Author: Elite Life Warrior

Can somebody help me start my business?

Posted Elite Life WarriorLeave a commentPosted in Entrepreneurship

Photo by Adeolu Eletu

Post #31

Although everybody wants to say that “it’s never been easier to start a business” than it is now, the truth of the matter is that they are exactly right! Not only has the Internet and its many tools made starting and operating a business easier than ever, the amount of attention being given to Entrepreneurship is at an all-time high. Whether through popular television shows like “Shark Tank”, “The Profit”, “Cleveland Hustles” or other shows that chronicle the trials and tribulations of entrepreneurs, being an Entrepreneur seems to be the ‘in thing’.

Entrepreneurship is the In Thing

Even though this added media attention brings with it potential negative energy, it certainly has elevated the importance of entrepreneurship in the economy and has made the true Entrepreneur the new darling of popular culture. In fact, all of this positive attention has helped put in motion a renewed level of assistance from governmental, non-profit and for-profit entities that are focused on elevating entrepreneurial and small business activity. It REALLY has never been a better time to start and grow a business!

Take advantage of what’s out there 

That being said, where do I start? Who do I reach out to? Where do I go or who do I go to for help? All great questions. Like many things in the world of entrepreneurship there is not an exact formula or a perfect pathway. However, there are definitely some places to go first that might help compress the time frame to get on a pathway to success. Unfortunately, with the onset of this new focus on entrepreneurship, there is also more ‘noise’ out there in the space which has caused more confusion on where an entrepreneur should go for help.

What’s an Entrepreneur to do?! The first place to go is to a Small Business Development Center (SBDC). The SBDC is a national network that is usually a partnership between the federal Small Business Administration (SBA) and a University or state economic development agency. Either way, the SBDC is staffed with professionals that have spent their careers in helping entrepreneurs with getting businesses started and to the next level.

They’re from the government and they REALLY are here to help you!

In most cases, each SBDC has business counselors that have a general comprehensive of business formation and operations and have personnel that specialize in specific areas of business. The benefit of reaching out to an SBDC to begin with is that they are normally connected to the overall business assistance network throughout the state and have a broad network of contacts. These centers can help you get your business idea from a concept into a business plan. The other good news is that the first few meetings with an SBDC counselor are usually free of charge. Therefore, it is extremely important to get as many of your ideas down on paper and fleshed out as completely as possible so that you can maximize your interaction with the SBDC.

The next stop would be to your local Senior Corps of Retired Executives (SCORE) chapter. SCORE is actually made up of volunteers who have had significant experience in private business and industry. In most cases, these individuals held substantial positions within their respective businesses and offer an array of skills for a startup or a business that wants to get to the next level. Similar to the SBDC, SCORE provides their services for free and works with other governmental agencies in the business assistance space such as the Small Business Administration (SBA) and state development agencies. Although sometimes SCORE specializes in specific areas, they are usually able to provide the same type of assistance as the SBDC. In fact, SCORE’s sponsoring agency is the SBA (www.sba.gov).
SCORE has some incredibly important resources for the entrepreneur and small business person, like their online counseling and workshop offerings. In addition, their forms ranging from business plans to financial spreadsheets are some of the best in the business. The easiest way to determine the type of assistance that is possible for your venture is to look them up at www.score.org and see if there is a chapter location near you.

The third place to look for help is a local or regional economic development agency. More than likely these will take the form of being a municipal or community funded department usually with the title of economic development, business development or commerce department. Either way, if it is a municipal entity it will require that the business is actually located within the confines of that’s community boundaries. Regional development agencies, by their make up, tend to be able to assist businesses from a wider range of communities within their vicinity and usually provide very similar services.

The last place to look for help in starting or growing a business would be your state’s business development agency. These usually reside in your state’s capital city and are identified by being a department of the state’s administrative governing arm. More specifically, they would normally have names such as Department of Commerce, Department of Economic Development, Department of Business Development, Department of Industry and Commerce and other similar titles. Regardless of their format or make up, state business development agencies tend to be a nice resource in themselves as they usually know of other business assistance resources much closer to where you are located.
In addition to the four resources identified above, there are also other resources available that are similar in nature. In fact, many metropolitan areas throughout the country now have what are called ‘business accelerators’ or ‘business incubators’ that assist business startups with counseling, workshops and in some cases financing. Although many have adopted enrollment requirements, where they only deal with those businesses that have been chosen to be part of their programming, many others provide basic services to all businesses beyond those that they provide financing and other long-term business services to.

With the success of such accelerators and incubators like TechStars and Y Combinator, many communities are developing entrepreneurial networks that rely on their community of entrepreneurs to help those individuals that want to start an entrepreneurial venture. These networks have been springing up in nearly every corner of the country and are filling the void where there may not be an established publicly funded effort.

In addition to the more established entrepreneurial networks springing up, there are also more ‘loosely’ associated groups such as regional entrepreneurial ‘meet up’ groups that meet infrequently in person at restaurants or banquet rooms and that may have an online presence. The best way to find these groups, other than to do a Google search is to perform a search on LinkedIn and other social media platforms.

Help IS out there

So at one time in the not so distant past there may not have been somebody to help you on your entrepreneurial adventure, that is simply NOT an excuse nowadays. In fact, there are a number of available resources, in many cases free, that are being targeted toward entrepreneurs and small businesses. This is an incredibly exciting time to take that step to control your own destiny.

So where can you go to get help with your business venture? Let’s recap the info from above:

1. The SBDC closest to you
2. The SCORE chapter nearest you
3. Your local or regional economic development agency
4. Your state’s business development agency
5. Regional business incubator or accelerators as well as entrepreneurial networks
6. Entrepreneurial ‘meet up’ groups

There’s never been a better time. Get out there and get going!

Goals. A Pathway to Prosperity

Posted Elite Life WarriorLeave a commentPosted in Strategy

Photo by Robert Baker

Post #30

Every one of us wants something great out of life. Whether it’s to start our own business or to be successful in our career. We think about how it would be if we were only able to make it happen. We know that it’s going to take some serious effort, perhaps good timing and maybe even a little bit of luck. But is there anything else that we could do to improve our chances?

The infamous Harvard Study

You may have heard about the purported 1979 study of Harvard Business School graduates. The story goes that these graduates were surveyed regarding whether or not they had any career goals and whether  they were written down or not. The story further indicates that 3% of those graduates that had both written goals and a plan were making 10 times as much money as the remaining 97% of those that didn’t.

Now whether or not this study actually took place is not the point. Now what IS the point is that having goals that are actionable is extremely important to our success. In fact, most experts on the subject would suggest that it might be the single most important determining factor for our success. Wow! That’s heavy stuff!

So if having goals may be the single most important thing we can do for our success, what is the best advice around writing and executing our goals? One of the most prevalent strategies out there on goal setting might be the SMART goal setting method. SMART is an acronym that stands for Specific, Measurable, Attainable, Relevant and Timely.

Be SMART about Your Goals

Specific: For each of your goals, write down the specific action steps that need to be taken in order for you to reach that goal. As an example, if your goal is get an MBA identify each and every step that needs to be taken in order to successfully get that MBA; study for the GRE, identify an MBA program, apply, etc.

