Tag: finance

Opportunity cost, saving money, and living your rich life

If you want something, you HAVE to give something up to get it – whether that’s time, money, effort, etc. You have to make sacrifices…you can do anything if you set your mind to it, but you can’t do everything. You will have to pick and choose what is most important to you because by saying yes to one thing, you are inherently saying no to something else. It’s opportunity cost.

For example, if you want an expensive new car, you have to give up money to get it. To earn enough money, you have to work for it (trading time and effort for dollars). You’ll also have to save up for it (also costing time, because it won’t happen over night, and effort, because you might be tempted to spend money on other things). So if you also want to go on vacation, go out to eat all the time, go on a shopping spree, etc., but you don’t make enough money, by saying yes to those other things, you are saying no to getting that dream car.

You can’t have all of the toys and live the “rich” life without PAYING for it. What you need to do is redefine what is a rich life for you (it’s different for everyone). Living a rich life doesn’t necessarily mean you have to spend a lot of money. It does mean that you’re allowed to spend money on things that matter most to you though. Life is meant to be enjoyed. When you die, you can’t take that money with you.

But the problem for most people isn’t having too much money leftover when they die, it’s not having enough for their later years. Most people mindlessly spend money on things they don’t really get enjoyment out of. They do this all of their lives. Stop doing this! If it’s not something you truly care about, cut it out of your life or buy off-brand. Save money for the things that matter most to you and when you do spend on something you’ve been saving for, don’t feel regret.

Remember what you’re working for

For the high achievers out there, remember what you’re working for. Some people refer to this as finding your “why.” Why are you working so hard? What is it that you really want?

Sure, you may like what you do, you may find enjoyment getting recognition or accolades from your employer, or you want to be seen as successful in the eyes of your peers/family members, but is that in alignment with what you actually want?

I’ve been working hard for a long time. I worked in high school, worked my way through college, and upon graduating I worked multiple jobs and many hours of overtime to pay off any student loans I had, pay off cars, a mortgage, etc. But after having kids, I had to re-prioritize my life goals. Did I still want to earn financial freedom? Absolutely. But I need to do it in a more sustainable way so I can see my family. Working 60-70 hour work weeks will help me earn income, but at what expense?

The questions I had to ask myself were:

1) What am I working so hard for? What is my new why? The answer to this, I think, is to create the best life possible for my family. That doesn’t necessarily mean to have or to make the most money though. Instead, I think it’s to raise respectful children with good work ethics who are happy with life…and me NOT being around just so I can earn more money or do something I’m “passionate” about is actually a very selfish thing to do.

2) Instead of racing the the financial freedom finish line, am I willing to maybe work a few more years to have a better quality of life (more free time to spend with my family, friends, and hobbies)? The answer to this is yes. What’s the point in rushing to retirement when you might lose your family (say, if you get divorced as a result of never spending time with your spouse), you lose your health (because you’re “too busy” to work out), lose your friends (because you never hang out with them anymore), and have no hobbies (are you just going to sit at home and watch tv all day)?? That life would be so unfulfilling to me.

So, as I conclude, I just want to say that everyone is different. We feel different things, have different goals, and are in different stages of life. Our life experiences are different. Our expectations are different. There is no right or wrong when it comes to why you’re working as hard as you are. But the key thing is to think about what you’re working for and adjust your time accordingly.

Memento mori

“Memento mori” means that “remember, you will die.” It helps to keep things in perspective. Some people hate the idea of death and try to avoid thinking about it (whether it’s their own death or others’)…but we should all contemplate death. It is inevitable. No matter how rich or poor you are, your life will eventually come to an end. When it does, how do you want to be remembered? Make sure that you act in accordance to this and don’t forget it.

One last thing – make sure that if others are depending on your salary that you set up a will and get life insurance. You never know if you’re going to get hit by a bus, get cancer, etc. When you do die (especially early or unexpectedly), it will already be an incredibly difficult time for your loved ones. Please don’t make it even harder for them by burdening them financially or not setting up a clear will, which often leads to infighting with those you love the most.

What to do with your money

First of all, let me say that I’m NOT a financial advisor. I’m not an expert with personal finances. I just like reading and learning about finances. The below “strategy” is not financial advise to anyone. It is only my current way of thinking about how I want to save and invest my money.

In The Richest Man in Babylon, they say that all people should pay themselves first and save 10% of any income they earn. I say, why not more? If you can optimize your life, it’s very possible to save more money without feeling deprived.

It all starts with having the right mindset (being grateful for what you have and not feeling like you have to “keep up with the Joneses”). You aren’t depriving yourself when you save at least 10% of your paycheck. You’re paying yourself and investing in your future. The first part of the saving should go towards your emergency fund. Once you have that, the savings should be invested (see where I like to diversify my portfolio below).

Second, you need to be intentional with where your money goes. It’s very easy to let your lifestyle creep up to the amount that you make. I remember when I got my first job out of college. I really didn’t make much. It was probably the equivalent of $35,000 for a year. But I felt RICH! After increasing my income, it would have been easy to increase my expenses too. But if I could live happily off of $35k per year, why should I not be able to bank the balance of the money when I make $50k, 80k, or more than $100k? Control your expenses and aggressively pay off all of your debts (with the possible exception being your mortgage).

Third, you need to beef up your investments. Have real, liquid cash for your emergency fund. Obtain credit lines if you don’t have a 3-6 month emergency fund, but keep in mind that credit lines are more like fake liquidity and can be removed at anytime. As far as investing is concerned, if you’re not an expert in a field (where you have a leg up on the competition), I think it is wise to diversify…

1. Some money in the bank (money market accounts, CDs, high interest savings accounts, no fee checking accounts)…this is your “emergency fund” and your everyday spending money. Don’t worry about optimizing your returns here. This is about convenience/accessibility.

2. Keep some money in stocks (primarily index funds…and cover different spectrums of aggression/conservatism, different countries- U.S. vs Europe vs developing nations, different categories – tech vs medical vs natural energy, different timelines, S&P 500, etc.).

3. Keep some money in real estate (your home and rental properties)…this is tangible. People always need to live somewhere. It would be nice to own these free and clear, but as long as they are cash flowing after all expenses are paid (including paying the principal, interest, taxes, insurance, and withholding money for capital expenditures, repairs/maintenance, vacancy, and property management).

4. Keep some money in bonds if you are more risk averse or getting closer to retirement (only in governments that you feel are strong and can repay the debt)…have a lower percentage of your money here.

5. Some money in a small business that you own/partially own (self storage, laundry mat, car wash, pizza chain, property management company, blog, or other “side hustle”).

Finally, after you’ve controlled your expenses, and invested what you can, try to increase your income by earning a raise at your current job, changing jobs/careers, or earning income off of a side hustle.

Thoughts on revenue versus profit

If you are building a business, or if you are self-employed, are you trying to grow to eventually become profitable? Instead of focusing on rapid growth and ever increasing revenue, why not focus on growing sustainably and profitably from day one?

The saying is “revenue is for vanity, but profit is for sanity.” Who cares if you had millions of dollars in revenue when your business is not profitable (or is barely profitable)? Why would you want to work so hard and not make any money? It might sound good when you tell others how much you sold, but it’s not the top number that matters. It’s not how much you make, but how much you keep. What is your net profit?

Keep your ego in check. Focus on being profitable, on doing things the right way, on helping as many people as possible, and forget about the vanity metrics. Over time, they will eventually come. But just like a lack of sales can kill your company, so can growing too fast. Grow sustainably and do it right from the beginning otherwise it is going to be much harder to try to put the systems in place after the fact.