If you want to be financially free in the future…you need to create it for yourself. Nobody is coming to save you, and nobody is going to do it for you. Remember that the idea “If it’s to be, it is up to me (you)” has never been more relevant than right now for Gen Xer’s (and everyone else) looking to fuel their future financial freedom and be in a position to cover a sustainable level of “Desired Retirement Spending” from a certain age…whether you chose to work or not.
However, one of major roadblocks to building wealth for most people is cash flow…or lack of it.
You may recall from one of my very first blogs Wealth Creation for Generation X – Introduction Part 2 that there are two non-negotiable factors if you want to be building toward future financial freedom. These are;
1) find a way to create a surplus cash flow and then,
2) use that cash flow to achieve your future financial & lifestyle goals.
Pretty simple right?…but not when 90% of people are spending everything (if not more) than they earn. Even people who budget don’t necessarily save anything…they just know where their money goes. Traditional budgeting is not fun & doesn’t work. Which is why I’m a huge believer that the absolute number one best way to budget isn’t to necessarily track everything that you spend, but instead flip the whole budgeting process on its head and pay yourself first. We call this “bottom-up budgeting”.
Bottom up budgeting to create Financial Freedom involves;
- Deciding upon your Financial Freedom goals for the future,
- Figuring out what assets you’ll need to achieve Financial Freedom (and perhaps even create Generational Wealth), see Wealth Creation for Generation X – How much is enough…really?,
- Determining what cash flow per year you’ll need to fund a wealth creation strategy to achieve this level of assets, and
- Then “taking this money off yourself”, paying yourself first and then learning to live off what is left over.
Very regularly new clients come to us with a strong desire to turn their financial situation around, get ahead, and start implementing a wealth creation strategy. They may want to buy an investment property, put more money into super, or start a regular investment plan. Combined with this they want to further reduce their mortgage, while simultaneously having more family holidays. However like most people they are currently in a breakeven position, (or small surplus / small deficit). More often than not “Bottom up budgeting” is required….Cash flow is required to be found to fund this and make it all work.
There are only two ways to create cash flow;
1) Reduce expenses (not overly exciting but often necessary),
2) Increase income while keeping expenses constant (far more exciting but easier said than done).
Of course there is a 3rd option…some combination of both.
Whilst most of us spend more than we should, there is a limit to how much we can reduce expenses. Life costs money. And it’s getting more expensive by the year. The best and most sustainable way for Gen Xer’s to build towards Future Financial Freedom and create Generational Wealth is to Create cash flow by increasing your earning capacity.
As we covered in Wealth Creation for Generation X – Protect your greatest Asset (part 1), for Gen Xer’s & Gen Y’s, your greatest asset it not your house, or your superannuation balance…your greatest asset is your future earning capacity. Not only is it important to protect that asset (via appropriate wealth protection) it’s also crucial to ensure that your “greatest asset” keeps on growing, and doesn’t plateau or go backwards.
It’s far easier (and far more motivating) to choose to save future income increases than to find cash flow by reducing current expenses…without impacting your current lifestyle. Resolve to do whatever it takes to grow your income and then use at least 50% of the extra (after tax) income to accelerate your wealth creation strategies. Most people’s experience is that over time their expenses rise to meet their income. Decide in advance to create a “wedge” between the rate at which your income increases and the rate at which your expenses increase. Use the difference to fund your future financial freedom.
So in this day and age where wages increases seem close to non-existent, how do you increase your earning capacity? And the answer is…you make yourself more valuable. How exactly do you do that? Well, you make yourself more valuable by increasing your knowledge and skills and then applying your increased knowledge and skills to add more benefit to the organisation you work for, whether that be as an employee, or alternatively in your own business if you are self employed (by adding as much value as possible to your customers/clients lives).
Ever since I was 18 years of age fresh out of secondary school, I’ve been investing anywhere from 2-5% of my income on an annual basis on personal and professional development. In the last 22 years I’ve invested a considerable amount on personal and professional development…and will continue to do so. These investments have ranged from audio tape programs (way back in 1995), a personal library full of books (now an iPhone full of audiobooks), to more recently multi day intensive courses (whether it be audio programs of these or attending in person). However it’s been said that “unless you take action, the wisdom is wasted”. Studies have shown that only 10% of people who buy a book read past the first chapter (or listen to the first section of an audio program). After buying the book or program they feel comfortable again and are no longer motivated to take action. Spending on personal & professional development is only an investment if you use the knowledge to one way or another make yourself more valuable…and as a result, to grow your earning capacity.
One of my greatest mentors over the years has been Brian Tracy. Whilst I’ve never had the pleasure of meeting the great man, his books and audio programs have had a phenomenally positive impact on my life (and no doubt tens of thousands of other people). Many years ago I learned from Brian that one of the best investments of your time and money is to increase your earning capacity. If you have a desire to create future financial freedom but feel like you don’t have the cash flow to make it happen, then this needs to be your mantra. “The best investment of your time and money is to increase your earning capacity” – and then create the Wedge.
Jim Rohn said that “Formal education will make you a living…Self education will make you a fortune.”
