Would you ever frost a cake before you baked it?
It doesn’t make much sense. It wouldn’t look good, and it would definitely taste worse. There is a process involved when baking a cake, and following the process results in delicious cake like the one pictured above (it’s definitely cheat day, right?).
Just like you need to bake the cake before you get all excited about the frosting, you need to do things in a certain order when you are trying to expand your wealth.
Do you know what’s most important for you to focus on today with your financial future?
Success is simple. Do what’s right, the right way, at the right time. Arnold H. Glasow
Let’s focus on what is most important at the point where you are in your savings goals. It’s like you know what you want your cake to look like, but all you have done is mixed the ingredients together. We’re going to look at how a guy named Rich deals with $2,000 at different points in his life to determine what the most important action he can take today is.
For most of us, when we have a few thousand dollars saved, we tend to focus on trying to get the highest rate of return possible. We may spend hours studying and looking for the best investment to get the highest returns. However, at this point, we need to bake the cake before we start to ice the it and drizzle chocolate syrup all over it. It’s not wise to spend our time icing the cake or trying to figure out our highest rate of return.Why? Let’s see what it means for Rich.
Rich has $2,000 saved and wants to invest with the highest rate of return possible. Rich spend hours figuring out how to increase his return from an average 8% to a whopping 15%! While this is definitely awesome, Rich earned $300 instead of $160, a difference of $140. As you can see, he spent hours and only earned $140 for his efforts. Instead, Rich should have spent his time figuring out how to get another $2,000.
Not sure how to get another $2,000? Well, one way is to bargain and cut some of your expenses. This post has some ideas: http://richersoul.com/2014/06/05/want-to-earn-100-an-hour/
If that is too much trouble or something you are not comfortable doing, then you can hire a company like Billcutterz: http://billcutterz.com/ While they will charge you half of your first year savings, if they can save you $1,000 per year, you will have $500 toward your $2,000 goal, and $1,000 towards next year’s goal!
Another option is to get rid of stuff you don’t care about anymore. This is especially true if it has debt or a monthly payment attached to it. We all have things we once cared about but no longer do. Get them out of your life and use that towards your $2,000 goal.
The other option is to increase your income. Now before you ask for a raise, think about what your response would be to your 10 year old if they came and demanded $50 from you. You need to provide more value or make your bosses life easier, and they will gladly pay you more for that if you can. Here is a great resource on how someone negotiated a $16,000 raise! http://www.iwillteachyoutoberich.com/blog/salary-negotiation-earning-more/
Now let’s take a look at Rich’s choices a while later. Rich now has $200,000 saved. At this point, he could earn $16,000 with a 8% return rate. If he was able to earn the 15% return that would be $30,000, a difference of $14,000. He has already baked his cake and now would be a great time to ice it and make it even more delicious. Figuring out how to earn another $2,000, especially if it’s going to be recurring, is definitely a worthwhile effort. Looking to advisers or spending time increasing returns is also becoming more profitable. At this point, Rich can balance between his situations to see which path, or even a combination of both, will best serve his needs (chocolate icing or peanut butter icing, it’s a personal choice…).
Since Rich has continually been saving, he has truly experienced the power of compounding and will soon be in the sweet spot of the curve. If you are not familiar with the power of compounding, you can brush up here: http://richersoul.com/2014/03/26/how-the-principle-of-compounding-can-help-you-save-more/
Rich has $2,000,000 in savings now. Earning a 15% return makes Rich $300,000 versus $160,000 at 8%. The value of paying people and finding investments to earn higher returns is well worth Rich’s time. As to the $2,000 for the year, Rich should go have fun and do something extravagant with his $2,000. It’s not going to make any real difference in his retirement plan. I wonder what a $2,000 cake looks like???
Because Rich did the right things at the right time, he gets to lead a great life. Had he focused on the wrong choices he would still be broke and wondering why he doesn’t have a lot of wealth. The reality is that most young people with a middle class income have the ability to follow Rich’s path.
If you are not sure how begin, please reach out so we can help you get started.