In another post, I talked briefly about the way to get wealthy. The concept is pretty simple, really:
Maximize passive and portfolio income
But I want to go a little deeper into how to get there from here. The biggest question most people have is “How do I start?” How do you go from no passive and portfolio income and big expenses to wealthy? Well the passive and portfolio income may take a bit of work, but the minimizing of expenses is much easier. So start there!
The best way to have more money is to stop throwing it away!!
As mentioned above, the way to wealth is to maximize passive and portfolio income and minimize expenses. However it’s VERY hard to make any investments into your passive and portfolio income sources if you’re strapped for cash from the start! So in order to even get started building that income, it’s important to have cash available to sieze opportunities as they arise. In order to build this cash, your current J-O-B income can help get you there. But if you’re spending all of it, there’s no room left to invest in passive and portfolio income.
There’s no better way of keeping money than to stop spending it all. And here’s how.
I plan to talk in more detail about keeping track of your personal finances, but for now start by listing out your expense categories. These typically include: giving, food, restaurants, gas, household items, car repairs, house repairs, education, insurance, utilities, phone, internet, mortgage, credit cards, student loans, car payments, medical bills, and so on. Some of these can’t or shouldn’t be eliminated, some can be reduced, and some can be eliminated altogether!
– Giving. This includes tithe, charitable giving, and any other generous donations you make. Getting to a wealthy state doesn’t mean you’re a tightwad! I strongly suggest keeping up with your giving habits (unless they’re spinning wildly out of control) and find other places of minimizing expenses.
– Education. Don’t sacrifice on education. The only thing in the world that you can change is you. So invest in your own education! Now obviously be careful what sort of education you get and how much you spend on it, but rarely will good education go to waste. I’m personally not a huge fan of “traditional education” (although it’s usually necessary in getting a J-O-B and have a Master’s degree myself), but specialized online courses, seminars, and real-life experience are typically much better bang for your buck.
– Saving. I didn’t include this in the “expense” category, because it’s technically not an expense. Outflow, yes; expense, not really. However I did want to mention it quickly here. It’s important to keep saving! Retirement (especially if you get matched 401k donations from your employer), Roth IRAs, and just general saving are very important. However, once you’ve reached a comfortable level of savings, I’d recommend using that money toward the “eliminate” category below. And of course, these savings are part of the foundation needed to build your passive and portfolio income.
– Consumables. This includes food, restaurants, gas, household items, and utilities including phone and internet. Do you really need to eat out every day? Or buy the latest toy, tool, gadget or other doodad for your house? Do you really need to be driving an Excursion instead of a Hyundai? Or go do Disney every year? This is probably one of the biggest areas to save money on. Sure some of those categories such as food won’t change much, but there certainly are ways to reduce how much you spend on it, such as buying things that you need when they’re on sale (if you buy something you don’t need, you just got SOLD), or buying off-brand items instead. There are entire blogs dedicated to this though. Or how about cutting back on how much you spend for your smartphone? Or negotiating the price of your internet service (yes, that is definitely possible!). I’m not advocating eating rice and beans every day and never going on vacation! There is a time and very important place for all of that. But try to be more frugal. There are so many areas in this category where just a little savings can add up quickly. It’s worth taking a very close look at.
– Repairs. Sure, you can’t control when things break down. But you can help prevent these repairs by – go figure – preventative maintenance. I’m suggesting you spend a little more on preventative maintenance which will help cut down on overall repair bills, be it for your car, house, or otherwise. Nothing like being stuck with a $5,000 engine repair because your oil got too low in your car.
Ok, this is where it may get painful for a lot of you.
– Car payments. I’m just going to rip this band-aid off. Car payments are NOT a necsesary evil! It is possilbe to buy a car – albeit a cheaper and slightly older car – with cash. Interest is one of the most painful ways of losing money. Partly because it’s so invisible, partly because for some people it feels like they’re doing “the right thing”. “But a new car has a warranty and won’t cost you anything for repairs.” While true, it certainly does not outweigh the cost of owning a new car and losing out on the depreciation and interest. Trust me, I’ve run the numbers and would be more than happy to show them to you! “But I got it at such a good deal!” I bet I can get an even better deal used and a couple years older. Every time. “I can’t afford to buy a car with cash.” True it takes a little bit of saving. I currently put aside a bit of money every month into a savings account (actually a bond-based mutual fund) and call it my “car payment”. Except instead of paying a lendor, I pay myself. In reality, you can’t afford to buy a car with a loan. It’s hard, it’s painful, but car payments are one of the biggest wastes of money. Pay off your current car, sell and buy a cheaper one, do whatever it takes to get rid of that car payment. And then keep it that way!
– Credit card bills. Ouch. Another biggie. Although this one is a lot more simple. If you don’t have money in the bank, you can’t afford it. Don’t buy it. I’m still amazed that people are willing to pay 18% interest just to have it now. It’s not like you’re not going to pay for it at some point in time! You still have to pay for it, now you’re just adding 18% a year onto that! My wife and I still use credit cards, but have always paid it off every month. Stop overusing your credit cards!
– Mortgage. Surely not! It’s impossible to pay off a house! Well… no, not exactly. It may take awhile, but it certainly is possible to get a house paid off. My wife and I were debt free for about a year after paying off our student loans. We were still paying rent at the time, but what an amazing feeling it was to be completely debt free! We’re very eager to reach that state again, and as soon as possible. Imagine also the possibilities of being able to save and invest everything that WAS going to your mortgage once you get it paid off!
– Student loans. Similar to the mortgage, it’s certainly possible. Also since the interest rates are even higher than mortgage rates, it’s even more important to get these paid off quickly.
– Home equity loans or other personal loans. If you haven’t gotten my drift yet, let me be a little more explicit… Get out of debt as soon as possible!
The easiest way of getting more out of your income is reducing or eliminating as many expenses as possible. I’m not an advocate of living bare bones, but I do believe most people have quite a number of areas that can be reduced.
Avoid loans as they continually suck money away from you.