Everybody knows that to have excess money, you have to spend less than you earn. There are two “formulas” for wealth. You need to live below your means and take advantage of compound freaking interest. But that requires a little more math, and I’m going to save that for another time. The formula for living below your means:
Net Income = Income – Expenses
You already know this. To generate a positive net income, you just need to make sure that your Expenses are less than your Income. So, how do we achieve this? The good thing is, like the formula, it’s simple. There are only two ways to have a positive cash flow:
- Earn more money.
- Lower your expenses.
Let’s break it down.
Option 1: Earn More Money. There are no shortage of ways you could earn more money. You read about it all of the time on PF blogs. Hustlin’ like the boss Rick Ross. It would probably be shorter for me to list all of the things that you could do that wouldn’t earn more money. But I’m not going to do that. You could ask for a raise; get a second job; sell things on Craigslist, eBay, or Amazon; start a blog; freelance, drive a taxi; get a new higher paying job; tutor; et cetera, et cetera, et cetera. You already know this too. Personally, I make money online by creating niche websites. I’ve also done some consulting on the side that ads a nice extra boost. If you’re working to pay off debt, I would say get a second job. The simple reason is that the income is going to be there faster. It can take a while for revenue from a side hustle to start being generated. It took me two years before I ever made a considerable amount of money from my websites.
Option 2: Lower your expenses. Fancy way of saying spend less. This is probably the more feasible approach for most, and it’s certainly easier than finding a second job. I’m sure you know that you spend money on a few “luxuries,” but hey, everybody else does it, right? And it’s not seriously harming your bottom line. Besides, you’re tired, so what’s $4 for a coffee? Or after a long day, when you might not feel like cooking, and decide that $15 on pizza isn’t that bad. Except that it is. It adds up. If you have debt, you don’t have money for luxuries.
The key to lowering your expenses is to budget. I know I (among others) may harp on this one a lot, but it truly is one of the core tenets to getting out of debt and growing wealth. What you want to do is treat your personal finances like a business would treat theirs. Any good company is going to track their expenses and cut any unnecessary expenditure. You should do this, too. When you spend less, you have more. This extra money can be put towards your debt and is vital to growing your wealth.
Okay, I lied. There is a third option, and it’s a combination of options 1 and 2. Spend less money, and then put that money to work for you. Once you set a budget and find yourself with extra money, you can use that to pay off your debt. Once you have no debt, you find yourself with extra capital. You can then use that money to make more money by increasing your 401(k) allocation, open a low-cost Roth IRA with a company such as Vanguard or Sharebuilder, or find a high-yield savings account. Although a high-yield savings account likely won’t keep pace with inflation.
Any account might not earn much in the beginning, but over time, that extra money will turn into a nice little nest egg. 40 years from now, you could be living off the dividend payments from your ownership shares, while all of your friends struggle to make their monthly credit card payments. Remember, “might oaks from little acorns grow.”
But, if you’ve read this far, you already knew everything I wrote. I didn’t say anything new or novel or crazy. So, why don’t more people do this? Because it requires action. And is sometimes uncomfortable. But, not as uncomfortable as being poor because you’re bad with money.