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.
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?