Making Real Money Online: Spending to Earn
In the first part of this series I showed three earning styles. People earn money by working for it directly, creating a business that makes them money or by investing.
While there are no rights or wrongs, and most of us actually never leave the first category of working to earn, the best potential for wealth and financial security are found in the latter two categories.
Reaching those sectors and profiting from them is what this post will focus on. I will also reveal the real secret to wealth, why some people get it and lose it while others start with nothing and end up king of the hill.
Spending Styles
As well as earning styles, each of us has a predominant “spending style”. Here is what I mean:
- Minimalist - I only spend money on what I need. Mainly essentials like food, housing, clothing, bills, that kind of thing. When I go to a store I make it a mission to go in, get what I need, and get out. My spare cash goes in the bank for a rainy day.
- Shopper - Spending money makes me feel good. I take my time, I browse, I like to go shopping. So I buy stuff I don’t need, why not?
- Investor - My money works for me. I shop not for “stuff” but for things that will pay me back over and over.
We will all at some time experience a mixture of spending styles but most of us gravitate towards one more than the others.
Many of us will have been raised by our families to save but the world we live in is becoming ever more consumer focused. The culture we live in can have a profound effect on our spending styles. From what we see on television and in magazines, to keeping up with the neighbors.
Some countries such as China started out having national trait towards #1 but in recent years have grown extremely biased towards #2. Some of the worlds financial problems are due to an excessive amount of consumer credit spending and a lack of saving. USA now dips into a negative savings rate I understand.
So, Spending Bad, Saving Good?
This isn’t to say #1 is right or that #2 is wrong. It’s a bit more complicated than that.
Many personal finance advisers will say that we should cut out luxuries, pay down debt, put spare money in the bank in high interest accounts, top up pension plans to the max, and invest in bonds and unit trusts. Sensible, actionable advice.
Thing is most financial advisers are not wealthy. When I speak to people with high net worth, that isn’t the route they take.
When Donald Trump was on the verge of bankruptcy he took on more debt and still used his private jet. There is obviously more to this idea than clear cut good and bad.
The reason is most people focus on debt, savings and treats. Spending type #3 is overlooked or confused with savings. It’s a shame because if more people learned about investing, true investing, we might all be better off.
Saving is NOT Investing?
I don’t consider saving to be investing, I regard it as hoarding. For me real investing is putting your money to work, not handing it over to a bank to earn them profits in return for locking it away from you. Bank account interest rates are pitiful, and once the devaluing currency and taxes are taken into account can’t compare to the returns you can get by spending your money on real investments.
Saving and Debts
When I realized I was on the wrong track with the way I was earning money I also came to the realization that my spending style was all wrong. I was earning a decent income but flip-flopped between #2 and #1 - I was a spendaholic then an obsessive hoarder then a shopper again.
While I did manage to reduce our household debt, pay off credit cards, we also spent our cash reserves on vacations to Canada (albeit with the intention of moving there permanently), buying a new car and moving home. So now outside of our mortgage and car payment we are debt-free but do not have a safety net and nor do we have any investments.
Before I can invest heavily I need at least some cash reserves and I would advise anyone to do the same. Only risk what you can afford to lose. That doesn’t mean you can’t do both. I intend to both save some and invest the rest.
Debt-free might be a position many people would like to get to but I would actually argue that debt is not necessarily bad. Bad debt is when it is out of control and where the money has financed wasteful spending. Even debt can be good when used for wealthy spending.
What is Wealthy Spending
Wealthy people put their efforts and money into earning in the investment mode. It is no coincidence they both earn and spend with the same style.
While the rest of us earn some money, spend money, and save what little is left, wealthy people spend their money on assets that earn them more money allowing them to reinvest and spend the rest.
We make ourselves less wealthy with our spending styles, they make themselves more wealthy with theirs.
Investments, Essentials, Treats and Junk
An accountant sees the world in terms of “Assets and Liabilities“. My definitions for the sake of this discussion are not how they are used in accountancy. The below descriptions are how I think of the terms.
- Assets are purchases that are worth what you paid for them or more.
- Liabilities are purchases that reduce in value or cost you money to own.
Many people mistake their home or even their car as an investment. I am told the homes we live in are strictly speaking an asset but I don’t think they are a very good one. Your house costs you money to own rather than generating revenue (unless you take a lodger), plus if you sold your home where would you live? Your home is only a really great asset to your will beneficiaries!
A second home could be an asset, property investing is a great way to make money, but I would not say your primary residence is a great asset.
Rather than splitting the world into assets and liabilities I see your purchase choices more broken down into the following:
- Investments - Spending on these will potentially earn you a return, either repeatedly or when sold
- Essentials - We all need food to eat, clothes to wear and somewhere to live. Also if you are going to make money online you are going to need a computer and internet connection.
