A common theme throughout popular finance literature is the idea that the rich see money differently than average people. You may have heard buzz phrases like “pay yourself first,” or “don’t work for your money, let your money work for you.” These concepts sound great in books, but putting them to practical use can be a challenge.
My finances used to be a mess. I was drowning in a sea of debt, late fees, overdraft fees, and collection notices. I was always a few dollars away from a total financial meltdown. Even though I had read dozens of books on personal finance and understood the basic concepts of wealth, I obviously didn’t know how to put this information to work. Something was going to have to change or I was going to struggle forever.
When I finally had the “a-ha” moment that turned my financial life around, it wasn’t by learning another wealth strategy. I realized that even though I was creating a very sophisticated budget every month on a detailed spreadsheet, by the end of the month, I was right back where I started.
The thing that I finally figured out was that wealth has more to do with psychology than with math. As smart as I thought I was with the numbers, it never came out as I planned. I was able to put a stop to the madness by setting up a system that carried out my intentions for me so that I couldn’t mess it up. I found that changing my perception of money attracted more of it into my life.
Where Does the Money Go?
Have you ever realized that no matter how much money you have in your pocket, it always seems to disappear? Is there a place in the sky where all of our misplaced money goes to congregate and have cocktails? Most people spend money almost unconsciously until it’s gone. This phenomenon is why most people never really get ahead even as they make more and more money.
Creative people are especially vulnerable, mainly because we have great visionary skills to see what we want for ourselves and our money; but these skills usually come at the expense of the logical management skills that are necessary to carry out our plan. To make things worse, creative people tend to rely more heavily on their emotions, and therefore are more susceptible to impulse buying and frivolous spending.
This type of behavior is how Las Vegas makes its money. Most people think that the house always wins because the odds are stacked against the players. While this is true, it’s only part of the story. The rest of the story has to do with psychology.
During the course of an evening of gambling, the average person’s winnings and losses oscillate back and forth to some degree. Vegas wins because they know when a person will walk away. Think about it: is a person more likely to walk away when they are up $500 and “feeling lucky” or when they are completely out of money and have nothing left to gamble? Very few have the discipline to walk away when they are up.
The Economics of Bartending
Ironically, most people’s financial situation doesn’t change much between large and small paychecks. I learned this from years of bartending, an industry where the income is highly volatile. To make things worse, I worked in a restaurant on a lake that was very sensitive to the seasons. We joked that it was solar powered.
In the summers, when the place was packed, my pockets would be fat with wads of money. In the winter, when it was deserted, there were nights that I didn’t even make enough to pay for my ½ price employee dinner. Ironically, my standard of living never really changed much; I was always on my last dollar. How could this be?
It turns out that when I was making a lot of money, I was spending it as fast as I could make it. Feeling like I had money, I was more likely to go out for dinner or buy toys, but at the end of the week, I didn’t have anything to show for it.
When I wasn’t making much, I still somehow came up with enough to pay my rent and bills. I was still able to eat, put gas in my car, and I even went out from time to time. It didn’t seem possible, but it always worked out.
This taught me that how much money I was making wasn’t the problem. The problem was that I didn’t have a system in place to organize it before I spent it.
My last few years bartending I took a chance and transferred to a new restaurant next door that had great potential, but was still very slow even in the summer. My thinking was that I would get in while it was slow and ride the wave up until I was making the big bucks.
Unfortunately, the wave never happened. The restaurant continued to struggle as if it were winter all year round. The amazing part was that since I had this new system working for me, I was able to work my way out of $20,000 in debt even though I was making less money.
My Old Way of Thinking
I was struggling because of how I saw money. I realized that I was mentally and physically lumping it together into one category: just plain money. There was no difference to me between the money I had in my checking account, hidden under my bed, given to me as a gift, or in my savings account; it was all just money. While this doesn’t seem like an entirely illogical way to think, I’ll show you why it’s dangerous.
With this mentality, when someone asked me to go do something with them that cost money, this is how my decision process would go:
“Do I have enough money?
Let’s see, I’m out of money in my checking account…
I don’t have any under my bed…
I might have a bit left in my savings account…
Yeah, I’ll just transfer some over to my checking account and pay it back later.
