I remember it like it was yesterday. It was one of the most important moments in my life.
The year was 2014. My friends and I were pulling out of a gas station in Delray Beach. Josh was driving, Bryan was in the front seat and I was in the back seat. As usual, we were talking about money and dreaming of all the ways we were going to spend the money we were making.
I probably said something like “I’m saving all my money. I’ll put it in the bank.” Josh probably said something about buying new clothes. But it was Bryan who knew something that Josh and I didn’t.
Bryan said, “I’m going to put my money to work.”
Bryan’s insight that day completely changed my perspective on money.
Bryan knew the secret.
To establish true financial independence, you need to learn how to make your money work for you.
The first step is to change your perspective of money. Most people think of money as a finite resource. The amount of money in your possession is the limitation of your choices.
This is the wrong way to think about money.
Instead, start thinking of money as something that wants to grow. It is not finite. It is limitless. Money is a force, much more than it is a thing.
How poor people and middle class people manage their money
It’s easy to conceptualize this if you think of your personal income as a business. Every business has a balance sheet. Every balance sheet is broken down into four sections.
- income – what you’re making
- expenses – what you have to pay for
- assets – things that put money in your bank account
- liabilities – things that take money out of your bank account
Most people manage their money in the following way.
They get a paycheck (which is already taxed) and their money goes straight to paying for their expenses and/or their liabilities. This could include a car payment, student loans, a mortgage, etc.
The typical American spends more money than he/she makes.
This is the behavior of people who never attain financial independence. Making more money doesn’t necessarily solve the problem, because more income usually leads to more expenses. It’s very common for professionals with high salaries to also have bad debt in things like credit car payments, car payments and student loans. This method of cashflow virtually guarantees that you will be living paycheck to paycheck.
If this looks like you, understand that your money is not working for you, but rather, you are working for your money. In this scenario, the only way you can make more money is to either work more hours or increase the rate of your hourly pay.
Below is a visualization of what cash flow looks like for a poor person. Typically, they don’t have any liabilities because all their money goes straight to expenses.
This is the cash flow visualization for a middle class person. In many cases, middle class people are even worse off than poor people because status symbols incentivize them to go into significant debt to buy cars, houses, and clothing on credit.
How rich people manage their money
Rich people invest their money. However, I feel like the term “investing” creates an oversimplification of how it works. A more articulate explanation would be to say that rich people buy, build, or invest in assets that generate a financial return over time.
This can manifest itself in many ways.
For me, the first step was to build my marketing agency. In the beginning, I was still working for my money. Over time, I was able to generate leverage by hiring employees and using software (such as QuickBooks) to do the manual labor for me.
12 years later, I co-own a successful business.
But it doesn’t stop there. Over the years, I’ve continued to use the profits I’ve generated to either buy, invest in, or build more assets.
For instance, two years ago I invested $25,000 for 50% ownership of an affiliate site called LSATclarity.com. The site generates a small profit every month. By this time next year, I hope to be at breakeven on my investment and everything after that is money that gets deposited into my bank account.
The money is doing the work for me.
Another common way to create income generating assets is through real estate and rental properties. I personally don’t own any rental properties, but I have friends that do and it’s a great way to build wealth.
For instance, let’s imagine you buy a home for $100,000.
You now have a monthly mortgage payment of $600 and other expenses such as insurance and interest. In total, let’s assume you have to pay the bank $700 a month for the house.
However, you now have a rental property. Typically, you can charge 1% of your buying price as rent. If you charge $1000 a month for rent, you are generating $300 a month in cash flow.
To take it a step further, as you continue to pay off your mortgage, you will create equity in the home. Now you can leverage your home equity to take out a loan and buy another house. You now have two income generating assets.
Both of which are increasing in value over time.
You are no longer working for your money. Your money is working for you.
What’s the best way to get started when generating new income streams?
Since 2014, I’ve been investing money into the stock market every week. I’ve been investing mostly into the S&P 500. No matter what, I put money into the market and in total, my investments have generated a 14.4% return.
The best part is that this investment will continue to compound over time.
Once again, the money is doing the work for me.
You can easily become a millionaire simply by putting a small portion of your paycheck into the S&P 500. This is especially true if you started investing in your youth. I wish I had. I didn’t start seriously investing until I was 28.
You need to understand that you will never have financial independence unless you are able make your money to work for you.
It’s perfectly fine to start small. As I said before, setting up an automated investment strategy that puts money into the stock market or an index fund is a great way to get started. We all have to start somewhere, and there is no shame in needing to save money for two or three years before you have enough cash to be able to make a more significant investment, such as real estate or equity in a business.
This all starts by changing your mindset and coming to the realization that money is a force more than it is an object. Use that force for growth!
A year from now, you will wish you started today.