Making Money Made Simple

Author Noel Whittaker says two things are needed to be wealthy. Knowledge of what to do and the discipline to do it. He gives you plenty of the first in his book Making Money Made Simple.

This book covers a broad range of topics; saving psychology, loans, insurance, real estate the stock market, tax, superannuation, inheritance, and more.

It's a cross between a mini-wikipedia of finance with medium-length articles on different topics; and a journal of helpful money advice that an older (money-smart relative) might give.

Here are some of my highlights (though far, far more was covered).

The 7 things that make the difference

Only 8% of people make it financially, says Noel - meaning they can retire on a liveable income. Why not more people? He list 7 "drawbacks" that prevent a lot of us from achieving better.

1. Lack of knowledge
2. Lack of foresight
3. "Must have it now" mentality
4. Borrowing for things that lose value (eg cars)
5. No goals and no plan
6. Confusing good income with financial independence
7. Bad mental attitude

Number 6 is earning lots but spending the same amount. That still leaves you on the hamster wheel, just spinning faster.

Number 7 is believing things like "tenants would wreck a rental", "shares are too risky", or "the government keeps changing rules on super". Such beliefs prevent people from taking advantage of opportunities, says Noel.

The dozens of chapters that follow are an attempt, topic-by-topic, to get us past, around or over those drawbacks and onto a better financial path.

Guaranteed secret of wealth

Regular consistent savings in a high-yield investment. Obviously there's a lot more detail in the book but that's it in a nutshell.

Earning more from less

In the same way that bank interest compounds, as you get interest on the interest, other investments can also compound if you reinvest the earnings. Noel shows the power of this by comparing two investors.

Person 1: Invests $ 1,000 a year from 18-30 at 10%.
Person 2: Invests $ 2,000 a year from 30-65 at 10%.

Intuitively you'd think Person 2 would be better off, investing twice as much each year - and for many more years. But here's how it finishes:

Person 1: $ 690,000 from $ 13,000 invested
Person 2: $ 542,000 from $ 70,000 invested

That's the advantage of starting early and maximising your time. By the time the first person stops investing, their investment is already earning $ 2,450 per year by itself. That's more than the second person is investing, so they never catch up.

What else increases investment earnings?

As well as time, the amount invested (capital) and the rate of growth affect the investment earnings. But not in the same way.

Double the capital. Double your earnings.
Double the time. More than double the earnings.
Double the rate. More than double the earnings.

That last one seems a bit odd at first, but again it's the compounding effect. For example, 8% per year earns 3 times as much as 4% (over a 20 year investment).

The rule of 72

Here's a maths shortcut. How quickly will your investment double? Use the rule of 72.

Years to double = 72 divided by the growth rate (in percent).

Got some money in the bank at 2%? At that rate you'll have to leave it there for 36 years to double it.

Got some money in superannuation averaging 8%? It should double in about 9 years. And double again in another 9 years, etc. In 36 years, it could be 16 times the original amount.

Hard to climb a ladder with a car

One of Noel's concept's is the millionaire ladder. The steps go $1000, $2000, $4000, ... $250k, $500k, $1 million. Obviously the steps get bigger as you go up because it's easier to earn money when you have money.

One of his tips for youngsters is to put off getting a car for as long as possible - especially if it's with borrowed money. Paying money on a loan while the asset devalues really hampers your ability to start climbing those rungs.

In short

This is a great reference book. The chapters on mindset and attitude are a great starter. The remaining chapters will be relevant at different times in life.

What I like about it, is that it's not about getting filthy rich - it's about making "the best use of what you have now". Just by making better decisions with our money, far more of us (not just the 8%) can be financially secure or financially independent.

"Financial independence means the freedom to choose ... the freedom to work part-time, spend time with loved ones."

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