Spending less than your income is the cornerstone to building wealth. We at Millionaire Foundry believe it’s the first of four mandatory wealth drivers.
We call it Lower Your Burn Rate, and it’s your most critical first step.
It’s powerful because every dollar you don’t spend immediately goes to build your wealth foundation, and has the potential to throw off investment returns for a lifetime.
It’s also the cornerstone to wealth accumulation because if you can’t get your spending under consistent control, it’s unlikely you’ll ever get rich.
But you can only take your expenses so low. In order to get rich more quickly, and ultimately reach your Financial Independence Day, you also need to do three more things.
The first is to increase your personal, after tax income. If you have a career, that means an increase in wages and other compensation like bonuses or company stock.
If you own a business, it’s an increase in profit.
Sounds simple, but easier said than done.
What steps can you take to increase your income?
Insisting on a raise for the job you’re currently doing? A different employer, who may pay you more for the same skill set? Attempting a price increase for your existing product or service?
Those things may work, but I consider them akin to looking through the wrong end of the telescope.
The only sustainable way of increasing your income over the long term is to increase the value you create for others.
Your employer pays you because your contributions somehow represent a value-add to the output your company creates.
Customers pay companies for products or services because they’ve decided that what the company offers is more valuable than the cash they trade to get it, as it solves an important want or need.
The way to increase of the value you create is by doing what we call Maximize the Value of You.
Maximize the Value of You is the second wealth driver, and it’s based on the principle that You are your most important asset in building wealth.
And it’s second in importance to cutting your spending because raising your income is a powerful lever, but it often takes a little time for your strategies to produce more cash. The benefits of saving, however, are immediate.
Avoid a dollar of spending and it immediately welds itself to your wealth foundation for life.
Together, the first two wealth drivers make an immensely powerful duo.
With your Burn Rate reduced, and the value of what you create increased thereby producing a higher income, you are now throwing off more excess cash.
This money can now be invested with the purpose of generating even more cash.
In our post Great Recession world, successful investing is not as simple as it was in the 1990s or early 2000s.
What happened in 2008 destroyed key pieces of financial common wisdom. Like that diversification will always protect you, residential housing will never plunge, or bank CDs will provide return that’s at least near the inflation rate.
The economic dynamics of the Great Recession might be just a blip. Or it could represent the new normal. Only the passage of few decades will prove which it is.
What we do know with certainty, however, is that the post-Great Recession interest rate management by the Federal Reserve represents an unprecedented financial experiment.
As rates eventually reinflate, the long term results are completely unknown. It may be a non-event or a complete catastrophe.
As a savvy wealth accumulator, you must manage your wealth in such a way that the next round of tough economic conditions, or some random event in your life, doesn’t destroy everything you worked so hard for.
This is the focus of the third wealth driver, Build Your Wealth Generating Machine, is to create an approach for structuring your investments and generating cash that can empower you to realize lasting wealth.
Properly structuring your investments cannot be achieved with a simple one-size-fits all plan.
Your specific needs, financial situation, tolerance for risk, timeline, and investing experience all are important considerations for finding the right approach for you.
In fact, the right plan for you can be as specific as your DNA, which is one of a kind.
The key to building wealth, and eventually arriving at your Financial Independence Day, is to Lower Your Burn Rate, Maximize the Value of You, and Build Your Wealth Generating Machine, in that priority order.
The bottom line is this: individuals and companies are the same, they can’t cut their way to becoming rich.
At some point successful companies, as well as successful wealth accumulators, need to raise revenue.
And ideally that revenue increase will come from multiple sources, generated both by the value you create, and the cash your investments throw off.
The first three wealth drivers work together to maximize your total excess cash, to rise well above your Burn Rate, that becomes the cement of your wealth foundation.
The fourth wealth driver, Your Wealth Success Plan holds together and synchronizes the first three.
In fact, it makes the first three drivers work together like the parts of a finely tuned, high performance sports car, which will help you accelerate your wealth journey.
Your wealth plan can help guide you to your ultimate goal of your Financial Independence Day, just like your navigation app ensures you arrive at your intended destination.
And when inevitable challenges and barriers occur, your wealth plan is flexible enough to recalibrate a new route so that your financial progress continues instead of being derailed.
It’s all relatively simple.
But easy?
No.
Give yourself a strong probability of reaching your financial goals by using all four wealth drivers instead of focusing on just one.
As powerful as lowering your Burn Rate can be, you can’t save your way to get rich. In fact, despite their power, no one of the four drivers is likely to get you to your financial goals on its own.
But the four drivers working together create an incredible system for reaching your goals. The power comes from the fact that the drivers work together to create a wealth system.
Even leaving one driver out can deny you of the brighter financial future you so much deserve.
Commit to learning how to get rich and reach your Financial Independence Day far more quickly than I did, with fewer painful mistakes.
Consult trusted resources. Start by visiting us regularly at Millionaire Foundry for The Truth About Building Your Wealth.
Wealth is Freedom!
A First Generation Millionaire