Cool… so, where are we going again?”
In my mind, if there was any money anywhere, it was available for the taking. This became an even bigger problem when I started to apply this way of thinking to my credit card balances. Since I didn’t give myself any barriers to accessing my money, it was as if gravity was pulling it down like sand into a hole.
A New Way to See Money
My first clue that it was my mentality that was holding me back was when I asked a friend who was well off if they wanted to do something that cost money. “I don’t have any money,” he told me.
“What are you talking about?” I said. “You have all kinds of money. What about the $300 you made last night?”
“That money is for rent. If I make a little extra money tomorrow we can hang out.”
I couldn’t believe my ears. Rent wasn’t due for two weeks. Besides, this guy was trying to tell me that he didn’t have any money and everyone knew that he was doing just fine. Why couldn’t he just spend that money now and use the money he made the next day for rent?
Compartmentalize Your Money
What my friend understood (and I didn’t) was that all money is not created equal. He gave every dollar a purpose from the minute he made it. I learned that if I was going to learn to keep more of my money, I would have to learn to compartmentalize it.
When each dollar has a purpose in its own compartment or category, it is free to pursue its intended goal. A good example is the difference between principal and interest in an investment. A person who doesn’t compartmentalize blends the two into one category: just plain money. Using this mentality, they might dip into the principal and diminish its power.
A savvy person knows that the principle is never to be touched. They might move the principle from one investment to another, but it will always remain invested. The interest, on the other hand, might be harvested as passive income, or reinvested. Principle and interests are two different types of money with different assigned values and barriers to access.
A Support System
Just seeing it this way is not enough. To really implement this type of mentality it is important to set up a system that makes it as easy as possible to know the barriers between the compartments. I suggest that the best way to do this is to open up five separate bank accounts, one for each major compartment. When I worked for tips, I had five separate envelopes that I put my money in so that there was no confusion as to where it belonged before it made it to the bank.
Here are the five categories that I suggest in order of importance.
1. Long Term Wealth
2. Minimum Spending Cash
3. Regular Monthly Expenses
4. Irregular Expenses
5. Fun Fund
It is possible to have many more compartments for your money, but I find that five is enough without getting too confusing (and driving your banker crazy). Money should flow into these compartments in this order as it is received. The absolute best way to accomplish this (if your company allows this), is to automatically split your check into these different accounts when it is deposited directly on payday.
1. Long Term Wealth Account
(Principle Debt Reduction, Retirement Savings, Passive Income) – Money Market Account
The first 10 – 30% of every check should end up in this account. This is what is known as “paying yourself first.” Some people think that “paying yourself first” means taking yourself out to dinner, but it really means putting aside money that you will invest and grow for the rest of your life.
Even if you think that you don’t have enough money for this type of account, DO IT ANYWAY! Most people won’t even notice taking home 10 – 30% less money, just like I didn’t notice the winters at in my bar jobs. Start by paying yourself first, and then adapt the rest of your budget.
A good type of account for this compartment is a money market account. These types of accounts generate a decent interest rate and have restrictions on how many checks you can write. Restrictions are a good thing for your most sacred compartment.
The most important thing about this account is that you never touch it. You are allowed to move it from investment to investment, but the principle that you put into this account should never be cashed for the rest of your life.
Principle Debt Reduction
The first job of your wealth account is to pay off any debt that you might have. Use your two or three checks a month to make principle payments on credit card or any other debt you have until it is paid off.
Retirement Savings
After your debt is paid, set up a retirement savings account like an IRA and that draws monthly funds from your wealth account.
Passive Income
The money that is left over in your wealth account should accumulate until it is big enough to make an investment that will product passive income. If you can save $10,000, you can easily find a piece of investment property that will produce some passive income for you. If $10,000 sounds like a lot of money, read this article on five ways to create passive income with little or no money.
2. Minimum Spending Cash
(Groceries, Gas, Dining, Entertainment, Coffee, etc) – Checking or Savings with ATM Card
Figure out the minimum amount of spending money you need each month and put it into your spending account. For example, I have found that I can usually live on about $200 a week or $800 a month, but I add another $200 as a buffer for a total of $1000.
