As the holidays are fast approaching, you may think the financially savvy thing to do is start tightening up. You’ve gone through life hearing things like” “cut your expenses” or “live below your means.”
As it turns out, this is one of the most ridiculous methods the “financial experts” advise one should do to attain financial security. The path to wealth is not a matter of cutting back, reducing spend, and living a life less than what you had hoped for.
In fact, it’s incredibly LAZY advice. It’s safe advice for the so-called “advisor” because it sounds logical and it won’t cause any flack for the advisor. It’s lazy because the advisor doesn’t have to think.
Plus, who wants to live below their means? It’s simply uninspiring, and promotes a spirit that keeps people poor.
Cut vs. spend
Not only is “cut your expenses” lazy advice, it is also incorrect advice if you truly want financial security for life. Consider this: you own a duplex that you rent out to two families. In any rental property, as in any business, your three key financial components are:
- income
- expenses
- debt
So, what are the first questions you should ask when it comes to income, expenses, and debt?
Income
Very simply, “How do I increase my income?” Whether it’s your rental property, your business, or your personal household, oftentimes the solution to a financial problem is to increase your income. In real estate, ways to accomplish this are by lowering your vacancies, introducing alternate streams of income (such as laundry), and increasing rents.
Expenses
Most people automatically ask, “How do I cut my expenses?” Wrong question. The better question to ask is, “How do I spend my money more effectively to increase the value of my property?” Another option is, “How do I spend my money more effectively to increase the value of my business?” (And yes, this is the question to ask when it comes to your personal finances as well.)
For example, you decide the water bill of the rental duplex you own is too high, so you choose to cut that expense by cutting back on the amount of water you use on the property. As a result of the water cutback, your trees and shrubs start dying. Now your tenants are unhappy because the landscape is brown and ugly.
Instead of cutting expenses, the better idea can be to spend money. As another example, instead of cutting back, perhaps you have an opportunity to spend more money on additional trees and shrubs. This expenditure can increase curb appeal and make the property more attractive to the residents and prospective tenants.
A change like this can allow increased rent; which leads to increased value of the property.
“How do you spend money more effectively to increase the value or income,” is the exact same question you should be asking of your personal finances. “How can I spend, or use, my money to make more money?”
Don’t live below your means; expand your means
Instead of focusing on reducing your expenses (a scarcity mindset that keeps you poor), focus instead on increasing your income. Increase your income — not by working harder, but by spending money that then works hard for you. It takes no brains to cut expenses. Anyone can do that. It takes creativity and a little bit of guts to figure out how to spend your money to make money. That’s financial intelligence.
Debt.
The question to ask is, “How do I get the best financing terms?” Too many people focus on the price of the investment, when the deal may be found in the terms, such as the interest rate, length of the loan, interest-only versus 30-year fixed, recourse versus non-recourse. (If you don’t know the definitions of any of those terms, just look them up — learning the lingo is one of nine tips to become an expert real estate investor.)
It’s the financing terms more than the price that can make or break a deal. The beauty of debt (good debt) today is that it is cheap.
As a reminder, debt isn’t necessarily a four-letter word. There are two types of debt: Good debt is debt you use to buy assets with (assets are things that put money in your pocket whether you work or not). Bad debt is debt you use to buy liabilities (liabilities are things that take money from your pocket).
The power of positive cashflow
A quick word on cash flow:
When investing, your first and primary focus ought to be cash flow. Cash flow is simply the income you receive from an asset each month, quarter, or year, minus the expenses required to maintain the asset.
For instance, if you invest $25,000 in a new gourmet food business and receive $400 a month in net income (your take-home after expenses, interest and taxes), that $400 is your cash flow. If you put $20,000 down to purchase a $100,000 rental property, and, after paying the mortgage and operating expenses, collect $100 per month in rental income, that $100 is cash flow.
It’s money that flows right into your pocket.
Cash flow leads to freedom
Ultimately, cash flow leads to financial freedom or financial independence.
When one is financially independent, they’re free to do what they want; whether it’s to have a life of leisure or pursue a new business adventure. They can be with people they choose, set the schedule they want. Their time is truly theirs.
Freedom means more choices.
But for as long as one might have to work, they are not free. Your time belonging to another, is the absence of freedom. And relying on another the majority of your life, in order to generate money for daily living, that is not freedom.
On the contrary, positive cash flow is money that comes in every month whether you work or not. Assets throw off positive cash flow every month, regardless of your time towards work; and that money goes straight into your pocket.
To become financially secure, your number one goal is to get more cash flow coming in than going out for living expenses. Have assets work for you, instead of you working for money. That is financial security.
How do you know when you’re financially free?
If you or your spouse stopped working right now, how long could you survive? The average person cannot survive more than three months.
Financial freedom is not about amassing millions of dollars to live off of. It is simply having more money coming in every month in cash flow from your investments, or your business, than is going out in living expenses.
For example, Robert and Kim Kiyosaki retired in 1994, but didn’t have a lot of money. They had $10,000 per month coming in from their investments, primarily real estate at that time, but their living expenses were only $3,000.00. So at that point, they were financially-free. And then from there, they continued to grow.
Real estate isn’t the only path
Just because real estate is an often referred to asset type, doesn’t mean it has to be your favorite. Be creative — there are plenty of ways to create cash flow.
For example, in Kim’s book, It’s Rising Time!, she share a story about a woman who loved to spend money on designer handbags. She did not stop buying these handbags to save money. Instead, she realized that all of her friends wanted to borrow her handbags, so she decided to rent them out. Now, she has cash flow coming in each month from her rental-handbag business.
And when some of Kim’s friends wanted to self-publish an eBook online, they created a 20-page document on how to do this and turned it into an eBook. Now, they make about $100 to $200 per month selling this eBook online.
To be financially-free, think about your area of expertise. What can you offer to expand your means and increase your cash flow?
Take some time to think about your future. Even if you are struggling with finances right now, know that by being creative, learning about money and taking action, it is possible to enjoy financial freedom in the years to come.
It’s time to spend money!
So, the real key to happiness? The key to having a secure and financially healthy life is to Spend! Spend! Spend!
Just be sure to spend your money in the right places. Financial intelligence is knowing how to spend your money to acquire assets that make money for you versus spending money to acquire liabilities that take money from you.
