This is the second in a series of eight articles expanding on the steps of the article:
8 Steps to Build Wealth
Step 2: Attain Positive Cash Flow
In order to begin putting money to work for you to grow exponentially and provide passive income, you first of course have to earn some money. This can be from a job or your own business, and is an obviously necessary step in building wealth.
What I mean by positive cash flow is that you need to ensure that the money coming to you exceeds the money that you pay out during the same time period. Many people maintain a small or negative cash flow, meaning that they spend most of the money that they bring in, or might even spend more money than they bring in. If you’re going to build wealth, you need to find ways to ensure that your income greatly exceeds your expenses.
There are many ways to improve one’s financial situation in life, and increasing your income is a primary way to do this. It could involve investing in education for yourself, investing in your business, or finding other ways to increase your marketability as an employee. This is for you to figure out, as this site is not about careers. There are plenty of resources to help you along your path, and if you are reading this, they are likely available to you.
In addition to these primary methods, there are other ways to develop additional income streams. You can start a website, a small business, turn a passion or hobby into a part-time income stream, or any other of a variety of options limited only by your creativity and your desire. You may be content with your current level of income, or you may seek more, so depending on your situation, the importance of increasing your income will vary.
While improving income is important, decreasing expenses can’t be overlooked. A high income doesn’t necessarily lead you to wealth, as can be seen by the fact that plenty of expensive homes have been foreclosed in this recession. In fact, I’d say that most people place too much importance on income when it comes to building wealth. Even if your income isn’t very high, you can still build a significant amount of wealth if you keep your expenses far lower than your income. Here are a few pillars for achieving this:
Much of the world today is obsessed with the concept of buying, buying, and buying some more. It’s basically expected of you. It’s a given that your car and your house will match your career and income, even if you have no real desire to own an expensive car or expensive house, but that doesn’t have to be the case. As I mentioned in step 1 of this series, building wealth generally implies that you must go against what is normal and average. Do things that you want to do, not what is normal to do.
Sometimes the best things in life are inexpensive or free. Some of the best experiences are ones that you make for yourself, some of the best meals are home-cooked meals, and some of the best times are those spent in nature or with loved ones.
A big source of income drain is your car, and some people cycle through cars every few years. Often the best type of car is an inexpensive (but safe and reliable) car that frees you of worry. In fact, my favorite car I ever had was a 10-year-old used car that ran great and looked pretty good too. I liked it so much because I didn’t have to worry about it. If someone bumped or scratched it, that was completely fine with me, because its financial magnitude was not very significant to me and I cared little for the superficial appearance of it. I took good care of it of course, but wasn’t burdened with worry and protectiveness for a simple material possession. This is in contrast to a car that is worth up to a half-year’s worth of income, as some people tend to buy.
When you own something that is so expensive compared to your means, it instills worry and possessiveness in you. Most material possessions decay and diminish, and trying to preserve them is a constant uphill battle. The wise choose their battles carefully.
-Fight Against Expense Inflation
As most people grow their income over their lifetime, their expenses grow as well. They begin to have more money to spend, so naturally they spend more money, and therefore their net positive cash flow doesn’t really increase as much as it could. Ideally, you want your income to grow more quickly than your expenses, so that each year you can devote more resources towards your long-term goals.
This is such a hard thing to do because it can be difficult to measure. A good way to measure it is to keep track of how much new money you add to your investments each year, and ensure that each year has a higher total of money added than the year before. This makes measuring it simple because you only have to focus on one variable- the amount of money you put away each year. Things come up in life that increase your expenses, such as marriage, kids, health issues, home expansion, and unexpected problems, but keep your eyes focused on making sure that each year, you put more money away for the long-term than the previous year. Some of these things, especially family, are far more important than building wealth, but don’t use them as excuses for why expenses are out of control.
-Don’t Become Obsessed
I put a lot of emphasis on minimalism and simple living, but it’s generally unhealthy to be obsessed with it. Striking a balance that is appropriate for you is important. It’s fine to splurge sometimes as long as your long-term view remains intact. Constantly improve, but give yourself a little bit of leeway to keep yourself from burning-out or becoming disillusioned.
Have fun with it! Building wealth should be an enjoyable process, not a burden. View it as a construction in your life; a masterpiece. Sure, it takes some time and some resources, but it’s also a work of achievement and passion.
Earn $10.00 and spend $9.99 happiness, earn $10.00 and spend $10.01 misery springs to mind.
Dividend Growth Investor
I like positive cash flow. Dividend investing helps me generate positive cashflow, which is also passive as well. I am looking forward to reading the rest of the steps on attaining wealth.
amikha, you may quote any of my posts. I’d prefer an acknowledgment of authorship and a link. Yes, I have twitter- check the blue circle on the top left.
Excellent post, couldnt have said it better myself.
“Sometimes the best things in life are inexpensive or free. Some of the best experiences are ones that you make for yourself, some of the best meals are home-cooked meals, and some of the best times are those spent in nature or with loved ones. ”
So true. Its just a matter of only buying what you really value. For me one example is beer. I never cut down on beer expenses, fridaynight outs are the best time of my week. Instead I cut down on stuff like new clothes and expensive food, stuff I dont really value.
On a side note I tend to go a bit obsessed with the minimalism im afraid. I regularly overbuy stocks and so I have to live by vegetables and rise until next paycheck. But I dont really mind this, having little money over gives me an “excuse” to be a bit stingy. But im probably an extreme case..
Ironically, that’s why dividend-paying companies often make good investments.
They have to pay out money on a regular basis, which ideally makes management more focused on efficient capital allocation. Instead of having all sorts of extra capital to play with, they have to stick to their best ideas only.
Hehe thats very true:) I havnt thought of it that way:D