How to Control Your Money like the Top 1%
Most people have their finances out of control: they don’t know how much they spend, how much they should spend, save or invest, and don’t achieve anything with their money.
As a result, half of Americans and Brits are broke! They spend their entire life working and don’t even have a thousand dollars or pounds in the bank. I don’t want to sound too harsh because it’s not entirely their fault.
Technology is progressing too fast for our brain. But the real danger is that technology is only serving the interest of capitalism. That’s how we end up living in a world designed to make people spend more than what they earn. So, unless you are aware of how modern capitalism exploits the majority to make the minority richer, and how to build a system that protects you, you’re going to be another victim of modern capitalism.
Step 1: Know your numbers
Let’s start with the basics: you need to know your numbers. And by numbers, I mean how much you make and how much you spend.
- Money IN - Money OUT = Money Saved
I know it sounds very basic but most people don’t know their numbers. There is no way you can be in control of your money if you don’t know what you’re doing with it.
I want you to think of yourself as the CEO of your own life, trying to run a good business. Every month you make money and you have costs.
- What you make - your costs = your profits.
It should be positive to be a good business. If it’s negative, then you’re making losses. It means that you spend more than what you earn.
As the CEO, your job is to make more money than what you spend so you can keep your business running and reinvest the profits. If you are consistently making profit, then your lifestyle is under control and you are on track to become financially free.
But, if you are making losses every month, it means that your finances are out of control. Your lifestyle is not sustainable, you’re building debt, and are heading towards bankruptcy. Your business will be closed, all your possessions will be liquidated, you will have nothing left. You will be blacklisted from financial institutions and nobody will lend you a dime.
If it sounds like a horror movie, then you’re hearing it right. So, always stay on top of your numbers and you’ll be fine.
Now, let’s talk about the practice:
In order to look at your numbers, start by taking all your bank accounts and credit cards. Don’t forget any -it’s super important - and aggregate all your transactions. Again I insist, don’t leave any card out of the equation, you really need the full picture.
Once you have all your data ready, you’re going to look at all your monthly cash flows. What are cash flows? It’s the sum of all the money that comes IN and OUT of your bank accounts.
20 years ago, you would need to compile all your bank paper statements each month and go through them one by one. Now, technology makes it so much easier. Apps such as Nova aggregates your accounts in one place, to help you analyse your cash flow a lot quicker and easier. The app is available for free on the App Store, Google Play and Web.
Let’s look at the month of June:
- My salary was £3000 which gives me +£3000 of Money coming in
- Then I need to deduct my fixed costs. The fixed costs represent everything we need to pay the same amount every month, such as bills, subscriptions etc…
I spent a total of £1300, which includes my rent, utility, broadband… As a rule of thumb, always try to keep your fixed costs below half of your income.
Here 1300/3000 = 43% so we’re good.
However, if you were to spend more than half your income on fixed costs, you will have a hard time-saving money
- Then I spent £1200 on variable costs. Variable expenses include everything that isn’t fixed cost: groceries, eating out, shopping, etc.
- Now let’s sum all the cash flows: 3000 - 1300 - 1200 = 500.
- I have saved £500. That’s 16% of my salary.
As you can see, knowing your numbers is very simple. Anyone can do it, and I recommend you run this analysis at least once a month.
Being in control of your money means that you understand your monthly cash flows, you understand that your numbers are the reflection of your own behaviours and you know which habits you can change if you want to save more. In a way, knowing your numbers is like knowing yourself and once you start to know yourself, then you’re ready for step 2.
Step 2: Know what you want to achieve
Many personal finance coaches tell people to budget using a 50/30/20. It sounds easy and sensible but it doesn’t work for most people: 75% of them will fail to hit their budget, feel bad about themselves and give up.
The problem is they don’t have the motivation to save for a random target that doesn’t mean anything to them. It’s just not tangible enough to be worth the effort. The smarter way to budget is to work backward. Think of what you want to achieve with your money, make it your drive, and then work out how much you can spend.
Do you want to save to buy a house, car, pay off debt, invest, retire early…?
Remember: you’re the CEO of your life.
You need to know what you want and then execute. Because if you don’t, then you’ll end up serving modern capitalism instead of living the life you want, which is exactly why the majority of consumers are broke.
Let me explain how capitalism is now using technology to manipulate the spending behaviours of people. As you know, we live in a capitalist society, where investors invest billions of capital in companies to turn these companies into huge profit-generating machines.
