How to Be Richer
The answer is to make it easier for yourself by making sure that you are in the best position to expand your income and spend wisely. You need to have the right mindset and approach to manage your money. If not, having money will not help you at all. I like to illustrate this point with a story.
Daniel checked his ticket and he couldn't believe his eyes. He won the lottery and the prize he will claim is a grand amount of $5 million. He jumped around and rejoiced with loud words of celebration. A few years later, Daniel lost his newfound fortune and was left with $70,000. When asked what happened, Daniel said he lost his money. Lost? He did not lose his money, he spent it. The word lose makes it sound like an accident happened. However, the loss of his wealth was not overnight, it was an ongoing process. The italian suits, luxurious cars, and needless spending.
Richard is a long-time businessman, he started his business 20 years ago. Over the years, the hardships of running a business built his character and made him realize that money earned has to be properly managed. Due to this, Richard can preserve and even grow his wealth. He has many investments in his portfolio so if things go wrong, he has a backup plan.
Which one will you be? Daniel or Richard? The choice is yours.
Your Road Trip
“Many people want to change their life, but they are not will to change their choices, and ultimately this changes nothing.”
― MJ DeMarco
All Work and No Play
When you go to work and receive a paycheck, you are making earned income. This means you're essentially trading time for money. This is the primary source of income that many people rely on to pay for daily necessities. This is a great way to earn your income; However, this makes people complacent. Many people actually think that earning just their salary is more than enough to last them for a lifetime, well, if only things were that simple. The problem lies in the mathematics of it.
Earned income = Hourly rate X Number of Hours
Hold on, I don't get paid on an hourly basis! I can see that as a very common response to the formula. However, you technically are paid on an hourly basis. Let us assume that you work an average 40 hour work week, this means you work for a total of 160 hours per month. If you are paid $4,800 in a month, you're actually paid $30 an hour for your labor. If we follow the formula, you can either leverage time or pay rate, both of which is difficult. To leverage pay, you have to go through your boss who calls all the shots. To leverage time, you will miss out on time with your loved ones and your hobbies. It is actually quite ironic to leverage time since most of us want to be well off to have more time to relax.
Warning! Income Ahead!
There are basically 2 other sources of income that you can establish.
• Passive income
• Capital income
"Money doesn't grow on trees, young man!" I constantly hear this from parents when their children whine about wanting a new toy. However, is this actually true? Not literally, money does grow on trees if you have the seeds to do the job and it really isn't that difficult to obtain the seeds.
Now, passive income isn't just free money waiting to be taken. It requires you to actually put some work into it before you can reap the benefits of your labor. For example, you can write a book and allow others to translate your book to another language. When that happens, you will be paid royalty income for each copy of it sold. Before that, you'd first have to spend many hours to write the book, proofread it, and pay for professional editors.
What are the seeds? Are they only accessible to the rich? Not really, as long as you have some money, you are good to go. With that money, you can already start to plant and grow the tree, although perhaps not as quick. You can finally switch positions. From paying interest to charging interest. From paying rent to receiving rent.
With that money you can...
• Lend money (Interest income)
**This includes bonds, fixed deposit, unit trust, and personal loans.**
• Buy and hold stocks (Dividend income)
• Rent out properties (Rental income)
• Write a book (Royalty income)
Chances are that you are already doing this. When you deposit money into the bank, you're essentially lending the money to the bank. In Accounting, a liability is recorded on the credit side, hence, in your bank statements, the positive balances on your account is a credit. This is because the bank actually owes you money and that is their liability.
By growing a healthy money tree, you can earn your income while sleeping. In this case, instead of fighting against time, you are working together with time.
This may require some capital to earn but this should still be attainable. This happens when you are selling off long-term assets such as stocks, real estate, cars, and etc. Although, I should remind you that cars depreciate and you'll be selling it off at a loss most of the time. For this type of income, you need to buy low and sell high. For real estate, this is very nicely coupled with rental income because you can charge rent while waiting for the property to appreciate in value.
"If you fail to plan, you are planning to fail."
Income vs Expenses
You see, the formula is simple.
Earnings = Income - Expenses
If you receive a salary of $10,000 a month and spend $9,000, you'd be foolish to say that you make $10,000 in a month. The goal is to maximize income and minimize expenses. Which one is easier? No doubt, I would say it is minimizing expenses. Why? Minimizing expenses only requires you to cut down or eliminate unnecessary expenses, meanwhile, maximizing income requires additional time, responsibilities, ideas, and risk-taking. Plus, increasing income will eventually put you in a higher tax bracket, this is especially true as many countries have progressive tax rates.
Keep Your Hard-Earned Money
• Slashing debts
In our modern world, we have credit card debts, student loans, car loans, and so on. You need to get out of debt as soon as possible, the longer you wait, the more the interest charges build up. This applies to companies as well, companies with higher debt-equity ratio (gearing ratio) are considered to be of higher risk and lenders will be unwilling to lend them money. Be sure to check your credit card to make sure it is paid off as often as you can.
If you can't control yourself, don't use credit cards. Use debit cards when you have to pay for something without using cash. If not, bill collectors will call you every minute of the day until you pay it off.
• Buying in bulk (or with discount)
When you see a large discount on a necessity such as toothpaste, toilet paper, shaving cream, and etc. Buy a few months or years worth and you can make an instant return on your money. By doing this, you are beating inflation and getting the discount (the discounts are higher if you buy in bulk). Plus, you are also saving time with the reduced trips and money on gas. Inflation is a tough fight, expenses are going up, but mysteriously, your salary probably isn't going up as much.
• The Big Picture Analysis
While having a meal in a nice restaurant, you think about getting a drink. The drink costs $2, sounds reasonable. Hold on, how often do you eat out? Once a day? In that case, it costs $730 per year. Imagine if you can keep that $730. You can invest it, give to charity, or buy other things.
• Time Value of Money
Let us say you paid $100,000 for a car, and then 5 years later, you sold it for $60,000. Any normal person would say that they lost $40,000 from this transaction. Is that actually true? In 5 years, economic inflation will definitely happen, the problem is the rate of inflation. Similarly, is $1,000 from the 1950s equivalent to the current value? No, the value of the money from the 1950s is exponentially higher.
The time value of money highlights something extremely important and that is the importance of investing. You may think it is harmless to just shove your money into a savings account and slowly accumulate it. The problem with that is your money is slowly but surely dropping in value due to economic inflation.
Below is a list of reasons to invest.
• Hedge inflation
• Provide comfortable living
• Improving financial position (net worth)
• Pay off debt
• Retirement planning
• Achieve financial freedom
Hopefully, with the knowledge acquired, you will try your best to invest your earnings to ensure the next stage of your life is better.