Just like we have the laws of power, we also have laws of money and what I want to do is share with you 4 laws of money that have shaped my financial success!
Law #1: The Law of Income
The first law of money that you should definitely know is the law of income. The law of income covers the different money-making mechanisms that can grow your income, including how to break income barriers like 9–5 jobs. But besides that, the law of income aims at exposing you to the different types of income that can boost your overall net worth. To begin with, a regular income is critical in wealth accumulation and in achieving financial freedom. Your primary income, let’s say from your day job, forms the basis of all your financial goals, including savings, investments, homeownership, insurance, and early retirement. This income source is likely carved out of what you studied in college, whether accounting, art, medicine, law, or IT. Additionally, this type of income is usually more stable and predictable, paying you monthly or even weekly. Regardless, at the end of the specified period, you are set up to receive your salary less of taxes and other deduction plus allowances. It’s also important to note that this type of income directly correlates to the number of hours you put into it.
The second type of income is passive income. Ideally, you don’t need to exert too much time or effort to earn passive income. You simply inject your money into an investment vehicle and let the money work for you. The best part is that passive income isn’t tied to the amount of workload to carry, meaning that you can generate income even as you sleep. Dividend income is a perfect example of passive income. If you set aside money to buy a rental property, for example, you can potentially earn monthly rental income whether or not you put in a lot of work. This also applies to buying dividend-stocks or government bonds that yield dividends. Other forms of passive income are online businesses, music royalties, and interest earned from bank accounts.
Besides primary jobs, you can also generate income from a side hustle. You undertake this type of job during the extra hours after your 9–5. Freelancing, selling products on your online store, driving for Uber, or mixing cocktails at a local bar are some common side hustles you can start. One crucial advantage of side hustles is that they pave the way for another type of income known as profit income. This type of income comes about from selling your products or professional services at a nice profit. Think of making jewelry and selling profitably on Etsy or designing a website and charging your clients by the hour. With these type of side-businesses, you’re not limited in how much money you can make since the income is not fixed. This is why, according to financial experts, starting something of your own will add pace to your wealth-building journey, than betting your life on fixed-income salaried employment.
Actually, a 9–5 job can slow down your journey to financial freedom in a couple of ways. For one, this type of job demands so much time that you are barely left with any time to do anything else. Employment makes multi-tasking difficult, not unless you’re willing to let go of your work-life balance. In the end, you’ll have to fully depend on your monthly salary, leaving you with little money to save, pay off debts, and invest. Usually, companies will suck you into this system by offering high salaries and juicy employment benefits. Before you know it, you’ll be putting in more than 40 hours a week and missing out on vacation or family time. Secondly, with employment, being promoted is not yours to decide. You could stretch yourself all you want, but if your boss decides they’re promoting someone else, there isn’t much you can do about it.
Remember that some companies don’t pay for the extra hours you spend trying to impress them. So, if you take home $50k a year, that will be $25 per hour if you worked 40 hours a week, assuming you get 3 weeks of vacation. Suppose you went the extra mile and worked 50 hours a week; that will drop your hourly earnings down to $20 per hour. To be honest, you’re better off painting walls and mowing lawns 4 hours a day than working a 9–5 job that doesn’t reward your efforts. Unless you really love your job and it’s rewarding, these numbers can devastate you.
So, how can you ensure you are making more from your 9–5 job?
There’s no short cut to getting the most out of your 9–5 gig. Ask for that raise if you feel you’ve earned it. Sharpen your skillset and use it as leverage to secure a promotion. And if those don’t work, then resort to entertaining new job opportunities that will substantially increase your earning potential. Start with upgrading your academic qualifications or by upgrading your skillset via more informal means. Next, conduct thorough research on salary websites to find out what employers are paying for your position before sitting at a salary-negotiating table. This is the only way to ensure you’re not ending up with the short end of the stick.
Lastly, never underestimate even the smallest difference in monthly payments. Negotiating for an extra $100 could do wonders to your savings, especially over one year or more.
Law #2: The Law of Saving
The second law that you should know is the law of saving. It’s proven that people who save at least ten percent of their income have higher chances of attaining financial freedom faster. Sure enough, saving is the best gift you can give your present and future self. Whether you have a regular paycheck or not, start setting aside a fraction of your gross income every month.
The benefits of saving are unmatched if you ask me. Not only do they provide a cushion to fall back on when times get tough, but they can also fund some of your biggest investments if you’re determined enough. And we’re not done yet. Saving money generally gives you peace of mind as you navigate through life. Easily, there is no better feeling than knowing you have an extra, untouched $5,000 stashed in a money market fund (MMF) somewhere.
