For one reason or another frugal people focus on the last item on this list. They would become significantly wealthier by focusing more on the first part but just don’t have any interest in putting in the time. Perhaps this is because they believe being rich at 30 versus 40 isn’t a big difference (could be one explanation). We disagree since life is the most active between 30 and 50 so we wouldn’t give up our 30s to live frugally (essentially living like you’re starting from scratch). With that we’ll jump in.
Recurring Income
This is by far the most important item to understand. Recurring income allows you to invest more aggressively. It allows you ability to buy time since you can wait out a downturn in one of your riskier investments. It also allows you to save consistently on a monthly basis without praying for your year-end bonus to make it up (we’re looking at the Bankers on that one). Essentially recurring income building is the most important item to get rich since it offers the most stability. This is exactly why millionaires have multiple streams of income (they generally have 7 or so).
What is a Stream of Income? Pretty simple hurdle for us, we think a stream of income is anything that represents 15% of your annual spending. This is a moving target and is an important concept since we assume the other streams of income don’t require a lot of time. Assuming you spend $100K a year after tax you’d need to generate $15,000 after tax in order for it to be considered a stream of income. The second hurdle? It needs to generate this amount of money for at least 5 years.
Breaking down the math we’ll see how this makes you rich in short order. Assume you already save about half of your high paying career/business income that runs at $200K a year. Well you’d essentially save $100K a year, meaning 1 full year of living expenses. Assuming you had zero other forms of income it would take you a long time to be well off (you’d be set in about 15-19 years depending on investment returns). Here’s the catch… Assume you had just four of them. Four tiny streams of income that only contributed ~$1,250 a month each (practically nothing). Now you’d be financially set in just 10-12 years. You have essentially accelerated your way to being rich by a factor of ~40-50%. Since we know that your 30s and 40s can be an amazing time (still fit, no age related issues, still mobile), buying 10 years of “life” is an enormous change.
Standard Thinking: Standard thinking says you have one stream of income (career/job) and then you invest to slowly build out the second stream. And. This is “good enough”. Naturally, this makes no sense. If you’re with a large company for a longer period of time you become a bigger target for being cut and people typically spend a little bit more as they get older. This creates two problems: 1) your expense line is growing making you run on a treadmill and 2) the cash flow you rely on becomes more and more risky as you age. Think about it. If you were the Company would you focus on cutting a few guys who make $40K a year or the one middle management guy who makes $300K a year. You cut the middle management guy and give the lower level people slight pay raises to make up the gap.
Put the shoe on the other foot. The faster you can hire people the faster you’ll be rich. There is a reason why managers and business owners make a lot of money: someone else is doing the work for them. Sounds harsh but it is true. Ask someone how many people he manages and you’ll get a good snapshot for how well off they are. We’ve never met a single person who manages a large P&L with 100+ employees that is poor. This will almost always be the case. Why? Well you wouldn’t hire someone unless they made you money… right? Right.
Never Quit: No this isn’t motivation, this means you never quit something that is cash flow positive! Another common mistake is selling an asset because it isn’t growing anymore. The bigger question is “does it need to grow?” If you have an asset that generate $5K a month online (as an example) and it remains there for two years in a row… You probably shouldn’t sell it. Instead you should ask “how do I reduce my time on this project”. By focusing on efficiency, you’ll naturally move on from businesses in the future. Why anyone would sell their website for 4x earnings when they know it’ll be around for a decade is beyond us. The person better be 100% certain that their new idea will be better. The final answer is that the income stream requires too much time and cannot be automated (we highly doubt it!).
Putting This into Simple Math: If calculating percentages isn’t your thing we have an easier rule of thumb which is the “five house” rule. Essentially, your spending will equal ~3-4x your housing expenses in a single month. If you spend $2,000 a month on housing, you’re typically spending $6,000-8,000 a month for all of your expenses.
Knowing this, the ideal set up is to have “five houses” worth of income streams. Once you know how much you pay in rent, your next hurdle is to create one cash flow that pays for your mortgage/rental payment. Once you have five of these you’re essentially set. Real estate is a good example since it gives you a good benchmark for the amount of money you need. In simple terms, it also controls for 1) area you wish to live and 2) amount of time you have to spend on recurring income projects.
Time of Day Vs. Income
This is probably the easiest way to break down mental hurdles. Generating income is easy once you know how to do one of them. But. Most people don’t want to put in the work. Similar to any activity in life, once you learn how to do something once, the second time is typically easier.
Surprisingly, we actually encourage thinking small for your first internet income stream. Why? Most people believe it is impossible to make $100 a month let alone $10s of thousands a month online. Making $100 in a month online typically leads to an “ah ha” moment where they realize it is possible. This is particularly true for people who are working as affiliates: they realize that the money they received was just a sales commission and doesn’t represent the full margin of the sale.
When was the Money “Made”: This is a big part of getting through the breakthrough. $100 is nothing. But. Most people have the “ah ha” moment because the money is made while they are sleeping. That’s right. People who buy stuff on the internet do so 24/7/365. While they do buy a ton of stuff while they are at work (after all no white collar worker does 8 hours of work per day, likely closer to 3-4 hours), the website is up 24/7. This means you now have an opportunity to make money when there was no way to do so before (you were asleep!).
Once we figure out that the money is being made with no physical time being contributed to it, you can see the value of internet income. We’d rather have three mediocre internet income streams, than any income stream that required 10+ hours of work per week. Why? Well at this point, we could probably take any internet business down to 1-2 hours of work per week maximum. If you’re selling something online all you’re dealing with is returns and basic customer service. Something that can be outsourced with a basic flow chart of how to respond and deal with the issue.
