- Tax-Free Wealth by Tom Wheelright
- Rich Dad, Poor Dad by Robert T. Kiyosaki
- Heads I Win, Tails You Lose by Patrick H. Donohoe
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Watch the episode here
Listen to the episode here
Systemizing Your Finances (O.S.O.M. Method)
What is up, Money Masters? I’m so excited to be with you to talk about one of my favorite topics, systemize. As you know by now, my main system for money management is based on four key principles. The first is to get organized, financially organized, mentally organized, monitor your mindset, check in with your belief systems, and clarify what’s important to you. We talked about that in a prior episode. This episode is about systemize. The next part is to systemize, and then optimize, which is closely related to maximize.
The Ice Maker Story And Its Money Management Parallel
This is part two of the four-part acronym and four-part principles of money management and becoming a money master. Let’s get systemized. I want to tell you a story. A few years ago, I had an incident. If you remember from a prior episode I did on vision, I talked about how I have water issues in my house. For whatever reason, we periodically have issues show up. This is one of those stories.
One of the first things that happened when we moved into this house was we had a freezer. Thinking back to get the right details here, we have a side-by-side fridge. It has a freezer and an ice maker. Most of us have ice makers these days. This is a normal thing. Most of us probably have not yet had one fail. I’m one of those few who have had an ice maker fail.
For some reason or another, something happened where the water kept flowing after it was supposed to be shut off. Water flowed down into the base of that freezer and onto the floor, creating some pretty significant water damage in our kitchen. After that, I turned off the ice maker, so that we wouldn’t have any issues. What did we have to do to get ice? We had to buy bags of ice, or we had to get those trays of ice.
If you can imagine those trays of ice every day, we had to open them up, crack them to get them loose, and put them in a bag. There was some effort that we had to go through to make sure that we had ice. Who doesn’t like ice in their drinks? For years, we did this. Why? 1) I knew it was going to cost $100 to $150 to get a new ice maker. 2) I wasn’t quite sure how to install it. 3) I was fearful that there would be more water damage if we installed it and something went wrong again.
We delayed and delayed it until one day, I’m so sick of running out of ice. I’m so sick of having to crack these ice trays. They actually crack when you do it, and you have to replace them. I’m like, “What am I doing? Why don’t I put an ice maker back in so I don’t have to worry about it?” Our ice bin always seems to be empty. We never seemed to have enough ice. I was finally at my breaking point, “I’m done with this. I’m going to get the ice maker.” I found one for about $100. The installation was simple, and I turned it on. From that point forward, it’s set it and forget it. I have never had to worry about ice since then. It’s been about three years.
That’s a lot like what happens with money. When we get ourselves financially organized, we recognize what we need to do to keep things on track. We have some benchmarks like that bin of ice. We know how much we need to stay in good flow and not be running out all the time. We then put a system in place. What does that system look like? First of all, you need to have some bank accounts.
Most of us fund our income into a checking account. Nothing particularly wrong with that, except for some psychological things that are happening due to laziness. We’ve been trained to spend everything that comes into that checking account.
It’s like back in the day when we had cash in our pockets. We used to get paid in cash or by check. We’d go cash those checks, and we’d put some of our money in our pocket. That pocket money was intended to be spent. Today’s checking account is like pocket money. The pocket money or the checking account is our bill pay account. Anything that goes into the checking account is intended to be spent.
To overcome the psychological mishaps of draining our bank account and never having enough to save or invest, I have found a system like that ice bin and the ice machine. We set it and forget it. We need to have the ice machine. We have the bin, but we need to have the ice machine. The ice machine is like a savings account.
The Wealth Capture Account
What I have found over the years is there’s this thing called lifestyle creep. As our resources and as our income increases, we tend to spend all of it and sometimes more of it because we anticipate, “I’m going to have a big increase.” We may miscalculate what that’s going to be. We overspend. It’s a silly behavior, but most of us have done it at some point.
As lifestyle creep happens, the only way we overcome that is if we set a point of clarity about what our living expenses are, and we stay there. We have an automation where every dollar goes into a savings account rather than a checking account. Let’s put it this way. It doesn’t have to be a savings account. It could be a money market. It could be a checking account, as long as it’s not the bill pay account.
This is the secret sauce of everything I do with all the clients I’ve worked with over the years. This is the thing. This is something I’ve learned from my own mentorship. I hired a mentor. I’ve been mentored by many people. I’ve read the books. I’ve looked at the systems. Almost everyone goes through the checking and then to savings. What I found is we need to have it opposite.
We need to have all of our income go through a separate account first. This is the system. Everything goes through a separate account. It tells the brain, “All of it is mine first. Everything I earn is mine to keep.” Only based on my values and the things that I determine that I need, do I move money out of that account to my bill pay account, that checking account, or that personal operating account.
In essence, we put ourselves on a salary. We earn a salary from our businesses or from our employment that goes into that catch-all account. I often call it a wealth capture account or a clearing account. Those are nicknames for it to help determine what it is. I set a new salary for myself, which is the amount that I need to live on. Everything else automatically stays in that savings account. What has happened for me and what has happened for my clients who do this is there’s more cash there than you realize you would ever have. I have clients who say, I’ve never had this much cash in my life. Where did it all come from? It’s automating the system.
This episode is going to be short in that regard. Of course, this is a talking head. There are no visuals on this at the moment, but I do have some stuff on the website. If you’re working with me or someone else one-on-one on the team or in a coaching process, I give you the visuals on this. The point is you need to have a system. If we don’t have a system, things leak out. It’s like my ice bin, it’s always empty. It’s like you have it and then it’s gone. You forget to do certain things.
You need to have a system; without one, things leak out.
You forget to move money to savings, you spend what’s there. We need to overcome lifestyle creep. We need to be smarter than that. We need to get out of our own way by having a system where you put money through a separate account. It’s like an intermediary account. It’s a wealth capture clearing account. In essence, it’s an intermediary where everything goes first. As it builds up, we have our emergency money automatically handled. We have some fun money that’s automatically there. We have money available to make investments when the timing is right.
If we have a debt we want to pay off, we have money building up that we can pay off. If there’s a consumer thing that comes up or something unexpected that you have to pay for, a larger expense like this flood and having to pay a deductible, there’s money there. It makes things easy to handle. That’s part two, organize and systemize. We have to get a system in place that’s pretty much automatic so that our bank account is filling up rather than always being depleted. Take care. We’ll catch you in the next one.