Measurable: You should be able to evaluate whether or not you are making progress towards your goals. If you can’t, it will be very difficult to know if you are taking the right actions necessary in order to get there. As an example, if your goal is to lose weight be specific about it. Indicate the actual weight that you intend to attain. Not only will you know if you reach your goal, you’ll have a benchmark along the way as to whether you’re having success toward meeting your goal.

Attainable: Is your goal something that you have the ability to reach? This doesn’t mean that it won’t be hard but is this something that you can accomplish if you get the right resources together? Don’t forget, President John F. Kennedy had a goal to put a man on the moon! I’m pretty sure you can do whatever you want to if you put your mind and energy behind it.

Relevant: Identify WHY you want to attain your goal. Of all the aspects of SMART goals this might be the ‘driver’ behind all of them. Knowing the WHY that motivates you toward achieving a goal is perhaps the single most important thing. Now here’s the dirt on your WHY. If the reason you want a certain thing doesn’t ignite a certain spark inside your belly, chances are you are going to struggle accomplishing your goal. As an example, if you want to be “rich” and can’t come up with a compelling reason that moves every fiber in your body in order to do what needs to be done in order to become rich, you’re going to struggle to reach that goal. Now if you need to obtain a certain amount of financial success in order to pay for medical treatment for a family member, that’s motivation! (If you’re looking for what might be one of the best explanations of how to find your WHY, check out Simon Sinek’s TedX speech at the following link: https://www.youtube.com/watch?v=u4ZoJKF_VuA&t=910s.)

Timely: Put a specific date on every goal. In order for a goal to be something that you’ll doggedly pursue, you need to put a timeframe on it. Want to lose 10 pounds? Then be willing to do it before or on a certain identifiable date. This makes it real and makes you accountable to your goal.

So now you have the format for each of your goals to be SMART goals. Let’s talk about what can be done in order to give you every advantage on achieving your goals.

Give yourself an Advantage

Accountable: Although this can be very hard, because it doesn’t give us much of a chance for excuses (I’m just making it real!), telling our friends what our goals are and when we are going to achieve them puts us on record. Once we tell our goals to people that we have an emotional attachment to, psychology tells us that we don’t want to let them down or do things that will lessen their view of us. The broader we make our goals public and known to others, the more accountability that we have to them.

Viewable: Write down your goals on something that you can make copies of and put them in a few locations where you will see them each and every day. Some people go as far as laminating copies of their goals and putting them in the shower! Hey, whatever it takes! Regardless of where you put copies of your goals, make sure you look at them every day.

Reviewable: Even though you’re looking at your goals every day, you want to make sure that you are reviewing the actual action steps required for success and making an honest assessment as to whether or not you are making progress toward them. In order to do that, you need to make sure that you are recording action steps in your daily calendar and taking action.

Benchmarking: Make sure that you set aside regular intervals to review and benchmark the progress being made toward your goals. A weekly, monthly and quarterly interval should give you adequate timeframes by which to monitor whether or not you’re making the progress toward achieving your goals.

The cost: If you really want to achieve your goals, sometimes you need to make it painful should you not reach them. One way to do that is to commit to making a financial pledge towards a cause that you find utterly offensive, whatever that might be, should you not reach them by a specific date. In order to be held to it, you need to make sure that your friends and family know what you have in mind.

There are other resources that also can help you reach your goals. One of them is to obtain a product that systematically records and helps you take action steps toward your goals. One such product is called “The Freedom Journal: Accomplish your # 1 goal in 100 Days” by John Lee Dumais of “Entrepreneur on Fire”. (www.FreedomJournal.com) The Freedom Journal is actually a hard bound book that has exercises which assists you as you work through identifying your goal and make progress achieving it.

So instead of aimlessly drifting through life, make some definable goals, be SMART about them and lean in! You’ve got this!

Leveraging your Time? Or Trading Hours for Dollars?

Posted Elite Life WarriorLeave a commentPosted in Entrepreneurship

Photo by Austin Distel

Post #29

Leveraging your time? Or trading hours for dollars? That’s really what it is when you get right down to it. When the book “Rich Dad Poor Dad” from Robert Kiyosaki came out, this idea became a central theme of conversations about how individuals create wealth. As expected, many people at the time questioned whether this was a message that fairly conveyed the options due to the fact that it challenged the ‘conventional wisdom’ of working for somebody else for 40 years and then hope to be in a position to retire.

For myself, I can now well appreciate one of the more simplistic lessons in the book. We really only have two choices in the world-of-work; we can either trade our hours for dollars, like most W-2 workers do, or we can own the system that creates wealth and leverage other people’s time. Although I used to think that this was too simplistic and there had to be much more to it, I’m now pretty convinced that’s about how simple it really is.

Now this is nothing to get depressed about, I assure you, but you can’t escape the fact that if you work for someone else you do not normally share in any of the ‘profit’ that is generated even by your great work. The owner(s) of the company share in the profit that is being generated. You get paid an hourly wage for your contribution to the creation of their profit.

As a practical perspective, this seems to be a pretty fair exchange; you aren’t taking any of the risk in generating the profit, just your time, and you’re also being fairly compensated for your involvement in the enterprise. Fair enough! However, the dilemma is that you only get paid when you show up, someone decides how much money you can make no matter how much magic you create and you are not building equity in your job…you can’t sell it and you can’t pass it along to your kids. Huh.

That all being said, if you’re going to continue on with your plan for trading your precious hours for money wouldn’t you want to make as much money per those hours as possible? Humm. I’m pretty sure you don’t value your precious time on this earth any less then I do, so why would you want to get paid any less for those hours than the next person? I’m also pretty convinced that not one of us starts out by saying “my time just isn’t as valuable as someone else’s, so I’m okay with making less money per hour than they do” but that’s EXACTLY what ends up happening to many of us. We forget that we made a conscious decision to trade our hours for money when we decided to work for someone else and by doing so someone else gets to value how much those hours are worth.

On the other hand, when you work for yourself you get to own the entity that creates the wealth. The true value in that is when other people are hired to work on YOUR behalf. As a result, you get to leverage their time and by doing so, literally ‘multiply’ the amount of hours that others get to work on creating profit and equity in your enterprise. In addition, if you are then able to work “on” your business and not “in” your business (thank you Michael E. Gerber, “E-Myth Revisited”), you can leverage your time doing other things that add additional value to your business while others do those tasks that either you are not as good at or that are not as valuable with your time.

The magic in owning a business is to make sure that you are able to maximize the leverage of other individuals time along with having systems that these individuals operate. In this manner, not only is the business owner multiplying the amount of time that is being worked in a given hour, these hours are being deployed as efficiently as possible.
Although it’s arguable that working for yourself is better than working as a W2 employee, all things being equal, if you’re not able to leverage other people’s time utilizing systems you’re just not getting the benefit of what owning a business is all about. The only benefit that remains may simply be the lifestyle value beyond being able to call your own shots.

So faced with the choice of either trading hours for money or leveraging time, what are some things to think about? Obviously the first thing to think about if you’re trading hours for money is that you need to make the most money you can per hour. Simple enough. Therefore, why not be the CEO! If you can’t be the CEO, look for additional benefits such as working at a company that provides stock options, that has profit sharing, that is employee owned, that offers a healthy matching 401(k) plan, company vehicle, education reimbursement or other favorable compensation elements.