Time of Day: You’d think that would be the only benefit. It isn’t. The biggest benefit of all is when you are personally working on the project! Assuming you have a serious career that demands your time from 8am to 6pm… you don’t have much free time to do the other project… Or do you? Well once you learn the ropes and realize you only need a couple of hours to do the work, you just made your lunch break a lot more profitable. You can now take those few hours a week and put them into time slots where you are typically doing nothing. Ideas include: 1) airports, 2) transit, 3) lunch break, 4) at conferences and 5) large company presentations where you’re supposed to simply “listen and take notes”. Don’t even get us started. While making money in your sleep sounds like the “coolest” part. The really cool part is knowing that you can do the work any time you like.
Location: This is less relevant to us but sounds good for millennials. The last benefit of having something recurring online is that you can do it anywhere in the world. This isn’t relevant for older people. Why? Well if you’re rich, you already live in a city you enjoy and likely want to travel less (we’ve grown to despise airports with the exception of a couple trips for fun). Location is also important for people who go down the “five home path” since you want to build that empire in a city you will live in.
Asking the Big Questions: Now that we have convinced the readers that income is more important than being frugal, the next question is “what type of time do I want to expend”. Many people ignore this question and just go for anything that makes money. This creates headaches as you may be forced to work extremely hard at all times without being able to maximize your time. This also creates cash flow issues as you’re forced to choose between two different tasks that must be done during an explicit time frame. (Hint Hint as to why we avoid brick and mortar businesses).
Fixed Expense Game
With the most important topics out of the way we can now create a ladder for anyone to follow if they want to see the value of recurring income. As usual we recommend thinking big. But. If someone really thinks it’s difficult then they can start small. A buyer of our products recently stated the following:
If you do not make your first dollars online in the 6 months you read efficiency from @WallStPlayboys, you aren’t going to make money online. Plain and simple
— Yannick (@nerdow) May 14, 2018
Naturally we agree with this statement since it is possible to make at least a few hundred dollars online in just a few months. With that in mind we thought of a good game to play if you’re trying to build up to financial independence without even realizing it. Play the fixed cost ladder:
Cell Phone Bill: Generally costs ~$100 a month or so. More or less, and take all your income from online and pay this bill every month.
Gym and Utilities: Once you clear out the cell phone bill, move onto the gym and utilities.
Rent: Now instead of trying to pay the small bills, you then move onto trying to pay off your rent only.
Rent + Utilities + Phone + Gym: Now you hit a point where you’re paying all of your fixed costs at once.
After this you’re essentially on your own. If you can’t see the value in having no fixed costs anymore all from selling basic products on the internet we don’t know what else to say. Naturally, the hardest jump is typically from #2 to #3 since it requires quite a bit of income. And. If you can make this jump, the sky is the limit because you’ve likely succeeded in some form of paid traffic.
Psychological Note: Notice, we don’t recommend spending your first revenue stream on food or variable costs. Why? Well psychologically you’re going to think “I am making more so I can spend more”, while this is fine in the future we assume the person isn’t financially set yet. By targeting the fixed costs it makes it quite difficult to overspend. All you do is live the exact same life and simply pay of all of the fixed costs on a monthly basis. This creates forced saving mechanism for you and also teaches you to focus on leverage in your own P&L.
Conclusion: Rules for Getting Rich Remain Unchanged
Luckily math doesn’t lie, so the rules for getting rich remain the same. First: you have to focus on earning money since your costs will always be at a specific level. You have to eat, sleep and pay for internet so there is no way to reduce those costs to zero. Second: valuing streams cash flows over a raise at work will help you immensely since it reduces your risk, increases your ability to take risk and improves your long-term investment returns (ability to weather downturns). Third: to stay optimistic think of cash flows in terms of annual spending. If you’re able to create a small cash flow that covers 10-15% of your annual spend that’s a large boost if you look at it over a five year frame. Fourth: time allows you to get rich based on compounding. And. You want to get rich before it is too late. So you want to focus on income streams that allow you to be flexible so you earn money when you would have nothing to do. Fifth: once you learn how to earn money in one way, the more likely you are to automate it. Automating it will reduce the amount of time you’re spending on it making the return profile in terms of time go up.
For those that missed it this post is essentially inspired by the best question we got yesterday which is pasted below:
“For cash flowing assets outside of a business what yield do you look for before worrying about capital preservation?” – Synth
“Probably the best question on here.
Here’s the thing, we don’t think about yield as much as we think about time. If you can do nothing at all the yield can be lower and we’d be fine with it. Say you buy an internet asset and only work on it for 2 hours a day, well how much money did that make? If it made you $100 a month it was terrible. If it makes you $10,000 a month that’s fantastic. That is $1,250/hour or the equivalent of a $2.5M annual income! That’s worth it.
Then if it requires no time at all (say stocks/bonds etc) and you’re setting and forgetting. We would just use a standard barbell approach and put a weight on stocks and a weight on bonds that hits your yield based on your age.
After that for capital preservation, we suggest basic living expense calculators. If you’re young you only need a few months of living expenses, when you get to age 40 or so you need a few years sitting basically in risk free assets. Here’s the natural catch though… if you got to age 40 and are likely rich, then you don’t really need more than 3 years (a recession will only last a couple years and at worst 3 years or so), this creates a natural way for you to take on more risk.
Hope that helps may need a post on this one specifically. But. Think about it in terms of how much energy you’re using. This is why we think online is the way to go, people underestimate the ability to automate an online business. If you’re working 40 hours a week online to make $100K a year that is just awful. Essentially created a new job. We would rather have one asset making $25K a year but have that asset only require 1-2 hours a week. At least that one has potential and doesn’t take up valuable time”
