RPF-0029-The_Iron_Law_of_Wealth_Building
00:00:00.000 | Radical Personal Finance, Episode 29.
00:00:06.760 | On today's show, the iron law of wealth building.
00:00:11.360 | I guess I should say the iron formula of wealth building.
00:00:15.140 | The only three topics, the only three variables that you can adjust to ensure your long-term
00:00:21.920 | wealth.
00:00:22.920 | Welcome to the Radical Personal Finance podcast for today, Monday, July 28, 2014.
00:00:44.800 | I am your host, Joshua Sheets.
00:00:46.960 | Thrilled to be back with you.
00:00:49.160 | Feeling a little bit better, not quite back at 100%, but a little bit better.
00:00:54.120 | I couldn't stand to stay away from you any longer.
00:00:56.120 | I figured I got to get you a show, got to get you a show.
00:00:58.640 | Today, we're going to have a show on wealth building, my favorite.
00:01:07.560 | It really was hard to be away.
00:01:14.280 | I really look forward to recording these shows.
00:01:16.400 | I enjoy doing it.
00:01:19.640 | I just love doing it.
00:01:21.200 | Being out and being sick last week to the point where a couple days I could barely even
00:01:24.720 | speak and usually I would roll over in bed.
00:01:27.960 | What happened was that I just got run down as far as the amount of time.
00:01:31.960 | I was staying up too late, getting up too early.
00:01:34.160 | I got a lot of fun, exciting projects that I'm working on.
00:01:37.640 | When I should quit and go to bed, I just, "Oh, just a little bit longer, a little bit
00:01:41.800 | longer."
00:01:42.800 | A couple days in a row of going to bed at 11, getting up at 6, going to bed at 2, getting
00:01:47.160 | up at 6, going to bed at 12, getting up at 5, going to bed at 1, getting up at 7.
00:01:53.800 | These don't work for me.
00:01:56.440 | You would think that at this point in my life I would be smart enough to say no and to go
00:02:02.360 | to bed and force myself to do it.
00:02:04.440 | I'm just trying to make progress on some projects that I've got going on.
00:02:08.800 | Well, anyway, I didn't do it.
00:02:11.760 | I didn't do what I should have done, which was listen to my wiser self and go to bed.
00:02:19.240 | Today we are going to be ... We're back in the saddle.
00:02:24.400 | Last week was pretty challenging.
00:02:25.400 | There were a few days when I would wake up in the morning and I'd try to say something
00:02:29.360 | and I couldn't even make my voice go.
00:02:31.760 | Then I'd go get a cup of tea and after a little bit I could get some sounds to come out.
00:02:38.600 | It's certainly sobering when you recognize that none of us are invincible.
00:02:45.200 | It's so easy to ... I sold a lot of disability insurance over the years and I'm convinced
00:02:49.000 | that I'm not invincible.
00:02:50.720 | But in the past when I was talking about disability insurance I would never understand why people
00:02:55.120 | did not recognize that they weren't invincible.
00:02:58.120 | Then now I think it's experiences like this that help you to recognize that you're not
00:03:06.200 | invincible.
00:03:07.200 | You've got to take time, as Stephen Covey would say, to sharpen the saw, to go to bed
00:03:11.160 | early and get a full night's sleep and stay healthy and active because you can't help
00:03:15.360 | anybody if you're flat on your back in bed.
00:03:18.200 | You've got to be up and active to be able to help anybody.
00:03:23.000 | So we're back at it today.
00:03:24.360 | Today we are going to be talking about my formula for wealth building, or as I grandiosely
00:03:30.720 | put it in the introduction, the iron formula of wealth building.
00:03:36.560 | I'm not sure if this is something that I made up or if this is something I stole from somewhere
00:03:40.760 | so long ago that I can't remember it.
00:03:43.120 | I really have never heard many people talk about it this way, and I'm sure others have.
00:03:48.640 | There's nothing new under the sun.
00:03:49.640 | I don't expect to necessarily have an original idea, but I can't attribute it to anyone because
00:03:53.840 | I just kind of figured it out for myself.
00:03:56.680 | Although again, if I've stolen this from you as an author or something, forgive me.
00:04:01.880 | But I learned this formula by doing financial planning it for myself and for others.
00:04:09.320 | And it's very simple, and it's all based upon the two financial statements that we've talked
00:04:12.640 | about.
00:04:13.640 | If you haven't listened to episode 22 and episode 26, episode 22 was an introduction
00:04:20.200 | to the balance sheet, and then episode 26 was an introduction to the cash flow statement,
00:04:24.680 | how to create them for yourselves.
00:04:26.480 | I would encourage you stop and go listen to those shows.
00:04:29.360 | And before you listen to this show, create those two financial statements for yourself.
00:04:33.800 | So go to RadicalPersonalFinance.com/22 or /26 and you'll be able to hear those shows
00:04:41.600 | and create your own personal financial statements.
00:04:44.360 | And then look at them and think about them as we're walking through today's show.
00:04:49.880 | Because in reality, I'm going to do nothing more than just simply walk through how these
00:04:55.400 | interact with each other, but show how this leads to wealth.
00:05:02.000 | So when you understand the workings between financial statements, whether that's business
00:05:05.880 | financial statements or personal financial statements, then it kind of solves all the
00:05:10.560 | things you're trying to solve.
00:05:12.440 | And so here's what I would say, here's how I would prove that my formula for wealth works.
00:05:18.680 | First of all, how are we defining wealth?
00:05:19.680 | In this sense, we're talking about financial wealth.
00:05:21.480 | So financial wealth is going to be something that's going to show up on the balance sheet.
00:05:25.600 | The balance sheet is made up of assets and liabilities.
00:05:28.000 | And the financial assets are listed with a financial number.
00:05:31.620 | So if you tell someone, I want to be wealthy, what that means is, if you're talking about
00:05:35.600 | financial wealth, what that means is we're going to increase the net worth that's listed
00:05:42.200 | on the balance sheet.
00:05:43.680 | Now obviously, there are other kinds of wealth.
00:05:45.640 | I would consider someone who has-- I'm the youngest of seven kids.
00:05:50.040 | I would consider my father to be extremely wealthy, having the love of seven children,
00:05:57.320 | even if he didn't have a dollar saved.
00:06:01.080 | And I would encourage you to always consider those things, the financial and the non-financial
00:06:05.800 | aspects of life and of wealth.
00:06:08.240 | But in today's show, we're going to focus mainly on the financial wealth.
00:06:12.080 | So being financially wealthy is defined as having a high net worth.
00:06:22.080 | That's it.
00:06:23.080 | Now high is a relative term.
00:06:24.080 | So we could insert $1,000 net worth, $100,000 net worth, $1 million net worth, or $1 billion
00:06:30.560 | net worth.
00:06:31.840 | You can determine the scale that we're going to use.
00:06:36.080 | To the person who is just getting started in life-- I remember the first time I had
00:06:40.480 | $1,000 saved, that was pretty exciting.
00:06:42.360 | I remember the first time I had $10,000 saved, that was pretty exciting.
00:06:46.080 | Every stage along life is exciting.
00:06:48.520 | And then to one person, they're first excited when they can save their first million dollars.
00:06:53.800 | But how does the money get to be listed on the net worth statement?
00:06:58.200 | How does it actually show up at the bottom?
00:07:00.560 | Well, it gets there off the cash flow statement.
00:07:02.680 | So the net worth statement is a snapshot in time.
00:07:06.200 | And the cash flow statement is listed as over an accounting period.
00:07:11.000 | So if you look at your net worth statement, you have a date.
00:07:13.440 | So let's say today is July 28, 2014.
00:07:16.540 | You can do a snapshot.
00:07:17.900 | My net worth as of 3:01 PM as I record this show on July 28, 2014 is x dollars.
00:07:25.120 | Now at 302, that may change if some of my net worth is invested in volatile assets,
00:07:30.960 | such as publicly traded stocks that I can go and I can check to see what their valuation
00:07:35.540 | is.
00:07:36.540 | And maybe at 303 or 315, that may be slightly different than it was when I originally made
00:07:43.160 | the balance sheet.
00:07:44.720 | But it's good enough for now.
00:07:46.200 | But the cash flow statement is over a period of time.