If you decide to embark upon the path of the entrepreneur, make sure you work on developing automated systems within the business for everything that can be systematized. A business truly must be a ‘system of systems’ in order to create the type of benefits that a business can provide. In addition, as was already identified in order to get the biggest benefit from a business, you’ll want to hire others so as to multiply the amount of time being worked on your behalf in order to make profit.

When in doubt, strive to be on the right side of the ‘Quadrant’ (Shout out to the Rich Dad!)

Houston…We Have Launch!

Posted Elite Life WarriorLeave a commentPosted in Entrepreneurship

Photo by Tim Mossholder

Post #27

Launching a business or a project has become legendary in the entrepreneurial community.  In fact, stories of such launches have become as epic as those tall tales that gave birth to such legends as Pecos Bill and Paul Bunyan!  Even though these stories of launches are the things that are both told with vigor and admiration in the public, the real stories were being created much earlier in the process of developing the business or project.

The Process of Entrepreneurship

In fact, how the business or project was created is the real story.  So what is the “how” that I’m talking about?  I’m actually talking about the “process” that an entrepreneur used to create that new business or project.  Interestingly enough, within the past decade we’ve been enjoying a transformation in how businesses, products and projects are created.

That transformation has now taken on many different monikers but the one that I believe is the most deserving is the “The Lean Startup” coined by Eric Ries.  (In fact, Eric Ries not only coined the term “The Lean Startup”, he wrote the seminal book by the same name which is a must read!)

The Lean Startup

The concept of the “Lean Startup” is that it is more desirable to put out a basic version, or Minimal Viable Product or MVP, of the product or service in order to get customer feedback than it is to spend additional time and resources refining the offering prior to getting customer feedback.  In a sense, by using the MVP method an entrepreneur is leveraging his/her ideal customer by getting their valuable input on the virtues of the product or service before spending additional resources which may not add value.

To that point, if you’re able to offer a MVP to your customers you’re less likely to run the risk of spending time and money developing features or benefits that your customers may not value, or worse, feel may detract from the product or service.  In his book, Ries gives an example of spending hours and hours on a feature within his company’s product IMVU that his customers didn’t value at all. In fact, when he was able to interact with his customers regarding that feature they actually preferred a much less tech-intensive and simplistic approach, which if initially followed, would have avoided the expenditure of hours and hours on useless computer code.

Taking this concept to the extreme, the entrepreneur now has the advantage of not necessarily having to know their EXACT customer’s needs, desires or concerns before launching a product or service.  In a sense, you and I are getting the advantage of potentially testing the market with a less than perfect offering that allows us to get actual market tested customer responses, versus plans based on our assumptions and hopes.  The real value of the Lean Startup methodology perhaps is the opportunity to incrementally learn valuable customer input incrementally so as to refine the offering “after” the feedback is being provided.

“Build It and They Will Come” is not Entrepreneurship 

So why is this such a profound approach?  Although The Lean Startup has now become the prevailing standard of entrepreneurship, prior to this methodology being fully embraced the previous standard was more about trying to validate customer interest ahead of time based on research and building out the product and service to what is assumed to be the optimum offering, with all the bells and whistles intact. As an example, think about the Model T where you could have it in any color as long as it was black!  This previous approach relied primarily on the “build it and they will come” concept.  The problem with this approach is that customer feedback is more theoretical.  More specifically, customers are being asked prior to seeing, feeling or using the product/service what they like about it.  To a degree, in this manner a business is being held hostage to the fickleness of how customers react to questionnaires or even the dynamics of focus groups or bias in customer research.

The Build-Measure-Learn Loop

Using the Lean Startup method an entrepreneur gets the best customer feedback possible; sales or no sales with the least developed product or service.  Remember, the only thing that really counts is revenue…not some elaborate business plan that details multiple scenarios on possible customer behavior!  So to that end, why not get the best feedback…sales or no sales…within the quickest timeframe possible?  Of course that’s what we all want!
So what are the takeaways of the Lean Startup methodology?  Ries would suggest that it is the Build-Measure-Learn loop.  Build as Minimal Viable Product (MVP) as possible; Measure the success of your offering from your customer’s feedback through “sales or no sales”; and Learn what iterations or modifications need to be made from that feedback.

This should keep the entrepreneur from spending needless time and money on features that aren’t wanted and more clearly refine who the customer is to begin with. This is truly the definition of a “win-win”!

So even though the “Launch” is the glamorous debutante, it’s less known but more formidable sister is “The Lean Startup”.

7 Primary Tactics of a Wealth Builder

Posted Elite Life Warrior2 CommentsPosted in Finances

Photo by Alexander Mils

Post #26

I have been privileged to have had the opportunity to have worked with dozens of individuals who have created significant amounts of wealth. Although each of them have done it through different mechanisms, they all have followed a similar “blueprint” of sorts that have very common underlying tactics.

After years of observing these similar tactics being used by these individuals on their way to reaching substantial success, I started to notice that there are approximately 7 primary tactics that when followed make up this template for success. Although many of these tactics are specific to generating wealth, many of them are actually how to “set up” one’s life, so to speak.

Choices matter

More specifically, it was the particular choices that these individuals made in those areas such as vocation, lifestyle, asset ownership and investing as examples, that had a major impact on their level of success. In fact, in most cases these structural decisions created ‘foundational’ building blocks that in many ways formed the structure for this later success.

So what are these magical tactics that if followed can lead to a highly successful Life? In fact, there’s absolutely nothing magical about them at all. They are in most cases lower effort activities that are quite easy to implement but they are decisions that may be unconventional when compared to the decisions that are made by most other individuals. As a result, that makes them difficult decisions to make if not seen as part of a successful effort.

Going against the grain

In addition, if there are no other individuals known that have made these decisions it becomes very difficult for most individuals to go “against the grain” and do something different than the masses. However, that literally is the difference between being highly successful and perhaps struggling to find even a hint of success.

The 7 primary tactics that are critical to be a Wealth Builder are as follows:

1. Own the Money Machine – Picking the right vocation is the first critical element in being a prolific Wealth Builder. Although it is not impossible to become a Wealth Builder by being an employee (a worker or a W2), it is much harder. The seminal writings on this subject and that still hold true to this day were identified by Robert Kiyosaki in his book “Rich Dad Poor Dad” where he identified that it is much more probable to become a Wealth Builder by being an Investor or a Business Owner and not an Employee (W2) or even Self-Employed.

Business Owners and Investors become Wealth Builders at a much higher percentage because they get natural leverage from the efforts of others, from capital equipment, by utilizing operating leverage and a host of other advantages, including tax benefits. Therefore, picking the path of becoming an entrepreneur, business owner or investor is a much more prosperous path and has a higher level of probability to provide the opportunity to become financially successful.

2. Own Assets – In order to build wealth, it is critical not to trade hours for dollars, a one for one proposition. What you need to do instead is work to purchase assets which have the ability to generate income without you having to spend your own time earning it. The correct assets literally work on your behalf, such as stocks, rental property and businesses. Basically these assets not only leverage your time, exponentially multiplying every hour that you spend, but it does the same for the hours of other individuals who are working for entities that you own as well.