Your current and future desired career path will determine whether or not formal education such as an Undergraduate degree, Masters degree (or some other post graduate qualification) will make you more valuable and increase your earning capacity. In most cases it will be pretty clear what formal education is required to progress in your field. What will be less clear though, is the Self Education required that separates the top 20% of performers (who earn > 80% of the money) from the other 80% of average and below average performers (who battle it out for < 20% of the money).
One of the best ways to find out what Self Education would be beneficial for you is to seek out and speak to the people in your field who are doing what you want to do and earning the money you want to earn. What are they reading? What are they listening to? What courses have they attended? What are they doing and thinking differently that has helped them become a top performer? What do they do on a daily/regular basis? (Remember from Wealth Creation for Generation X – The Power of a Regular Investment Plan that “What you do on a regular basis matters far more than what you might do every once in a while”). Top performers in any industry would love to help others keen to learn and grow.
However, prepare for top performers to be a bit shocked though (in a good way) when you seek out their advice. Unfortunately the majority of people are more concerned with what they are going to watch on TV at night time, than with devising a strategy to grow their earning capacity and be a top performer in their industry. According to the Australian Bureau of Statistics the average Australian adult spends 13 hours per week watching TV! Not to mention another 12 hours per week on average spent surfing the internet or on social media like Facebook. 25 hours per week! Just imagine how much the average persons life would change if they only spent say 10 of those 25 hours per week on activities to make themselves more valuable…and as a result to increase their earning capacity.
Watching meaningless TV is one of the greatest wastes of time that there is and is a huge reason that the majority of people don’t achieve their financial and lifestyle goals. According to Brian Tracy here are two other major (but less obvious) wastes of time;
- Staying too long in a job/company that clearly has no future for you,
- Earning $75,000 per year for 20+ years when you could earning $150,000 or more per year (with the right combination of formal and self education).
There are not many people in the world who would willing give up half their income every year…but the majority of people are doing it unknowingly by not growing their earning capacity in the first place.
However what if you love what you do, but have progressed as far as you can in your field and tapped out your earning capacity. Well unless you want to change careers (which is not wise if you have already found what you love to do…as “Only 13% of people actually like going to work”), then if you want to grow your earning capacity and have the cash flow to fuel your Future Financial Freedom, it’s time to look at other options…in particular second income opportunities. What else can you do (in addition to your current role), to produce a part-time level income? No…I’m not talking about delivering pizzas 4 nights per week, or working Friday & Saturday nights pulling beers at the local pub…or even driving an Uber. I’m talking about working smarter, not harder…and where possible automating the process (eventually anyway). These days the best option for most people to create a second income is via an internet based business. To create and sell products or services that there is a demand for. What could you do to generate an extra $30,000+ in annual income (in addition to your current income) that could then be used to fuel your Future Financial Freedom. To get your creative juices flowing start by listening to these audiobooks;
- Crush It! – by Gary Vaynerchuk.
- Key Person of Influence – by Daniel Priestly.
- The 4 hour work week – by Tim Ferriss.
For those that are keen to invest in themselves and grow their income, in addition to the audiobooks above (which I’ve listened to at least 5 times each and will continue to do so regularly), here’s a quick list of some of the most valuable personal & professional development books, audiobooks or programs I’ve invested in over the years (and still listen to at least a few times per year);
- Success Mastery Academy (audio program) – by Brian Tracy.
- The Psychology of Selling (audio program) – by Brian Tracy.
- The Psychology of Wining (book & audio program) – by Denis Waitley.
- Get the Edge (audio program) – by Tony Robbins.
- 7 Habits of Highly Effective People (book) – Stephen Covey.
- From Good to Great (book) – by Jim Collins.
- How to Win Friends and Influence People (book) – by Dale Carnegie.
- Where’s My Money? (book) – by Jason Cunningham (I may be a bit biased given Jason is one of my business partners…but this book is still one of the best personal finance books I’m ever read).
- Sell Your Thoughts (book) – by Matt Church, Peter Cook & Scott Stein.
- Start with Why (audio book) – by Simon Sinek.
- Purple Cow (audio book) – by Seth Godin.
- Eat That Frog! (audio book) – by Brian Tracy.
- Toastmasters (multiple weekly/fortnightly public speaking clubs).
- Persuasive Presentation Skills Masterclass (2 day intensive course) by Michelle Bowden (hands down the best public speaking & presentation skills training I’ve ever done).
What have you read, listened to or done over the years that has increased your earning capacity? I’d be very keen to hear what has enabled you to make yourself more valuable (please share in the comments and pass your best ideas along to others).
To Earn more, you must Learn more (whether via formal or Self Education). Commit to life-long learning that is relevant to your field. Turn that life-long learning into a continual increase in earning capacity. And from the continual increase in earning capacity, create the “wedge” and use this to fuel your future financial freedom.
Matthew Morrison is the Director of Wealth Advisory at The Practice, a Personal Wealth Advisory & Business Advisory firm based in Parkville, Melbourne. Matt along with The Practice team are committed to and passionate about developing & implementing wealth creation strategies for clients to enable them to Fuel their Family’s Future (while protecting them along the journey).
Matt and The Practice team can be contacted via http://thepractice.com.au or (03) 8888 4000.
Disclaimer – the above views and ideas are general advice only and are purely the opinions of the author. It’s important that you seek professional advice tailored to your needs before taking action regarding your financial future.