Let me now show you how to manage your money better by teaching you a theory that I learnt from Robert Allen and which he calls “The Bathtub Theory of Economics.”
Money flows into your life through a money tap and pours into your money bathtub. Money flows out of your bathtub through a drain or a leak in the bottom. Now if you want to have money overflowing in your life you have to figure out a way to fill up that bathtub to overflowing. What’s the best way to fill that bathtub up?
I used to think that the best way to do this was to turn on more taps so that more money would flow into my bathtub. I then found that the more money I earned, the more I spent. In other words my lifestyle expanded to take up the extra income I generated. Have you found that too? People who spend freely always think that the best way to solve their money problems is simply to earn more.
Spendthrifts always think of new ways to turn on the taps rather than looking for ways to plug up the leaks. The best way is to do both. You’ve got to turn on multiple sources of income, (many taps) and also plug up those leaks. Most people have one simple tap or main source of income. Their job. This income flows into the bathtub of their life and flows out through the drains at the bottom.
Most people spend every cent they earn and then some. They never put aside money in savings. They spend it all. Their plan is that they will save what is left over once they have taken care of all the bills. The reality is that usually there is nothing left over. That means that they are not rewarding themselves for all their hard work. They are simply working to pay the bills. In my opinion, that’s not living, - that’s just existing! Obviously the only way to become really wealthy is to plug up those holes and to turn on more taps. When you have multiple sources of income, you become more financially secure. When you spend less than you earn, you are master over your money and you have extra choices open to you.
How many leaks are there? I’ve simplified the ways you can spend money into ten categories. Each one flows in order of the their priority.
According to Rockerfeller where should your first outflows go? To your partners – God first, yourself next and then the Australian Taxation Office third. Then you need to live and maintain your lifestyle with what’s left over.
Therefore the first category is called Tithing which represents your contribution towards God, Church, charity, others, giving. In the book,
The Richest Man In Babylon George Clason talks about giving away 10%. It’s interesting to observe that some of the richest people in the world are also the most generous supporters of charity. Is this just because they can afford to or are they rich because they give so much away? It’s worth considering.
Category 2 is extremely important. You must pay yourself next. You must take the next 10% and put it into the self-category. This is to reward yourself for all your hard work. It’s the foundation of all your future wealth.
Category 3 is Taxes.
Next comes the ATO. Although the top tax bracket is over 47% including the medicare levy, you really don’t have to pay 47% of your gross income in taxes. With standard deductions, depreciation etc you can get your taxes down fast. In fact, Kerry Packer once said that: “Anybody in this country who does not minimise his tax wants his head read.” When you minimise your taxes however, you need to be very clear about the difference between tax evasion and tax avoidance. Tax avoidance is fine if it is done within the law, whereas tax evasion can land you in jail.
Category 4 is your shelter in the form of house payments or rent.
Category 5 is for household expenses. E.g. food, clothing, TV, normal living expenses attributed to living in your place of residence. This will amount to the largest category.
Category 6 is for your car – every time you pay petrol, repairs & maintenance you should record those outgoings in this category.
Category 7 – Fun or entertainment – usually when you spend money on movies, fast food, travel or toys.
Category 8 – Insurance. E.g. house insurance, car insurance, health insurance etc.
Category 9 Miscellaneous expenditure including payments towards debt.
Category 10 – business expenditure.
Every dollar you spend should be itemised and recorded in one of these categories. When you do so, you’ll develop a financial tracking system which is very easy to follow.
Get yourself 10 manila folders and number them from 1 to 10. Don’t throw your receipts into a shoebox. File them daily. This will help you to take control of your finances in a few short weeks. There are lots of advantages in doing things this way. But the big one is TAXES. Most of us don’t keep our receipts and when we do, we don’t know what they were for.
Suppose you buy some stationery for your small business. This is a tax-deductible expense. The ATO lets you deduct this expense from your income before you calculate your taxes. If you are in the 43% tax bracket then every dollar you claim as a tax deduction gives you a 43% return on your money spent. When you keep the receipt for a tax-deductible expense and then deduct that expenditure from your income, you’re making 30% on your money. 30% on your money is the kind of return that makes millionaires fast.
The key to financial planning is cash flow management. You’ve not only got to get the money to flow into your bathtub, you also need to manage the leaks so there is money left over at the end of the month. That’s called profit. With this profit you buy things we call assets.
You may also buy things by going into debt. The object of the money game is to accumulate enough assets so that eventually the income from your investment assets will support you instead of you having to work for your income.
Are you good at turning on taps? You need to get those multiple sources flowing into your bathtub. Are you good at plugging leaks? Are you good at investing? Are you good at accumulating assets? Are you good at repaying debt? You need to stay out of consumer debt. The better you are at controlling and managing these activities the wealthier you’ll become.
About Hans Jakobi
Hans Jakobi is an educator, author and investor. He is the author of six best-selling books including,
How To Be Rich & Happy On Your Income which is available at:
www.supersecrets.com and the presenter of the Super Secrets to Wealth® do-it-yourself real estate home study course. Join Hans Jakobi’s FREE Super Secrets® Online Newsletter
© 2002 Hans Jakobi. All rights reserved worldwide
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