3. Incorporate your Life – Due to the preferential tax code which favors business owners over W2 employees, it is essential to incorporate yourself into a business entity. As an example, you could be someone who likes outdoor recreation and owns boats, canoes, ATV’s and fishing gear. If you were to incorporate as a Limited Liability Corporation (LLC) and legitimately operate a guide service, those items that you own and use to conduct business would now become business deductions.

So now instead of paying for these items out of your personal funds, since you are now incorporated as a business, you now get a business deduction. In an addition, you could also record your telephone, vehicle, equipment and even a portion of your house as tax deductions for legitimate business expenses. Obviously these items aren’t free, you still have to pay for them, but you now get to take a qualified tax deduction.

4. Non-Income Generating Assets – Wealth gets built when you invest your money in things that make you more money. In the world of wealth building the only thing that qualifies as a true asset are the ones that generate income for you. That said, items such as cars, boats and jewelry, although they have some inherent value, are certainly not income generating assets.

In fact, items such as cars and boats not only don’t generate income, they cost money to operate and normally depreciate in value. Although controversial to consider, your single-family home is also not an income generating asset, as it too costs money to operate through maintenance and taxes.

The housing option that qualifies as an income-generating asset is a multi-unit where you would live in one unit and have others effectively pay your mortgage and operating costs for you by living in the other units.

5. Side Hustle – With the widespread growth of software tools to run a business on the Internet such as automated email, lead magnets, sales funnels and easily developed websites, being able to run a side hustle has now become easier than any other time in history. In addition, with the proliferation of social media platforms it’s so much easier to draw potential consumers to your business than ever before.

As identified earlier, incorporating a business allows you to receive preferable tax treatment through deductions in addition to providing you with leverage of other people’s time.

6. Automatic Investing – One of the biggest principles of growing wealth is ensuring that you invest your money in reliable investment instruments that generate income. However, it’s critical that you spend as much time in the market as possible and not try to time it.

The solution is to put your investments on automatic investing so that you are guaranteed on a regular basis that your money is working on your behalf through the ups and downs of the market. Of course, one of the most important aspects of this principle is to take advantage of your employer’s 401(k) match but in addition, to do the same with a traditional IRA or ROTH IRA.

7. Multiple Streams of Income – Most wealth builders that I have known always had a business that they operated on the side. The most successful of them had a few. The challenge is to figure out a way to maximize your available time so that you can have multiple streams of income.

The mainstay of this strategy is to usually be involved in owning rental income property in addition to having a primary job that is used as the foundation to build wealth, as it provides needed income and benefits. In addition to their day job and rental income property, wealth builders also look to own and operate other ventures that can leverage other people’s time and effort. The most successful individuals focus on those opportunities that require the least amount of their own direct time but that deliver as close to passive income as possible.

Being a Wealth Builder doesn’t happen by accident. From my observation of watching dozens of wealth builders create extremely successful financial lives, it’s a matter of having a particular foundational strategy like the one identified above and continually working it.

Leverage is the magic ingredient 

Although there may be some tactics that are more impactful than others, the one element that appears to be the most important is to be involved in wealth building exercises that leverage other people’s money or time. This is reflected in tactics where other people are either spending their time in helping the individual generate income, such as in businesses, or spending their money to pay rent to the wealth builder who in turn has leveraged their down payment against the banks funds.

Leverage, focus and persistence. They’re not magical but they sure have a central place in building wealth!

An Alternative Investment Strategy

Posted Elite Life Warrior2 CommentsPosted in Finances

Photo by Aaron Burden

Post #25

It’s hard to believe that the financial services industry in the United States makes billions and billions of dollars every year convincing investors that they need the latest stock or mutual fund, inevitably encouraging takers to time the market. Although investors are cautioned daily not to be susceptible to market timing strategies or to purchase the latest and greatest investment, individual investors do so out of desperation to make up for lost time in the market. As a result, they lead themselves down the path to the Wall Street slaughterhouse of high fees, commissions and bad market timing.

There is NO wrinkle in the stock market to exploit

So with all the advice being provided to investors not to engage in this type of behavior, why do investors still do it? The bottom line is that most investors make the assumption that they can make up for lost time in the market by finding the ‘wrinkle in the market’ that they have assured themselves that exists. This wrinkle amounts to picking what they believe is the right investment at the right time. Invariably, however, this leads more time than not to the investor buying at the height or near height of the valuation of that particular investment, as they are chasing past performance. Rarely does the average investor, or an even experienced trader for that matter, get it right.

An alternative investment strategy 

So other than being lucky enough to pick the best performing stock, what is the alternative investment strategy? As unamazing as it sounds the alternative is quite simple;

(1) Buy a broad stock Index Fund such as Vanguard’s VTSAX or S&P 500 and
(2) Commit to invest a much more substantial amount of your annual income, such as between 30% to 50%, in the chosen stock Index Fund.

By investing in a broad stock Index Fund, you are avoiding the temptation of trying to “beat the market” and simply “owning the market”. With an investment in a broad Index Fund you are invariably mirroring the overall market performance both in gain and in loss. The simple truth of the stock market is that 94% of all stock fund managers don’t beat the S&P 500 in any given year and the 6% that are able to do it in that specific year are not normally the same to do it year to year.

The ‘age-old- advice is risky

In addition, in order to receive the type of returns that the investors expect these stock fund managers to get they also have to take much greater risks to get those returns. So not only do these fund managers NOT beat the market consistently from year to year BUT they also take much greater risks than simply having your money invested in VTSAX or a S&P 500 Index Fund.

So the bottom line is this…most investors try to make up for lost time in the market by buying the latest trend in mutual funds or individual stocks in the hot industry sector (today it’s technology, yesterday it might have been biotech) and purchase…possibly unbeknownst to them…what turns out to be pricey managed funds that have higher risk profiles with no guarantee that they’ll beat the broader market.

But HOW could so many “smart” people continue to repeat this behavior year in and year out? There HAS to be some very compelling reasons or solid positive evidence to support this behavior, right? Well you’d hope so but the evidence shows just the OPPOSITE. Take the following as an example:

Investor 1:
This investor doesn’t believe that you have to “beat the market”. All you have to do is match the market by investing in the S&P 500 Index Fund. So with this strategy this investor commits to put $10,000 a year for 10 years in an S&P 500 Index Fund.

Let’s assume the S&P 500 Index Fund will generate a constant 7% annual return with a total management fee of .14% for an effective annual rate of return of 6.86%.

Investor 2:
This investor believes that he/she has time on his/her side. As a result of his/her ‘superior’ strategy, they’re going to put off investing because they know they can get much higher returns if they put their money with someone “who knows what they’re doing”.

As a result, they are going to commit to start investing when Investor 1 has hit year 6 and then invest each thereafter until year 10 (5 full years). BUT…they’re going to employ their ‘superior strategy’ and invest DOUBLE of what Investor 1 is investing, $20,000 a year, AND receive a phenomenal annual rate of return of 12%! WOW! Maybe these investors REALLY DO know that they’re talking about!

However…in order to get these types of returns, there is going to need to be a steady hand at the wheel with someone who ‘knows what they’re doing’. As a result, there’s going to be a LOT of buying and selling (we’re not even going to talk about the tax implications of such an investment fund in this post) and the cost of trying to out perform the market comes at a cost…a 2% annual fund management fee. So…this greater risk, less tax efficient fund actually will only return an annual 10%. That’s still a 45% higher return than the S&P 500. That’s financial Rockstar territory!

