Over the last few years I have been studying wealth.
What kind of people are rich? What do they believe? What do they do? What did they do?
Two Paths
There are basically two ways to start accumulating money. Earn more. Spend less.
Most people will try to spend less. That is not wrong, it is just difficult to do long term and has a limited effect. You can only reduce your expenses to zero. Zero expenses is pretty difficult, but for someone just starting out it might be possible for a time (i.e. living with parents).
Also, too many people go for small wins when reducing expenses. Cutting out entertainment, leisure, or that morning cup of coffee.
Earning more is tough. It usually requires sustained effort, increased responsibility, and often some creativity. Also, many methods of increasing your income require some financial investment. But the upside is basically unlimited.
Lets just go over a little example of the difference. If you earned $2500 per month and your expenses are $2000 per month, if you just want to decrease your expenses, the absolute most income you will get doing that, assuming you can get your expenses to zero, is $2500 per month.
Now if you want to increase your income, you can work to increase it to $5000 per month and now you have a net of $3500. And you can just keep increasing that number. It is up to you.
I recommend doing both at the same time if possible. But for expense reduction, focus on easy wins and focus on big wins (big easy wins are the best). An easy win would be canceling subscriptions that you don’t use. A big win is switching cell phone plans and cutting your cell phone bill by 60%, getting rid of car payments by selling a car that you owe on and getting one that is paid in full, moving to a less expensive apartment or smaller house, getting a roommate to share expenses with.
If you want more info on different ways to creatively get big wins on expense cutting, I recommend Ramit Seti’s blog I Will Teach You To Be Rich. His writing had a huge influence on me giving myself several thousand dollars worth of raises over the past couple years with big expense cutting wins. (i.e. I reduced my cell phone bill by $1200 per year)
Real Estate
Besides working harder on your job, there are a few different methods of earning more money. One of the big ones that I researched is through real estate.
Specifically, buy and hold real estate.
One of the keys to actual wealth is having your money work for you. Kevin O’Leary, one of the Sharks from the show Shark Tank, likes to say that he sends his little dollar bills out as soldiers to go get him more dollar bills. There is a word that describes this process, investment. Based on my research, buy and hold real estate is one of the best investments you can make. It is not easy, but it has good returns.
With buy and hold real estate you do not flip houses to try to make a quick buck. You find a house, condo, etc. in a decent neighborhood buy it and rent it out for 20-30 years, ideally with positive but possibly with neutral cashflow until it is paid off. Eventually you will want to move up to apartment complexes but probably best to start with houses. One of the most creative ways to start if you can is to buy a duplex and rent out the other side.
A few caveats about this.
First, it is good to have a property management company handling the renting so you don’t have to. From what I hear, a good company is hard to find.
Second to make the cashflow math work, you will most likely need to put a 20% down payment on the house. There are a lot of people out there selling courses on how to get started in real estate with no money down. I am not an expert on this but that method is high risk and getting leveraged like that can put you in an awkward situation.
Depending on where you live, that 20% can represent a large chunk of change. This may be a prohibitive factor for you and it has been for me.
Doing a Better Job and Getting a Better Job
Upgrade your skill set. Become more valuable. You are going to get paid what your worth. If you aren’t getting paid much it is probably because you aren’t very valuable to the marketplace.
One of the fastest ways to get an increase in pay after upgrading your skill set is to get a better job. Often companies are slow to give raises and promotions. But if you already have the skill set and another company is looking, you can often negotiate your way in at a higher starting salary.
Warning, responsibility comes before money and some things are worth more than an increase in salary. Make sure you calculate everything when considering a new position.
Anther method that a lot of people won’t use because of fear of rejection is ask for a raise. Go in prepared. Get industry numbers and comparisons and have information about why you should be paid more. If you discover through your research that you are getting paid a fair amount, you should look into how you can be more valuable.
Tomorrow I will talk about one of the other methods of earning more money, starting a business.
Keep getting wiser, stronger, and better.