Try to err on the high side because you don’t want to have to dip into another compartment. As you get more financial breathing room you can increase this to a more comfortable level.
Withdraw your weekly spending limit in cash one day a week and put it in your wallet. I generally take my cash out on Sunday or Monday to start my week. Cash is important because people tend to spend 10-20% less money when they use cash. It is also important to have a constant visual gauge of how much money you have left.
The first two things I buy with my weekly cash on Monday is groceries and gas. These are the least discretionary of all of the cash expenses, so I like to get them out of the way to make sure I have enough money.
The rest of the week, when faced with a spending decision, the answer will be in my wallet. Do I have enough to make it the rest of the week or not? This makes it easy to know if I can afford that cup of coffee or lunch out with a friend.
Resist all temptation to dip into next week’s stash! You should have added a buffer, but try to save up your buffers for several months and treat yourself on the overflow.
3. Regular Monthly Expenses
(Rent or Mortgage, Electric, Gas, Phone, Cable, Internet, Insurance, Credit Card Interest Payments, Car Payment, etc.) – Checking With Bill Pay
Add up your monthly bills plus at least a $100 buffer and put it into a checking account. The absolute best way to make this account a no-brainer is to get a checking account with bill-pay. Set up all of your bills on bill pay and you will hardly have to pay attention to this account.
4. Irregular Expenses
(Car Maintenance, Medical Expenses, Gifts, Necessary Travel, Emergencies, Taxes, etc.) – Money Market Account
Irregular expenses are the number one category that people forget. This is also known as the “Murphy’s Law” category because it seems to always kick in at the worst possible moment. Compartmentalizing this one category alone is enough to save you a lifetime of money trouble.
Add up all of the possible irregular expenses you can think of over the course of a year and divide it by twelve. Add a healthy buffer and put this money in a money market fund each month.
Use your limited checks to take care of these expenses as they arise. Hopefully you won’t use it all over the course of the year and you can put the excess in your fun fund!
5. Fun Fund (Vacations, TV’s, New Cars, Boats, Jewelry, Shopping Spree, etc.) -Money Market Account
The last compartment on the list is the fun fund. Only put money in this fund if there is some left over at the end of the month. This is the account that will take the place of your credit card for luxury expenses. Wait until you have enough money in this account to make a purchase and avoid using credit at all costs.
Most people make the mistake of combining their wealth account with their fun account (if they have any savings at all). By mingling their most sacred money (wealth account) with their least sacred money (fun fund), it “dumbs down” their sacred money. By withdrawing money every time they make a major purchase, the wealth money never gets a chance to gain traction and benefit from exponential growth.
Possible Other Accounts
I recommend keeping the number of accounts that you have as manageable as possible, but some cases require other separate accounts.
Small Business
If you are an entrepreneur running a small business, it is an absolute must that you have a separate account for your business. Mingling personal money with business is the easiest way to put yourself out of business.
Real Estate
I recommend setting up a separate bank account for each individual investment property that you own. This makes it easy at tax time and gives you an easy gauge as to how much cashflow the property is generating.
Special Purchases
Sometimes it is wise to set up a separate account for special purchases like holiday expenses or a wedding. If you are saving for something that is important to you, put a barrier between it and your other money by opening a separate account.
I hope this information has been helpful to you. I am still on my path to riches like most people, but I am light years ahead of where I used to be. I am finally free to work for myself and pursue my creative passions. The mission of geniustypes.com is to help people to free their inner genius and create their own life by sharing this type of information.
I’m impressed, I have to say. Actually rarely do I encounter a blog that’s both educative and entertaining, and let me tell you, you have got hit the nail on the head. Your thought is outstanding; the problem is one thing that not sufficient people are speaking intelligently about. I am very blissful that I stumbled throughout this in my search for one thing referring to this.
Cool ideas, genereating a own budget system to have a great own good admisnitration…. Thanks for the enthusiasm in this post.
Those are some great tips Brian!
There’s an ‘ol saying… ‘Pay Yourserlf First,’ and your advice work well into most of what I’ve already been doing. Yep, I wish I had learned some of this stuff when I was younger.
