How to Use Money As A Tool To Build Lasting Wealth
This topic is inevitably a favorite. So many people don’t have enough money, spend too much money, don’t make enough money to cover what they spent, take on too much debt, and couldn’t spot an investment if it spit in their face.
There are a lot of books on money management too. A lot of GREAT books. Yet, the financial education of most people is lacking.
To tell what I know and believe about the use of money will take many posts. This article will act as a center point for many of them, but mainly this article will discuss the philosophy of money, wealth, and consumption.
Part I: There Are Only Four Ways to Build Wealth
Yep. Only four.
- Earn more money
- Spend less money
- Pay off debt
Every imaginable way you can think of to build wealth can be boiled down into one or more of these four areas.
Let’s skim the surface of each.
Make more money
If you have one source of money, you are doing it wrong. You are doing it wrong because you are trusting that your employer will keep paying you.
One day they won’t pay you anymore.
Do your future self a favor and figure out another way to make money.
There’s a famous quote that goes something like “The average millionaire has seven sources of income.” That is probably pretty true.
Think about ways you can make more money. I’ll write a post on this later. If you MUST know now, shoot me a DM on Instagram (@wisehealthywealthy) and we can talk.
^ Wise words from Naval Ravikant. Eventually you will need to stop trading time for money. Think about ways you can do this.
Spend less money
This does not mean stress over every penny. In fact there is an entire philosophy around what is the best way to cut expenses, which I will cover in a later post. The basics are,
This means stop spending money before you make it (credit cards), and stop spending more money than you make (credit cards).
There is a concept I call The Gap of Sorrow, shown in the visual below.
As you can see, Whowly the owl is terrified.
Why is he terrified? He’s terrified because he spends more than he makes, putting himself deeper and deeper into debt. This is bad.
On the flipside we have the Gap of Opportunity, shown to the left.
Here we see Whowly looking triumphant!
He is finally earning more than he spends, and now has excess income to spend on other areas. This is where you need to be.
What should he do with his Gap of Opportunity?
As my favorite author loves to say “RAFO” (read and find out)
Pay off debt
When you accrue debt from spending more than you make, that is bad. There are good types of debt, but they are few and will not be discussed here. Maybe another time.
So, assume for our purposes that all debts are bad. You need to use the extra money from the Gap of Opportunity to get rid of that debt.
There are many strategies to paying down debt, and they all have their merits.
Until your debts are paid off, don’t focus on investing.
Invest that cheddar
The last step of building wealth is to invest. This means to put your money into something in the hopes that it will grow and become more valuable, thus growing your money.
This is the business Wallstreet was built on, and as such they have created tens of thousands of different ways you can invest that money.
Fuck that shit. Until you know what you are doing, do not mess with any of the power brokers of wall street. They will make sure they stay rich and you never get there.
Instead start with something easy, simple, and effective. Low-cost index funds are all three. They are the boring and safe way to build wealth.
I recommend Betterment, as I use them for several things. I also hear good things about their primary competitor Wealthfront. These two companies invest your money into low cost index funds. The index funds grow as the stock market or bond market grows, and they pay dividends quarterly. The dividends are reinvested into your account, helping your account grow.
This is the absolute basics. There is so much more, and I will write about that in a later article.
The flip side of Wealth seeking
Life is not about making money, although it may seem that way. Money is a tool that is needed to establish and maintain a standard of living. How high you want that standard to be determines how much wealth you need to seek.
On the flip side, chasing an unrealistic standard of living can quickly become toxic.
Money is neither good nor evil, it is a tool. The bigger your tool, or the more money you can accumulate, the more options you have.
Part II: Putting all of this into perspective
What do you plan to use your money for?
Before you should learn the ins and outs of accumulating large amounts of money, you should first wrap your head around what you would do with enough money.
What is enough money anyway?
For example, if your perfect lifestyle involved spending $10,000 a month, how much would you need to live that lifestyle for 20 years? Let’s do some simple math in a simple scenario, removing factors like inflation.
- 10,000 x 12 = $120,000 a year.
- $120,000 x 20 = $2,400,000
$2.4 million allows you to live for 20 years spending $10,000 a month without earning another dime.
I can’t speak for you, but before I ever did this kind of math I thought I’d need a LOT more.
But, but, but $2.4 million is an INSANE amount. Yes, sort of, although anything can be broken down into manageable parts. It’s all how you think about it.
Take this image for example, from the Happy Trader’s Instagram page.
In this example, you’ve built a product that people need and is valuable enough for them to pay you for it. $1,000,000 in revenue is an attainable goal.
And this is just showing what income would like. It does not show how this number would change if the entire Gap of Opportunity was invested semi-intelligently.
In the end, your quality of life is the goal, and that is up to you
You decide how you cut the expenses, increase the income, pay off the debt, and invest.
You choose if you value money, time, or something in the middle. You choose if want to work a 9–5 job, or work for yourself.
Money is just a tool for you to use to get what you want out of life.
The Next Steps
It’s now time to take a deep dive into each of the four pillars of wealth building.