I trained as a Civil Engineer and learned to love systems. Engineers are trained to build and maintain systems to solve problems. For example, your car is a system that has been perfected to move you from one place to another in a safe and comfortable way. Systems obey certain rules and are predictable. They don’t depend on people’s moods and whims. For instance, your car should work whether you are happy or not.
This fascination with systems has led me to try and apply these principles in the messy world of money. For most of us, money is such a touchy and sensitive subject. That’s why you rarely find people discussing their salaries at the dinner table. This makes money a good problem in which to apply systems thinking. Many of us want to have more money and freedom. We don’t want to be burdened by debt. We want to have a good career. We want to live in a decent place. We want to take our kids to good schools. We want to drive nice cars. Creating a system to achieve these things could be a worthwhile investment.
There is a simple system I am applying to help with my money. This system has helped me get out of debt, start businesses, and increase my savings and it has put me on a path to achieving financial independence in a couple of years. Financial independence is the point at which passive income from my investments will be able to cover my monthly living expenses. This system has been developed through trial and error and lots of research. The system has five parts to it: 1 – Set clear goals; 2 – Determine a baseline; 3 – Plan (Income, Savings, Spending, Debt Management, Investment); 4 – Execute Plan; 5 – Monitor and evaluate progress.
I will try and explain it in as much detail as I can for your benefit.
1 – Set clear goals. You need a vision for your finances. Without clear written goals you will continuously drift and blame the whole world for your financial problems. The bible even says that my people perish for lack of a vision. This is serious. Without envisioning the future you want you will actually perish literally! There are two acts of creation for everything. The first creation is spiritual and the second is material creation. Before money enters your wallet it has to enter your spirit first. The way it enters your spirit is through constant reflection on the life you want. If you don’t see yourself driving the car you want, you will never drive it. If you don’t envision yourself debt-free you will forever stay in debt. If you don’t dream of the career you want, you will never get it. Everything is created twice. So be careful to create the life you want by setting clear goals.
A couple of years ago I set an ambitious goal to retire early at 40 (I am 39 years old so the pressure is on!). This crazy goal forced me to do several things. This meant I had to get out of debt because I didn’t want to retire with a loan payment over my head. I had to secure a home for my family. I needed to have enough savings to survive without a job. I needed to be able to meet all my expenses without a job. I had to secure my kids’ education till University. So I wrote all these goals down with clear timelines for achieving each one of them.
2 – Determine a baseline. Once you know where you are going you need to determine where you are. In finance terms, it means assessing your level of income, spending, savings, assets, and liabilities. This is a painstaking process but a necessary one on your new journey to financial independence. I designed detailed excel templates to assess my current financial situation. I did a budget and also determined my net worth. This clearly helped me to see what I needed to do to achieve my goals.
3 – Plan (Income, Savings, Spending, Debt Management, Investment). Next is to develop a plan to get from where you are to where you need to be. The plan doesn’t have to be perfect. You improve the plan as you go along. I developed a plan to create more sources of income. I started two companies to earn more income. I developed a plan to increase savings. I automated my savings to build a system to grow savings. I used the debt snowball technique to tackle debt. I started investing in unit trusts and treasury bills to grow some passive income.
4 – Execute Plan. A plan is useless unless you implement it. The best plan is the one that is acted on. I created a business to teach and consult about financial management. That is how The Money Engineer came about. I knew that if I retired early I needed something to keep me busy. I also started a cottage manufacturing business with my younger brother which makes laundry soap, juices, and ketchups. These two projects have really kept me awake at night! I got out of debt using the debt snowball strategy. I created standing orders to save more money. Once I got out of debt I accelerated my savings into liquid assets like provident funds, insurance products, unit trusts, etc. I imagined retiring to the countryside so we bought land in the village and set up some simple projects.
5 – Monitor and evaluate progress. As you execute things change so you need to constantly track and evaluate progress. I have developed an elaborate tracking system for my finances. I track my income and expenses using simple apps. I have five-year projections of my finances. I track my net worth on a monthly basis. We have also developed a comprehensive reporting system for our business. I know the plan is working because of the key metrics I monitor. My savings rate is over 70% meaning I save most of my income. My debt ratio is zero because I have no personal debt. My net worth is growing at over 30% per year. I can survive for over five years without additional income (previously I was living hand to mouth and was one paycheck from going broke). My passive income currently covers 40% of my monthly living expenses. My retirement goal may be delayed by a few years but definitely within five years, I will achieve financial independence.
Having some kind of system has really helped me to get a grasp of my finances. Now, you don’t have to replicate or agree with what I am doing. I am just sharing my experience. Find what works for you and do it. However, leaving your finances to chance is not a very good strategy. Achieving financial independence is a really difficult undertaking and that’s why most people never achieve it. Creating a system to improve your finances can really ease the journey to financial freedom.