And my motto in life is… “The More You Swing the Bat the More You Hit the Ball~!
KB – MBA e-Biz
Nice saying!
thanks for making such kind of website…..i want to know how u build this site?
I found this article truly amazing. Some very good pointers in there. I personally use a excel sheet for my budgeting but this is making me think again.
This post is an eye opener for me to not see money as an evil one but rather a great medium to help me live a happy life with my family and other peoples lives. What matters most is I am contented of what I have.
[…] from GeniusTypes.com. He wrote an article about compartmentalizing your paychecks (you can read it here) and once I started employing those techniques; my monetary situation began to flip a 180 on me. I […]
Don’t look at money as evil, we should be able to attract money of it.
My son sent me this blog and I was a spredsheet person. Years of this has made me lazy. Now I can see how my camera and trip to Artic is a reality now for me. Thanks for a clear way of putting a tried and true way to a happy life.
I tried this method of budgeting and it really works! well I gues there goes mind over matter, I recomend this method to anyone having money problems and especially business people.
This is definitely one of the best articles here Brian. This should be a must read for every high school grad lol. Even without implementing it yet, I can see how well it would work. I am working on opening the bank accounts.
Thanks!
Great advice, I´ve been reading Rich Dad Poor Dad and it´s great too see that you are writing this, it´s like “how I haven´t seen this before”
Now I realize.
Keep the great work.
You´ve won another feed reader.
Wow, amazing site here….. but where are you now? No posts lately? I’m one of your creative types, so I’ll have lots to gain from this place.
I like the idea of the exponential growth curve, but how do you convince yourself that you’re doing the right thing? How do you know when to stay on board (especially if there’s something else catching your eye, or you’re afraid you’re missing out on life because you’re not doing xyz instead?)?
Would be good to hear from you and what you’re doing now…
thanks for the tip man! you know, sometimes when i read your posts i find a lot of things in common about us well, lets just not get mushy and say you have a fan.
[…] full article can be found at http://geniustypes.com/see_money_differently_to_attract_more/ , hope you can learn something from it […]
Very well written article, and excellent advise.
[…] See Money Differently to Attract More – Genius Types […]
Hey Brian,
I like your system. I also use a system, the JARS system that is taught by T. Harv Eker. Only reason I mention this is becuase you had posted a review on his book, ‘The Secrets of the Millionaire Mind’.
My wife and I have been using the JARS system for a year now and have increased our net worth by a wopping 45%.
The article is called, ‘Managing Money – the JARS System’
http://www.stephenmartile.com/2007/11/13/managing-money-the-jars-system/
Keep up the good work,
Stephen Martile
Personal Development Made Simple
http://www.stephenmartile.com
[…] there are many other types of money management systems out there, I’m biased to Harv’s system. The main reason I choose this system over […]
JL, the balanced perspective you’ve just described is the key to happiness.
An idea just occured to me…
I for one am a master of delayed gratification. I would be much more likely to tranfer money from the fun fund to the wealth account for long term benifit than use the wealth account money for a vacation. But then it hit me that: “If I keep living in the future how can I enjoy the present?” Life isn’t about starving yourself of a good life now so you can have it later, it’s about having a good life [i]always[/i]. Otherwise if you keep your luxuries at a minimum too long you’ll wake up 10 years later and think “I didn’t have enough fun ”
So as a rule of thumb, I say once you put money into the fun fund, go out have have FUN, you won’t regret it. The long term wealth account will keep you in abundance.
Thanks JL, I appreciate your energy for this post!
If you’re looking for passive income sources, this is a good place to start:
http://geniustypes.com/five_ways_to_create_passive_income_with_little_or_no_money/
This post is simply brilliant! That’s a really good idea to compartmentalize money, I’ll definitely be using this when I’m 18 and need to start making money.
This is perhaps the most helpful article I’ve read this year, in fact, I’ll leave a tip when the post helps me make some money. Even though I’m never the kind of person to buy on impulse I’ll never get a credit card, that’s certain!
