According to Robert Kiyosaki, the primary differentiator between the rich and the poor is the difference between investing money and spending money.
When we first started IR.Tools, it was a money pit. We poured our life savings into it hoping it would pay off eventually. Around years 3-6, it paid off well. I remember one deal that alone netted us $100,000. Rather than increasing our standard of living, we began saving for college, buying real estate, and giving with our surplus funds. We ended up with eight rental houses in the great city of Memphis, TN. Also, note that these assets were of a different type than our business providing diversification as well. After a while competition, hiring employees, and other forces started taking their toll, and we stopped making as much money. In fact, we have lost money many months recently. As the cash decreased, the assets we bought with our previous surplus allowed us to continue our standard of living. Without those assets, you girls would not have been able to maintain your high level of involvement in sports.
Had we bought a boat, or more substantial house, or went on dream vacations, we would never have had the assets available to help us. However, this is what many people do with their bonuses, pay raises, tax refunds and other windfalls. They increase their standard of living one dollar for ever dollar they get. Don’t.
Here is a better way. In your careers and your families, you need to spend 80% of what you make. Give 10% to the church. You should save at least 10% of what you make. This 10% will fund your:
* Emergency fund
* Retirement savings
* Savings to buy assets
When you get a bonus or other windfall, purchase assets with at least 50% of it. It would be even better to invest all of it. When you get a pay raise, allocate at least 50% toward savings and investing. Commit to using 50% or less to raise your standard of living.
Assets can pay out for years. Some will outlive you, providing income for a future generation. You will always do better in the long run buying assets instead of spending now.
Here are possible assets you could consider:
* Index mutual funds
* Investment real estate
* Start a small business
* Special equipment for a company
* Land
Your home is a unique asset because it is also an expense. Buying another asset will usually produce a better return. However, improving (not repairing) will have a better return than spending money on your lifestyle and may provide some convenience or benefit you appreciate at the same time.
Commit to living below your means and buy assets with your surplus and you will see your financial strength improve.
