One of the biggest elements of reaching a financial goal that’s larger than just putting a few hundred £ aside for a few months, is knowing how to make money with your money. Or save long term and not spend it.
I never had much of a financial education as a child. My mum did her best, but there’s some degree of, if you want to educate someone on what to do with money, you kind of need money to help them.
No one really taught me what you were supposed to do with money other than open a savings account and put some in when you can and try not to spend it.
That strategy isn’t going to cut it when it comes to buying a whole castle and making sure I have the funds to run it no matter what. There’s a whole heap of other things people do with money, especially those who have lots of it. So I’ve been researching what people are supposed to do with money and strategies for saving it more effectively.
That led me to two books that came highly recommended. One called Profit First, which is aimed at small businesses and entrepreneurs just starting out, and another called The Richest Man in Babylon, which is more about how to save and invest and what amount to do so and how you know how to do all that sort of thing sensibly.
So, I’m going to sum up some of that, but the essential component they both recommend, is that the money you want to profit/save/invest, should come off the top of your income, royalties, or money in before anything else.
You shouldn’t be waiting until the end of the month to see how much is left after you’ve paid bills and spent whatever you want and then just save or call profit whatever is left. Partially because it is very easy to keep spending money on in the moment feel good things, like buying that fancy coffee, or staying for another pint at the pub when you said you’d only have one.
Even if you have a healthy income, it is very easy to spend what you were going to save.
You should be seeing how much has come in, work out what you absolutely must spend to survive, what you want to spend, but isn’t necessary, and how much you need to save or want to pull out of your business to reach your goals.
With The Richest Man in Babylon, it recommends that 10% of everything you earn should be saved and invested. No matter how much you have coming in. 10% of all the money (including the money from your investments), should be invested. Then you pay your bills, etc with the rest. And if you have debt, you use 20% of your income to get out of debt as well (essentially living off 70%).
Profit first is looking at business expenses and is about understanding how much you need/want to take out of your business as your profit and then only investing what’s left.
As I’m an author who essentially runs her own publishing business, I am using a mixed approach of the two. I look at what’s come in for my business each month, how much I need to pay my basic bills (and I mean the basics, rent/mortgage, electricity, not Netflix, or meals out).
Then I work out what I must pay for in order to perform my business. I have my editor on retainer, I need dropbox to store all the audio files etc. There are some costs that aren’t entirely necessary. Is it nice to have all my team on Notion, yes, but not fully necessary, for example.
Everything left over is my ‘profit’. That’s what I split up. I don’t do 10% of everything like Richest Man of Babylon, but a much higher percentage of this profit amount. It often works out that I am dividing it into four. A quarter to pay off debt, a quarter to invest to fund the castle costs, and a quarter to save to buy the castle/property. And then that final quarter is money I get to enjoy along the way, reinvest into the business or do whatever else I want with.
Once the debt it paid off, this will become a three way split, but for now quarters work quite well.
And that’s basically it. I don’t spend money and then save/invest. I save/invest, and then spend what I’ve got left over, both in business and with life.
There’s a little more nuance. I know that this can be really tough when there isn’t enough money for what is necessary. There is a threshold where you can’t cut subscriptions, luxuries or anything like that out any more. I’ve been in the place in life where my phone is the cheapest sim only contract I can find, there’s no money for netflix, TV, cinema, days out, or hair or nails, not even money for makeup or clothes and all my clothes are birthday presents from family. I’ve looked at cash and had to try to do a week’s shop in such a way that it covers everything I need and I’m not eating rice and ketchup every day.
Thankfully, I’ve not been there in a long time, but I don’t have a problem with deciding that I’m still probably not going to pay to have my nails done because I’d rather pay for marketing, or some character art. Or invest enough to get my castle. My nails can wait… cause a castle is what I want more.
I’ve also noticed that this way I spend money intentionally, not reactively. I have a budget and I choose what to spend it on specifically, then don’t spend any money otherwise.
There is a little for incidentals, especially with tiny humans. An eating out budget, or takeaway, especially with my health being a struggle sometimes, but even that is an intentional choice. There’s money there for when I need it most. And once it’s spent, it’s spent.
I’m also entirely reinvesting investment money so far. It goes back into growing the money. And of course, owning a house, even as I pay off a mortgage