Saving in a wealth account is a surefire way to future wealth indeed. 30% sounds like a ton but when you say most people wouldn’t notice it, it sounds like a great way to start building wealth. A question – what kind of passive income assets do you invest this money in?
[…] full article can be found at http://geniustypes.com/see_money_differently_to_attract_more/ , hope you can learn something from it […]
Thanks Mintie! You’re welcome back anytime!
Wow! this is a great post. I never thought that a person like me (18years old uni student who miserably failed economics in high school) would find your blog’s post interesting.
I’ll be back to read more great post 🙂
I don’t know of any bank accounts that have separate “compartments” per say, although I’d love to hear about them if they exist.
What I do is open multiple accounts with the same bank so that I can see all the accounts online and easily arrange transfers. Most banks will let you open accounts online.
Brian, what are your thoughts on compartmentalizing money with only a single bank account? Is there a single bank account you recommend that handles “compartments”?
Wow, thank you so much Alexander!
I can see how having multiple accounts in Italy would be a problem. I am lucky enough to have free accounts.
What about online accounts such as or Emmigrant Direct. I have accounts at both of those and I love them. Their interest rates are the best in the industry.
Do you have a savings account attached to your checking? Maybe you can divide some money that way. Use your creative powers!
Thanks again, Alexander. I really appreciate the tip!
Hi Bryan,
your post was eye opening for me and for that I left you a tip.
I still don’t realise exactly how to apply the envelope technique to my reality, because both me and my wife have to dip from that money.
I live in Italy and here a bank account costs you approx 50$ per year (gov taxes + bank costs), I find that having so much bank accounts is money draining, specially if you start nearly with no money, like I do.
I’m thinking about how to apply the compartimentalizing technique also to my time.
Keep up with your great work
ciao
alexander
Ottantaventi blog
(2 – 1%)http://www.bloglines.com/myblogs_display?sub=23…[IMG] (2 – 1%)http://us.f552.mail.yahoo.com/ym/ShowLetter?Msg…[IMG] (2 – 1%)http://blog.guykawasaki.com/2006/01/addendum_to…[IMG] (2 – 1%)http://geniustypes.com/see_money_differently_to…[IMG] (2 – 1%)http://blog.guykawasaki.com/2006/04/the_first_1…[IMG] (2 – 1%)http://www.bloglines.com/myblogs_display?sub=21…[IMG] (2 – 1%)http://www.mybloglog.com/buzz/community/makeitg…[IMG]
[…] Compartmentalize my money – This is different than budgeting, it is actually about training yourself to think differently about your money. I wrote a post about it here and was inspired by Brian Lee here. […]
I think you have to be a “people person” to work in the service industry. If you’re good with people, that means you have an attractive personality…which in turn means that you can accomplish anything if you work hard and practice discipline.
Thanks for the tip! That’s very generous of you.
That’s interesting that you were also in the service industry. I’ve always believed that people who could handle a service job were very talented. Whether or not they did something with it was another story. It’s great to see that you are using yours!
[…] See Money Differently To Attract More (geniustypes.com) […]
How The Rich get Richer…
Today I came across possibly the best blog article I’ve ever read. The focus of the article was to educate people on how to take their existing income, and make it more useful and purposeful. The author, Brian Lee of GeniusTypes, strives to p…
Brian:
This is a fantastic article. I printed it out and plan to implement it. I am not in debt, but I’m not saving like I want. I was a waiter all the way through college, and I too separated my money in envelopes, how funny.
I am happy to say that I already have a good start. I have two checking accounts, a money market account, and an IRA. Now I’m off to open two more accounts, and start moving my money appropriately. I’ll keep you updated.
This article did help me so I left you a $10 tip.