00:07:48.120 | So the cash flow statement is showing over what the accounting wonks would say, an accounting
00:07:52.240 | period.
00:07:53.240 | Usually this would be either a year or a quarter.
00:07:55.880 | Those would be the two most-- and business would be the quarterly.
00:07:58.560 | And for us, maybe we're talking about the annual or the monthly, depending on which
00:08:02.360 | one we're looking at.
00:08:03.820 | So I don't care which one you use.
00:08:04.920 | I usually prefer annual numbers.
00:08:07.480 | But the way the money gets onto the balance sheet is it has to show up at the bottom of
00:08:11.000 | the cash flow statement as surplus.
00:08:12.920 | So remember, the cash flow statement is inflows minus outflows equals a surplus or a deficit.
00:08:19.320 | That's it.
00:08:20.320 | So in order for the money to show up on the net worth statement, we've got to create a
00:08:23.760 | surplus from the cash flow statement.
00:08:25.960 | And if we're going to build wealth from one accounting period to the next, let's say one
00:08:29.720 | month to the next, then we've got to make sure that there is a surplus at the bottom
00:08:33.820 | of the cash flow statement.
00:08:35.640 | So what this leads you to is understanding that inflows minus outflows equals surplus.
00:08:40.700 | Surplus leads to wealth.
00:08:42.600 | Then that uncovers really the only three levers that we can adjust, the only three levers
00:08:49.560 | that we can press on to affect the ultimate wealth that we wind up with.
00:08:56.360 | And those levers are we can adjust the inflows, we can adjust the outflows, and we can adjust
00:09:05.260 | what happens with the surplus.
00:09:07.180 | Let me talk about deficits for a moment.
00:09:09.780 | This is no different if we're talking about deficits.
00:09:12.500 | So let's say that we did run the cash flow statement.
00:09:14.420 | We have inflows minus outflows equals a deficit.
00:09:17.300 | Well, we can only adjust the inflows or the outflows to reduce the deficit.
00:09:21.780 | And that's going to be step one.
00:09:23.740 | If we have a deficit, we have a problem.
00:09:25.840 | But we need to look at it and say, is this a temporary deficit or is this a structural
00:09:30.280 | deficit?
00:09:31.280 | And I'm sorry for using all the big words, but I'm trying to use the accounting words
00:09:37.040 | to kind of disconnect and decouple this from this financial conversation from all the normal
00:09:44.640 | emotionally charged words that exist around money and people's finances.
00:09:51.800 | Now the idea of we're going to go on a budget makes it a little sound a little bit less
00:09:55.960 | difficult to say we're just going to reduce the outflows than it does to say we're going
00:10:00.600 | to go on a budget.
00:10:01.980 | So I try to use the accounting words or the more precise words sometimes just to drive
00:10:07.040 | the point home.
00:10:08.040 | And then if you want to go and use the emotional words, that's fine.
00:10:11.520 | But if there's a deficit, we've got a problem.
00:10:13.320 | So we look and say, is this a temporary deficit or is this a structural deficit?
00:10:18.360 | So example, you are a college student going to college.
00:10:21.460 | You're not working for income.
00:10:23.380 | You are studying in your classes and you are borrowing money on student loans to pay for
00:10:27.920 | school.
00:10:28.980 | Do you have a temporary deficit or do you have a structural deficit?
00:10:32.640 | You have a temporary deficit.
00:10:35.580 | You're a college student.
00:10:36.800 | So we know that that's going to change.
00:10:39.240 | We know that something's going to change.
00:10:40.480 | This would be what an entrepreneur would face when an entrepreneur is starting a business
00:10:44.520 | and they're beginning their business.
00:10:46.020 | They know they're probably going to be operating in a deficit for a period of time.
00:10:51.280 | And deficit is not necessarily a problem as long as it's a temporary deficit, whether
00:10:57.160 | this is applied to individuals or to nations.
00:11:00.080 | It's not necessarily a problem that a country has a deficit if it's a temporary deficit.
00:11:05.480 | The United States of America has had deficits in the past and has deficits currently.
00:11:10.600 | But then the problem is only if they're structural deficits.
00:11:14.040 | If they're just temporary, hey, for this period of time, our expenses have exceeded our income,
00:11:21.160 | then that can be fine.
00:11:22.840 | Again, I'm in the middle of starting some new businesses.
00:11:25.880 | My expenses are exceeding my income.
00:11:28.800 | This is not necessarily a problem unless that is going to be a long-term thing.
00:11:35.080 | But if it's a structural deficit, my expenses are consistently exceeding our income and
00:11:40.680 | there's not a clear event on the horizon at which those times are going to change, now
00:11:44.920 | we have a problem.
00:11:45.920 | We have a more significant problem.
00:11:48.520 | And so if it's a deficit, what do we have to change?
00:11:51.480 | Well, we can adjust the inflows or we can adjust the outflows, and probably we're going
00:11:56.480 | to do both.
00:11:58.160 | So that's probably going to be the most effective plan is to adjust the inflows and adjust the
00:12:02.640 | outflows.
00:12:06.280 | What is Dave Ramsey's plan?
00:12:08.440 | Work extra jobs, adjust the inflows, cut all your expenses, adjust the outflows.
00:12:14.280 | So all we're doing is adjusting inflows and outflows and we have a deficit.
00:12:17.660 | So let's set aside the issue of deficits because I'm going to cover that in its own show as
00:12:21.960 | far as what to do.
00:12:23.280 | But one more thing on deficits.
00:12:26.160 | Even when we cut deficits and even the way that we cut deficits, it's all going to come
00:12:30.080 | back to this inflows, outflows, and surplus.
00:12:33.640 | A rational approach to looking at deficits should say, well, guess what?
00:12:38.560 | I'm going to refinance my debt to get it at a lower rate.
00:12:41.280 | Well, that cuts my outflows because it reduces my interest expense.
00:12:44.520 | I'm going to choose to pay off my debt because by paying off my debt, I'm going to get a
00:12:48.600 | greater return on my surplus because there has to be surplus to pay off debt.
00:12:54.160 | I'm going to get a greater return on my surplus by paying off debt than I would if I invested
00:13:03.200 | it elsewhere.
00:13:05.240 | We'll talk through that as far as the financial and non-financial considerations of that.
00:13:09.280 | But ultimately, it all just comes down to inflows and outflows.
00:13:13.120 | Let's assume that there's a surplus now.
00:13:14.960 | And let's ignore debts and deficits and all that stuff for another day.
00:13:19.040 | The three levers that we have to push are inflows, outflows, and the investment of surplus.
00:13:26.880 | Now I'm going to add another kind of sub-lever.
00:13:30.440 | We can adjust the size and the characteristics of our inflows.
00:13:38.480 | We can adjust the size and the characteristics of our outflows.
00:13:45.000 | Or we can adjust the size measured in rate of return and the characteristics of our investments.
00:13:52.640 | And into those three kind of adjustments, I can fit every single financial planning
00:13:59.520 | article, book, essay, anything that, you know, suggestion, advice, anything that people have
00:14:05.560 | to say.
00:14:06.800 | Because a lot of it is just differentiation.
00:14:09.480 | If you understand that wealth is only going to come by intelligent investment and growth
00:14:14.500 | of surplus, then you see through the smoke and mirrors of one person saying, "Cut expenses,
00:14:20.400 | cut expenses, cut expenses.
00:14:22.280 | Inflows don't matter."
00:14:23.280 | And the other person saying, "It's stupid for you to worry about cutting expenses.
00:14:27.000 | Make sure you just focus on your inflows and earn more money."
00:14:28.880 | No, mathematically, they both matter.
00:14:31.840 | And the person who's just saying, "Cut expenses," would do better if they had focused on cutting
00:14:36.480 | expenses and increasing inflows.
00:14:38.840 | And the person who says, "Expenses don't matter," no, mathematically, they do.
00:14:43.080 | But you would do better if you increased your inflows and you decreased your outflows, decreased
00:14:47.000 | your expenses.
00:14:48.360 | So I'm not mad about all this stuff.
00:14:50.680 | I just laugh when I see people make these statements.
00:14:52.800 | Now, what they're usually focusing on is the, what they're usually focusing on is going
00:14:58.160 | to be the behavioral characteristics.
