A new survey of the self-employed from TD Ameritrade reveals that entrepreneurs are in a savings drought. A shocking 76% of entrepreneurs are prepared to work forever if they can’t save enough money for retirement. The same study shows that 55% admit to being behind on their retirement savings goals, and 41% aren’t saving regularly.
Now as an entrepreneur myself, it’s my position that the definition of retirement is “out of use.” I don’t want to be “out of use,” so I don’t ever plan to retire from my business. But I also don’t want that decision to be made by financial necessity. So I developed a system for saving money that benefits all entrepreneurs.
With this savings system, you can grow wealthier each and every month, grow your savings at an ever-increasing pace and live wealthy at the same time—without ever setting a budget. It’s designed to be easy and mindless, allowing you to live in the abundance mindset of wealth creation rather than the scarcity mindset of obsessing over spending. I call it the Automatic Wealth Ladder.
The First Rung: Your Wealth Capture Account
It works like this: the first step on the Automatic Wealth Ladder is to create a “Sweep Account” with your main checking or savings account—wherever your income is deposited each month. Set up an automatic transfer to sweep 15% of your income, on the day it is deposited, into a savings account that we’ll call your Wealth Capture Account. (If 15% of your income is too much to set aside at first, then choose a smaller percentage and stick to it while working your way up to 15%.)
For example, if you know that $5,000 will be deposited on the 1st and 15th of every month, then you can set up an automatic 15% transfer into your Wealth Capture Account on the 1st and 15th of each month. (Or on the 2nd and 16th of each month to make sure the deposit makes it first.) With this example, you’d have $1,500 transferred into your Wealth Capture Account after the first month, $4,500 after the third month and $18,000 after one year—all automatically.
That’s the first rung of the Automated Wealth Ladder.
The Second Rung: Your Living Wealthy Account
Next, set up a second automatic transfer on the same dates to sweep 3% into a separate savings account that we’ll call your Living Wealthy Account. This account is for setting money aside to let you enjoy life along the way without feeling guilty. It’s to save up for those European vacations, or luxury cars or courtside season tickets—whatever brings you value.
Now that you have these automatic transfers set up, 18% of your income is spoken for every month—it’s going towards capturing wealth and living wealthy—and it’s in a separate account, so you can’t slip up and spend it by mistake. Now there’s no need to obsess over your spending or set a budget, which leads to the scarcity mindset, because you’ve already put money aside to save.
With the other 82% of your income sitting in your sweep account, you can pay bills and cover day-to-day expenses—anything besides reaching into your Wealth Capture Account to help cover costs. Do this even when times are financially tough. In fact, it’s more important to capture 18% of your income when times are tight because it forces you to be resourceful and make more money in your business to bounce back.
With this system, you will grow wealthier every month. And because it’s based on a percentage of your income, rather than a set amount, as your income increases, so does the velocity of your Wealth Capture.
For example, we showed how putting 15% of two monthly $5,000 deposits into your Wealth Capture Account will leave you with $18,000 at the end of the year. But let’s say your income is increasing 10% per year. The second year, you’d sweep $19,800 into your capture account. By the fifth year, you’d be sweeping $26,354 into your capture account, for a five-year total of $109,892. The faster your income grows, the faster and greater your Wealth Capture Account grows.
The Third Rung: Your Wealth Creation Account
The third rung of the ladder is your Wealth Creation Account—a safe, reliable place for your money to grow where it can also be utilized for investments or accelerating business growth.
Your Wealth Capture Account is for saving money, your Wealth Creation Account is for safely and consistently growing money. So once your Capture Account has reached a savings level that gives you peace of mind, it’s time to decide about funding your Wealth Creation Account—and if so, by how much.
For example, instead of putting 15% of your income into your Capture Account, you may want to divert half of that to your Wealth Creation Account. That’d put 7.5% of your monthly income towards savings, and 7.5% towards growth. Eventually, you may want to divert the entire 15% into your Wealth Creation Account.
I’ve found that the best vehicle for growth in a Wealth Creation Account is properly designed permanent life insurance—or what I call Cash Flow Insurance. Cash Flow Insurance allows you to earn a consistent, guaranteed tax-deferred return no matter what the stock market does—historically around 4-5% annually. In most states, the money in your account is untouchable to creditors. And it also allows you to become your own “bank” and quickly borrow cash to accelerate your business growth—without the hassle of a loan application or credit checks. In my opinion, it’s the perfect wealth creation tool for entrepreneurs. However, Cash Flow Insurance isn’t right for everyone. Do your own research and consult your financial advisor or retirement planner.
Once you have all three of your accounts set up and supporting you—your Wealth Capture Account, Living Wealthy Account and Wealth Creation account—then you’ve climbed the Wealth Ladder. As an entrepreneur, you are flying head and shoulders above the other 76% of entrepreneurs who don’t have their finances in order, are putting off living wealthy and living paycheck to paycheck instead. I highly recommend it.
This article was written by Garrett Gunderson from Forbes and was legally licensed through the NewsCred publisher network.