Chapter 1: What is the relationship between money and time?
You know I'm all about helping normal people build financial freedom, but here's the problem. Making a million dollars from your job would take forever. We don't want to wait that long. The people who actually get ahead, not the lottery winners, not the high earners, the ordinary people who quietly build real wealth, they're not just earning more than everyone else.
They're thinking about money completely differently. They think about it as time. Not like time is money. Everyone knows that one. I mean that how you invest, how you make the most, what you do with your money all comes down to time. How much time you have changes everything. It tells you where your money should go. It determines how hard it can work for you.
And it's the reason some people build serious wealth on ordinary incomes while others save hard for decades, put in all of that work and just never quite get there. So if you get this right, You don't have to earn every dollar yourself. Your money earns alongside you. Once the money and time relationship clicks, truly everything changes.
So today I'm going to show you exactly how it works and how to use it to build your own financial freedom faster than you think. So welcome to Making Sense. It's the podcast people who want financial freedom without giving up their coffee. I'm Frances Cook, a financial journalist and fellow financial freedom seeker who makes money simple for you.
I want to help as many people as possible reach financial freedom by taking control of their money. You can help me in that mission. Two really easy ways. First, hit subscribe wherever you like to listen. YouTube, Spotify, Apple Podcasts, or any other podcast player. Then send this episode to a friend so we can all level up together.
Then the show grows and I can keep giving you the money info that makes a difference for your life.
Okay, back to it. Now let's start with what everyone probably expects this to get into. Investing is crucial for getting your financial freedom and keeping it. Your money needs to work hard, not just you. In fact, send your money to work instead of you. You can't expect to save everything you need for financial freedom all by yourself. There will be so much money to accumulate all on your own.
You're going to make investments do quite a bit of this work for you. Once you understand the money world, you can start treating the dollars that you earn as if they're employees. You can send them to work Get them earning money for you so that you reach financial independence without doing all of the heavy lifting yourself.
And you can eventually have so many dollar employees earning money for you that you won't have to earn it at all yourself. But think about how any company works. You might have a lot of people doing a certain job because it's important, but you will never have a company filled with everyone doing the exact same job.
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Chapter 2: How can the rule of 100 help with investment decisions?
Volatile is it bouncing around and that translates to risk. It might give you money hand over fist one year. It might give you absolutely nothing the next. That's why risky assets need time because over several years, it smooths out. Those hand over fist times outweigh the bad stuff that happens in the low years. You just don't know ahead of time which year will be which.
Whatever the gurus say, nobody knows ahead of time. You've got to give it that time. But they are still proven investments with known outcomes. They're just going to bounce around at different levels on the way to making you money. So if you're younger, you can dive into investing more forcefully because you have more time to ride out the waves. Now,
The rule of 100 gives us a baseline to help us figure that out. What is the rule of 100? Take your age, subtract it from 100, and what's left is the percentage of your money that you, according to this rule, should put into riskier high growth investments like shares and property. The rest should be in cash savings or less risky investments like bonds.
This works as a rule of thumb for the average person because it immediately demonstrates that younger people can afford to go harder in building up wealth, generating higher risk investments, but they still need some safe money because life happens. No matter what, you're still having a certain amount in the safety bucket.
Meanwhile, older people need more cash on hand because they're in the spending phase of life. Without mentioning the D word, older people don't have as much time to ride out a market downturn and then cash in on the upswing. But they can still put a certain amount into riskier assets because, hey, Nobody knows when death is coming.
You could have a few decades of retirement years, in which case you do want some money still working and growing on your behalf. So for me, at 38 now, 62% of my money, according to this rule, goes into shares or other risky growth assets. Now, when I was in my 20s, it would have been more. But, of course, this is a general rule of thumb. And from there, you customize it to your own situation.
So let's stick with me as an example because I know myself the best. And then we can lay out what works best for me. You can kind of see how this works in practice, figure out how to customize it for you, right? So when I customize this rule of 100 for me, I think about how I'm ambitious with what I want to achieve with my money. I am in the building phase.
of my life and I'm all in on building myself true financial independence. I'm fine with the costs that come with that. I am fine with the choices needed to make that happen because I see that end goal, so worth it to me. I also trust myself to not panic when the market goes down. I know I'm not going to be yanking money out if something happens.