00:15:03.320 | So for example, maybe somebody is much more motivated to say, "It's important to me that
00:15:07.560 | I drink my Starbucks coffee every day.
00:15:10.320 | And in exchange for that, I'm going to go ahead and work more at another job."
00:15:14.920 | But work more at another job, that may be fine for some person.
00:15:19.400 | But for another person to say, "I don't want to work more at another job, and I'll just
00:15:22.000 | cut my Starbucks coffee."
00:15:23.360 | Neither of them is wrong.
00:15:24.360 | They're both right.
00:15:25.360 | The only three things that we can adjust, the size and characteristics of inflows, the
00:15:30.560 | size and characteristics of outflows, and the size or rate of return and characteristics
00:15:35.440 | of the investment of the surplus.
00:15:38.360 | So everything falls into that.
00:15:40.680 | So when I think about financial planning, or someone asks a question, I immediately
00:15:48.000 | think, "Where am I on this formula?
00:15:49.880 | Inflows, outflows, or surplus?
00:15:51.720 | What am I dealing with?
00:15:52.720 | Inflows, outflows, or surplus?
00:15:53.720 | Inflows, outflows, or surplus?"
00:15:56.080 | And this just helps me to kind of isolate what we're focusing on.
00:16:00.080 | You can't do it all at one time, I don't think.
00:16:03.040 | You can't really do it all at one time.
00:16:04.960 | But you can focus on these things concurrently.
00:16:11.480 | You can do one, and then you can switch your attention to the other.
00:16:15.320 | The human brain can do a lot of planning in these concurrently, even if we can't necessarily
00:16:20.680 | do them both at the same time.
00:16:23.160 | I want to introduce two other concepts.
00:16:24.960 | Or not introduce, but then bring in two other concepts that we can then apply to this formula
00:16:29.880 | and then walk through a number of examples of how we can use this.
00:16:34.280 | Now that we've created the personal financial statements, how we can use this way of thinking
00:16:38.800 | about this formula to help us to guide our own financial plan.
00:16:44.720 | So if I were doing this for a client, I could use this formula with a client.
00:16:48.880 | Or this is one where doing it for yourself is really powerful.
00:16:52.960 | So the other two things are compounding and leverage.
00:16:57.120 | So the first thing is compounding.
00:16:59.160 | Everyone knows about, or I hope you know about the importance of compounding.
00:17:03.040 | I shouldn't assume.
00:17:04.160 | I should do a show on compounding and just to show why it's so valuable.
00:17:08.120 | But compounding is, as Albert Einstein, didn't he say, there's a quote, an Einstein quote
00:17:14.360 | that says, "Compounding is the eighth wonder of the universe."
00:17:16.680 | Something like that.
00:17:17.920 | But the idea of compounding is very simple.
00:17:19.760 | And I prefer to use non-financial examples.
00:17:22.800 | But the focus of compounding is if you plant one grain of corn in the ground, then that
00:17:31.080 | grain of corn will grow, assuming that that seed is fertile.
00:17:36.360 | That grain of corn will grow into a corn stalk, which will produce one head of corn, or one
00:17:41.180 | ear of corn, which will have many more kernels than the one that you put in the ground.
00:17:47.120 | So I mean, that's a powerful example.
00:17:49.260 | If you do that each year, if you do that in the first year, you have one kernel of corn,
00:17:53.400 | you get an ear of corn.
00:17:54.880 | You shell that corn, now you have many hundreds of kernels of corn.
00:17:58.440 | You plant those many hundreds, now you probably have many hundreds of thousands of kernels
00:18:03.360 | that result.
00:18:04.360 | That's how compound interest works.
00:18:06.280 | Compounding works in every area of life.
00:18:09.000 | So we want to look at that formula and we want to say, where can we apply compounding?
00:18:14.680 | So most people think of applying compounding to the investment of the surplus of their
00:18:19.560 | wealth.
00:18:20.560 | So they say, well, if I'm going to invest the money, I'm going to invest the money in
00:18:22.920 | stocks and it's going to grow over time.
00:18:24.920 | Yes, it is.
00:18:26.360 | But where else can we apply compounding?
00:18:28.600 | Can we apply compounding in our inflows?
00:18:32.680 | So can we apply compounding to the way that we earn a living and to the salary that we
00:18:38.280 | earn, to the amount of money that the marketplace rewards us with?
00:18:43.760 | Can we apply the idea of compounding to that?
00:18:46.520 | And can we compound that at a faster rate otherwise?
00:18:50.960 | And I'll come back to that in a moment and review that in depth.
00:18:55.440 | The second thing of the concept is leverage.
00:18:59.120 | So leverage can work for us or leverage can work against us.
00:19:03.800 | And compounding can work for us or compounding can work against us.
00:19:07.200 | If we're deeply in credit card debt and we have a substantial credit card balances on
00:19:13.240 | which we're paying relatively high interest rates, then we have leverage working against
00:19:18.520 | us because we're in debt and that leverage is compounding against us where the interest
00:19:23.440 | on those credit cards are compounding as time goes on.
00:19:27.920 | But we can also apply leverage to other areas of life.
00:19:32.000 | We can apply leverage to our inflows, apply leverage to our outflows, and apply leverage
00:19:36.580 | to the growth of our investments, of our surplus.
00:19:41.140 | And we can do this in both financial and non-financial ways.
00:19:43.680 | Then we can get compounding working on our side.
00:19:47.080 | So if you understand these flows, remember there's no net worth that's going to grow
00:19:55.680 | without having an excess, a surplus, coming from the cash flow statement.
00:20:00.400 | So we've got to grow the balance sheet based upon the cash flow statement.
00:20:03.480 | So look at some examples here.
00:20:07.200 | And I want to use a couple of examples that most people may be thought of and then give
00:20:10.480 | some more out of the box examples that you may not have thought of.
00:20:14.760 | Why is it that many people recommend going to college?
00:20:18.800 | You read stories and many people are recommended to go to college because going to college
00:20:21.920 | increases your lifetime earnings.
00:20:23.840 | If you read the charts, the charts are all crystal clear that the total amount of lifetime
00:20:29.480 | earnings on average across the population is based, has a direct correlation to the
00:20:37.200 | level of education.
00:20:38.880 | So a high school dropout has the lowest lifetime earnings.
00:20:42.120 | A high school graduate has the next amount of lifetime earnings.
00:20:46.480 | A bachelor's degree certificate for university has the next highest, then a master's, then
00:20:54.120 | a PhD.
00:20:55.820 | So the charts are very clear.
00:20:57.680 | And so the idea, most people are doing this maybe subconsciously, but they're applying
00:21:07.480 | this formula and the way that these things work, they're applying these formulas to their
00:21:12.560 | financial planning suggestion.
00:21:14.040 | And they're saying, you should in the beginning of your career, assuming that college is going
00:21:18.720 | to have an impact on your income, with that assumption, you should in the beginning of
00:21:23.560 | your career, you should run a deficit if you need to.
00:21:26.320 | So you're going to run a deficit in your budget where your outflows are higher than your inflows
00:21:31.280 | in order to grow your salary higher.
00:21:33.600 | And then you're going to have the advantage of that salary will be growing and compounding
00:21:37.720 | throughout time, throughout your lifetime.
00:21:41.080 | So you're going to apply financial leverage through the use of a student loan.
00:21:44.760 | And you're going to do that so that you can raise the amount of your inflows.
00:21:49.120 | And then by raising the amount of your inflows so substantially, you're going to wind up
00:21:52.920 | to be wealthier over time.
00:21:54.940 | So by converting it into the formula, you can understand where the problems come in.
00:21:59.680 | So problem number one comes in, what if the deficit is too high?
00:22:04.640 | And so what if the leverage is too high and it doesn't result in higher earnings?
00:22:08.440 | This is a problem many college students and college graduates face.
00:22:11.880 | I borrowed a bunch of money, I owe $100,000, and I now have a career that's not resulting
00:22:17.440 | in higher inflows.
00:22:18.920 | And because my career is not resulting in higher inflows, then I don't have sufficient
00:22:23.280 | inflows to cover the amount of the debt.