So here’s what happens:
Investor 1 receives $157,835.44 at the end of 10 years by only taking the inherent risk of being in the broader market. Other than worrying about whether the market would be up or down, they didn’t have to worry about timing the market or ‘picking the right horse’.

How did Investor 2 do with his/her superior investing strategy? Well, by incurring much greater risk, trying to pick the right fund manager, timing the market and arguably having tax implications if investing outside of a retirement instrument, they received $154,311.71 for their efforts. Hummm…that’s actually LESS than Investor 1.

Why the age-old investment strategy doesn’t work

So what happened here? A few things actually. The first is the phenomenon of time in the market. Not “timing” the market but “time in” in the market. Those extra 5 years in the market compounding returns, even at a lower rate of return, has a huge impact on the growth of money. Second, although Investor 2 thought he/she would be getting the full advertised return of 12%, the cost of getting that return comes with it a lot of daily buying/selling and analyzing investments. This takes time which in turn, takes money. The loss of this 2% annually really has a negative impact on compounding, especially when you have fewer years. Lastly, Investor 2 had to make a MUCH bigger annual investment commitment in order to just about keep up…not blow away…Investor 1.

Let’s go back to the earlier proposition that all it takes to have an incredible investment strategy is the following:

(1) Buy a broad stock Index Fund such as Vanguard’s VTSAX or S&P 500 and
(2) Commit to invest a much more substantial amount of your annual income, such as between 30% to 50%, in the chosen stock Index Fund.

In reflecting on the example of Investor 1 and Investor 2 in this post, we see the hard math as to why number (1) above makes sense. We’re simply trying to match the market, not take on additional risk of market timing, tax liabilities and high management fees. The math shows this to be a sound strategy.

Now, if we could only increase the amount of “time in” market as well as the amount of money (number 2 above) we put into that broad stock Index Fund (number 1 above) we’d have a low-effort, solid investment strategy that would match the market year in and year out.

So we know what number (1) does but where’s the evidence on why (2) is part of this strategy? The sad truth of the matter is that the age-old advice to save and invest 10% to 15% of your annual income each year simply doesn’t work for most people. Why? The simple truth is that if you are like most people, you didn’t start investing until you were around 35 or 40 years old. You didn’t have the 40 years of annual investing that this age-old advice is built on. So as a result, if you follow this advice you’ll look more like Investor 2 in this post. And you now know how that turns out!

Even if you start late…YOU can win

So here’s a thought. When you’re around 35 or 40 years old and you’re starting to think about retirement AND presumably have a lot more available money to invest than you did when you were in your 20’s, consider the advice in number (2) above. This is time to invest 30% to 50% of your annual income so that you don’t have to play the game of Investor 2.

But seeing that I didn’t start investing until I was 35, aren’t I going to have to take the same approach as Investor 2 in order to catch up for all those years that I didn’t invest? NO! This is the beauty of strategy number (2).

Consider this:
If you were to start investing at 35 years old and made $75,000 annually (22% above the median United States annual income of $61,371) and the S&P 500 Index Fund generated a annual return of 6.86%, if you invested just 30%, or $22,500 annually, you’d have accumulated a retirement account worth $2,072,576.82 at age 65! Now consider this: If you used an annual withdrawal strategy of 4% (which is argued in the ‘Trinity Study’ as having a high percentage of not spending down your principal) on that $2,072,576.82 you could enjoy an annual withdrawal amount of approximately $83,000! That’s MORE than your annual salary!

THAT is the power of investing at least 30% of your income annually and having “time in” the market.

Now what would happen if we dismissed this advice and went back to that ‘age-old advice’ of investing 10% of our annual salary starting when we were 35 years old? Well, if we were making $75,000 a year that would be an investment of just $7,500 a year for 30 years at 6.86% annualized for a retirement amount of $690,858.94 at 65 years old and an annual withdrawal amount of $27,634.46 (using the 4% withdrawal rule). If you were expecting to live a similar life in retirement to what you are doing now on $75,000, $27,634.46 in annual draw is roughly 37% of your existing lifestyle! That’s going to be some SERIOUS belt tightening.

So, $2,072,576.82 or $690,858.94? 30% or 10%? $83,000 annually or $27,634.46?

The choice is up to you!

Financial Independence. 10 Principles Of A Simple Financial Strategy

Posted Elite Life WarriorLeave a commentPosted in Finances

Photo by Vladimir Solomyani

Post #24

There’s been a considerable amount of media attention in the last several months regarding what seems to be a substantial movement in the otherwise sleepy and stodgy Personal Finance industry.

This movement is called Financial Independence, or FI, to those that have become its standard bearers. Many of the individuals that strongly identify with all of the strategies that make up this particular approach to personal financial go the additional step and call the movement Financial Independence Retire Early, or FIRE.

Regardless of what you call it, FI or FIRE, it approaches Personal Finance in a very, very different way than what has become the typical approach that most people in the Western world have been instructed to handle their finances.

The “Typical” approach to Personal Finance

This typical Western World approach to personal finance is built around a few structural aspects towards finances that have been promoted for the past few decades such as:

• To plan on a 40-year working career
• Save a maximum of 10% to 15% of your annual income for savings and investment
• Buy the biggest house you can afford as it will always appreciate in value
• Go to the most prestigious college that you can get accepted into regardless if you have to incur considerable debt to do so and
• Take on debt to finance depreciable items such as cars, furniture and consumable items

The need for a new approach to Personal Finance

Interestingly enough, considerable cracks have started to become evident in the ‘veneer’ of this typical approach to Personal Finance. For starters, within just one generation employees no longer have the ability to fall back on Defined Pensions which guaranteed monthly retirement payments at a set level, with some even growing from what was referred to as a Cost of Living Adjustment, or COLA.

Now without this Defined Pension style retirement plan providing the foundation for our retirement, 10% to 15% set aside annually for retirement is mathematically insufficient. Especially when these funds are now being invested in a 401(k) program which is at the whim of the uncertainties of the stock market.

In addition, with a significant amount of anxiety rising amongst workers regarding how the introduction of artificial intelligence, machine learning and automation will impact their long term careers and earning power there is starting to become stronger cries for more affordable housing options. This has been amplified lately in the news from the growing concern amongst retiring baby boomers that there is nobody coming up behind them able or willing to purchase their large…call them McMansions…homes and enable them to downsize into smaller dwellings. Added to this fact, that although real estate pricing is still strong in most major urban areas at the time of this post, there is a growing level of speculation that this could be the top of the bubble and indicate yet another period where real estate may simply not provide the type of asset appreciation that most people have come to expect.

This traditional financial lifestyle is also being challenged by the trend, especially in the United States, whereby the cost to attend many mid to upper tier colleges and universities is outpacing the ability of their graduates to be able to land the type of jobs required to be able to pay the monthly cost of these loans. As a result, many people are finding themselves in crushing debt even before they start on their financial journey.

All of these traditional approaches to Personal Finance only get riskier with the growth of very affordable and what our banking institutions have gleefully called “cheap” credit. For many individuals, this builds a never-ending cycle of borrowing money at extremely high annual interest rates only to just be able to pay the “low” monthly payment.

