Sid was my surrogate Jewish uncle, and he taught me the most important lesson I ever learned about managing money.

 

When I first started making a bit of money back in 1983, Sid (who was my mentor’s father-in-law and my personal accountant) invited me to lunch to talk about the "facts of life.”

 

Sid’s intention, I was relieved to discover, was not to cue me in on the birds and bees (I was 33 at the time), but to tell me how to manage my money.

 

“There are basically three things you can do with money,” he said. “You can spend it. You can save it. You can invest it.”

 

Having grown up poor, I was more than excited about spending my money. Sid had noticed that, by observing my checkbook activity.

 

“Mark,” he said. “You’re a mensch. But when it comes to money, you’re acting like a schlemiel. How will you ever get rich if you keep spending as much as you make?” he asked me.

 

“But I’m buying things that have value,” I protested. I offered two new cars and some jewelry for my wife K as examples.

 

“Don’t be a schmuck,” he exhorted. “Those are depreciating assets. You might as well put your cash in a blender.”

 

I knew he was right. So I promised him I would begin to “save” money.

 

“That’s not enough!” he snorted. “Saving doesn’t do bupkis but pay future bills. You can’t get rich by paying future bills. You have to invest to grow wealthy.”

 

I had no idea what he was talking about. At that time, being new to money, I never considered that there could be a difference between saving and investing.

 

I admitted I was confused. I asked for clarification. This is what Sid told me:

 

•   The purpose of spending is to take care of current expenses and avoid debt.

•   The purpose of saving is to take care of future expenses by saving excess cash.

•   The purpose of investing is to increase wealth.

 

This may seem like common sense, but it is not commonly known.

 

After Sid taught me that, he went on to tell me the most important thing of all: what really matters, in terms of building your wealth, is managing your money accordingly. “Always separate your money into three pots,” he said, “one for spending, one for saving and one for investing.”

 

And so I did.

 

Back in 1983, I organized my money into three separate bank accounts: what I needed to spend, what I needed to save and what I wanted to invest.

 

I put the money K and I needed for rent, food and entertainment into the first bank account.

 

Then, I put an amount of money that K and I decided to “save” for an individual retirement account, a college fund for our children and a down payment for a starter house into the second account each month.

 

I put any money I had left over, if there was any, into the third bank account.

 

By separating the money physically, I was able to able to absorb Sid’s wisdom gradually as I looked at the fluctuations of each bank account over time. I began to understand what my priorities were as the primary spender, saver and investor of my family’s income.

 

Because they each have different purposes, the accounts should be different in terms of their monetary makeup:

 

•   Spending accounts must be liquid. Thus, they need to be in cash.

•   Saving accounts must be safe–super safe. The goal is to protect and preserve value,   not to grow it.

•   Investing accounts must be positioned for maximum growth over a defined period of   time. The longer the time perspective, the better.

 

Among other insights, I learned several things, at a gut level. First of all, spending makes you poorer. Secondly, you should never allow your savings account to fluctuate up and down. It must always move steadily upwards toward your target. And I also learned that growing wealthy takes a bit of risk, but not nearly as much as most people think. By investing with a long-term view, you can grow amazingly wealthy without working very hard or undergoing a lot of stress.

 

Again, this may seem like common sense, but I’m quite sure that 99% of the population doesn’t understand it at a meaningful level. This is also true, I’m sure, for 90% of the world’s top moneymakers.

 

It is important to understand the difference between spending, saving and investing. Separate your money into three accounts. I have been following Uncle Sid’s advice for close to thirty years now. It did not necessarily help me to become wealthy, but it has allowed me to remain wealthy.

 

Next week, I’ll tell you about Lord Jim, a very rich friend of mine. He didn’t manage his money well, and the consequences were catastrophic.