Your Finish Rich Plan - A Personal Finance Blog

Making Money Is Easy, Keeping Money Is Hard

When it comes to making money, my personal premise is that it’s not something that’s particularly hard to do. In this day and age, no matter what your interests and/or skills are, there’s the distinct possibility of making a decent living. Set your mind to it, arm yourself with the proper tools (formal education, or on-the-job training, or launching your own business) and you’re more than halfway there. The problem is, however easy it may be to make money, it’s probably the most difficult thing in the world to keep it.

How to get rich

Quite frankly, the road to wealth is quite simple: spend less than you earn, so that you have positive cash flow. Said cash flow can then be used to increase your income, thereby creating a virtuous cycle of wealth creation. There are two basic ways to create a positive cash flow, you either decrease your expenses (given a certain level of income), or you increase your income (given a certain level of expenses).

Save more or earn more?

There’s quite a debate over which method produces the best results. I say focusing on either one to the detriment of the other is a mistake. Why? Because there’s a limit to how much you can decrease your expenses. You will eventually reach a point where there’s no realistic way of further cutting expenses (not to mention that your life should be pretty miserable by then). I was watching Robert Kiyosaki pitch his latest program, and he was saying that “savers are losers”. He’s partly right and partly wrong. On the one hand, it’s practically impossible to save your way to wealth. On the other hand, he advises to invest and/or create your own business, and most of the rules for success are those that savers abide by! Also keep in mind that if you’re just saving, your income might not leave you much wiggle room to work with, which brings me to the other part of the equation, which is increasing your income.

Riches-to-rags stories are well documented (MC Hammer, Mike Tyson, lottery winners). I was watching a show recently on ESPN where they were talking about NBA players going broke within 5 years of retiring from the game, after making tens of millions of dollars over their careers. Most of them had never earned a penny in their entire life, had never had a bank account (much less balanced a checkbook) when they earned their first paycheck (which can be as much as $500,000 in the case of Tracy McGrady)! It’s hardly surprising then that they manage to spend it all, and then some. McGrady was fortunate to have had “gotten it” as some point and started putting his financial house in order, but many players never did. I’m not saying every player comes into the NBA in that position, but the fact that so many of them have burned through tens of millions of dollars over their careers was kind of an eye-opener. Obviously, making more doesn’t help if you can’t keep your spending in check. There’s also a favorite show of mine that regularly runs on E!, titled “The Curse Of The Lottery”. Makes me laugh. There’s no curse, just financial illiteracy!

So the obvious answer is that it’s a combination of both. You keep your spending in check in order to create the positive cash flow that will be put to work to further increase your income. And then you raise your lifestyle as your wealth grows. To me that’s the best of both worlds. And yes, I’m insisting that you raise your standard of living as your income grows because after all, what’s the purpose of making money? To spend it at a later time! It’s unhealthy to deprive yourself of the finer things in life, as long as you can afford them, under the pretense of saving for the future. You might not be there to enjoy it!

Need for financial education

Indeed, there’s no “secret” to getting rich. The formula is actually rather simple. Why is it then that so many people miss the mark by such a wide margin? The simple truth is that people simply don’t know much about money. Unfortunately, natural laws don’t forgive ignorance. Even if you don’t know a thing about gravity, you will fall to your death if you jump from the top of a building. Similarly, not knowing the rules of making and keeping money will lead you to financial disaster as you ignore them. So the first thing to do is to get your financial education. CNNMoney.com’s Money 101 is an excellent place to start. This education will go a long way towards helping make the difference between an expense (where it’s normal to try and cut corners here and there) and an investment (where the focus is getting the best return). Otherwise you’ll be in the unenviable position of “saving” money only to turn right back and hand it away for things that are of absolutely no help to your financial goals.

Need for a wealth creation mindset

True financial savvy consists in always trying to make the income exceed the expenses. Wear your clothes a little longer if necessary; dispense with the brand names (or at least cut back); reduce the partying; carpool if need be. Make a few cuts here and there so that unless some unforeseen event rears its ugly head, there will be a margin in favor of the income. Small savings here and there do add up. Properly invested, they will accumulate, and will go a long way towards helping you achieve your financial goals.

It requires a different mindset to accomplish this, but once used to it, you will find there is more satisfaction in rational saving, than in irrational spending. And if you find that you have a lot of month left at the end of your money, and yet have a good income, you should take it up on yourself to track every expense you incur over the next month. Post them every day or week in two columns, one for “necessities” or even “comforts,” and the other for “luxuries,” and you will most likely find that the latter column will be double, triple, and frequently ten times greater than the former. The real comforts of life cost only a fraction of what most of us earn. Yet we let vanity and marketing hype drive us to spend many more times what we should on non-essential stuff. That, more than anything, is what makes most of us go broke.

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Now is the time for you to refocus. Be a better employee and get that coveted raise. Adopt a more frugal lifestyle. Contribute as much as possible to your 401(k). Make a budget. Set up an emergency fund. Work towards paying off your debt. If you play your cards right, the downsizing will only be temporary.

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