As was so well stated by a young millennial woman recently, when she applied the math to figure out how long it would take her to pay off an outstanding credit card bill by simply meeting the minimum monthly payment she stated, “20 years to never”. This hardly seems like the right strategy for a sound financial life.

The Financial Independence Movement

Now what about this FI or FIRE movement? What would have been straight out thought to be a radical approach to conducting your finances just 5 years ago, is now starting to look more sensical than the alternatives…INCLUDING the traditional approach. In fact, it’s starting to look downright like the only responsible way to approach personal finances.

For those who may have not heard of FI/FIRE before there are several main tenets to the approach:

1. Create a money “gap” between your income and your expenses by cutting expenses to the greatest degree possible, as well as doing what can be done to maximize your income.
2. Invest the “gap” identified above in number 1 in low cost index funds.
3. Save and Invest the largest percentage of your income as possible; 30%, 40% or 50% are solid initial goals.
4. Pay yourself first by automating savings and investments
5. Take advantage of every tax deferred investment program available, such as your employers matched 401(k) program.
6. Actively control and reduce your three highest expenses; Housing, Transportation and Food. This is done through what FI practitioners refer to as “hacks”.
7. Reduce and eliminate, if possible, recurring monthly “want” expenses such as cable, cell phones, and those stealthy “subscription service” payments.
8. Actively look to “optimize” aspects of your financial life, such as getting benefits such as ‘cash back’ or travel mile awards through credit cards, which are completely paid off each month.
9. Resist buying consumable items, including cars, and if purchased spend the least amount of money on them and avoid borrowing any money for them.
10. Determine and strive to hit your FI number, which is an amount that you have available in savings/investments and which equals 25X your yearly expenses. This amount would theoretically allow you to withdraw 4%, or the “4% Rule”, of it annually and still cover your yearly expenses indefinitely (for example, if your annual expenses were $40,000, you would need $1,000,000 available in order to withdraw 4% of it annually, or $40,000).

Although hard-core FIers might argue that there are more foundational principles that make up the FI movement and should have been included in this post, if anyone were to follow those that I’ve listed above, they’d be a financial superstar within years. In fact, they might even be able to “Retire Early”!

The FI Movement picks up speed

I have absolutely enjoyed the attention that the FI movement has garnered these past few years. In fact, as it turns out my wife and I have been living a FI lifestyle for decades and we didn’t even know it! As such, I was honored to be featured in a recent Market Watch article https://www.marketwatch.com/story/how-these-parents-are-raising-frugal-kids-as-they-attempt-to-achieve-fire-2019-07-11 that featured how we had taught our daughter these same principles over 20 years ago!

I used to express my interest in this type of an approach to life as simply being a “minimalist”. However, I started to think differently when those that started to write openly about their chosen FI lifestyle as being something much differently than being a minimalist.

They saw themselves as being “intentional” about their financial journey. They didn’t see themselves as self-depriving misers. No. In fact, they saw themselves as being “valuists” and “optimizers”. As proof, if they saw something that they believed would bring quality to their lives, they didn’t balk in purchasing it regardless of how much it may cost. THIS spoke to me!

As a result, I embarked upon a different path for the past 20 years and which a name for it, FI/FIRE, has finally caught up to it. To my surprise…it’s even become a movement!

10 Irrefutable Laws of Wealth Building

Posted Elite Life Warrior6 CommentsPosted in Finances

Photo by Pepi Stojanovski

Post #23

I’m at a certain age that I’ve developed a pretty keen understanding over the years of how to build wealth.  I’m also of a certain age that there weren’t many books on the subject and the early “Gurus” in personal finance that are fixtures today, such as Suze Orman and Dave Ramsey, were just getting started in their public careers back then.  The result was that I had to come to the lessons that I learned the hard way…by making my own mistakes and significant trial and error.

The other obstacle that kept me from learning these lessons when I was in my 20’s and 30’s was that there was no way to quickly dissipate information other than books, as the Internet would not be available for public use still for some time, and quite frankly, there were very few people who would openly talk about how to build wealth lest they were some Sunday morning huckster selling some get rich quick scheme on cable TV.

A real life tested system for building wealth

To have found a real life tested and numerically sound system of building wealth back then would have been incredibly valuable to so many of us.  And rare.  As I’ve spent so many years researching the subject of building wealth, I now see that there were certain books written that had many of these wealth building ideas in them but unfortunately not many of these, if any at all, were claimed as being a wealth building system.  The closest to this and probably one of the first, if not the first, would be “Your Money or Your Life” written by Vicki Robins and her partner Joe Dominguez back in 1981.  A true classic and a book that deserves a serious shout out due to it being a ground breaking idea of building wealth through frugal living.

Over the past 30 years, I have cataloged a variety of wealth building concepts and ideas.  I’ve easily read close to 100 books on the subject and I’ve gone to dozens of seminars on the subject.  I became obsessed…a healthy obsession … with the concept of wealth building but nonetheless an obsession.  In truth, I have either put many of these concepts to the test personally or have run them through the appropriate financial models to see if they make any sense.  I have also reached out to others who I believed knew a lot more than me on the subject to get their opnion.

By and large, over the years I have developed my own wealth building approach on principles that have been proven to work for me and that match my mindset around money.  As importantly, perhaps, is that these same principles that I have followed for many years are also the principles that are now being touted by a new generation of financial strategists.

The 10 irrefutable principles of building wealth that I have followed for the past two decades are as follows:

1. Pay yourself First

Although each of the following laws of wealth building are extremely important, perhaps the most important law is “Pay yourself First”.  If you were able to abide JUST by this law alone, you would become a wealthy individual. If you were to pay yourself at a rate of 50% of your income or more, you’d become a VERY wealthy individual.

The key to this law is that BEFORE you pay your bills and spend your paycheck on useless gadgets and services you really don’t need, determine how much you should be paid first from each paycheck.  Think of it this way…if you just spent everything that you made on bills and other expenses, you literally aren’t paying yourself anything for the work that you’ve done…just everybody else instead.

2. Don’t own non-income generating assets

The truth of the matter is that if you were to never own a non-income generating asset, such as a single-family house, car, boat, jewelry, etc. you would become wealthy very quickly because a large percentage of your income could then be available to be invested in income producing assets such as stocks, bonds, rental properties, businesses, etc.

Owning income generating assets put money in your pocket, non-income generating assets (or in reality, “liabilities”) take money out of your pocket.  It’s that simple.  Now clearly, there are those of us that will argue but “I need a house and a car” to live.  True, but if you were to own a duplex or a multi-unit rental property and had renters pay your mortgage and taxes and you owned a substantially older car that you weren’t making payments on, you’d not only have positive cash flow being created for your enjoyment but you’d also have lowered your costs to the absolute minimum.

3. Don’t use debt to pay for items that don’t generate income

To build wealth you simply cannot be in the position of borrowing money and paying interest on things that don’t generate income.  More specifically, you NEVER want to be in a position where you have taken a loan out where you are paying interest on things like cars, boats, motorcycles, jewelry and other items.  This is called “bad debt” because it doesn’t add to your wealth, it only subtracts from it, and it is the single-handed destroyer of building wealth.