All this capital has created a gigantic market of products and services that consumers can buy. So far nothing new, capitalism is 100 years old. The rules of the game changed when our generation started to massively use social media. Have you ever paid to use Facebook, Instagram or Snapchat? No, and yet they make billions.
What’s the secret? They use our data to make us spend money on things we don’t need. And if you don’t have any money left? No problem, buy now and pay later. The financial system sucks the money of the consumers who are out of control.
You see where this is going. It’s not a coincidence that most people are broke, it’s not the result of a series of random events, or chance. No, it’s all engineered. You may wonder why people buy things they don’t need? Who can engineer that, that doesn’t seem to make sense.
No, it doesn’t make sense because humans don’t spend rationally. And guess who were the first to realise that? Marketers!
Yes, marketers are the first who learned that people buy emotionally rather than rationally. So instead of selling products based on their intrinsic value or their concrete utility, they sell by exploiting people’s emotional needs, frustration, loneliness… that have nothing to do with their product! Do you know why it works? Because buying stuff gives people a dopamine rush that makes them feel better… for a short moment and then back to square one.
Sounds familiar? Of course it sounds familiar, I just described to you the principle of instant gratification. Wait, it gets better. Do you know how to put marketers on steroids? By giving them access to all your freaking data of your entire life. And then an army of data scientists will build AI technology to exploit any event of your life to make you believe you need to buy stuff to feel happier.
Look they’re not bad or evil, I’ve been a data scientist as well (but never for marketing).
The point is, they’re just doing their job. And our brain is 2 million years old, it can’t defend itself against today’s technology if we don’t teach it how to.
So your job as the CEO of your life is to tell your brain that modern capitalism is trying to transform you into a consumer who buys stuff to fill emotional voids. Your job is to understand that if you don’t know what you want, you’ll end up wasting your money on stuff you don’t need.
And if you spend your entire life working, to buy what others want you to buy, you’re not free anymore. All your money would feed modern capitalism instead of feeding your own ambitions.
In other terms your job is to be financially free, and I wish they were teaching that at school.
Financial freedom is when you’re spending money on what you really want. Just look around you at those who don’t have any purpose. They don’t know what they should do with their money, they are lost and desperately trying to find meaning. And guess what happens? They chase instant gratification. They are the perfect consumers,
So try to isolate yourself from the advertising you see and think of what you want to achieve with your money. Then make it your financial goal. Own it and remember it whenever you feel like saving is too hard. Because your financial goal will become your best protection against the trap of instant gratification.
I will write an article on how to set financial objectives because it’s a super important topic. But here is the short version for today:
Case 1: you have expensive debt, like a credit card or overdraft…which usually costs 20, 25% then your ONLY objective is to get rid of it as soon as possible. It means that you don’t invest, you don’t buy a bigger car, you don’t start saving for a house. You just pay that off.
Case 2: You’re debt-free, congratulations! You’re free to set any target you want.
Anyhow, whether you need to pay off debt or save for any goal, the idea of financial planning is the same: you need a certain amount of money for a future date, and you’re trying to figure out what’s the best plan.
If you already know how much you can save per month, the planning is easy.
Here is the formula:
Goal Amount / Monthly Saving Capacity = time it will take
I make it sound easy but in reality most people don’t know how much they can save per month.
That’s why it’s critical to know your numbers.
If you need to save for a fixed date like holiday or weddings, then calculate how many months you have left and the formula becomes:
Goal Amount / time you have = Required Monthly Saving
Let me show you how I do it. I’m setting a new savings goal to buy a 500k house.
Nowadays banks can provide mortgages with just 5% down payment, which means that I just need to save 25k.
Let’s see when I can afford it. The answer really depends on how much I can save per month. At my current saving rate, the completion date would be August 2025 by saving £500/month. But I would progress much faster if I could save more.
When would I get my house if I can save £600/month? December 2024. What would it take to have my down payment ready for next year in 2022? How crazy would it be? And the answer is to save 1400 per month.
That’s quite a stretch but not impossible. All I need to do is to spend a year and a half living frugally and I’ll have my down payment. I’m up for the challenge! Look, you don’t have to make dramatic changes in your lifestyle, sometimes a small improvement is enough to make a long-term impact.
I don’t know what your personal goal is, but you can translate anything you want into a desired date and its Required Monthly Saving. Having a goal gives you the motivation to change your habits because you know where you’re heading, and you know that the only thing you need to focus on is to meet your Monthly Required Saving.
