Get Rich Slowly carried a very interesting post on “building wealth with a virtual employer”.
The gist of the story, is that James (a guest blogger on GRS), disguised his income. His actual salary went into one Money Market account, which had automated instructions to transfer amounts predetermined by James to his checking and savings accounts.
The checking and savings accounts were used for paying bills and ATM withdrawals, while the balance in the Money Market account went on merrily earning for James, first by creating his emergency fund, and later for his investments.
James treated the checking and savings accounts as his “true salary” and lived within that. Raises and bonuses from his employer were ignored and retained in his MM account.
James worked out the “raises” he felt that he should get and paid himself by adjusting the automatic transfers from his MM accordingly. Over a period of 15 years, he built up a sizeable nest egg from a net debt position.
It is not as easy as it seems.
Throughout the period, James exercised great discipline and lived within his means. Always spending less than he “made”.
The advantages of setting up this “James plan” are many. It creates forced savings. This plan will greatly assist in not allowing our expenses to automatically rise as our earnings rise. Overtime, we should get used to living within our “salaries”.
Can we do it? Is this James plan for all?
I suggested the James plan to a colleague who has just been offered another job, with a 20% increase in salary. I told him to speak to his new employers and ask them to automatically transfer to a savings and investment account an amount equivalent to the difference between his new pay and old pay.
Since he was already used to living within his old pay (despite the occasional complaints and mumblings about insufficient income), he should be able to continue to do so. He could give himself a “raise” one year later.
Will he follow this advise? Or will the tried and tested devil of expenses creeping up to meet income prevail?
Time will tell. I’ll check with him 6 months down the road.