Don’t Cut Expenses. SPEND! SPEND! SPEND!

If I hear one more financial advisor tell their audience to “cut your expenses” or “live below your means,” I may just do something I will later regret.

Personally, it’s insulting to me, and it should be to you too, if a financial “expert” thinks we are so unconscious and ignorant that the only way we could possibly reach financial security was by cutting back, reducing what we spend, and living a life less than what we really want.

That is incredibly LAZY advice. It’s safe advice for the so-called “advisor” because it sounds logical and it won’t cause any flack for the advisor. It’s lazy because the advisor doesn’t have to think.

Plus, who wants to live below their means? It does not inspire me. I think it kills the spirit and keeps people poor.

Cut vs. spend

Not only is “cut your expenses” lazy advice, it is also incorrect advice if you truly want financial security for life. Consider this: we own a duplex that we rent out to two families. In any rental property, as in any business, our three key financial components are:

1. income

2. expenses

3. debt

So, what are the first questions we should ask when it comes to income, expenses and debt?

Income. Very simply, “How do I increase my income?” Whether it’s our rental property, our business, or our personal household, oftentimes the solution to a financial problem is to increase our income. In real estate, ways to accomplish this are by lowering our vacancies, introducing alternate streams of income (such as laundry), and increasing rents.

Expenses. Most people automatically ask, “How do I cut my expenses?” Wrong question. The better question to ask is, “How do I spend my money more effectively to increase the value of my property?” Another option is, “How do I spend my money more effectively to increase the value of my business?” (And yes, this is the question to ask when it comes to our personal finances as well.)

For example, we decide the water bill of the rental duplex we own is too high, so we choose to cut that expense by cutting back on the amount of water we use on the property. As a result of the water cutback, our trees and shrubs start dying. Now our tenants are unhappy because the landscape is brown and ugly.

Instead of cutting expenses, the better idea can be to spend money. As with a property I owned, instead of cutting back, I spent more money on additional trees and shrubs. This expenditure increased the curb appeal and made the property more attractive to the residents and prospective tenants.

Because this property now had such a lush look and feel, more and more people wanted to live there. This allowed me to increase the rents. Increased rents equals increased value of the property.

“How do you spend money more effectively to increase the value or income,” is the exact same question you should be asking of our personal finances. “How can I spend, or use, my money to make more money?”

This is what I mean when I say don’t live below my means, instead expand my means.

Instead of focusing on reducing your expenses (a scarcity mindset that keeps you poor), focus instead on increasing your income. Increase your income — not by you working harder, but by spending money that then works hard for you. It takes no brains to cut expenses. Anyone can do that. It takes creativity and a little bit of guts to figure out how to spend your money to make money. That’s financial intelligence.

Debt. The question to ask is, “How do I get the best financing terms?” Too many people focus on the price of the investment, when the deal may be found in the terms, such as the interest rate, length of the loan, interest-only versus 30-year fixed, recourse versus non-recourse. (BTW, if you don’t know the definitions of any of those terms, just look them up — learning the lingo is one of nine tips to become an expert real estate investor.)

More than once, I have paid full price in exchange for terms that allowed me to get more cash flow, more time if repairs were needed, or more flexibility for future usage of the property. It’s the financing terms more than the price that can make or break a deal. The beauty of debt (good debt) today is that it is cheap. The interest rate of a rental property in 1989 was 18%. And we still made it cash flow.

As a reminder, debt isn’t necessarily a four-letter word. There are two types of debt: Good debt is debt you use to buy assets with (assets are things that put money in your pocket whether you work or not). Bad debt is debt you use to buy liabilities (liabilities are things that take money from your pocket).

The power of positive cashflow

A quick word on cash flow, since I just mentioned it and some of us may not be familiar with the concept.

When I’m investing, my first and primary focus is cash flow. Cash flow is simply the income we receive from an asset each month, quarter, or year, minus the expenses required to maintain the asset.

For instance, if we invest $25,000 in a new gourmet food business and receive $400 a month in net income (your take-home after expenses, interest and taxes), that $400 is our cash flow. If we put $20,000 down to purchase a $100,000 rental property, and, after paying the mortgage and operating expenses, collect $100 per month in rental income, that $100 is cash flow.

It’s money that flows right into our pocket.

Cash flow leads to freedom

Ultimately, cash flow leads to financial freedom or financial independence.

When I’m financially independent, I’m free to do what I want, whether it’s to have a life of leisure or pursue a new business adventure. I am free to be with people I choose. I’m free to set the schedule I want. My time is truly my time.

Freedom means I have more choices. And I like choices.

If we had a choice between flying coach or flying first class, which would we choose? Most people don’t have that choice. They fly coach because that’s all they can afford.

If we had a choice between eating at a taco stand or a five-star restaurant, which would we choose? It depends on what we are in the mood for. (Personally, I’d probably choose the taco stand!).

The point is that with financial freedom, we have the choice!

And as long as a person has to work, he or she is not free. We may choose to work, but that is a very different thing from having to work. If A person has to do something every day to generate money to live on, then he or she is not free.

Positive cash flow is money that comes in every month whether I work or not. My assets throw off positive cash flow every month, whether I’m working or not. And that money goes straight into my pocket.

My number-one goal was to get more cash flow coming in than was going out for living expenses. Once I did that, I became financially free. My assets and money work for me, instead of me working for money. And trust me, it’s the best way to live.

How do I know when I am financially free?

If we or our spouse stopped working right now, how long could we survive? The average person cannot survive more than three months.

Financial freedom is not about amassing millions of dollars to live off of. It is simply having more money coming in every month in cash flow from our investments, or our business, than is going out in living expenses. And then from there, we grew it and grew it and grew it.

Real estate isn’t the only path

Just because real estate is my favorite asset type, doesn’t mean it has to be only that one. Be creative — there are plenty of ways to create cash flow.

For example, in my book, "Cash Flow," I share a story about a woman who loved to spend money on designer handbags. She did not stop buying these handbags to save money. Instead, she realized that all of her friends wanted to borrow her handbags, so she decided to rent them out. Now, she has cash flow coming in each month from her rental-handbag business.

And when some partners of mine wanted to self-publish an eBook online, they created a 20-page document on how to do this and turned it into an eBook. Now, they make about $100 to $200 per month selling this eBook online.

To be financially-free, think about our area of expertise. What we can offer to expand our means and increase our cash flow?

Take some time to think about our future. Even if we are struggling with finances right now, know that by being creative, learning about money and taking action, it is possible to enjoy financial freedom in the years to come.

It’s time to spend money!

So, the real key to happiness? The key to having a secure and financially healthy life is to Spend! Spend! Spend!

ESCAPE THE RAT RACE!

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