In a chemical reaction, a catalyst is a substance that increases the speed at which the reaction happens.
The reaction can still happen without the catalyst, but you get much more powerful results when it is included.
In this post, we will be discussing three catalysts to reduce our financial stress and improve the value each dollar has in our lives.
This is the fifth part of a five part series on “Getting more value from your money”.
While this post can be read on it’s own, you might get more value by starting from the beginning ( Prologue )
The first two catalysts are categories for our list of priorities that are often underrated.
The first Catalyst:
The Ten Percent
This rule is an adaptation of a rule from that awesome book “The richest man in Babylon”.
The rule is:
Ten percent of what we earn does not belong to us, it belongs to our future!
We want to create a category in our budget, whose sole purpose is to improve our future financial health.
Either directly, by earning more money for us, or indirectly, by increasing our ability to earn money in future.
We want to aim for 10%, or more, of our income to be budgeted here.
There is a movement called the F.I.R.E movement ( F.I.R.E = Financial Independence, Retire Early). Their goal is to achieve financial independence as early as possible and retire from their jobs.
They focus on getting the percentage of income that they save as high as 80% or even 90%.
By reducing their expenses and increasing their investment savings at the same time, Many of them are able to permanently retire from their day jobs as early as their mid-30s.
The most common way to use this money is in direct investments.
This is where you put the money into a long term project. Where the money can work for you and return interest or dividends.
It could be an investment in property, perhaps buy-to-let or buy-upgrade-sell.
Investing in a local business, which you know well enough to expect growth and dividends.
Or doing long term investing in the stock market.
Any type of investment requires some homework.
Do not rush, this is a long term decision.
It is better to take two or three months to really investigate your options, rather than start three months early and lose all your money.
(Ps, anything that requires you to work on it daily or weekly is not an investment. It is a job or a business.
The goal of an investment is to free up your time, not demand more of it.
It may require some study and effort in the beginning but, once that is done, it should be paying you back years after you have forgotten about it. )
These types of direct investments are not our only option though.
We can also invest in ourselves.
One way is by education. Paying for training courses, extra certification or even a degree or Masters education.
It needs to be something we are doing to improve our future earning power though.
If we are studying a course just because we are curious, or it is interesting, that’s okay.
But that should come from our “Entertainment” budget not this one.
This category’s purpose is strictly to increase our future financial freedom.
We can also use some of it to test risky business ventures or side hustles. Without going into debt, or putting our main source of income at risk.
This money becomes our “opportunity fund”.
Whenever an interesting opportunity comes around, we will now have the funds, and therefore the choice, to take advantage of them or not.
Not every investment attempt we make will be successful. But that’s okay. As long as we remember not to put all our eggs in one basket.
They say experience is the best teacher. This gives us some money for the tuition fee.
An interesting thing will begin to happen once we have this “opportunity fund”.
Now that we have that money set aside looking for an opportunities to grow, more and more opportunities for that money to grow will start to appear in our lives.
And now, we will be able to take advantage of them.
The Second catalyst:
Always have a “Just for fun” category
As it sounds, this category contains a small amount of money that we set aside, each time we get paid, purely to spend on something fun, enjoyable and frivolous.
It can be a tiny amount.
But it needs to be enough for us to do something each month that we look forward to.
Perhaps the price of a single bar of our favourite chocolate, or the price of a trip to the cinema to watch a nice movie each month.
Something we look forward to. Something we enjoy.
The way this category works is a bit counter-intuitive.
The tighter our budget is, the more important it is to have this category.
If we have every single penny being spent on bills and/or paying down our debt, with the minimal amount for food or other essentials, that can be a bit of stressful place to be.
As we pay off those debts, and as we improve our income vs spending ratio, things will improve.
However, this category is how we let off some steam in the meantime, so the pressure doesn’t build up into an explosion.
It is us reminding ourselves of the goal we are working towards.
Us taking time to appreciate that where we are now is better than where we were yesterday. And where we will be tomorrow will be better than where we are today.
It is confirmation that we have done everything we planned to do this month, a guilt free appreciation of the progress we have made.
The budget is there to serve us, not the other way around. It’s purpose is to make our life better.
When things are tight or really difficult, it is easy to forget this.
To mistakenly see see the budget as the thing limiting us, rather than a tool taking us towards freedom.
This category is a reminder;
We are the boss.
We have chosen this path to a better future.
And, all along the route, we have placed these “Fun money” milestones as a reminder.
A reminder that we are doing a good job.
The third catalyst:
“Important” is greater than “Urgent”.
“Long term” is greater than “Right now”.
This one is a rule that is useful to remember whenever we are comparing two different choices.
For instance;
We are hungry tonight, it is urgent that we buy something to eat for dinner.
It is also important that we do grocery shopping for next week.
A normal reaction would be “I’m hungry now! How can I even think of groceries next week when I don’t know what I’ll eat for dinner?”
However, if we go to the rule, we realise that it is a higher priority to do the long term important thing “shopping for next weeks groceries” and then use whatever money is left to do the urgent thing “get dinner tonight.”
Look at it this way.
If we had done the important thing last week and done all our shopping for this week, then we wouldn’t be so hungry tonight.
And, if we do the apparently urgent thing tonight and spend all our money on a big dinner, then we are likely to have more nights next week when we don’t have enough food and end up going to bed hungry.
The thing that we focus on urgently fixing tonight, is likely to become urgent again tomorrow night, and the one after that, and so on… .
Leaving us always rushing to do the quick, risky fix. Never quite able to catch up.
The only way to change this, is to always prioritise the long term solution over the short term patch job.
Another way to look at it is that we need to say
“Even if I end up having to go to bed hungry tonight, I know that, for the whole of next week, I will eat like French Royalty!”
This catalyst applies in many areas of life.
Specifically here though, it applies whenever we use YNAB rule 3 – “Roll with the punches”.
That it!
Well done for getting through all the steps of “Getting more value for your money”.
The will be a short epilogue in a few days.
Giving some examples of just how well these principles and ideas worked for me.
In the meantime, you should definitely get started!
The full “Getting More Value from Your Money” series
>> Prologue
>> Part 1: On Being broke
>> Part 2: Measure, Measure, Measure
>> Part 3: The power is yours
>> Part 4: The YNAB method
>> Part 5: Catalysts
>> Epilogue
For Further Study
Mr Money Mustache’s Blog – How To Make Money in the Stock Market
Mr Money Mustache is one of the unofficial leaders of the F.I.R.E movement. In this article he talks about the safest way to make long term income from the stock market.
The Richest Man in Babylon – A book by George S. Clason
This is the book that laid the foundation for all modern financial management. If you learn and apply it’s lessons, you will be protected from all the most common financial mistakes people make.
The 7 Habits of Highly Effective People – A book by Steven R. Covey
This book goes in-depth into a number of practical habits that we can develop, which will help us improve our personal power and our ability to interact and work with others.
It is a book you will need to take time, sit down and absorb. And it will generously repay every minute spent on it with years of added value.