That would cause mayhem for future me, but I know I'm not going to do that. I've already had a trial of fire in that big old COVID-19 crisis. I held my nerve through that, so that's good to know. I also have a good understanding of the share market, and that always calms your nerves, I think, when things get weird.
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Chapter 3: What is the framework for organizing your finances: now, soon, and later money?
Does it make you a bit nervous? And then you can adapt from there. You can ratchet up, ratchet down, depending on what you've answered. So I really like the rule of 100 as a place to start in figuring out your own money timeline. But then why, even as someone who's quite aggressive with my money, why do I still have some of it in safer, more boring places? Because...
we like to supercharge without getting into hot water. Because once again, we're organizing our money by time. And time helps us understand just how hard we can go on things like investing without leaving ourselves with no safety net for life's little fun challenges.
So when it comes to organizing our money employees, most of us need a mix with things like cash savings accounts, then shorter term investments like bonds, and long term investments like shares or property. That mix... is where it can get tricky, but you can work that out by considering now money, soon money, and later money. So you think about how soon do you need the money?
When you have that now money that you need for current bills, anything that life might spring on you, now, as the name would suggest. You have soon money that is for bigger life issues that could pop up. They're not entirely unexpected, but they're not here right now today. And then you have later money for building your future with.
Your now money is things like your everyday bank account and a savings account that you can access immediately. You would have at least one month of expenses in those savings. You can expect maybe one to 2% back on that from interest rates. And then you have money that you might need in one to six months.
That's cash still, but in a higher interest savings account that you can access in a few days. And from that, you could expect returns of maybe a smidge over 2%. If you don't think you need that money for six to 12 months,
then you can look at something like rotating term deposits, where they all sort of mature at different times so that you get a decent interest rate, but you can still access funds within just a few months. It's not totally locked away. So for that, you can expect returns of around 3%.
Then maybe if you don't need to access it for one to five years, you know, you might have some stuff coming up, but it's not immediate. That's things like bonds or fixed income investments. And for that, you might get three to five percent. And then your proper long term money, five years or more. shares, property investment.
And for that, we're looking at sort of over 7% per year, but smoothed out over a period of years, right? Now, obviously, this is all a general rule of thumb, but they give us a starting place for understanding it all. And again, you're seeing the time factor here, right? So now money is life right now. Bills, sudden surprises.
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Chapter 4: Why is it important to keep your emergency fund in cash?
That could get me ahead faster. But clever ideas like this, and I'm saying clever ideas in quotation marks there, it misses the point. That money is your safety. Safety means you don't earn much on it, but that safety is also what allows you to earn more elsewhere. It is part of the system. You need it because here's the other part of it.
The faster you can access that money, the less you will earn on it, But the other part of that money and time equation, you have to make that sacrifice in some areas. It is important. But we have to balance that by making sure you only sacrifice what you need to and nothing more. That's why you've got to understand the money and time relationship.
So why do we make that sacrifice of some money being in cash savings? Because you can't be cashing out of shares when you have an emergency in your life. The emergency could be that you've lost your job, which is happening because the economy has suddenly tanked. It's absolutely a possibility right now.
And if that is the case, then your shares will also be worth less because, well, the economy is tanking. tanking. And you'll be forced to sell them when they're worth less, possibly a lot less. When the share market goes down, it can really go down. And that's fine if you can sit back and wait it out. I've done that before more than once.
Overall, made a lot of money by sitting back and waiting it out. But if you're forced to cash out at exactly those sorts of times, Because you've tried to pull a clever trick and get a little extra by putting your savings into shares, the emergency money you were relying on might be so much less than you need.
And you will lose so much more money overall than what you would have lost by just biting the bullet and putting some of that safety money into savings. It sucks. But those emergency savings need to stay in cash, easy to get if you need them, and keeping their same value.
The good thing is by the time you follow the investing I talk about elsewhere on the podcast, you stick with it for a few years, those emergency savings will eventually look so small that you won't care if they're cash. 10 grand in a bank account will feel big at the beginning of your financial independence journey.
By the end, it will look small and you truly won't care about any missed opportunities there. I'm not joking. Let me come back to that point in just a moment. I want to finish this other point first. Treating your now money like savings, as later money, like shares, that is just the greed devil on your shoulder. And the greed devil can sabotage things for you just as badly as the fear devil.