00:22:26.580 | Or if I do have sufficient inflows to service the debt, I don't have any surplus on top
00:22:31.160 | of it.
00:22:32.160 | And so I'm constantly left right scraping bottom.
00:22:34.800 | And this is an unpleasant place to be when it comes to financial planning.
00:22:41.080 | So you can see what you need to make sure of if you're going to do that, if you're
00:22:43.760 | going to use leverage, financial leverage, to go to college.
00:22:47.800 | And you're going to borrow money and you're going to take on that deficit.
00:22:50.000 | You need to make sure that you're going to do that in a way that it's going to actually
00:22:54.120 | result in higher inflows.
00:22:56.840 | So people are intuitively using this formula when they're making the college decision.
00:23:06.380 | Now why do we pay off consumer debt?
00:23:07.840 | Well, we pay off consumer debt to free up cash flow and save on interest expense.
00:23:12.080 | So by paying off consumer debt, we free the cash flows, so we lower the outflows, and
00:23:17.200 | then both, I'm not sure what the word would be, both nominally and across the board, both
00:23:23.280 | in the aggregate and then both on the specific because we lower the interest expense and
00:23:27.760 | also across the board because we lower that cash flow expense and we have our freedom
00:23:32.320 | of cash flow coming back with us.
00:23:35.360 | So, I mean, that's it.
00:23:39.120 | That's the whole point of paying off consumer debt is because as long as we have the consumer
00:23:43.160 | debt, we have assets that are going down in value, so that's not working.
00:23:46.700 | So we need to build a surplus up and we need to increase the assets that are going up in
00:23:50.160 | value.
00:23:51.160 | And the only way we can do that is if we can generate a higher surplus.
00:23:54.200 | We pay off the consumer debt to generate surplus in our budget to build wealth.
00:23:58.760 | So I hope this is not too repetitive, but I want to give some more examples because
00:24:03.080 | with these concepts of inflows and outflows and rate of return and then compounding and
00:24:08.760 | leverage with these tools, I think you can build some amazing futures.
00:24:17.000 | We can build amazing futures for people.
00:24:19.080 | Now you can't escape math.
00:24:20.960 | The math still works.
00:24:22.520 | It works whether you want to admit it or not.
00:24:26.360 | Acknowledging it doesn't really matter.
00:24:27.360 | It doesn't matter whether you acknowledge it.
00:24:29.280 | It's still going to be -- the math is still going to be there functioning.
00:24:32.120 | So it's better to not fight it and just understand it and then focusing on optimizing.
00:24:37.140 | So if you're looking at your personal cash flow statement and your personal balance sheet,
00:24:41.720 | what you're going to do is apply the system of thinking and you can optimize each and
00:24:45.400 | every part of the equation.
00:24:47.680 | So let's start on the cash flow statement.
00:24:49.840 | You can optimize your inflows.
00:24:51.200 | Now remember, I added two variables.
00:24:54.160 | You can optimize the size and the characteristics of your inflows.
00:24:59.840 | So first of all, you can optimize the size.
00:25:02.340 | Most people -- I did a show in the past.
00:25:05.800 | I think it was called You're 100% Responsible for Your Income, which is kind of funny.
00:25:09.920 | It seems to be one of the more popular shows of the ones that I recorded a year ago.
00:25:15.360 | It was one of those that I just sat down and just dashed off in a day.
00:25:18.760 | And I'm kind of embarrassed of its popularity because I just sat it down and just did it
00:25:22.480 | off the top of my head.
00:25:23.640 | But that was one of the most listened to episodes of the show.
00:25:29.000 | But in that -- I believe it was in that episode, I talked about the importance of increasing
00:25:33.480 | your income, of compounding your income.
00:25:35.040 | And I talked about Brian Tracy's 1000% formula.
00:25:39.080 | And the fundamental idea behind the 1000% formula is that if you'll focus on compounding
00:25:44.000 | -- on growing your income at a compounding rate, you can do some amazingly amazing things
00:25:50.280 | with your wages.
00:25:51.800 | And so let me run some numbers here.
00:25:53.440 | Let me give you an example.
00:25:54.560 | So what I'll do is I'm going to just use a financial calculator, which by the way, if
00:25:58.360 | you're not familiar with using one, get good at one because you can answer all these questions
00:26:01.440 | like this yourself in about 10 seconds.
00:26:05.300 | So let's just show how compounding works with income.
00:26:09.640 | So what I'm going to do is I'm going to apply an annual compounding rate to a level of income.
00:26:14.440 | So let's start -- let's say that we have a 25-year-old just starting their life.
00:26:20.560 | And let's say that just coming out of college -- and actually I'm going to play with some
00:26:24.160 | of these scenarios.
00:26:25.160 | So we have a 25-year-old just coming out of college.
00:26:27.400 | And this 25-year-old takes an entry-level job making, let's just say, $40,000 a year.
00:26:32.000 | At least 40 because it's easier for me to remember as my number.
00:26:35.260 | So we're going to put in $40,000 as our starting value.
00:26:39.440 | And let's compound this over 40 years.
00:26:42.520 | So we're going to put a 40-year time period in.
00:26:45.000 | We're not going to put any payments in.
00:26:46.600 | And we're going to -- let's just use a 3% annual compounding rate.
00:26:50.460 | If you'll start at $40,000 and you'll compound your income at 3%, then at 65, when you retire
00:27:00.560 | -- just stick with this scenario -- when you retire, you would be earning $130,481 per
00:27:07.240 | year.
00:27:08.840 | And that 3%, that would be about an inflation rate.
00:27:12.040 | Now if you can bump that up to a 4%, and look at the difference, now you're earning $192,000
00:27:20.400 | that final year.
00:27:21.400 | That's an extra $60,000.
00:27:23.860 | But remember, that's in one year.
00:27:25.700 | So that was an extra $60,000 at 65.
00:27:28.720 | It was probably an extra -- I could go and make the chart, but I'm not going to do it.
00:27:31.760 | But it was probably an extra $59,000 at 64.
00:27:34.880 | And an extra $57,000 at 63.
00:27:38.600 | And an extra -- you get my point.
00:27:41.160 | That's an extra hundreds of thousands of dollars.
00:27:43.640 | Now let's say that you could compound your income at something like 7%.
00:27:48.520 | Well now at 65, just the difference between -- actually, that one's too scary.
00:27:53.240 | Let's go back to 6%.
00:27:55.760 | So if you could double that compounding rate, and you could go from earning 3% per year
00:28:02.160 | to earning 6% per year increases.
00:28:06.080 | You would go from earning $135,000 a year at 65.
00:28:09.640 | So we're going from 40 to 135 in the first example, 3%.
00:28:15.080 | You would go from earning $40,000 a year to earning $411,000 at age 65 each year.
00:28:23.500 | So now at age 65, you've got an extra $250,000.
00:28:30.700 | And at 64, you had an extra $230,000.
00:28:32.920 | And at 63, you had an extra $220,000.
00:28:36.280 | And at 62, you had an extra $210,000, et cetera, et cetera, et cetera.
00:28:40.360 | So if you're really looking for the most powerful thing that you can compound, forget about
00:28:45.160 | the investments.
00:28:46.960 | Focus on the income.
00:28:48.480 | Because just the growth from 3% to 6% -- growth from 3% to 6% -- that is an incredible difference
00:28:56.360 | between $130,000 and $411,000.
00:29:00.200 | Now, could you do 6%?
00:29:04.280 | I think anybody could do 6% if they want to do.
00:29:06.880 | I think that -- remember, with Brian Tracy's formula, which to me makes all the sense in
00:29:12.320 | the world, you're going to be increasing your income at 26% annually.
00:29:17.240 | And what would that mean?
00:29:18.960 | Let's just do -- I wonder if this will break the calculator.
00:29:21.360 | If I put in 26% annually, then that means that you're earning $413 million a year at
00:29:28.320 | age 65.
00:29:29.320 | Now, you say, "That's not possible," right?
00:29:31.400 | But are there not people who have done that?
00:29:34.640 | There are people who are earning $413 million a year.
00:29:37.800 | Now, maybe the formula does break down.
00:29:39.480 | I think that is kind of a dramatic example.
00:29:43.560 | But 10% per year?
