There are a wealth of resources on the web for achieving this, here are a few good ones:

    http://www.moneysavingexpert.com http://www.myvouchercodes.co.uk http://www.searchfreebies.co.uk I have no affiliation with these websites; they are just sites that I recommend and personally use.

  • Consider what you are paying for. For example, can you find a better insurance deal? Save money on groceries, clothing, and transportation by shopping around? Hop on a bus instead of getting an Uber? Dude! buses are not that bad.

  • Lastly, consider your employment. The only reasonable option you may have, is to increase your income by working overtime, finding a part-time job, or possibly changing jobs which is usually the fastest way to increase your net income on a yearly basis.

I recommend doing this last because usually there are so many other ways that you can reduce your monthly spend that these should be considered (and exhausted) first. Changing jobs can be stressful and stress could potentially lead to “comfort spending” or “retail therapy”, so attack the other areas first.

Cashbook Ledgers:

You may have to change your initial ‘Essential’ figures during the first couple of months because you may not know how much you are currently spending on each ‘Essential’ category. If you do not know your current expenditures just enter an estimate for now, you can fine tune it as the months go on.

This is where the Cashbook ledgers come in handy and is why all savy investors use one.

It will probably feel daunting to log and record every single income/spend but you will find it extremely informative at the end of the month and you may even be surprised to find out that you have been spending in excess on the simplest / throwaway items.

The use of a Cashbook ledger on an app or PC only needs to be used in the initial stages of your wealth building journey, just for the first two to three months.

Once you know your current spending habits, then you can enter an exact budgeted monetary amount for each ‘Essential’ category and aim to stay within that budgeted amount each month, trust me once you focus your attention you'll start to get a feel for it.

I have found that Smart phone apps are best for achieving this, we have our mobile with us whenever we spend money. Another way to achieve this task is to ask and collect a receipt every time that you purchase something. This is a bit old school but still worth mentioning... Ummm I guess.

Keep the receipts in one place (a pocket in your wallet or a metal tin at home) then once a month pull out all these receipts and complete you're monthly Cashbook Ledgers.

Both ways will get the job done but the mobile app is the better way as we now have so many different ways to part with our money, Android/Apple pay, PayPal, debit-card, etc.

Conclusion

The above initial Wealth building tasks are probably the most boring and tedious to complete but once done they provide you with a very clear and concise understanding of your true ongoing financial position.

It is this understanding that will allow you to create an achievable plan and goal to increase your net worth on a daily or even hourly basis.

Once set up correctly the money will literally flow in.

To-do list

  1. Pay yourself 10% first; every single time you receive income of any kind and of any amount.
  2. Get in the habit of mentally separating your needs from your wants.
  3. Continually asses your needs and reduce your wants.
  4. Keep a cashbook ledger on you at all times.

Final Thoughts

A thought about Debt: Okay if you are currently in debt? Do not dismay, simply use the above techniques in this post and part 1 //link// and instead of paying the surplus towards your capital use it to reduce your outstanding debt.

Check out the final post in this series where we will look at how to maintain wealth and passively build your capital, after which we can then start to look at the more interesting and fun stuff of trading and money management.

Published on February 7, 2018.

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