Thanks again Brian,
Matt of eJabs
[…] C Lee presents See Money Differently to Attract More posted at Comments on: See Money Differently to Attract More, saying, “What bar-tending […]
[…] See Money Differently to Attract More […]
I agree with the above article which says that The thing that finally figured out was that wealth has more to do with psychology than with math.This is an interesting article so click to the link Organize your wedding expenses
http://www.weddings-cost.com/
– Credit Card Lowdown Do You Judge Your Financial Situation? – My Financial Awareness Violate Parkinson’s Law for Financial Abundance – Brian Kim Overspending? Maybe you need a smaller “bowl” – The Coin Jar See Money Differently to Attract More – Genius Types What Use Is Personal Finance Advice If You’re Making Minimum Wage? – Free The Drones Pay off the house or have another child? No contest! – The Coin Jar Scam-Proof Yourself to Eliminate Risk
Great story. Im proud of you to have figured it out. One of those knowledge thats so simple yet so valuable. It looks so simple that people are unaware of its importance. Anyways ill be directing a lot of my friends and acquaintances to read your powerful and inspiring story so they too can get on track in their finances like us.
I myself am on a journey to Financial Independence.
http://www.43things.com/things/entries/378
Keep It Up!
See Money Differently to Attract More
Personal Growth Carnival – Thanksgiving Edition…
Thanksgiving is a great time to take a few minutes and be thankful for all the blessings in your life. Many of us slow down from the day to day work. With that in mind, perhaps you’ll have time to read some articles that can really inspire y…
There is a really long entry that I loved. I’m suggesting you guys take a look. It’s similar to my post about “Playing Mind Games to Get out of Debt”. In the end, your spending habits are all about how you perceive your money… Here’s the entry See Money Differently to Attract More at the blog geniustypes.com . Have fun reading the great entries!
This is an excellent viewpoint for someone who finds themselves in a rut they cannot get out. You bring the reader out of their firmly held position in order to get them to adopt a new position!
Great article.
I recommend avoiding credit cards like the plague. Just like other compartments of money, they tend to take on lives of their own.
The best way to avoid them at all costs is to start building up padding of at least $1000 in your “Irregular Expense” account and only use it in emergencies. This takes away the need for a credit card all together.
Using a spreadsheet is a great way to give your money a purpose, but I have seen too many people (myself included) spend too much time on their spreadsheets and not enough on actually compartmentalizing their money. The spreadsheet will tell you how much money to put in each account, but the accounts will protect your money from yourself.
Plane tickets are usually irregular expenses and can be bought using a debit card attached to the checking account that you have designated for this compartment.
Thanks for the great comments!
I love it! Brilliant?
It makes sense people spend less with Cash because you can see the ‘bottom of the barrel’. So are you against using credit cards completely?
Can you use ‘eEnvelopes’ and track things in a spreadsheets?
What do you suggest when I buy an airline ticket on line with a credit card?
So great…
It’s a great idea and one that I’m going to think about; the only thing is that it seems like a lot of work to set up all the different accounts. Did you find any problems on that end?
It takes a bit of organization up front, but I have found that once it is set up it takes a load off my mind. It eliminates the need to constantly check with my budget to make sure I am on track.
My plan calls for five accounts: two checking and three money market. Most banks will let you set these accounts up online. You could also accomplish this in about twenty minutes with a visit to your banker.
There is nothing to say you can’t use several banks if you feel like one bank will not allow you to have five accounts. I recommend checking with Bankrate.com to find the best money market rates.
The difference is subtle, but I learned to budget long before I learned to compartmentalize. I found that budgeting works great on paper, but money seems to have a mind of its own.
Giving it a purpose as soon as I had it in hand and physically separating it was the only method I found that actually worked. How many times have you started a great-on-paper budget, only to quit it a week later?
In order yo ensure that your money is going to its proper place, it is essential to physically “tell” your money what to do or it will have its way with you.
Get it? Read the post. I love the simpler approach to life and it’s a hell of a lot cheaper! If that article didn’t feel right, then check this article out over here: Brian @ Genius Types wins my award for longest and best article of the carnival. It has great points and he delivers them with personal examples. Great article Brian!! I can get you in to this article TODAY! CJ @ Coinjar talks about overspending and how setting limits can really help
Good idea. You’re basically budgeting. The separate accounts you suggest add up to a budget… the only difference is that you’re literally compartmentalizing your money instead of just doing it on paper.
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A stream of passive income is only as good as your strategy to nurture it. You have to discipline your money, just as you have to discipline yourself in order to reach your goal. As I wrote about in See Money Differently to Attract More
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