2 min read
I recently listened to a Bigger Pockets podcast featuring Chad Carson. About halfway through, Chad shared a great story that one of his mentors told him early on in his financial journey. I’m paraphrasing, but it went something like:
Mentor: Ok, you currently make $30k per year. That means you need to live on $30k per year. Can you do that?
Student: Sure, I can do that.
Mentor: OK, good. Next, you need to figure out how to earn $60k per year and still live on $30k per year.
Student: OK, got it.
Mentor: Then, you need to figure out how to earn $120k per year and still live on $30k per year.
Student: OK cool.
Mentor: If you can follow that simple formula, you can’t help but get rich.
The mentor laid out a simple and straightforward approach that leads to wealth creation: just keep living the same lifestyle each year no matter how high you grow your income.
I love this story because it doesn’t mention investment returns, asset allocation, or portfolio theory. It’s all about growing the gap between your income and your spending, which are both variables that you control. Let your investments do whatever they may, but just make sure your income is considerably higher than your spending.
On hearing this story, I went back and looked at my own monthly income and spending since last January.
Last January I was in my final semester as a grad student and was also working as a data analyst earning a salary of $52k per year. I was tutoring in my free time as well. I brought in $3,696 last January and spent $1,300.
Fast forward 16 months to last month. I brought in $6,362 from a combination of day job income, stats tutoring, blogging, and dividends. I spent a total of $1,479. My monthly income was nearly twice as high as it was 16 months ago and my spending was only slightly higher.
As much as possible, I’m trying to follow the advice given by the mentor in Chad’s story: I’m pushing my monthly income higher and higher while keeping my living expenses stable. As a result, my net worth has increased consistently each month since last January.
This isn’t a glamorous approach to building my net worth, but damn it works well. I don’t earn an astronomically high salary, I haven’t build a multi-million dollar app, I haven’t landed a deal for a product on Shark Tank, and I haven’t picked a 100-bagger individual stock. I have just slowly pushed my monthly income higher each month while consistently keeping my monthly expenses below $1,500.
As Scott Adams says, it’s better to be “pretty good” at two skills than “great” at one. In my case, I’m trying to be “pretty good” at both maximizing my income and minimizing my expenses.
Even if I was great at earning a high income and brought in $150k annually, I could easily cancel that out by spending the majority of it. Likewise, if I was phenomenally frugal but had a low-paying job, I still wouldn’t be able to save much each month.
The real secret is in making the gap between income and expenses as wide as possible. After all, the wider the gap, the faster you can achieve financial independence. I’ll leave you with the financial independence grid to illustrate this point:
This grid shows the number of years it will take to save up 25 times your annual expenses, based on your annual spending and income. It assumes you start with a net worth of $0 and earn 5% annual returns each year on investments.
My favorite free financial tool I use is Personal Capital. I use it to track my net worth, manage my spending, and keep an eye on my monthly cash flow. It only takes a few minutes to set up and it makes tracking your finances simple and easy. I recommend trying it out.
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