So you need them under control. That's why I'm giving you these timelines because they create a sliding scale that balances the need for money on hand compared with how much you could be earning on it. You can't keep everything super safe cash and earning nothing. That means you'll probably never, Be financially independent. Your money has to be working for you.
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Chapter 5: How do compounding returns work in investing?
Shares are for your later money. And if you put now money into them or even your soon money, then eventually you're going to get... a really nasty lesson in why people say not to do that. Once a crash has happened, the most you can really do is leave it alone for the recovery. You need to get through using any other cash source that you have.
Shares need time so that they can recover after these inevitable blips. And the blips happen and are actually an important way that you make money in the long term. They're a feature, not a bug. You just can't sell your shares during that time. Now let's go back a little bit to something that I said earlier. I mentioned that $10,000 in your bank account is eventually going to seem small to you.
And indeed, I did not stutter. Depending on where you are in your journey, that might seem like a truly ridiculous thing to be saying. But I promise you, when I first started my money journey, I would have laughed out loud at that sentence too. I am not a nepo baby. Part of me would have loved to have been, but alas, no.
I am someone who comes from a school where our biggest claim to fame was a bunch of kids nearly beating a cop to death. And I am someone who, at certain times, we were quite literally having to figure out ways that we were going to get enough food on the table to eat. I'm a scrapper who can put on a suit and mingle with fancy people these days.
But I tell you what, I never feel like one of those fancy people. It's just not my world. But it's true what they say. People overestimate what you can do in a year and they underestimate what you can achieve in five years. And what I've done over the time that I've learned about money and put these lessons into practice has meant that I've now come far enough to say something like,
Eventually, $10,000 won't seem like a big sacrifice to have in a savings account. And I say that... And I mean it. It is amazing what just a few years can do. Give it time. Put the little things into practice. Then build the bigger wins. Then the bigger ones after that. And investing and understanding how time and money are linked are core to how you can do that.
By being smart about your now, soon, and later money, you don't have to save up everything by yourself to hit elite status. You're going to make your money employees do it for you. And they're going to do it with compounding returns. Compounding just means that you invest your money. That investment earns a profit. You reinvest the profit. And then you have profits earning profits.
Sometimes you have the profit of the profit earning profit. You see how that can build up really fast. It's just this beautiful money snowball. It starts off so small, but the further you roll it, the bigger it gets. And it's soon far out of all proportion from the original little snowball that you made.
And just as the snowball gets bigger, the further it rolls, compounding returns get bigger with more time. Now, if maths immediately makes you tune out, don't sweat it. You don't actually need to understand the maths of compounding, I don't think. You just need to know that it does work.
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Chapter 6: What is the rule of 72 and how does it affect your investments?
If you are okay with maths, then there is also a really simple equation that can make it real for you. If people don't like maths, then go into a happy place for like two minutes. I won't spend long on this, but it's the rule of 72. Now the rule of 72 shows how fast you can double your money and almost always shows you that it's less time than you think.
You just take 72, you divide it by your expected interest rate or rate of return. If you're investing in shares, the average rate of return, 7% each year. 72 divided by 7, 10 years to double your money. This assumes that you keep reinvesting the money as it earns it for you because that's how compounding works. And again, it's your profits earning more profits.
So you can't spend what you make, not yet, but you don't have to do anything else. You just chucked in some money and left it alone. It'll just grow. No extra money from you, no shuffling around, just money making money. If you take control of this process, that is how you build financial freedom.
Because while you start out saving and investing little bits, soon those investments will be making profits. Those profits make profits. Your money grows out of all proportion to what you originally put in. Compound interest is the secret to how us normal people achieve financial independence. Like I said earlier, we don't have to earn a million dollars ourselves.
The thing is, doing this successfully means taking a long-term view and learning how to invest with one eye on the risks, always keeping the worst risks at arm's length. But that is why we're smart. We treat money according to time and we balance the need to put our money to work with protecting ourselves now and making sure that neither one is undermining the other.
You master compounding and time and you have the secret to making the most money with the least effort. Time is everything when you're dealing with money. Time is how you know where to invest your money. It's how you make money and it's how you lose money. I can dig more into the investing strategies in another video if you like. Leave me a comment if you would like this.
But this is the big underrated tactic for now. If it helped you, send it to a friend so we can all level up our money together. Until next time, have a great day.
This podcast can only give you general information about how things work in most situations. It's not individual financial advice. If you're after that, a financial advisor is always the best bet.
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