The reason is that the interest payments over time end up making the price of the item when you initially bought it SIGNIFICANTLY more expensive. Interest works both ways…for you but also against you.

4. Take advantage of employer-sponsored retirement plans

It is usually in your best interest to take advantage of an employer-sponsored retirement plan such as a 401(k) or a 403(b) even when there is no match but it is a no-brainer when there is an employer match.  As for the former matter, contributing in the program helps you build tax-deferred wealth AND lowers your taxable income.  A two for one. In the latter case, to not take advantage of matching your employer contribution is literally turning down free money.

5. Create a ‘gap’ between what you make and what you spend, invest the difference

One of the most basic principles of building wealth is to simply spend less money than you make and invest what remains.  Pretty simple!  However, as for a little spin on this concept from the “pay yourself first” school, set aside your investment funds FIRST and then dedicate the remaining funds to your reduced expenses.  What you are able to invest, in this case upfront, IS the gap that you need to create.

6. “Under buy” your house, transportation and other items

When my wife and I bought our house, the banker told us that we were “way under mortgaged”.  More specifically, that with our combined income we could buy a much more expensive house.  That one decision to begin with, to buy a house way below what we otherwise could afford, was one of the foundational elements for us becoming financial fit at an early age.  In fact, we used to say all the time “Little house, BIG Life!”.

If you can extend this same approach to cars and other ‘must haves’ you might not be able to eliminate these expenses but you’ll sure be able to minimize them as much as possible.

7. Develop a “No Budget, Budget”

Yup. A “No Budget, Budget”.  Instead of creating the old school budget where you have a hard figure for each of your family’s individual expenses that you track daily, weekly and monthly a “No Budget, Budget” is intentionally set up for you to save and invest more of your money and worry less about routine expenses.

Here’s how it works; You identify upfront how much of your paycheck that you want to save and invest.  Put this amount in investment or saving vehicles.  The remaining amount is what you have left over for your expenses.  More details on this form of budgeting is available at http://www.elitelifewarrior.com/the-no-budget-budget/

8. Put investments on automation

The only way to be absolutely certain that you will create wealth is to put your investments on automatic deposit.  The easiest way to do this is to set up automatic deductions from either your paycheck, in the case of employer sponsored or allowed programs such as a 401(k), or directly from your banking account to a taxable account to invest in a total stock index fund or the S&P 500 Index Fund.

The obvious reason for doing this is so that your money will be invested immediately and not make it’ s way into your hands to be spent.

9. Strive to not trade time for money

The bottom line is that if you trade time for money, your earning power is linear.  The amount that you are able to make is limited by the time you work and the amount of money earned is a one-for-one relationship; one hour worked times a set hourly wage.  There’s no leverage or residual value for that time worked.

However, if you were a business owner with employees or a real estate investor you would have the benefit of leveraging other people’s time, money and knowledge.  The goal is to own assets that can generate income when you are not having to spend your time earning it.

10. Entrepreneurship creates leverage and passive income

As previously identified, if you can operate and manage a system that has other people working on your behalf you have the ability of generating passive income; income that’s generated without you tending to it.  This is the highest level of leverage of one’s time.

Entrepreneurship allows individuals to maximize their time in a way where they simply cannot be an employee. Much of this is that time spent as an entrepreneur has the potential for ‘residual value’ for each unit of time spent. More specifically, should an information entrepreneur create an online course that provides value to the market there is a possibility of someone purchasing that product years after the initial investment of time.

Committing to just a couple of laws

If any of us could successfully execute ALL ten of these wealth building laws, we’d undoubtedly become wealthy.  If we could only commit to a couple of these laws, we would also have an incredible shot at becoming wealthy and if we didn’t meet that mark, we would undeniably be in much better financial shape.

It only takes one

I believe if you could only commit to ONE of these laws, over time you stand an unbelievable chance to become financially fit.  Even for many of us who may be ‘vocationally challenged’ and may not make a lot of money in our careers, committing to even just ONE of these laws has the potential of changing our financial lives.

I know it has made ALL the difference for me.

Potential. You’ve already got all you need

Posted Elite Life Warrior5 CommentsPosted in Mindset

Photo by Robert Lukeman

Post #22

You’ve got it.  No seriously…you really do have this!  Potential is one of the hardest things to identify yet we ALL have an amazing amount of it inside each and everyone one of us.  The problem with potential is that it’s one of those things that we have a lot more of than we actually believe that we may have and unfortunately, probably more than we’ll ever use.  The latter is what scares us the most.  That we have been given something that we know can make us better, smarter, perhaps even wealthier but because of our own self-imposed limitations we might not be able to ever know what could become of it.

We already have as much Potential as we’ll ever need

Whether we find it interesting or not, we already have all the potential that we’ll ever need.  It’s truly up to us to figure out how much of it that we will call upon.  The difficulty that we all have is knowing how much we have or wondering what it takes to unlock every last ounce of it.

The problem with potential is that it never reveals itself to us.  The only way to find out how much of it that we have is for us to take action towards our goals.  Understand that potential won’t present itself to us by merely showing up in our life and making it through the day.  That’s the mystic of potential. It only shows itself when we are pushing ourselves and challenging our existing skills.  Think about it. Do you really have any idea how much potential you have for anything if you’re comfortably working within your ability?  Of course not!  Potential is something that only shows itself when you’re stretching yourself, outside of your comfort zone and expanding your mastery of different skill sets.

Unfortunately, most of us will never find out our full potential because we are unwilling to engage in the hard work that is needed in order for us to unlock what we have.  In truth, potential is a word that we have given to this mysterious concept of “what we are capable of”.

Potential is actually just hard work in disguise

However, I believe that potential is much easier to explain and it’s not as mysterious as we like to make it out to be. In fact, I’m not so sure that potential is something that actually stands alone onto itself.  I actually think that potential is actually the exercise of hard work focused on a specific outcome.  As evidence, we all have experienced in our lives at one time or another where the harder we worked at mastering something the better we became at it and the more “potential” we seemed to have for that thing.

Realizing our potential takes a LOT of time

The other difficulty with recognizing our potential for a specific activity is that it is rarely something that we identify quickly.  In fact, in order to know what our potential is in something we normally have to spend months and on many things, years.  The author Robert Greene in his New York Times best-selling book titled Mastery insists that it takes roughly 10,000 hours doing something before we will see our potential for this activity present itself.  This would suggest that it easily takes an individual doing this activity every day, 8 hours a day for approximately 5 years!  No wonder most of us never recognize our potential in something, we never give it enough time to see if it’s something we have a particular talent in.  Quite frankly, we quit WAY before we’ll ever know if we have reached our potential in that given area.

Now this is not to say that we are going to be good at everything we try even though we put in the required time. Clearly we all realize that many things in life require some underlying talent in that activity in order for our potential to become evident.  That said, there are things in life where our level of potential in them will be quite limited and no matter how hard we try, we will simply not attain a level of mastery.

However, it is in those areas where we may have an identified talent, a passion and a particular interest in reaching mastery that we have the best chance of discovering our true potential in something.  And as earlier stated, this is where unbridled hard work focused on the activity at hand gets us closer and closer to our full potential everyday!

