Assessing Your Financial Situation
There are only two ways to create money: 1) reduce your expenses, and 2) make more. I’m under no illusion that it is always possible to reduce your expenses. For many of us, we are already living at the bone’s edge. And at my poorest, I invested heavily in cigarettes. Like a three-pack a day investment. I don’t know how many gurus I heard say, if I stopped, I would save $2,352 a year, and that’s when cigarettes were an average of seven dollars a pack. I think we are up to almost nine dollars now, which is what keeps me from going back. But honestly, after I quit, that $2300 just went to fuel and groceries.
Like my cigarettes, non-negotiable items exist, things that you will never give up. My wife will never give up her Netflix. I at one time never thought I’d give up cigarettes, and now I know I’ll never give up my coffee. In my opinion, personal austerity measures rarely work. That doesn’t mean you don’t reduce your expenses.
A great game I play over and over every three months is red light green light, which you can read about in more depth here and even download an excel red light green light budget worksheet. Basically, you run through your checkbook with red and green highlighters. You redlight anything you can cut and greenlight anything you want or need to keep. I play red light/green light game every quarter because I have zero discipline. Revisiting the exercise allows me to perform whatever course corrections I need to make.
As for making more money? That’s the tougher conversation, I think.
If you’ve subscribed to my eNewsletter, and you’ve been reading me long enough, you know I quit my 9 to 5 because my regular W2 made below poverty level pay, and I did that for ten years. I kept hoping for a raise. Every time I asked for a raise, that raise didn’t happen. It wasn’t like I was bad at my job—after I quit, they even asked me to return three times. But the pay never increased. This is not to diss a W2 job. My wife has a W2 position. A W2 is a perfectly acceptable way to bring in cash; however, the point here is that you have no control over the W2 position. What they decide to pay you is what you are paid.
Side hustles are great.
The money generated can be used for various purposes—whether you’re socking the side hustle income away in the bank or using the income to cover an unexpected expense (it’s early days in my business and I’m doing DoorDash to cover marketing and my daughter won an internship in NYC that has also made me pretty broke in the short term).
Start and own a business.
The Federal Reserve chart Assets by Wealth Percentile shows the bottom 50% of the population invest in real estate, and the top 1% percent hold their wealth in the stock market, and business ownership. A big difference sits between buying a job and starting a business. My dad bought a job when he started C&S Lumber, but when he was finished working, when he stopped making phone calls, the business ended. A business leverages other people’s time and money. In the early days of starting a business, you might be CEO and administrative assistant both. You’ll wear all the hats. And just in general, work your butt off until you are able to begin the leveraging process. Two and a half years into my real estate business, I’ve only begun to leverage other people’s time and money by having hired a freelance transaction coordinator paid on a per project basis. Hiring and leveraging the transaction coordinator has allowed me to make more sales calls instead of filling out more paperwork.
Build an emergency fund.
About 40% of all Americans could not come up with cash for a $500 emergency. They would have to put that unexpected expense on a credit card, ask friends or family, get a payday loan, or sell something. The money in an emergency fund does get depleted, which is perfectly fine. That’s what the emergency fund is for, and in some cases that fund needs replenished often. During Covid, for example, I dipped in many times just to cover rent. The tried and true rule of thumb suggests building an emergency fund up to three to six months of all your expenses. And if you can do that, awesome for you. But my suggestion is do what you can. Five hundred or a thousand dollars is not going to cover three months’ worth of expenses, but certainly that’s better than nothing.
Your biggest return on investment is paying off debt.
Sort of. Really depends on what kind of debt you are talking about. A credit card might be a high priority to pay off. A mortgage or a car loan might be a slow burn as long as you are paying on time. Student loans are rather up in the air. The interest rates on student loans are ridiculous, but student loans do not necessarily preclude you from making large purchases such as a home or a vehicle. It is really your debt to income ratio you have to worry about, and student loans can sometimes screw with your wallet if your ratio is high. The biggest take away here is that if you pay off your debt, that frees more of your income to invest.
One thing I’m not going to talk about in this particular post is your credit score.
I learned in my first two years of working in the real estate industry is that your credit score is a game that you can easily win in a short amount of time. And contrary to popular belief, a low credit score does not necessarily limit your access to money. A low credit score does limit your access to traditional forms of borrowed money—think banks, credits cards, and mortgages.
Assets versus income.
While income is the money you earn from work or investments, assets are resources that have economic value and can provide future benefits. Income is essential for covering day-to-day expenses; although, its primary limitation is that it is often directly tied to your time and effort. Assets, on the other hand, represent your wealth and can generate income independently of your active efforts. There are different types of assets to consider: real estate, stocks and bonds, business ownership, savings and cash reserves. The significant advantage of assets is their potential to generate income without your direct involvement.
Be careful with 401ks and other retirement products.
My wife’s been taking courses from Dumpster Dog Amanda Holden. Because I’m mainly a manly man and Holden’s content is mostly geared towards a female audience I tend to only eavesdrop. She teaches the same lessons you learn from Tony Robbins book, “Money: Master the Game: 7 Simple Steps to Financial Freedom” except with all of Tony’s stuff we’re talking a million thousand pages of reading. Where Holden clearly states, “watch out for the fees.” The fees will keep you poor. When my wife started looking into reducing her fees by selecting funds that had the lowest expense ratio, the financial service provider chosen by her workplace placed us on hold, used big words we didn’t understand, talked in circles, and encouraged us to maintain our current plan. Stick with this process of working through this conversation though, because her overall retirement fund value should increase dramatically years down the road.
Speak with a great financial advisor.
The biggest myth is that you need money already stashed away before you can speak to a financial advisor. But the conversation should be free, and they can lay out a plan specific to your needs. A good financial advisor can start you on the path you want to be on. When I first spoke to my FA, I had zero dollars to invest but still some huge goals. I’m not a good client for him yet, but his knowledge and expertise will turn me into an excellent client.
As a side note to these financial strategies, I’m in process and not a complete work of art. But playing red light/green light has helped me keep my daughter in NYC for her internship, and because of red lighting the cigarettes, I’m a little fatter now. I was able to go on Vacation this past Christmas, plus, I no longer work my W2.
I’m not a financial planner, but if you want to start down this path, reach out with an email and I can point you in the direction of an amazing FA.