- Treats - It’s good to treat yourself, things that make you happy also make you more productive.
- Junk - When you buy something you can’t use, don’t need, and go beyond a simple treat.
The key is balance. If you want to make more money and have more financial security you have to build up your investments, which means spending more money on assets and less on treats and junk. I don’t mean cut treats out entirely, as your income grows you can buy all the treats you like!
The Secret of Wealth
So now we get to the key. Have you ever wondered why some people have cash windfalls from the lottery or inheritance, then next time you hear about them they are broke? Then there are those other folks who land in a country with $10 in their pockets and in a couple of years are billionaires? This here is the secret of wealth and the real key to making money online or in the real world.
Put your effort and money into assets.
Whatever spare money you have left over after making sure you have met your commitments and built a healthy safety net needs to go into building assets.
Just start. This isn’t necessarily about great sums of money to begin with. You don’t have to start with buying a million dollar property. It might only take a small investment of time and money.
The idea is you get started then build a positive chain of events, a snowball effect. Invest-reinvest-reinvest. Investing in assets has its own compounding effect, the more revenue your assets create the more you have to invest and so on.
Once you start thinking in terms of revenue-generating assets your earning potential expands. You go from “work earning” to “business and investment earning”, and that is where real success lies.
- If you have a blog, use the advertising and sponsorship revenue to start another one. Or two. Pay guest writers $10 a post.
- Buy domains and websites, refurbish and either reinvest the revenue or sell for a profit.
- Create a digital product. Written many articles on one topic? Combine them into an ebook and sell via paypal.
- Start a business with a friend and divide the workload. As business comes in, outsource and sub-contract.
Brainstorm to come up with asset ideas then take action.
This is where I am now. How about you?
Table of contents for Making Real Money
- Making Real Money Online: What Type of Earner Are You?
- Making Real Money Online: Spending to Earn
- Making Real Money Online: Expanding Your Operations
- Making Real Money Online: Making it Happen
- Making Real Money Online: Confidence and Taking the Risk
- Making Real Money Online: Your Vision
- Making Real Money Online: What is Wealth?
Posted on October 18th, 2007 by Chris Garrett in Business
This is really a GREAT topic and I am enjoying it immensely! Pat yourself on the back, you did good!!!
Thanks Chris, this is one of the most actionable and sensible articles on personal investment strategy I’ve seen.
You’re right, most just advise to pay down debt and consume less - and that’s a fallacy if you want to make more moolah!
It’s essential to put your money to use, whether that’s by running a company yourself or having someone else do it for you (i.e. buying stocks).
I’d add that the sponsorship/ad earnings from a blog could be RE-invested in that same blog. If it is making a nice profit it shows it is a good thing to invest it.
@Dave - Thanks
@Jack - Yup, you can either eat a cow or milk it
@Matt - Good point, even better if you can build it then replicate your success
Thanks!
That was very insightful.
For spending style, I’m all about having the essentials also be the treats. In the words of Wm Morris, “Have nothing in your houses that you do not know to be useful or believe to be beautiful.” In the same way, doing a job that you love means that work and play can blend together a bit. Etc. So, I’m a whiz at spending to save… now the challenge is to shift focus to that whole snowball-effect cow-milking thing!
@Aurelius - Glad you like it
@Jen - Me too, I need more dairy and less beef in my diet
Chris, excellent post! Sounds a lot like Rich Dad, Poor Dad book, I would very much recommend that one too to people.
A slight point on Donald Trump, if I am not mistaken his business, or some of his businesses, were on the verge of bankruptcy, but not him personally. He was far from broke himself and living it up, and that just speaks to your points even more I suppose
Chris,
I generally like your blog, and I think you are trying to make some good points here, but I’m very frustrated with your usage of assets and liabilities. The definitions you have given are not correct from an accountant’s perspective. A house is definitely an asset, despite the fact you need a place to live. Because of your reputation, I am afraid people will take this information for fact when it’s incorrect. I hesitate to criticize, but I think the post could be very effective without the incorrect use of terminology and your point is getting lost in the fact that you are providing wrong information.
I still enjoy your blog and have great respect for you as a writer.
@Ari - Proof that we should protect ourselves by using business structures rather than exposing ourselves personally to all the risk
@Monica - Thanks for the feedback. What would be the correct definitions? Can you help me correct the terminology? I have tried to change the wording to make it clear my definitions are not the correct accountancy ones
To Monica: hi there. I think Chris meant that the mortgage on the house is a liability. People think the house is an asset - but it isn’t until a lot or most of it is paid off.
