When you hear “live within your means,” what is your first thought?
To cut back? Eliminate? Reduce? Don’t spend? BUDGET?
Is budgeting really the road to wealth?
And how compliant do you have to be with your budget?
Is it like being on a diet?
Counting dollars as if they were calories?
Or is there a financial gym where you can gain strength and grow without the focus being on cutting back?
If you are a financial trainwreck, budgeting can help you get on track. But that is more about surviving than thriving.
If you spend more than you make, budgeting can be very helpful, but it is only one solution. One that emphasizes reducing expenses.
When you hear the word “expense,” how does it make you feel?
Say it out loud.
Does it create a sinking feeling in your gut? Does it elicit fear? Anxiety? Worry?
Expense sounds like a bad word.
Something negative.
Something to be avoided.
Something to minimize.
But your expense is someone else’s income.
And your income is someone else’s expense.
So, what good would money be without expenses?
Expense is how you utilize money.
Expense creates exchange, and exchange creates wealth.
An expense allows you to tap into other people’s gifts and abilities.
Expense can create efficiency, leverage, and even enjoyment.
It all depends on the context.
Not all expenses are created equal.
The Four Types of Expenses
I’ve written more in-depth about the four types of expenses in books like Money Unmasked and What Would the Rockefellers Do?. These include:
- Destructive Expenses: Borrowing to consume, recurring charges with no benefit, out-of-control vices. Eliminate these.
- Lifestyle Expenses: Food, shelter, clothing, utilities. Pay cash whenever you can or make sure the asset is worth more than the loan (car or home). Manage these.
- Protective Expenses: Liquidity, asset protection, trusts, insurance, and education. Address these.
- Productive Expenses: The liability required to acquire an asset (marketing, mentoring, systems, tools, developing skills, etc.). Increase these.
Differentiating expenses can change the relationship one has with budgeting and even the emotional baggage around the word “expense.” If you get a sinking feeling in your gut, or think expenses are to be avoided, reconsider the type of expense.
My suggestion is to keep adding money to a productive expense until it is no longer productive, or you do not have the capacity to handle the growth. In business, this can mean it goes beyond capacity for customer service.
Are expenses bad or good?
Depends on the type.
Three Ways to “Live Within Your Means”
This can add new color and context to the saying “live within your means.”
Through productive expenses, you may increase your means. There is more than one way to live within your means.
- Budget (cut back)
- Efficiency (keep more of what you make)
- Expansion (grow your value, reach, and impact)
Budgeting focuses primarily on cutting back and can be suffocating and onerous.
What else can your energy and effort go towards?
What is of greater impact: sticking to a budget, or being more efficient with your money?
You can’t shrink your way to wealth.
Wealth is not a game of reduction as much as it is production, impact, and value.
Instead of cutting back to live within your means, why not just increase your means?
Mindful Cash Management
Mindful Cash Management is being responsible with your finances without allowing scarcity to suffocate you. It is knowing the flow of your money and knowing when to add money to certain areas or eliminate others.
Mindful Cash Management is watching your money flow each week and making adjustments. Course corrections rather than forced corrections.
The key to accelerating results with Mindful Cash Management begins with plugging leaks.
To keep more of what you make without cutting back, you can leverage the “4 I’s to Efficiency” framework.
The 4 I’s to Efficiency
The 4 I’s to Efficiency are:
- IRS
- Interest
- Investments
- Insurance
These are the four areas where most people lose and leak money. By addressing these areas, you can take the money and intentionally allocate it to one of three areas:
- Quality of life (Yes, it’s okay to improve and live your life for today.)
- Paying off loans
- Savings (Then potentially to investments when you have enough liquidity.)
Quality of life often gets overlooked. Yet, without having a life filled with joy and rejuvenation, our energy is diminished.
You are your greatest asset. Not a stock, bond, or piece of real estate. You. Your ability to produce. Your willingness to add value.
IRS
Ninety-three percent of businesses overpay on tax. Grab my Tax Navigator to see where you might be tipping the government.
Interest
There are 3 Rs to recapture money lost to interest and institutions.
1. Restructure: You can refinance your loans. Some loans can improve your credit (installment) while others can be detrimental (revolving). You can even roll higher interest rate loans into lower interest rate loans in some instances.
Do you have a paid-off car? You could refinance that car to pay off higher interest rate loans. An installment loan (like a car loan) can improve your credit score (if paid on time).
2. Renegotiate: I got this idea the first time I moved. When I called to cancel some of the services (at that time, cable), they offered a better price. I wasn’t canceling due to price but was able to get almost 50 percent off the service, then transferred the service to my new home.
I then tried this with my credit cards. As soon as I used the word “balance transfer,” they moved me to the retention department. I was able to go from a variable rate to a fixed rate and cut the interest by 5 percent.
3. Reallocate: If you have underperforming assets or if you have something that is earning less than you are paying, it is guaranteed savings by paying off the loan.
I have a friend who was complaining about the interest rate on his business loan (6 percent), and yet he had plenty of money to pay it off in a Certificate of Deposit (CD) earning 3 percent. He didn’t want to be penalized by withdrawing early. I checked on the penalty. He would forfeit forty-five days of interest. It was worth cashing out and taking the savings long-term by paying off the loan. It created more cash flow and more peace of mind.