00:29:45.800 | Now we're at $1.8 million a year?
00:29:48.640 | Look at the difference of no matter where you start.
00:29:51.840 | If starting at 25, no matter where you start, just earning $40,000 just by focusing on compounding
00:29:57.400 | your income, compounding your inflows.
00:29:59.960 | So what do you need to do?
00:30:00.960 | I think you probably need to enhance your skills.
00:30:03.920 | Because we're paid exactly what we're worth in the marketplace.
00:30:08.160 | On a financial basis, the income that you earn right now is exactly the appropriate
00:30:13.280 | income to what you should be earning based upon the skills that you're bringing to the
00:30:17.520 | marketplace.
00:30:19.080 | So the only way to change that income is to increase your skills and to enhance the value.
00:30:23.600 | And then to find somebody, find the marketplace and the marketplace, whether that's a new
00:30:27.480 | employer or whether that's the customers that value what you've created, to find somebody
00:30:33.240 | who values that so that you can command a higher wage to earn higher inflows.
00:30:38.200 | So I would say it means increasing your skills.
00:30:40.600 | And whether that's simple things like reading books in your field, attending conferences
00:30:44.160 | in your field, reading your industry magazines so you understand what's going on in your
00:30:48.040 | field, listening to the podcasts in your field, learning how to speak in public and speaking
00:30:54.800 | at the industry conferences in your field.
00:30:57.440 | And whether that means those things, whether it's field knowledge, whether that means enhancing
00:31:02.880 | your personal skills such as increasing your emotional intelligence, increasing your communication
00:31:09.640 | skills, learning how to inspire people, learning how to lead people, learning how to help other
00:31:14.740 | people be more effective.
00:31:17.120 | Whether that means changing industries, whether that means changing employers.
00:31:22.000 | You see these stories from time to time that come across and they say how much more somebody
00:31:29.680 | makes by transitioning from one employer to the next.
00:31:34.000 | If you want a 30% raise, it's probably easier to find a different employer and then negotiate
00:31:39.520 | a 30% raise with that different employer than it is to get your current employer to give
00:31:44.240 | you a 30% raise in a year if they're accustomed to giving you 3% raises.
00:31:48.680 | So this is how we affect the size of inflows, just one idea of many.
00:31:54.160 | Now you could also address the characteristics of inflows.
00:31:57.640 | So characteristics of inflows may be the characteristics of your job.
00:32:01.720 | Do you work a job that's agreeable to you?
00:32:03.940 | Are you working in a field that's agreeable to you?
00:32:06.440 | Are you working in an industry that you care about, that you like?
00:32:09.640 | Is there a need to change to another industry?
00:32:12.240 | Do you work in an industry that you don't like that -- well, if you work in an industry
00:32:17.880 | that you don't like, you might as well go work in another industry that you don't like
00:32:21.200 | and then go and get paid more for it.
00:32:24.040 | Or can you switch from the industry that you like -- excuse me, that you don't like to
00:32:27.800 | an industry that you like even if you need to have a pay cut?
00:32:30.720 | That's fine.
00:32:31.720 | It's your decision.
00:32:32.720 | There's nothing wrong with reducing the number.
00:32:34.760 | There's nothing wrong with it.
00:32:36.000 | But understand it because you're probably -- if you're working in an industry that you're
00:32:39.760 | more interested in, it's probably going to be easier for you to compound that number
00:32:43.720 | than it would be if you were -- than it would be if you were working in an industry that
00:32:51.360 | you didn't care for.
00:32:53.440 | And then leverage.
00:32:54.440 | How can you apply leverage to your income formula?
00:32:57.240 | Well, maybe the leverage that you could apply was the financial leverage to borrow money
00:33:03.040 | on student loans so that instead of making $40,000 out of school, you made $80,000.
00:33:07.960 | So let's reset this as $80,000 and now let's run our 3% inflation rate, our 3% growth of
00:33:13.920 | income.
00:33:14.920 | Well, if you start at $80,000 -- I did something wrong.
00:33:18.160 | Okay, there we go.
00:33:21.960 | So if you start at $80,000 and you can grow your wealth -- you can grow your income at
00:33:27.280 | 3%, now by starting at $80,000, now that final year you're earning $260,000.
00:33:33.960 | So remember, we're measuring this against our $40,000 base mark and this would make
00:33:37.800 | sense because we're intuitively -- we have intuitively doubled the salary.
00:33:42.960 | So what we've done is we've applied, you know, some sort of financial leverage maybe to build
00:33:47.600 | -- to get a degree in a field that is financially rewarding.
00:33:51.800 | We've applied financial leverage and we've doubled our income every year going forward.
00:33:55.880 | That's why the college financial numbers are so difficult to escape is that, you know,
00:34:03.240 | if you can double from $40,000 to $80,000, that's a doubling every single year.
00:34:08.840 | So even if you had to borrow $100,000, you know, just do this math in your head.
00:34:13.400 | If you had to borrow $100,000 for a college degree but you came out making $80,000 instead
00:34:18.800 | of $40,000 and even though my first example I imagined that you did have a degree, imagine
00:34:24.360 | now that you don't and imagine that the $40,000 was for the non-college graduate, well, the
00:34:30.240 | difference in earning power would be $40,000 per year.
00:34:34.240 | So 40, 80, 120, take out some taxes, let's say three years you've broken even on your
00:34:39.520 | investment in that degree.
00:34:41.240 | And then every year from then on, you now can command a higher salary if you learn something
00:34:47.440 | in school and you can deliver on that.
00:34:50.520 | So that may be one thing.
00:34:52.680 | You may be able to apply some sort of financial leverage through the form of a loan.
00:34:56.800 | You may be able to apply some other kind of synthetic leverage.
00:35:00.440 | So for example, could you work in an industry or in a field where you could apply some kind
00:35:05.360 | of synthetic equity or other leverage to the field?
00:35:09.480 | So maybe you don't have the money here to, you would really love to make your business,
00:35:15.720 | you would really love to earn your money and build your business based upon managing rental
00:35:21.760 | units that you operate for yourself.
00:35:26.040 | But the reality is you don't have any money to pay for those rental units.
00:35:29.160 | Well, can you go out and find some other people who already have rental units and hire yourself
00:35:33.520 | on as a property manager?
00:35:35.360 | And then now you're leveraging their $100,000 investment and you're just taking a 10% cut
00:35:40.680 | of the rents.
00:35:41.680 | So this would be a good way to apply leverage to your inflows.
00:35:45.800 | So consider that.
00:35:47.820 | Consider if changing the size, how can you change the size and the characteristic of
00:35:52.960 | your inflows?
00:35:53.960 | What are your personal likes?
00:35:54.960 | Are you working in a field that's best suited for your skills?
00:35:58.000 | Optimize both of those factors and optimize the inflows.
00:36:01.720 | Now the ultimate optimization might be to get to the point where your investment inflows
00:36:07.320 | are higher than your salary inflows.
00:36:09.480 | I think this is really the ultimate optimization.
00:36:12.160 | This is what financial independence truly is, is when the dividends and increases from
00:36:17.480 | the companies that you own are higher than your outflows.
00:36:23.720 | Well now you are financially independent.
00:36:26.640 | What a beautiful place to be in.
00:36:27.920 | So now we're addressing the size and the characteristic of our inflows.
00:36:33.600 | So if you have that as a set target, that my goal is to build my assets to the point
00:36:40.280 | where my investment inflows are higher than my personal outflows, if you have that as
00:36:45.080 | a goal, you'll reach it.
00:36:46.920 | Most people don't have that as a goal.
00:36:48.160 | They've never considered that it's even possible because they never even consider
00:36:51.440 | that there's anything to do other than work as a salary.
00:36:55.240 | So move on to outflows.
00:36:57.800 | Optimize the outflows.
00:36:58.880 | So here again, you're going to adjust the size and the characteristic of the outflows.
00:37:04.160 | So the size, are there any outflows you could easily cut?
00:37:07.720 | Could you just simply say, I don't want to spend that money anymore.
00:37:10.360 | I'm not gaining value from that.
00:37:12.320 | I'm not gaining value from-- I don't know what to pick on.
00:37:16.160 | I'm just not gaining value from this category of expenses.
