Today, we’re going to talk about the GIST of money. GIST stands for the Get-Invest-Spend Theory of money. Yes, I made up that acronym.
But what I didn’t make up is why it’s important to understand these 3 aspects of money.
To achieve our financial goals, we need to accumulate wealth, and understanding how to do that in the shortest amount of time possible is where the GIST comes in.
Let’s talk about each of these 3 steps in more detail.
If you’d like to watch a video version of this topic, check this out:
Getting money is the first step. Before you can do anything else, you need to have some money in the first place.
This money can come from any number of sources: sometimes it’s earned, sometimes it’s given, sometimes it’s found. Most of the time honestly… hopefully.
The typical way most people probably think about making money is by exchanging your time and effort… also known as working a job. Other ways include through an inheritance, finding it on the street, or if you’re really lucky, winning the lottery.
Let’s take an example with numbers. Say you have an income of $100,000 a year, and your goal is to reach a wealth level o $2 million. Ignoring everything else, that means it’ll take you 20 years to accumulate enough money to reach your goal. Pretty simple.
So however you acquire it, getting money is the first step. Regardless of what your financial goals are, you need some money to make it happen.
Once you have some money, we can move on to the second step.
Invest is the second step.
One option once you have some money is to keep it around in cash, maybe under your mattress, for example, so that nobody can find it.
But if you do that, you’ll actually end up losing money in the long run. Money that’s just sitting there will lose value due to inflation. The cost of goods is ever increasing, so what you can buy with $20 today is going to be far less in 10 or 20 years.
Instead, what you want to do is use that money to make even more money. That’s the core principle of investing and why its important. The more money you accumulate, the faster that money can grow itself. Eventually, you might even reach a point where your investments replace the need for you to work for money in the first place. Now, wouldn’t that be nice?
There are a lot of ways to invest, from bank savings accounts that provide interest… to the stock market… to buying real estate… and so forth. Too much to cover here, but we’ll be sure talk about them in the future.
For now, let’s just build on our simple example where it took 20 years of earning $100,000 a year to reach the goal of $2 million. Let’s see what happens if we invest as well. To keep things simple, let’s assume we’re investing all of our money on a yearly basis and earn 10% on it. That actually cuts down the time needed to reach our goal from 20 years to just 12 years! Seems like magic, doesn’t it? We’ll look at the details of why that is in the future.
Alright, so getting money and then investing it to make more money is great, but there’s a crucial piece missing that can really affect not only how fast you can achieve your financial goals, but what those goals look like.
And that’s the third step in the GIST of money.
Spend is the third step.
How you spend your money, or rather, the mindset behind how you spend your money, determines how long it’ll take you to reach your goals, and it does this in 2 different ways.
First, money you spend of course becomes money you no longer have, so it slows down the accumulation process.
Let’s go back to the simple example of earning $100,000 a year with no investments or anything else. Let’s now assume that we spend $50,000 a year. That effectively cuts the accumulation rate in half; what previously would have taken 20 years to reach will now take 40 years.
Second, the amount of money you need to spend to live your life will dictate the target of your financial goals.
In our example, we set a goal of $2 million. That’s because $2 million reflects the desired level of spending of our imaginary person. If spending levels are higher or lower, the goal needs to increase or decrease along with it. We won’t get into the details of how to set goals here, but for now it’s enough to understand that a goal of $4 million will take quite a bit longer to reach than a goal of $1 million.
So spending actually has a double effect on achieving our financial goals.
Getting money, investing it to make more money, and spending money are the 3 key concepts of the Get-Invest-Spend Theory of money, or the GIST of money.
Understanding how to optimize these 3 steps is the key to reaching our financial goals in the shortest possible time. If you only try to tackle one of them, you’re leaving money on the table, so to speak.