Let’s say you wanted to start an online business to make a big ol’ pile of money for yourself, be able to quite your day job, travel the world and help people… all at the same time. If you were successful in this endeavor, you might think you’ve solved a lot of your problems… but in fact, you just created a new problem for yourself which is: What are you going to do with all this money?
Well, Caitlin and I faced exactly this problem. Our businesses generate more than $70,000 in monthly revenue — sometimes more than $100,000. We have taxes to pay and some overhead, of course, and we have a great team of people helping us run things, but because we aren’t dealing in physical products for which we’d need a physical building, our overhead usually ends up being quite low. Generally, 60-80% of our revenue ends up as take-home pay.
Big Cash Flow Doesn’t Mean Big Spending
BIG cash flow can sometimes mean BIG spending habits. Caitlin and I noticed this about ourselves. At first we couldn’t even believe how much income we were generating. Then, a few months went by, and we became more used to it. We started checking into nicer hotels, eating at expensive restaurants more frequently, purchased first class flights…etc. We started dreaming of Teslas, McMansions, fine wines and all the other stuff “rich” people indulge themselves in.
Those things aren’t bad in of themselves, and most people would say, “Hell, yeah! Go crazy — I’d do the same thing!” Fancy stuff and luxuries can be great to enjoy, but if you’re not careful, it can become a never-ending treadmill of spending.
There was a major pitfall in our thought process: Caitlin and I were placing all our future dreams on our earning potential. We had started adopting a mindset that with more earning naturally comes more spending. Naturally. Why? No other reason other than because it’s fun and sexy.
But the problem with this limited thinking is that it’s actually impossible to reach true financial freedom with earning alone. Why? The more money you have coming in, the more you will want to spend it.
Michael Jackson, the King of Pop, while earning gazillions of dollars as an entertainer, loved to spend all his money. He purchased a fantasy-like dream estate called Neverland Ranch in 1988 for $17 million. It had a zoo, helicopter pads, a rail line — even its own fire department. Fast forward to 2007, and MJ filed bankruptcy on a $25 million loan for Neverland. The damn thing took 10 million dollars just to maintain and run it every year!
So it bears repeating: The more money you make, the more ways you will find to spend it.
My Money Mindset Shift
I recently devoured a great book that rocked my entire understanding of financial freedom and how to achieve it. It’s Tony Robbins’ “Money: Master the Game”. Tony offers a 7-step system to help you reach true financial independence and freedom. In a nutshell, you reach independence and freedom not by working and earning for years and years, but by becoming a wise investor.
When you become an investor vs. a spender, you start thinking more long term. Instead of “What can this extra $30,000 buy me?” you think “What can this extra $30,000 do in the market over 10 years?”
My wife found an spreadsheet template on the Mr. Money Mustache blog where you can take an amount you decided to invest instead of spend, or an expense you eliminated, and plug it into the spreadsheet which’ll then tell you how much that amount will be worth in 10 years.
Because why spend $40,000 on a Tesla Model 3 when, in 10 years’ time, that $40k will very likely double if you invest it in stock index funds instead? (And Tesla will be even cooler in 10 years anyway! That’s delayed gratification for you.)
Instead of you working for your money all the time — spending away your future — why not make it work for you? Think of each invested dollar as a little employee bringing you 7% of his value back to you. More on that later.
If you are someone who is desperately trying to increase your earning right now, you may be thinking, “This all sounds great, but I am living paycheck to paycheck right now and have no extra money to invest.” In Money: Master the Game, Tony challenges all readers to commit to saving and investing a certain portion of their income. No matter how little money you make, and how steep your bills are, you can always find a way to invest a little. Most people have no idea where all their money has gone by the end of the month.
Start taking stock.
Savings accounts… they ain’t what they used to be!
Maybe you’re not a hedonistic wild spender, and you actually save a portion of your money. Where do you put it? Savings accounts?
Did you know you are actually losing money by leaving it in a savings account?
Because of inflation. As the prices of goods and services slowly increase, the value of your dollar slowly decreases. Have a look at these statistics from Statista.com — it shows the annual inflation rate in the USA since 1990. When you average out all those years, the number you get is 2.57%. What does that mean? If you stored a wad of cash under your pillow and kept it there since 1990, it would be losing its value at a rate of 2.57% on average.
“But savings accounts can make you some money because they give you interest, right?” Wrong. Or half wrong. According to this article from U.S. News, the best savings accounts in 2015 provided you a whopping 1.05% interest. That’s right; the best ones! So even putting money in the “best” savings accounts will end up losing you money most years (all years but two according to the stats).
Instead of savings accounts, you’re better off putting your money into the stock market. Take a look at returns of the stock market since 1900. Those returns will put you way ahead of inflation, won’t they? The average of all those decades is 10.3%. Even during the “lost decade” of the 2000’s at 1.07%, it was still better than a savings account.
If you want to use a savings account to set aside money for a bigger purchase that’s less than a year away, that’s fine. But just letting a bunch of cash sit there for years and years is a waste.
Where to Start
Being overwhelmed by choice and uncertainty will hold you back from doing any investing. Fortunately there are some great companies out there who have narrowed the choices for you and reduced crippling uncertainty. They are called Wealthfront and Betterment. Here are the 4 steps you can take today to get started:
- Open an account with either Wealthfront or Betterment. Wealthfront has a minimum deposit of $500 and Betterment has no minimum. It will take you through a series of questions about your age, income level and goals. Fund your account with whatever you can to get started.
- Commit to investing a certain percentage of your income per month. The more you save, the faster you will reach your investing goals and achieve true financial freedom.
- Set up auto-deposit every month so that you’re depositing money each month.
- Set yourself goals. Betterment actually has a really cool goal setting system. Wealthfront is not as clear with the goals part, but it is easy to set your own goals.
Here’s where you shouldn’t start: Don’t go just buy random stocks from what you think are good companies. That’s actually a great way to lose money, not to mention put yourself at risk of a heart attack due to the high level of stress that comes from seeing your money go up and down all the time.
The great part about services like the above are that you don’t need to understand much about investing to reap all the benefits.
I wish I had know investing was this simple in my early twenties — ’cause then I’d have become a millionaire before I turned 30!
Let me know what you think in the comments.