00:37:18.320 | I'm going to remove it from my life.
00:37:20.640 | Now, then again, could you say, well, I'd like to go ahead and spend money in this category,
00:37:26.640 | but could I optimize it in some way?
00:37:29.160 | Instead of spending money on rent to a non-family member, could I rent from a family member?
00:37:36.480 | So at least then I'm benefiting a family member in this transaction.
00:37:40.500 | Instead of paying for food that is raised in a way that I don't think is appropriate,
00:37:46.560 | can I buy food from sources that I do want to support?
00:37:49.480 | Can I allocate my outflows in a way that support my values?
00:37:54.400 | So can you optimize the size of the outflows?
00:37:58.360 | And this is where skills planning comes in.
00:38:00.560 | That's what Jacob talks a lot about in his early retirement extreme book.
00:38:03.760 | Can you adjust and bring in the skill advantage to reduce the amount of outflows that are
00:38:11.120 | necessary?
00:38:12.160 | So whether this is something as simple as clipping coupons for your favorite breakfast
00:38:17.080 | cereal to as complex as a comprehensive income tax plan to shelter the majority of your money
00:38:25.080 | from income taxes, all of this is about optimizing outflows.
00:38:29.800 | And you have to optimize outflows in order to build wealth.
00:38:33.560 | You have to optimize them.
00:38:34.800 | You have to have lower outflows than inflows in order to build the surplus.
00:38:38.720 | Not going to be possible for you to get rich and build real wealth if that's not the case.
00:38:44.820 | But your plan is going to be your plan.
00:38:46.920 | So don't buy this nonsense that some people say, ah, don't worry about expenses.
00:38:50.440 | Expenses don't matter.
00:38:51.440 | Expenses matter.
00:38:52.440 | And they matter a lot at the beginning.
00:38:55.000 | They matter a ton at the beginning.
00:38:57.800 | I'm planning a show-- and maybe this week, it may not be-- but I'm planning a show on
00:39:04.360 | the concept of new cars, used cars.
00:39:07.480 | I don't want to destroy this myth about the new car versus the used car for wealth building.
00:39:13.320 | But one of the key things that's going to be a component of that show is to understand
00:39:21.280 | when this matters.
00:39:22.700 | If you're at the beginning of your career and you buy a $30,000 car that depreciates
00:39:26.680 | in value by 15%, that is a huge-- each year, that is a huge number.
00:39:32.760 | That's $4,500 of depreciation this year.
00:39:38.680 | That's an expense-- excuse me-- it's a massive expense that is very difficult for a small
00:39:46.640 | budget to recover from.
00:39:50.680 | Now on the other hand, if you're 70 years old and you've got a multimillion dollar income,
00:39:57.480 | does $4,500 of depreciation matter that much?
00:39:59.920 | It really doesn't.
00:40:01.140 | So the key is to understand how big are these numbers in a relative fashion to your specific
00:40:07.680 | cash flow statement, to your specific outflows.
00:40:11.640 | And then can you apply the ideas of leverage and compounding-- can you apply the ideas
00:40:20.440 | to any of the outflows?
00:40:22.160 | So for example, compounding-- can you lower the outflows by doing better tax planning?
00:40:31.560 | Because of the fact-- for example, investing in an IRA.
00:40:34.280 | Let's say that you want to invest $5,000 through an IRA.
00:40:39.280 | Well, you can leverage this by-- let me stop, sorry.
00:40:44.320 | Let's say that you want to invest $5,000.
00:40:46.280 | You can leverage this by leveraging through an IRA.
00:40:50.440 | So then let's say that at your tax rate, maybe you have to earn $6,500 to be able to pay
00:40:58.100 | taxes and then invest in a taxable account with the $5,000.
00:41:01.880 | Well, a good way to apply leveraging here would be to go ahead and put the money into
00:41:07.560 | an IRA.
00:41:08.760 | And then you can gain as it goes up.
00:41:12.520 | And what you can get-- my example breaks down because I'm combining two concepts, and I
00:41:15.840 | hope it makes sense.
00:41:16.840 | I recognize this is not mathematically perfect.
00:41:19.240 | But you can get-- in essence, you get to experience by leveraging the tax savings, you get to
00:41:26.280 | compound not only your original investment, but also the savings on the taxes.
00:41:33.680 | And you get to compound what you would have had to pay otherwise.
00:41:37.640 | So you get to compound not only your original investment, but an example-- I shouldn't have
00:41:42.520 | used $5,000.
00:41:43.520 | I should use, say, $3,000, and you've got to invest $4,500.
00:41:46.840 | So now you can invest on the tax savings and your original principal.
00:41:50.800 | And that can compound over time.
00:41:51.920 | And that's a tremendous leverage point that you can look for.
00:41:56.680 | And this can be applied in every area.
00:42:00.360 | Can you leverage your good relationships with your neighbors to share a Wi-Fi signal between
00:42:05.000 | each other so that one of you doesn't have to pay for the full thing when you've got
00:42:09.200 | a perfectly good signal coming in right across the street?
00:42:12.200 | Can you leverage your county library system so that you spend less money at the bookstore?
00:42:17.440 | Can you leverage-- I mean, there's a variety of things.
00:42:20.600 | And everything is going to come down to adjusting the size of the outflows and then optimizing
00:42:25.400 | those outflows.
00:42:26.760 | And then finally, we get to the surplus.
00:42:30.640 | And we get to the point of saying, well, how can I affect the rate of return, the size
00:42:36.560 | of the surplus-- excuse me-- the rate of return that I get, which is the size that it will
00:42:41.720 | grow at?
00:42:42.720 | And I'm trying to stay consistent with my size and characteristics.
00:42:45.560 | But this one is different.
00:42:47.640 | So how can I adjust the rate of return that I'm earning on the surplus?
00:42:51.600 | And how can I adjust the characteristics of my investments?
00:42:55.760 | So if we think of it in that way, then we're constantly going to be applying our lens to
00:43:00.400 | say, well, I have surplus.
00:43:02.720 | What's going to be the best use of this surplus at this point in time?
00:43:06.880 | And so the best use of this surplus at this point in time may be at one point in time
00:43:11.960 | going to college and paying for the college tuition fees so that I can increase my income
00:43:16.560 | if that's the reason that I'm going to college.
00:43:18.920 | At another time, it may be I went shopping.
00:43:22.600 | And my wife and I eat scrambled eggs and sausage every morning for breakfast.
00:43:27.080 | And the sausage was on sale.
00:43:28.880 | And I bought eight-- I think I bought eight packages of sausage.
00:43:34.040 | Because I don't know when the next sale comes around.
00:43:35.600 | I figure it comes around at least every couple months.
00:43:37.320 | And we probably eat a package a week.
00:43:39.160 | So at least then I got a couple months worth of sausage in the refrigerator.
00:43:42.360 | So maybe something as simple as saying, I'm going to make sure that I spend my surplus
00:43:47.320 | on the things that I'm going to use anyway and get them when they're at a price leading
00:43:52.120 | discount.
00:43:56.000 | And so this is one of the major areas.
00:43:57.560 | If you study how to save on groceries, this would be one of the major things that you
00:44:03.280 | can do, buy on sale.
00:44:04.280 | Well, you have to have cash to be able to buy on sale.
00:44:07.360 | So it may be every bit as appropriate for me to say, I'm going to use my surplus.
00:44:11.360 | I'm going to do that and stock up on food when it's cheap.
00:44:15.520 | Or I'm going to use my surplus and I'm going to buy stock when they're cheap.
00:44:18.780 | Or I'm going to use my surplus to do insulation in my attic, to install energy saving screens
00:44:24.360 | on my windows to lower my air conditioning bill, or whatever you guys do up north where
00:44:28.320 | it's cold.
00:44:29.320 | I don't know what you do.
00:44:30.320 | Or maybe buy a wood stove or put in better windows to have solar again.
00:44:35.680 | I don't know what you guys do up there.
00:44:37.760 | So whatever it is, I can apply the same thinking as saying, how can I optimize the surplus?
00:44:44.960 | How can I optimize the rate of return that I'm earning on the surplus?
00:44:48.080 | Now notice how the rate of return that I'm earning on the surplus is going to come back
00:44:52.200 | over and affect my inflows.