If paying off loans is your preference, use the Cash Flow Index to determine payment priority.
Take the loan balance and divide it by the minimum monthly payment. Only pay extra to the loan with the lowest index, or pay off the loan with the lowest index fully if you have access to capital.
Investments
Automatically save, then deliberately invest. Set up a system to capture the wealth as you find money, become efficient with your money, and save a portion of the savings.
Without a plan, expenses tend to rise to meet or even exceed the found money.
The culprit of the biggest loss in investing is ignorance.
Myths.
Misinformation.
Risk.
People lose money due to scams, chasing returns, lack of philosophy, and not knowing their Investor DNA. Risk is in the investor, not the investment.
How can you become a better investor? It begins with investing in yourself, developing skill sets around money, and improving your financial IQ.
You can be a better investor by creating a team supporting you with due diligence.
We have been sold a story that with limited time and knowledge, just rely on the long haul, and compound interest will take care of us.
We have been told to diversify (often “divorce-ifying” ourselves from the results or “diworse-ifying” by taking on things we don’t understand).
Plug Leaks and Mitigate Risk
I’d propose plugging leaks and mitigating risk. By not losing money, you will have a major advantage in creating sustainable wealth. Otherwise, chasing returns and inviting risk can lead to loss of time, money, confidence, and trust.
Downside protection is often ignored, to the investor’s peril. You can set up a trailing stop-loss that automatically cashes out your portfolio or a part of your portfolio if the market decline is beyond your level of comfort. You don’t have to participate in the downside; you can opt-out. You can protect your capital from fees and free falls.
Rather than have the volatility and risk of an investment infringe on your peace of mind, you can protect your energy (and confidence), being able to enjoy life more along the way. With less stress, you can be more productive. You can focus on value creation and earning more money rather than chasing fabricated returns with your money.
Simplify and Focus on What You Know
One of the easiest and most predictable ways to reduce risk is by removing unnecessary fees. For retirement plans, this can include legal fees, admin fees, expense ratios, 12B-1 fees, to name a few. Non-performing fees create drag with investments, costing a fortune.
We all hear about the benefit of compound interest but rarely consider the impact of compound costs. Think in terms of actual dollars rather than percentages.
The difference between 9.2 percent and 10 percent on $100,000 invested for thirty years is $340,000. You would have $340,000 more if that .8 percent is non-performing fees, a substantial cost.
Accumulation is Only Part of the Process
Accumulating money is only part of the process. Another key area to keep more of the money you make is planning for distribution today. People invest for decades without full consideration of how to benefit from the money saved. Studies show taking more than 4 percent out of a variable, volatile account can be detrimental to its very survival because of disinvesting.
Disinvesting is the process of using your money.
If the market loses 10 percent and you still take your distribution, you chip away at the principal. By simply having another option for two years, an account not tied to the market, something more stable, allows you to increase the amount to 6.5 percent instead of 4. More than a third more income from your assets if you have other options.
Whole Life Insurance as a Fixed Income Asset
You can also create a more efficient asset allocation with your fixed income portfolio. Fixed income includes debt instruments like bonds, CDs, money markets, etc.
In the short term, your best return for this portion of your portfolio are the instruments I just mentioned. Yet, any thirty-year period, whole life insurance with a participating mutual company has outperformed all other fixed income assets.
You don’t pay tax on the growth, you can access the money tax-free, and you do not have capital depreciation risk. You can also eliminate the cost of term insurance and other insurance like long-term care.
Capital depreciation risk is when interest rates fluctuate. As interest rates increase, your bonds will lose value. You’d have to sell them for less than you bought them for to compete with the new bonds at higher interest rates.
You eliminate this risk with whole life insurance. Once a dividend has been paid, it is guaranteed.
You will be at a disadvantage from a cash standpoint in the first several years to acquire these benefits, though.
Insurance
No matter how hard we try, there are things outside of our control that we may not be able to avoid. Insurance is instrumental in transferring those risks, protecting our assets, income, and mind.
Proper insurance design will lead to more bang for your buck. If you have the liquidity to handle the small things yourself, you can insure the catastrophic rather than the inconsequential.
It makes sense to self-insure, or more accurately, not insure things we can easily pay for and still sleep at night. If something infringes on our peace of mind, it may make sense to insure.
To transfer consequential risks without coming out of pocket, consider higher deductibles (car, home, health) and longer elimination periods (disability). With car and homeowners’ insurance, frequent claims lead to increased premiums or worse, coverage being dropped.
Let me reiterate: insure the catastrophic, not the inconsequential.
Embrace a New Approach to Financial Freedom
Living within your means doesn’t have to be about restriction and scarcity. By shifting your focus from traditional budgeting to more productive and efficient financial strategies, you can achieve financial freedom without feeling suffocated.
Mindful Cash Management empowers you to track your money, make adjustments, and allocate your resources in ways that enhance your quality of life, eliminate unnecessary losses, and increase your capacity for growth.
By understanding the different types of expenses and focusing on increasing productive expenses, you unlock opportunities to expand your value, reach, and impact. Coupled with the “4 I’s to Efficiency,” you can plug financial leaks and make more intentional decisions about your wealth.
“Living within your means” doesn’t have to mean a process of cutting back—it can be one of expansion and growth.