If the bulk of it is still a loan, and it is for majority of people these days I think, then it definitely behaves like a liability. You can’t get the asset’s worth if you sell the house, at most you can sell the difference of maturity, which could be negative as we are seeing soon, and the portion of principle which you might have paid off already, if at all. Same goes for a car loan, as opposed to already owning the car which you can sell.
I am no accountant, but I am hoping this agrees with accounting notions.
@Monica - Thanks for the feedback. What would be the correct definitions? Can you help me correct the terminology? I have tried to change the wording to make it clear my definitions are not the correct accountancy ones
Sure. Assets are things you own. Liabilities are debts. A house and a car are both assets, but a house is usually a good asset because you can often sell it at a higher value than you bought it for and make a profit on it. A car is an asset that loses value over time because of wear and tear and depreciates in value. It’s an asset that you use up after a certain period. A liability would be a credit card payment, a loan or mortgage payment, etc.
I think you use the word asset when you really mean investment, and liability when you really mean expense.
On a side note - I am by no means an expert on this. I’m just an MBA student at the University of Chicago that blogs and reads lots of blogs.
The clarification helps, but it’s strange to redefine common terms. I appreciate you took my comment as constructive as I was not trying to degrade your writing in any way. Thanks for being a responsible blogger and taking my comments into consideration. On that note, I’ll shut up, because this article is not about accounting definitions and I’m sure you don’t want your comments to turn into a discussion of accounting definitions.
Cheers!
Thank God someone finally put all these words into one blog post. You hit the investment part right on the head, and your view on how the rich do actually “get richer” is true. Chris, this article has been the highlight of my day. Thank you sir.
Monica, Chris, et al: I would love to weigh in here…I hope not to get into too much of a rant. As Ari implies, yes, for accountancy purposes, a house goes on the asset side of the ledger, and the mortgage goes on the liability side. BUT…
For what we’re talking about, I would use the definition that anything putting money into your pocket is an asset — anything taking money out is a liability. So even if the house is paid off, it still takes upkeep, has propety tax, etc., so it’s technically still a liability if we use that definition, which Kiyosaki and others in the game do use. (Of course this means kids go on the liability side when you use that definition, but it does make a good point.)
The bigger question though is: What are your assets doing for you? In other words, if the mortgage is paid off, and the money (value) is sitting there doing nothing for you, then it is under-performing. (In the Dairy analogy, it’s like the cow that’s not providing milk any longer.)
The biggest help with all this in my own road of financial wellness came when my mentor, L.L. (I mentioned her in the prior post) said so eloquently, “Get off your lazy assets!” In other words, take that equity back out of the house and put it to work for you with performing assets…yes, you pay on the equity you borrow (good debt) but you go find investments that outweigh the price you pay…
Okay, rant over:) Hope it is helpful.
Great article, Chris. This series comes at a great time, as I’ve been thinking a lot about my financial situation, and how to improve it (especially since I’m currently in the process of “shopping” for a condo to buy).
I used to be in the #2 area, but has recently started heading more toward #1. Hopefully, I can start finding some good investments and start making money, rather than just saving money.
Chris,
I started investing by not having medical insurance but putting the money into a managed investment account to be used if needed for my medical requirements.
(I dont recommend this if you have children)
20 years later the dividends from my investments covers my medical insurance and my investments are now all in direct shares.
Start with small investments and you will find your mind expands to enable you to make larger investments.
David
@Ari - I should have been more clear but that is the gist of it
@Monica - The problem when you sell your home for a profit is people in most cases want a bigger home, so rather than making a profit any additional money is plowed into the new one and then some. Only people who downsize or inherit realize the profits from a primary residence. Second homes on the other hand are better investments. I think you are right I should stick to the word “investment” rather than asset.
@Bunk - How kind, thanks
@Erica - Thanks, you put it better than me. I love the quote, fantastic
@Adam - Glad you like it. I guess it is ringing true for people because this is the situation I find myself in. From the heart as it were
@David - Good advice on the small investments. Just getting started might be all the mindset shift we need.
I have recently begun to see how spending money can do something for you other than just disappear down a hole. I find it interesting that you mention domain flipping, because that is something I’m starting to look at seriously as a low entry-cost investment strategy.
The key is to not get caught up in the bidding excitement, do your research and know your exit plans I think Michael
Thanks for the tips, Chris, I will keep them in mind.
Whoa, now this is really getting down to the brass tacks! Great post it really gets me thinking - this is what I should be doing, I want to know More!!
It’s so easy to not look at the bigger picture and just work day to day, instead of looking ahead and planning something like this. It’s making me think!
Thanks