Talk about feeling fulfilled!
So, with all these benefits, how can you save more money?
The secret is automation. Create a system that allows a smooth transfer of funds from your checking account into a saving account even before you smell it.
Another life-saving hack is to normalize paying yourself for the hard work you put in to earn that paycheck. Set aside some money to settle your major bills, then leave some to pamper your body and entertain yourself. If you do this, you won’t feel the pinch when saving 10% of your income or even more. Once you get used to keeping away the 10% or more, you’ll find yourself being comfortable shrinking your budget so that it’s covered by the remaining amount.
The 3rd strategy for saving more money is to be aggressive with money-saving opportunities that come your way. This applies to cash windfalls or spontaneous gifts from friends that can be monetized. When there are deferred tax savings, for instance, take advantage and redirect that amount to your saving account or money market fund.
Money saved or invested before tax grows 30%-40% faster than money taxed before saving or investing. Take advantage of such negligible situations to save and make every dollar count.
The other saving tip is to be intentional with your saving plans. It’s very easy to get obsessed with frugality, to the extent of denying yourself some fun even if you have no goal to achieve. Don’t just let your savings sit in a bank with no plan for its use. If you have no short-term financial goals, you can save for long-term goals like retirement, owning a home, or for your kids’ college expenses.
Lastly, for the law of saving to take its course, there has to be action. Dreaming about saving a million dollars won’t put money in your bank account. You have to go to work, earn that money, draft a functional budget, and actively find ways to save and grow your money consistently. Besides, people who take action today will be lightyears ahead of their peers who procrastinate. Therefore, start putting away 10% of your income today. You can open a special account for that purpose and treat it with the same seriousness you treat your rent and mortgage. Also, make a decision to become a lifelong student of money. With money and the financial markets, you never stop learning. Read books with a recurring theme on savings and investments, subscribe to magazines and challenges that add to your knowledge, and enroll in short courses that teach you about being a disciplined saver. Not all these may pay off immediately, but the fruits will be ripe and sweet when you retire.
Law #3: Parkinson’s Law
Ever come across Parkinson’s law? Initially advanced by Cyril Parkinson’s, this law states that work extends to fill out the time available to complete it. This law is the best possible explanation for procrastination. For instance, you’re highly likely to wait until the project’s deadline even if you had the whole year to complete it. The same principle applies to filing taxes, packing for a trip, and of course, money. The second Parkinson’s law states that expenditure will always rise to meet income.
In simpler terms, your spending habits will change to accommodate any extra income you earn. In the financial world, this is known as lifestyle inflation. Lifestyle inflation is the sole reason why some people struggle to save money even if their income shoots upwards. What happens is that most people will change their lifestyle upon getting a raise or bagging a well-paying job. They’ll probably buy a car if they didn’t own one, move into a posh neighborhood, and maybe even take their children to costlier schools.
If you’re keen enough, you realize that all these changes exponentially increase overall expenses, which eventually eat up their paycheck and leave them with nothing to save. If you want to attain financial freedom, master the art of delayed gratification like rich people do. Because the thing is, you don’t have to satisfy your desires immediately. If your side hustle starts bringing in an extra $1,000 every month, channel it into your retirement account instead of upgrading to a house that swallows an extra $1,000 in terms of rent. While rent is an expense, your retirement account greatly benefits from compounding returns, and the extra $1,000 will have snowballed into something bigger in a few years.
Law #4: Law of Upper Limits
The final law of money that you should know is the law of upper limits. This law refers to the self-sabotage tendency that causes us to relax once we achieve our targets. The upper limit is, therefore, the limit within your comfort zone. Once most of us hit this point, we forget that greater success lies beyond it.
The law of upper limits is probably fueled by the self-limiting mindset that convinces you to believe that success is a destination. In the real sense, success is a journey that requires you to never settle. If you want to break free from this wrong mindset, start by setting new goals every time you hit your targets. For instance, do you remember that one time you hit your target for a math test? Did you stop studying after that, or did you set a new target for your next exam? Probably, you did the latter, not unless you had scored 100% and couldn’t go any higher.
You should adopt this same approach for your financial goals. If you’ve hit a target with your emergency fund, start another one for your children or spouse. In case you’ve got a promotion at work, start thinking of getting a side-hustle to supplement your new income. Setting goals and stepping out of your comfort zone is the only way to break the self-limitation and achieve financial success.
And those are the four laws of money you need to know!