Once your goal is set, you’re ready for budgeting.
Step 3: Plan your month
Most people say they want one thing in life, but their decisions don’t align. They want to buy a house, but use their money for everything except saving for their house deposit. That’s where budgeting comes in, it’s a tool that will help you with the execution.
If you’re new to budgeting, it consists in planning your monthly income and expenses to make sure you will meet your savings goal. Planning will train your brain to think ahead. If you want to control your finances you absolutely need to be a forward thinker.
The best way to do it is to project your monthly cash flows. You know, the Money IN - Money OUT = Money Saved
The idea is to look at the current month and project:
- How much you will earn
- Minus how much you will pay on bills
- Minus how much you will need to save for your goal
And that will tell you how much you can safely spend until the end of the month.
I know a lot of people don’t budget in a forward-looking way and look at the past instead. For example, they would budget the current month based on their last salary. You could do that, but honestly mixing the past and future makes everything so complex.
So let’s keep things simple: every month there is Money IN - Money OUT = Money Saved.
Let me show you how I plan my month step by step:
Income: I will earn £3000 this month.
Bills: These are all my fixed costs, everything seems in order
What’s left will then be split between my variable expenses and savings goal.
My Required Monthly Saving is £1400/month and here we go!
The planning is done! You see, planning your finances is actually a matter of seconds when you know your numbers.
Many people ask me: but Sam I want to set a budget for shopping and groceries and going out and transport.
Yeah of course you can. In the early version of Nova, there were objectives for each category. But then you end up with 10 budgets for 10 categories, honestly, it becomes such a headache to track.
Back in the day, our users kept asking me questions such as “I’ve overspent on restaurant and home improvement but less on groceries, am I fine?” I realised that when people focus too much on the details, they kind of lose track of the big picture. And when tracking your spending, the big picture says that it doesn’t matter if you spend your money on shopping vs going out.
What matters is that you don’t exceed your total budget.
That leads us to step 4!
Step 4: Track your spending pace
Guys, pay attention because Step 4 should be easy and yet 99% of people do it wrong because nobody teaches you how to properly track spending. I’m going to reveal the #1 mistake that even the smartest people make, so you can avoid it.
Look, in my case, I can spend up to £300 for the month. Am I good if I spent £200? Yes, because 200 < 300 ? And here is the trap. You can’t answer this question without considering the time dimension.
Let me illustrate with 2 scenarios:
Case 1: I have spent 200 on day 1. I now need to survive the next 29 days with just 100
Case 2: I’ve spent a total of 200 and it’s day 25. I have 100 for the 5 days of the month, it’s obviously much easier
To track your spending, don’t just look at how much you have spent. Look at how much you have spent and how far you are in the month!
Traditional graphs like pie charts, bar charts that you find in most budgeting apps are not good enough because they show only 1 dimension, which is the money spent. You need a chart with 2 dimensions: money AND time. You can either create that chart on a spreadsheet or use an app like Nova that will do it for you.
Nova projects a dotted line known as the Budget line. The solid line on the other represents actual spending. If your spending is below the dotted line, you are in the green zone. But if your spending is above the line, then you need to slow down your spending. By slowing down,you will flatten the curve and return to the green zone.
Here is an analogy.
I don’t know if you played any car racing games, but often in the settings you can activate the AI guidance which will show you a dotted line with the optimal trajectory to follow if you want to win the race. Then you resume the race, try to follow the AI trajectory and it will improve your time.
This dotted line is the same, it acts like a guide and shows you in a very visual way at which pace you should spend money. 99% of people are checking how much they have spent rather than how quickly they are spending money. So I want you to take the habit of always asking yourself: “am I spending too quickly?”
And if you take that habit, you will find it much easier to stay in control.
Let me recap the 4 steps to manage your money:
- Know your numbers
- Know what you want
- Plan your month
- Track your spending pace
If you do that, you will never overspend. This is the secret to being among the top 1% and joining the tribe of the financially free! You can ask people around you, 99% of them don’t do any of that. And that’s why they’re broke no matter how much they earn.
The only way to be among the top 1% is to do what the 99% don’t.
If you want to download Nova or try out the web app, you can do so here.
Getting good at managing money is not rocket science, but it requires ACTION. I promise you - if you adopt this methodology, you will see changes. You will feel more confident, in better control of your behaviour and that’s how you should feel if you want to be the CEO of your life.