How to Become Financially Secure When You’re Not a Millionaire

It’s 2019.

As an entrepreneur, I just completed my annual goal review and goal setting exercise.

One of the things I noticed from my review was that I had been lazy in 2018 – didn’t follow much of my regular morning routine.  2019 is the year that I want to get back on track, make it my lifestyle and never look back again. 

In case you are curious, this is my morning routine (at least for the last two days ? ):

• Wake up before the kids get up by 1.5 hours
• Meditate for 20 minutes
• Read my goals
• Read a book for 20 minutes
• Gratitude
• Plan my day
• Drink water

Getting up early allows me to have a head start of the day.  This includes working on stuff that I struggled to find time to do during the day when the busyness kicks in. 

This blog post was written before 6 am. 

This means…when you’re hosting a New Year party the previous day, I had to kick all my guests out by 8 pm so I could get to bed by 8:30 pm. It’s NOT easy. ? (Hopefully they would understand.)

As embarrassing as it may appear to you, I also noticed from my annual reflection that I didn’t pay nearly enough attention to how I spent my money, including how I grew my business on the payroll, operating expenses, etc. 

Over the holidays, I started on the book Profit First written by Mike Michalowicz. One of the goals this year is to bring my business, including real estate portfolio, to the target level it describes in the book.

I’m only half way through the book but I am so fired up to use his system, and I will share what I have learned so far with all of you. This applies to both business owners & employees. 

Envelope System

The author, Mike’s mom, had a part-time job when he was a teenager.  Some weeks she got paid a bit more.  Some weeks, she worked less and got paid a bit less.

When she got paid, she divided up her pay into 5 different envelopes – “Food,” “mortgage,” Community,” “Fun Money,” “Vacation,” and “rainy-day”.  She would put 50% into her mortgage envelope, 15% to vacation, 5% to fun money and 10% each to the rest.

Her mortgage was 40% of her pay.  She chose saving 50% because there were weeks that she had fewer hours and there were weeks that she had more hours.

In case of bad weeks, she would always have the rainy-day envelope as a back up.

Mike’s mom never missed a mortgage payment, and he always felt that he had more than enough.

Installment loans allow the consumer to borrow a set amount of money at one time, and pay the loan back in monthly installments, which are at a set price. This type of loan has helped many people overcome financial difficulty and should be considered if you fall behind on any type of payment.

Applying this system to our personal life

Our brains are wired to use our bank account balance as a measuring stick to our financial health.

This system simply takes this habit to the next level.

You will always have a separate bank account for mortgage and household expenses, such as property tax, utilities, insurance, kids’ daycare and life insurance, etc.  Those are non-negotiable, and you can never touch them.

Be like Mike’s mom, allocate more than you truly need to, so you always have a safe cushion just in case.

Also setup a separate account for savings or a “rainy-day” with a provider like Atmos Financial.  This is also an account you cannot touch.  Once the money goes in, it can never go out except in emergencies. 

Using the allocation percentage above, she has 40% left for food, vacation, fun money and community.

Limit your spending on these categories, whatever it would be. If you net (after tax) $5,000 per month, this means you’re left with $2,000 on food, vacation saving, fun money and community. 

I have never applied a system like this in my personal life. I’ve always relied on the traditional profit & loss system to tell me how much I’ve made for the year. After all, I went to school to be an accountant.  I got a professional license learning how Income – Expenses = Net profit.

I put my focus on income and my expenses.  Net profit would automatically be there.  That’s exactly how I have been managing my own money.

At the end of the year, if we’re lucky, we have something left in our bank account.

If we are not lucky, we don’t have anything left.

How wrong was I?!  How flaw is Income – Expenses = Net Profit? 

Although my kids are only 3 and 5, it’s always in the back of my mind to teach them how to manage money. 

This Envelope System is exactly what I would teach them. 

Take away your daily obligation, take away your rainy day funds and take away your savings before you spend. 

You can always find a way to spend within your limit.

If you are struggling with saving for your first investment property downpayment, try this envelope system. 

If you are tapping into your line of credit to pay for your holiday spending, try this envelope system.

Years ago, I met with a prospect, and he came in with his wife for a consultation. She’s also an accountant.

They both made a decent amount of money, but they both felt that they didn’t have enough to spend.

Husband and wife both made 6 figures.  In Ontario unfortunately, $150K payroll would give you $100K of take-home income.  If you’re also making a contribution and paying for additional benefits, this $100K can be less.

$100K is roughly equivalent to $8,300 per month as spending. A pretty decent amount, isn’t it?

If both husband and wife are netting the same amount, you’re doing REALLY well.

This isn’t true when this couple has the following:

• Two kids were in private school, each costing $20K each annual tuition fees, plus all the incidental cost.  Easily $4K per month. 
• Large home in GTA with an $800K mortgage. Easily $3,500 to $4,000 per month.
• With a large home, it comes with a large operating expense.  This can easily be $1,500 to $2,000 per month. 
• A nice European car that costs about $1,500 per month
• A motorcycle that costs about $700 per month
• The list goes on…

I didn’t have the tool that equipped me to help them.  I do have it (at least I’m half way through the book) now. 

I didn’t have any solution provided to them, other than saying that they would need to cut down on their expenses.

The conversation wasn’t easy.  The car was on 4 year lease, the kids need their best education, and the motorcycle was only $700 a month. 

Accountants do not have the magic wand to lower your income taxes, especially with people who earn employment income. Our hands are tied.

Even if we could save tax, the tax is only part of the equation.  Not the entire solution.

It starts with making difficult choices and taking care of your own money. 

It starts with you.

Until next time, happy Real Estate Investing.

Cherry Chan, CPA,

Your Real Estate Accountant