00:44:55.000 | So let's say that my decision is, Joshua, you say that since the history of well-run
00:45:03.800 | equities markets, they've generally returned 10%.
00:45:07.280 | But you know what?
00:45:08.280 | That's not good enough for me.
00:45:09.280 | How can I do better?
00:45:12.480 | Well maybe have a business idea.
00:45:14.180 | So a business idea, a good business idea, may easily make far more than 10%.
00:45:19.200 | And so this would be where I could, if I ran my calculations, just for fun I will here,
00:45:24.920 | let's say I have $40,000.
00:45:25.920 | This is my earning income.
00:45:28.760 | And let's say I had a goal.
00:45:30.400 | Let's put this in as $40,000 present value, no payments, 3% growth over 40 years.
00:45:36.600 | So 3% growth over 40 years comes out to be $130,000 of income.
00:45:43.280 | So let's say you said, well, 10%, I want to compound that at more.
00:45:47.680 | Where can I do that?
00:45:48.680 | Probably in your own business.
00:45:50.140 | So the right investment in your own business, where you can apply leveraging and compounding
00:45:54.160 | and unique skill and knowledge, and if the business is successful, could increase your
00:45:58.400 | income at a massive percentage rate.
00:46:01.120 | Maybe it could be 10,000%.
00:46:03.240 | That's the way that you go from the $40,000 incomes to the $4 million incomes.
00:46:07.320 | It's in your own business.
00:46:08.720 | You don't get that working in middle management.
00:46:10.880 | You don't make $4 million working in middle management at a medium-sized company.
00:46:16.640 | You get that by becoming the CEO of a large public traded company, or you get it by starting
00:46:23.520 | a local scrap dealer, a local plumbing company that you grow to be a bunch of trucks.
00:46:30.760 | So I don't want to repeat anything that I've said.
00:46:35.240 | So I think this is about all I've got on this topic.
00:46:38.000 | But I guess I just want to point out to me, the cash flow statement and the balance sheet
00:46:42.520 | are beautiful, because they illustrate everything that I can do.
00:46:45.920 | And for you, they will illustrate everything that you can do.
00:46:50.960 | And somehow, maybe I should figure out a way to sell this a little bit better.
00:46:54.880 | But you don't need to listen to my show every day.
00:46:57.840 | All you would do is create a cash flow statement and a balance sheet, and look at it and say,
00:47:01.520 | how can I optimize the size and the characteristic of these inflows, outflows, and the rate of
00:47:06.160 | return that I'm earning on my surplus?
00:47:08.280 | That's it.
00:47:09.840 | Those are the only three, maybe six levers that you have to do.
00:47:13.120 | But that's what ultimately everything's going to come from.
00:47:15.560 | Now are there other financial planning things?
00:47:17.240 | Yes.
00:47:18.240 | Well, how does insurance play into it?
00:47:20.240 | Well, insurance is protecting my inflows, or it's protecting my outflows.
00:47:24.800 | So if I'm-- Sam, I mentioned disability insurance.
00:47:28.440 | So if I'm buying disability insurance, I'm buying disability insurance so that if my
00:47:32.480 | inflows are interrupted due to disability, that I can replace those inflows from the
00:47:37.040 | insurance policy.
00:47:38.460 | If I'm buying property and casualty insurance, a fire policy on my house, I'm protecting
00:47:43.320 | myself so that if my house is disrupted, I'm protecting my budget from the need to come
00:47:49.520 | up with an extra $200,000 to rebuild my house as an outflow.
00:47:53.560 | So it all works in on this calculation and on this formula.
00:47:58.760 | I find this to be useful.
00:48:00.200 | I hope that you also find it to be useful.
00:48:02.880 | To me, it kind of dispels a lot of the differentiation that everyone's trying to constantly say,
00:48:07.680 | look, I'm different.
00:48:08.680 | And I'm just like, you're not different.
00:48:10.080 | You're focusing on inflows.
00:48:11.080 | You're, ah, you're focusing on outflows.
00:48:12.560 | I got it.
00:48:13.560 | Ah, you're working on an investment trick here.
00:48:15.200 | OK, I see this.
00:48:16.880 | And so there's a dramatic, there are dramatic gains that can be made by seeing these things
00:48:22.000 | comprehensively.
00:48:24.880 | And my wish is that we all started to view everything we do in a comprehensive manner
00:48:29.440 | and that we all were able to think these things through and help one another by thinking comprehensively.
00:48:36.120 | I also just want to free you from the idea that this stuff is set in stone for you.
00:48:41.480 | It's not.
00:48:42.480 | You can choose.
00:48:43.480 | You can choose to change.
00:48:44.480 | You can choose to adjust.
00:48:45.480 | You can choose to affect any of these variables that you want to affect.
00:48:49.680 | I had an idea earlier, and I think I've got a moment to do it.
00:48:54.240 | Let me just take a second and adjust this.
00:48:57.440 | And let me show how, you know, you can have the choice.
00:49:00.240 | So I was using earlier $40,000 as my proxy income.
00:49:03.800 | So let me just put this in here.
00:49:05.200 | $40,000 is my income.
00:49:06.800 | But instead of starting at age 25, let's say someone starts earning at age 18.
00:49:11.000 | And so they start earning at 18.
00:49:12.920 | And so now my number of years from instead of 25 to 65, instead of 40 years, it's going
00:49:17.800 | to be 47 years.
00:49:19.280 | Well, at 65, this person is now earning $160,000 instead of the $130,000 that the person starting
00:49:27.720 | at 25 was doing.
00:49:29.640 | So this would be, if we were doing a rational college calculation, if we were doing a college
00:49:36.400 | calculation and we discovered that our starting wage out of college was going to be $40,000,
00:49:40.960 | but we could get a starting wage prior to college of $40,000, then we would need to
00:49:45.440 | factor in the seven years of lost productivity.
00:49:47.520 | And I know that's a little aggressive.
00:49:49.280 | It should be four or five years.
00:49:50.920 | But my point is that the extra seven years of compounding resulted in an extra $30,000
00:49:57.000 | of wages at 65.
00:49:59.400 | So, you know, but you have the choice.
00:50:01.960 | So what if you compound instead of at 3%?
00:50:04.180 | You started at 4%, and you started at 18, and you said, OK, I'm going to compound at
00:50:09.040 | 6%.
00:50:10.040 | Well, now at 65, we've got $618,000 a year.
00:50:15.040 | Let's say you put this at 8%.
00:50:17.840 | Now at 65, we've got $1.5 million a year.
00:50:21.440 | So there's amazing differences that can be had.
00:50:25.360 | I don't know which of those things are going to work for you.
00:50:27.720 | If you're 18, pay attention to those numbers.
00:50:30.040 | If you're 48, that's not a lot of help to you.
00:50:34.480 | But make your financial statements, and you'll still be able to figure out what will actually
00:50:38.480 | work for you.
00:50:40.520 | So I think that's most of what I want to share on this topic.
00:50:43.800 | And I do have one more idea, and then I'll leave you with a challenge.
00:50:48.640 | Remember that we're only really here talking about the financial statements.
00:50:53.960 | And there are a lot of other non-financial statements.
00:50:57.040 | There's a lot of other aspects of life that is non-financial.
00:51:00.360 | You know, a good question should be, as far as if we have a surplus, how should we-- how
00:51:05.280 | should we-- [MUMBLING]
00:51:08.200 | How should we reinvest the surplus?
00:51:11.160 | Should we save it in the bank, or should we move our family across town to a better neighborhood
00:51:15.080 | or across the world?
00:51:16.080 | Now, that's going to convert it into an outflow, so it's not a surplus any longer.
00:51:20.760 | But maybe, should we use the surplus to adopt a child and invest into the life of that child?
00:51:29.080 | Or should we use it to buy a van we can use for our side business?
00:51:32.560 | Or whatever the options are.
00:51:35.640 | Remember that it's not going to be, ultimately, the money things that any of us are really
00:51:42.240 | going to look back on and count most dear.
00:51:48.220 | There may be a few of us that look back fondly and maybe view a certificate of stock that
00:51:53.320 | was our first stock we ever bought, or that we keep some memento of our past financial
00:51:59.200 | goings on, whether that was the mortgage cancellation notice of our debt.