The No Budget, Budget

Posted Elite Life Warrior2 CommentsPosted in Finances

Photo by Carlos Muza

Post #21

As we all know, living an extraordinary Life is dependent upon many factors and choices.  Although not the only one, one factor that has a huge impact on our life is our ability to successfully manage our finances.  Those of us who are able to make enough money to cover our financial commitments each month and also have enough to build an emergency fund to provide some cushion, tend to have a higher level of stability in our lives than those that don’t.

Those of us who are able to pay our monthly bills and have a significant amount available afterwards, either due to making a lot more money than we have bills or because of frugal living, tend to live a much more comfortable life enjoying much more than just the basics.  Although the level of “material” life we can live is controlled to a high degree by the amount of income we make, it really is true that “it’s not what you make, it’s what you keep” that determines the quality of life that you will have financially.

The dreaded Budget

In order to put ourselves in as strong a financial position as possible, we first need to know where our money is going.  The traditional approach to that is to track each and every expense so that on a monthly basis we know exactly how much we are spending and on what.  This of course is the dreaded budget!

Although establishing a budget and adhering to it in order to save and invest money is truly one of the keys to living an elite life, most of us tend to struggle with the chore of budgeting.  We find it stifling and a ‘negative’ action, requiring way more discipline and time spent up front than what we believe we get as a result.  Personally, I avoid budgets like the plague…yet my wife and I are able to control our spending on only what we want to AND we hit our major savings and investment goals.  As a result, we enjoy a significant savings and investment rate just shy of 50% of our income (after taxes and deductions but NOT including our employer 401(k) match) while making significantly less money than our friend group.  In fact, we are on track to retire considerably earlier than the standard retirement age, unlike our friends, many of whom are doctors, accountants and otherwise high earning professionals who are prepared to go the distance.

The No Budget, Budget

So how can you control spending, save and invest a considerable amount of your income and NOT have a budget?  I know that this will sound surprising because it did to me when I stumbled onto the concept but it’s what I call our “No Budget, Budget”. Now here’s the kicker…it’s also the EASIEST thing in the World to do and it has turned out to have had the biggest impact on my financial life gar none.  I am truly convinced that had my wife and I not stumbled onto this that we’d be living paycheck to paycheck like most people.

The “No Budget, Budget” first and foremost relies on the principle that it’s important to understand what financial commitments you ‘need’ to cover and those that you ‘want’ to cover.  So the first thing you need to do is track what you spend for a consecutive three month period.  With this data in hand, you then open up a spreadsheet and on the far left column you will input large spending categories such as housing, car/transportation, food, education, phone, internet, cable, entertainment, etc.  Everything that you found yourself spending money on those past three months needs to be inputted.

Needs and Wants

Create two more columns and name them “Needs” and “Wants”.  Now here’s one of the biggest tests as to whether you’re going to be able to live an elite life or not.  Can you literally look yourself in the mirror and responsibly tell yourself which of these expenditures is a true need and which of them is a true want?  If you can stop lying to yourself financially at this point, you have the ability to turn your financial future around and I would argue your entire life.  I know, because I did this VERY THING almost 20 years ago and it literally changed the trajectory of my entire life.
Now there shouldn’t be much of a debate as to what is a Want and what is a Need so let me take some pressure off of you. Any expenses that will cause you to be legally prosecuted, cause you to starve or lose your job are Needs.  Any AND all other expenses are truly Wants. Seriously.  Although we all love television, cable and subscriptions to premium programming (sorry YouTube TV and Hulu) they are Wants.  As is our Internet expense unless we need it for our job.

I consider the cell phone an essential, due to having to communicate with work, but we’re going to talk about the “level” of what is needed. Although perhaps a Need, no one truly needs a $1,000 phone and a $200 a month cell plan. That’s turning a Need quickly into a Want.

Now that you have your three columns; (1) All monthly expenses over the past three months identified and averaged, (2) expenses identified as Needs and (3) expenses identified as Wants created and populated, we now can do the heavy lifting.  The first thing that we need to do is look at each and every expense individually, regardless of whether it’s in the Need or Want column, and make a note on the far right in the row that it’s in as to “why” it is even an expense and “why” it’s the amount that it is.  This will become a fourth column, the “Why” column.

Why

More specifically, in the Why column we want to ask ourselves “why do we need to spend the amount on this expenditure that we do?”.  We want to challenge why we need to spend $600 a month on a car when we could spend $300, or as previously mentioned, $1,000 on a cell phone when one for half as much would do the job.  This exercise is as much about validating the expense as a Need as it is reviewing whether we can accomplish the same goal with this expense if we spent less money.

Now as it relates to reviewing the expenses in the Want column, we need to be brutally honest and ask ourselves whether each and every expense deserves to take our money going forward.  When I did this exercise some 20 years ago, I was astonished as to how much money we spent on doodads and other meaningless stuff.  In addition, I couldn’t believe the amount we spent on Wants that I was willing to admit that we didn’t even need to have.  I found it to be frustrating from the standpoint that we could have been investing this amount all along versus uselessly throwing it away every month and feeling strapped because we “didn’t have enough money”.  The truth was our spending habits had held us hostage for far too long.

After you’ve finished the Why exercise, you should have a pretty good picture of a few things.  First, are your Needs really Needs in the first place?  Can you accomplish the Need in a more affordable way?  Secondly, of your Wants are any even worth spending your money on them going forward?  Of those that are, are there any alternatives where you could spend a lot less on them? (basic Internet versus a high-speed premium package, for example).

Once this is completed, you will need to reevaluate where you stand with your spreadsheet.  I’m assuming that you now have dialed in your expenses so that if it truly is a Need you know what you need to spend on it.  You’ve also now identified where you could adjust an expenditure and possibly even determined where you could get a more affordable alternative.  Perhaps you could even identify where you might have been duplicating an expense in an area such as insurance coverage.

In addition, you’ve also tightened up your Want expenditures and identified several that you no longer will be spending money on.  With all of this information in hand, you now have a “No Budget, Budget”.  You have a pretty good, albeit not exact, idea of what you will need to have monthly in order to pay for your life operating expenses.
Now how do you use your “No Budget, Budget”? Actually, at this point you need to make a pretty serious paradigm shift.  You now need to consider the amount that you have “left over” after your total Needs and surviving Wants, which I call your Future Fund, as the most important part of your finances.

In fact, this amount will now be the amount of money that you will do whatever you need to do in order to reserve up front BEFORE you allow any other funds to be expended.  These funds will be the first ones allocated, to your future, and everything else remaining is for Needs and then Wants, respectively.

Pay yourself first

Effectively what you’ve done is allowed yourself to pay yourself first and left yourself with ‘just enough’ money “leftover” to pay your bills.  Approaching your finances in this manner accomplishes a few things; First, you make sure you invest a significant amount of your money. Second, you reduce the amount of money you spend on Needs AND Wants.  Lastly, you don’t have to keep a budget because you’ve already apportioned the required amounts upfront to meet your commitments.  Therefore, there’s no need to track the expense of your funds as you have effectively already done so upfront before you spend any of them.

Although there are many ways to approach personal finance, I have found the “No Budget, Budget” approach the most effective.  Unlike the traditional budgeting process which requires ongoing effort and daily will power to follow the plan, the “No Budget, Budget” requires the effort and the commitment to the plan to be spent upfront.