“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” ~ Dave Ramsey
As Dave Ramsey indicates, financial freedom isn’t based on how much you earn, but rather…earning more than you spend. It requires implementing a budget, reducing expenses, and making more money. This idea of ‘earning more than you spend’ is also slightly different than ‘spending less that you earn’ because there are only so many expenses you can cut.
It’s the universal law of wealth…More In, Less Out. If you spend more in expenses than you make, you’re accumulating debt. If you spend as much as you make, you’re living paycheck to paycheck. Now, if you make more money than you spend, you’re building wealth!
To achieve this, first thing first…create a budget and reduce your expenses. The idea of minimalism comes into play here. Take a look at everything you pay monthly for and ask yourself if you need it…if not, simplify your life and eliminate it. In addition, create a list of all the expenses you owe on (i.e. credit cards, student loans, car loans, etc…). Next, arrange them from least to greatest balance and focus on paying off the smallest first. This will one allow you to reduce the number of creditors you owe monthly to and two, once you pay off the creditor, you can allocate the budgeted payment to your next greatest balance.
Second, since you can reduce your expenses only so much, you must look for ways to increase your income. In general, you can generate income in one of three ways: earned income, portfolio income, and passive income.
Earned income is any income generated from working (hourly/salary job, consulting, owning a small business, etc…). Portfolio income, sometimes referred to as capital gains, is income generated by selling an investment at a higher price than you paid for (i.e. buying and selling real estate for a profit). Passive income is any money generated from creating or purchasing an asset (i.e. receiving income from a rental property, creating a physical or digital product once such as a book or online course and receiving recurring income from its sales, affiliated marketing, etc…).
Of these three…wealth is mostly achieved by focusing on the last two types of income. The issue with earned income is that you must exchange physical hours for money, which means that if you stop working, you stop making money as well. Or…if you want to make more money, you have to work more…but we’re all only given so many hours a day. However, the latter two doesn’t require this exchange of physical hours for income. Plus, in regards to portfolio income, you can compound your return by continually reinvesting it. And in terms of passive income, once you create the investment or purchase the asset, you can receive recurring income on automation.
This is the secret to wealth: Make more than you spend and make more via creating income from your assets, creations, and investments as opposed to your hourly labor.
Stay tuned for more on this topic in supplemental blogs.