Roth or traditional? Passively or actively managed? Rent or buy? Over time, the minutia of personal finance can cause you to lose focus.
Seeing the big picture helps to reorient your thinking around the main objective. The overarching principles of personal finance can be boiled down to one simple image- a pipeline... a wealth pipeline (Copyright Mike Kern 2019... just kidding... kind of).
Let me paint you a picture. Imagine a water pipeline that flows into a pond. As more water passes through the pipeline, the pond grows. But, debris can clog the pipe, decreasing the flow of water and ultimately causing the pond to fill slower. With this image in your head, plug in the analogy:
The water is your income. The more you make, the more water you have flowing through the pipeline. The pond is your wealth. The debris is your expenses. The higher they are, the slower your wealth will grow. If they become too high, they can cause your wealth to become completely stagnant. The ultimate goal? Grow the pond. There are two ways to grow the pond- decrease the debris or increase the water.
Decreasing the Debris
The best place to start is always decreasing the debris. The ease with which you can examine your expenses allows you to quickly cut anything unnecessary that causes your wealth pipeline to clog. Examining expenses should be a routine exercise done monthly or even semi-monthly. Once you're accurately tracking your expenses, you'll have the clarity you need to remove the inefficiencies. No need to beat a dead horse- we've already done that here (Not literally. Why would you literally want to beat a dead horse? Just check out this article on cutting expenses).
Why is decreasing debris the best place to start? Think about this. A dollar of expenses saved is worth more than a dollar of gross income earned. Here's why. Most expenses are post tax, meaning that in order to pay $1 of expenses you actually have to earn $1.25 (assuming a 20% tax rate). That $150 cable bill actually costs you $187.50 of earnings! Why not remove the cable bill debris and allow that money to flow directly into your wealth pond?
Increasing the Water
You can only remove so much debris from your wealth pipeline. But, you can always increase the water flow- the potential is limitless! In this day and age there are more possibilities to grow your income than ever before. Uber, Bitesquad, Vipkid, Airbnb, deliver pizza, wait tables, ask your boss for a raise, start a landscaping business, go to the nearest casino, learn computer programming, sell cornbags! We've tried a handful of these things...I would not recommend the casino, but you can make a pretty penny selling cornbags if we do say so ourselves. The bottom line is that you have skills you can monetize!
I've learned from Robert Kiyosaki's book, "Rich Dad, Poor Dad," that the minute you say you can't do something your brain stops thinking. Instead, you should always ask yourself how can you do it. Rather than saying, "I can't make more money," ask, "How can I make more money?". It's not, "I'm too busy to increase my income," but rather, "How can I leverage my time more efficiently to increase my income?" If you continue this trend you'll become a problem solver and it'll only be a matter of time before you increase the water and have an overflowing wealth pond.
Re-Evaluate Your Strategy
The wealth pipeline has its limitations; however, it is simple- and in a personal finance world that is anything but, that means something. Every now and then, take a step back and re-evaluate your strategy. Zoom out and think about your main objectives. Remove the complexities and inefficiencies and watch your wealth pipeline work in your favor.
Mike Kern, CPA