Tips to Becoming Independently Wealthy

Being financially literate is important to independent wealth, or at least to becoming financially comfortable. There are varying degrees of financial literacy, from being a CPA to a CFP to being someone who only pays their bills and uses TurboTax® once a year. The beauty of what I am going to discuss is that you can be a complete novice or a savvy professional and still take something useful away from it, no matter how small or big that is. I have always been proactive in the area of personal finance and find some of these simple strategies to be the most effective.

This is about spending money, how to spend it, not necessarily about saving it (although that’s exactly what your doing in some circumstances). Most of us have debt, ranging from credit cards, to houses, to cars. We have bills. By the time our paycheck comes in, we pay our obligations and we are left with a goose egg. There is a fundamental problem with this, and the truth is that 98% of us are so concerned with being good little bill payers and having a good credit score that we miss the boat on our most important piece, our income-producing asset column. My first leg of advice, pay yourself first. YES, spend money on yourself. Take a percentage of your net pay and figure out what kind of assets to spend it on. (We will discuss this in a minute). The net of that cash flow is what is left to spend on bills and debt. Always pay yourself before creditors. This sounds bad, huh? Impossible for many, I am guessing. There are a couple of facets to this fundamental philosophy. One, you learn to operate on the net cash flow coming in after paying yourself. Two, if you are short for bills you will force yourself to find other ways to earn and create money. Three, you build up your asset column along the way, utilizing the second leg I want to suggest you stand on. Please advise, I am not telling you not to pay your bills, I am telling you to change your philosophy and take the hard road for awhile. After spending money on yourself, take the rest and pay those bills. Here comes the second leg.

The second leg is to spend that money on assets, not liabilities.When I say assets, I don’t mean the typical definition of an asset. I am defining an asset as something that will earn you a positive rate of return and provide you an income stream, not create an expense or negative rate of return. While traditional accounting says a house, a car, a TV and so forth are assets, these are liabilities by the definition I am providing you. Why? Because they depreciate and cost money. The return on investment is negative and these “liabilities” are expenses that increase your cash outflow; which is coming from a check that is already being taxed. Your hard earned money is being hit on multiple levels. It is anti-intuitive to creating any kind of wealth. One thing to clarify, a house can certainly produce a positive return, however your primary residence is often a liability in this case. Unless you are in the business of making money off of passive activities like real estate, we will consider it a liability here. Think about a car, you pay for it, it loses value (an expense), it needs repairs, you pay interest, etc. It is an asset traditionally but a liability to you because it creates cash outflows, not cash inflows. The added layer is that you are paying these constant expenses from money already taxed.

So what type of assets can you invest in? It depends on you. Are you interested in real estate, stocks, bonds, annuities, insurance, private investments, business ventures and so forth? There are many areas that will provide you positive returns that will build in the asset column, and more importantly, they will build up with lower taxation because you often do not have payroll taxes or you are afforded capital gains taxes on certain assets and investments. Another caveat, its often the people with cash and wealth who are often exposed to the highest return investments.

What is the end result of following this philosophy? An asset column that provides enough income to pay your bills by itself. An asset column that is more tax efficient than your earned income from every check you take home. An eventual end to the consumer debt. It is important to take it seriously when I say, pay yourself first. It could change your life if you do it right. And don’t get down if your earned income is low. You would be amazed at what a small $5,000 can be turned into with the right investments and a little luck.