Step 2: Find the 80/20 route

Because of compound interest, money becomes concentrated in few hands. There is therefore one, and only one, infallible 80/20 route to enough money — to save and invest in the easiest possible way.

There are many difficult ways to save. Budgeting is one. Budgeting doesn’t work because unexpected expenses always blow you off course.

Happily, there’s an easy 80/20 route to saving.

Helen and James decide to stay at Bullie Brake & Desmay, save and invest 10 percent of their pay — by automatic deduction — and accumulate enough to eventually live their dream. How long will it take?

Together, Helen and James earn $6,500 a month. After tax, $4,000. Currently, they spend it all. They have no savings.

They calculate that if they moved to a cheaper area, near James’s legal aid charity, they could live on $2,500 a month, even with the planned baby. The charity can only afford to pay James $2,600 a month. After tax, about $2,000. So they need $500 investment income a month — $6,000 a year — to plug the gap.

They plan to buy an apartment for $60,000 and rent it. After repairs, maintenance, and tax, they’ll make $6,000 a year. So they need $60,000 savings to change their lives.

Ten percent of their annual pay is $7,800. If they invest the money at 10 percent, that’s $66,000 within six years. Even at 5 percent, within a tax-exempt plan they’ll accumulate nearly $67,000 by year seven.

The basic 80/20 route to making the money you need

Save and invest 10 percent of your income before you receive it by having it automatically channeled into a savings account.

Do this as early as you can in life — which means NOW! Frankly, this is 95 percent of the advice that anyone needs. This is the easy way to end your money worries. No other way is remotely as powerful.

Refinements to the basic 80/20 route

Can you reach your destination faster?

• No investment is as good as paying off your credit card debt.

• The next best investment is to “retire” all your other debts. Start with the most expensive. Even though mortgage — property bond — interest rates are now very low, it’s almost impossible to find an investment as attractive as paying off your mortgage, when you have the savings to do so.

• Cut up your credit cards. You’re bound to spend less. If you need a card, get a debit card so you can only spend what you have in the bank.

• Be more selective in buying things. Only spend money on the few items that really make you happy. Spend more on the 20 percent that gives you 80 percent of pleasure, and less on the rest.

• Ask yourself, “Do I really enjoy this item I’m spending money on? Is it really in the 20 percent of items giving me 80 percent of satisfaction from spending?” If not, cut it out. You’ll have more money for the best 20 percent of spending and more life energy too — you won’t need to spend so much time earning.

• Go for cheaper items that deliver most of the benefit. A two-year-old car may be 95 percent as beneficial as a new car, at just 60 percent of the cost. Second-hand furniture may cost only 20 percent of the new price.

• With spare cash, buy assets that promise income or an increase in value: for example, any sort of land or property, art, or collectible items. Pick anything that delights you and appreciates.

• Save half any pay raise. Increase your automatic saving before it hits your bank account.

• Spring clean each year — get rid of the clutter. Give away the small items, sell the valuable ones, and invest the proceeds.

• Draw a wall chart of your monthly income and expenses. It’ll encourage you to cut expenses and augment income.

• Prepare a wall chart of your monthly income, expenses, and investment income, with a projection of when investment income will meet your monthly expenses. This is financial independence day: you’re no longer dependent on your job for your living.

• Cut one item of spending. Give the money away. Not only is this likely to give you greater pleasure, but also, mysteriously, it often increases your income.

Is compound interest different from investment?

Compound interest is hugely powerful, but only works for you once you’ve saved and invested, in a high-interest savings account, or investments like bonds, property, or other assets that will likely appreciate. Be careful with bank accounts — banks often rip off unwary customers, and many so-called “high-interest” accounts are anything but.

What rate of investment return is realistic?

My examples assume a 5–10 percent annual investment return. Two words of caution, however. First, you must try to avoid tax. Most countries have special tax-free accounts for small savers and investors, but you must be careful to put your investments in these accounts.

Second, we’re at a time when inflation and interest rates in many places are at 50-year lows. This makes it necessary to shop around, even to get a 5 percent return. The highest bank accounts may pay only 3–4 percent. Other forms of low-risk investment may be necessary.

Where should you invest?

The basic objective is to make at least 5 percent long-term annual return at minimum risk.

• First, pay off all your debt.

• Invest in risk-free savings accounts if they pay interest at 5 percent or greater.

• You may be able to invest in “bonds” — government or company debt — that “yields” (pays interest) more than 5 percent.

• Long-term, direct investment in suitable property — maybe your home — is attractive. Long-run property prices — really the price of the land beneath the property — have risen about 8 percent a year. The supply of land is fixed, yet demand tends to rise, driven by demand for larger houses, second houses, and a falling number of people per household. Where popu lation and wealth are increasing — for example, most attractive and warm parts of the United States or Southern Europe, or expanding cities anywhere — land is a good long-term bet.

• Be chary of the stock market. It may fall and fall. If you have enough money to invest, consider a “market-neutral hedge fund,” one not affected by general stock market fluctuations. Hedge funds may be lower risk and more attractive than traditional “mutual funds,” which depend on rising stock markets.

• Shun anything — shares, property, or the latest hot trend —with recent sharp appreciation. Bubbles burst. Wait until prices fall and then stabilize. Never buy in a market that is rising or falling fast. In the short term, stick to safe investments even if you can only get 5 percent.

• Should you start your own business? Most millionaires become rich by starting a venture. But beware. Only one in twenty new businesses succeeds. Probably 99 percent of the payoff comes from 1 percent of the new ventures. Will you really be in the lucky 1 percent?

• Only invest in a new venture if you also have savings to fall back on. Don’t risk losing everything. If you won’t sleep at night, don’t invest. Becoming mega-rich probably won’t make you happy anyway. It’s a very bad gamble.

• If you’re passionate about starting your business, wait until you have cash that you can afford to lose. Or go for a low-risk venture that requires little capital — for example, a stall in the neighborhood market, a service business like mowing lawns or cleaning cars, or a delivery service using your own car.

Step 3: Take 80/20 action NOW!

You’re at a crossroads.

You can go ahead and instruct your bank to deduct 10 percent of your monthly income and put it into a savings account. You can then look forward to a life without money worries, to your 80/20 destination.

Or you can do nothing.

Go ahead. Do it now. It takes five minutes to arrange. The benefit, for the rest of your life, will be enormous. Make friends with money — boost your life energy immeasurably!

Imagine you’ve freed yourself from money worries, perhaps even accumulated a small fortune. How is it going to make you happier? How far will your new-found riches deepen and improve your friendships and relationships, which, as we’re about to see, add the most joy to life? Money and material preoccupations pale into the background when we create and experience the bonds of true love and affection.