Preparing for a trip to Wealth World? Better get yourself a map. We’re not talking about a photo guide to the stars homes in Hollywood here or exact street directions from the Google satellite guide to the planet. That would be great, but mapping out a plan to wealth requires a little more flexibility since daily living is utterly dynamic.

What we’ll do instead is create the framework for the plan. This will give you structure and freedom. The structure part is like the architectural wall in a building. This will define the spaces, and hold up those special comforts like walls and roofs. This structure will not get into specifics like what kind of walls you’ll have or how you’ll end up decorating. You will define those items as you start filling up the various rooms or “wallets”.

The four wallets is a framework to setting up the basic structure to start and maintain a savings and investment strategy. This part of you planning is to determine HOW MUCH there will be available for these activities.

The Four Wallets, defined. (Live-Play-Plan-Port)

1) LIVING: Expenses (Live) > This is the money it costs you to live, your budget.  Rent/mortgage, current education expenses, utilities, dining, arcade money, transportation, bills, etc.  This is what you use to LIVE TODAY. What’s important here is that this is a FIXED amount. This is the budget, the amount you know that it costs you to live on each month. This must be LESS THAN your income! If it’s not, you’ll need to do some work to fix that soon or you’ll spiral down into a place you don’t want to go. Check back for more articles on this topic.

2) PLAY: Fun (Play) > This is the “Take care of me, guilt free – woo-hoo, party cash.” Now! Use this to pay for the “Must own coat!” or “Yes, Vegas snap!” A bay cruise for two, a gold-trimmed Gibson, Vera Wang’s Princess dress, a triple-Non Fat latte at the bucks, or a cool new Wii adventure… whatever your flavor, it’s ‘life now’, designed by you. Ideal is to spend this money as fast as you can… hopefully within 30 days of receiving it.  Spend on something that give you pleasure, that you would normally not do for yourself, is best.  (No drugs, kids! They’re bad for you.)  Other than that, live it up and… ENJOY TODAY.

3) PLANNING: Short-term Savings (Plan)> save for specific things.  This can break down into different sub groups.  This would be for things like a down payment on a house you plan to live in, future education (for yourself or others), a new car (when possible, buy in cash, not credit), an island, or a pair of skates… things you want to buy but require you to save.  This is where you collect for what you’re going to have in order to LIVE TOMORROW. Side note: if you’re saving for more than one thing, you can divide the total amount deposited into portions for the various savings items. For example: If you have $1000.00 to deposit. It can be split into $500 – kids college fund, $300 – new car, $100 Hawaii vacation, $100 as needed (TBD).

4) PORTFOLIO: Investment Savings (Port) > First rule is to NEVER, NEVER, YES, I MEAN NEVER spend it!! Only INVEST IT in things with cash flow and/or a pre-determined return on investment (ROI) plan… ie.  CDs, stocks, real estate (that you don’t live in… like rental property), business or business development, etc.  This is the wallet that will fund your future… like retirement, building your financial legacy, a wealth building account, if you will. This is your financial future.   Build this to ENJOY TOMORROW.

Wallets, defined

“Wallet” is used to describe each bundle of money.  This money can be stored how it works best for you.  Kids might start with piggy banks and work up to a single account with a good tracking sheet.  Teens might start with one bank account and a good tracking sheet and work up to multiple accounts.  Whereas adults may start with their existing accounts and build into having multiple accounts, including investment accounts and Trusts that are included in their “wallets”.  Use the system that works best for where you’re at and where you want to grow.  Just keep the tracking as simple as possible.  Spreadsheets and/or software is great.  I like MS Excel and Quicken myself.  This choice is up to you.

The Four Wallets, distribution amounts (Live-Play-Plan-Port)

For the teens and someday teens:

The world is your oyster, unless your a vegan, then it is a lychee.  So for you, start with simple math. Divide all monies that come in into 4 equal parts. Put ¼ in each wallet or account. Never borrow from one wallet to give to the other.  This is utterly important to your financial future.  The goal here is the training.  Not the amounts.  But every dollar you get should be used this way.  It doesn’t matter if the money is from earnings (mowing lawns, walking dogs, the job at the ice cream shop, etc.) or a windfall (yippee, it’s a birthday, or grandpa visited, or some kid lost his wallet and you found it,) no matter what the source, split it up in this way. That percent (%) distribution would be a 25-25-25-25 program.  Or translated the amount to contribute to each wallet would be 25% Live, 25% Play, 25% Plan, and 25% Port.  Simple.

For the grown ups (as defined by the IRS)

You have a different task.  You are going to budget.  Figure out what your spending habits are currently then decide what percentage you’re going to put into each fund.  It could be that right now you will have 80% in the “Live Today” wallet, which could create a 80-5-5-10 program. Oops… okay.  That’s a start.  Figure out how much goes into the rest… as much as you can in the Enjoy Tomorrow wallet… but do NOT deny the rest of the funds!  This is very important to the exercise.  Later you can tweak the percentages so that your Enjoy Tomorrow fund grows.  Eventually, this should be the largest percentage.  That’s how you get to the freedom.  A good starting point would be 60-10-10-20 or 70-10-10-10. Clearly, the closer you are to retirement, the larger the last percentage needs to be.

Challenge:

Work a plan to swap the percentages from Live Today to the Enjoy Tomorrow wallets!! So that it might look something like 20-10-10-60 by increasing income and investing and decreasing spending.  See if you can do it in less than 5 years!  If you do, make sure you have plenty in the Enjoy Today fund too to make the journey fun!

Phase 1: Introduction Training, complete. Congratulations! Now go prosper.