00:52:03.360 | But most of us are going to have a wall full of family pictures.
00:52:08.120 | And we're going to have those non-financial things that matter.
00:52:11.640 | And that's what we're going to be focusing on.
00:52:14.560 | The great things in life are really not that expensive.
00:52:17.480 | I've been blessed.
00:52:18.480 | I'm sometimes shocked.
00:52:19.480 | My wife and I just talk about what an amazing life we live.
00:52:22.880 | And I'm not saying that in a-- what's the word that means--
00:52:30.760 | there's a word that means excessive.
00:52:35.840 | I'm not saying that in some kind of-- anyway, I'm not saying that to-- it's true.
00:52:41.640 | We live an amazing life.
00:52:43.120 | It's really not that expensive.
00:52:45.760 | There's a beautiful sunset wherever you are.
00:52:48.000 | And the beautiful sunset is really no more beautiful from the $30 million mansion as
00:52:55.200 | from the public beach next door.
00:52:57.880 | So just consider those things, is that the great things in life are really not that expensive.
00:53:03.960 | They're really not.
00:53:06.320 | And consider how can you optimize not just the size, but also the-- not just the amounts,
00:53:12.160 | but also the categories and the characteristics of all the inflows and outflows.
00:53:18.800 | And my challenge for you is this.
00:53:21.820 | And I just remembered, I want to play a piece of audio for you before I go.
00:53:24.520 | In fact, I'm just going to end with that audio and I'm not going to play the closing music.
00:53:29.200 | So stay tuned.
00:53:30.200 | It's about a three-minute audio from Jim Rohn, who was just an amazing-- had an amazing ability
00:53:34.480 | to put things into-- to make-- turn words into poetry and turn them into poetry that
00:53:39.600 | affected people's actions.
00:53:40.760 | He's certainly been a huge help to me over the years and I want to honor his legacy and
00:53:44.760 | just play a moment-- a three-minute audio clip.
00:53:48.160 | But I'll give you a challenge.
00:53:50.320 | If you haven't done these financial statements, I know that this is not generally the type
00:53:53.840 | of stuff that's done in financial podcasts.
00:53:56.840 | But I really believe that this is a really useful tool.
00:53:59.800 | And if you haven't done this, just create these for yourself.
00:54:02.400 | Create a simple balance sheet and create a simple cash flow statement.
00:54:04.840 | But here's the key.
00:54:06.260 | Don't just create it and then just, you know, tuck it away in a drawer.
00:54:09.460 | Look at it and ask yourself if it's reflecting your values and if it's reflecting what you're
00:54:17.400 | doing.
00:54:18.440 | And give it some time with kind of a-- I don't know, maybe a journaling exercise to
00:54:22.440 | sit down and say, you know, what can I do?
00:54:25.640 | How can I optimize my inflows?
00:54:27.920 | And are they optimized?
00:54:29.000 | What could I do to increase them substantially?
00:54:32.280 | Or pick a category.
00:54:33.280 | If it's outflows, you can go through every category of your budget here.
00:54:36.380 | And sometimes, you may wind yourself-- you may wind up-- excuse me.
00:54:42.080 | May wind up in a perspective where you are doing a fancy financial planning tool.
00:54:46.920 | You're doing a fancy tax plan or something like that.
00:54:49.480 | The stuff that I'll talk about more, you know, more on this show.
00:54:52.720 | Or it might be that you're just saying, "Why am I paying money for this car that I just
00:54:57.560 | don't care about?
00:54:59.240 | Why am I paying money for this thing?
00:55:00.880 | I'm going to do something different.
00:55:03.880 | I'm going to sell it and move to another neighborhood."
00:55:05.880 | I just challenge you.
00:55:06.880 | You can coach yourself through this stuff once you have the statement in front of you.
00:55:10.680 | And look, in your situation, I want to talk about lots more ideas, but how can you apply
00:55:15.120 | leverage and compounding in all of the right ways without all of the negative ways?
00:55:20.840 | So get rid of the compounding credit card debt that's compounding against you.
00:55:25.120 | And start compounding your income at a higher rate than it's ever been compounded at.
00:55:30.520 | And try to apply some sort of synthetic leverage to your-- some categories of your expenses.
00:55:38.120 | You know, people do this with-- just another example of what I mean is like with travel
00:55:41.080 | hacking, where people say, "Well, I'm going to go ahead and use-- I've got to buy money,
00:55:46.640 | but I'll use airlines credit cards, and I'll buy all these free mile programs.
00:55:51.640 | And now I'm going to leverage my skill with this to get more money for the dollar than
00:55:56.680 | I would otherwise have gotten."
00:56:01.400 | So I hope that you'll do that.
00:56:02.840 | I hope that you'll do that.
00:56:03.840 | Oh, and the last thing, I almost forgot.
00:56:06.160 | I wanted to mention about the shows on Thursday and Friday.
00:56:09.160 | I hope you enjoy that.
00:56:10.280 | I tried to bring a little bit of-- I enjoyed the Alan Watts audio, and then also the talk
00:56:18.960 | from Cal Newport.
00:56:20.520 | And just want to point out one thing about the Cal Newport.
00:56:22.640 | I think it's a valuable balance.
00:56:25.240 | But notice that there's nothing in those two talks that is contradictory of one another.
00:56:31.680 | Is that you really do have to build skill.
00:56:35.160 | You know, Cal was right.
00:56:36.320 | But you know what?
00:56:37.320 | If you want to just say, I want to do what I'm passionate about and ignore the skill,
00:56:41.600 | if you're willing to forego the potential financial loss, there's no reason why you
00:56:45.480 | can't make that choice.
00:56:47.120 | And what annoys me about a lot of things-- and I'm sure Cal would-- I've never spoken
00:56:50.800 | to him.
00:56:51.800 | I'm sure he would admit it-- is that we generally only hear of the rich people.
00:56:55.360 | But you know what?
00:56:56.360 | There are a lot of people who don't have a lot of money.
00:56:58.720 | They're not Steve Jobs.
00:57:01.000 | So they're not speaking at college graduation commencement ceremonies.
00:57:05.560 | But they are living the lifestyle of their dreams.
00:57:08.400 | And they're doing it through the application of skill.
00:57:13.420 | So as Cal said, if you have 10 interests, pick one and get really good at it and build
00:57:17.940 | skill at it.
00:57:18.940 | But you know what?
00:57:20.080 | If you do know what you're passionate about, figure out a plan to get there.
00:57:23.200 | That's what this show is about, is having a customized plan that's really going to
00:57:32.080 | help you to get there.
00:57:33.680 | So that's the show.
00:57:34.680 | Stay tuned for the Jim Rohn audio.
00:57:36.240 | I hope that you've enjoyed it.
00:57:37.520 | Thank you for those of you who've been leaving reviews for the show on iTunes.
00:57:41.280 | I'm sorry that I've been sick.
00:57:42.520 | I'm doing the best I can today.
00:57:44.120 | But if this show fell flat, give me a little bit of mercy.
00:57:47.120 | But I'll do my best to keep on coming back this week with world-class financial planning
00:57:52.520 | content.
00:57:53.520 | And I just challenge you.
00:57:54.760 | Do something with this show.
00:57:56.160 | Create those two financial statements for yourself.
00:57:58.240 | And start watching them.
00:57:59.240 | And start coaching yourself through every one of your decisions.
00:58:02.520 | Enjoy the rest of your Monday.
00:58:04.840 | First question is one of the major questions of the world.
00:58:07.680 | Why?
00:58:09.000 | Why should you try?
00:58:10.000 | Why read that many books?
00:58:11.280 | Why go that far?
00:58:13.520 | Why earn that much?
00:58:14.520 | Why share that much?
00:58:15.560 | Why learn all that?
00:58:17.300 | Why get up that early?
00:58:18.440 | Why put yourself through that much?
00:58:19.960 | Why try for all that?
00:58:21.800 | Good question.
00:58:22.800 | Why?
00:58:23.800 | One of the best answers to why is the second question.
00:58:28.720 | Why not?
00:58:32.100 | What else are you going to do with your life?
00:58:34.780 | Why not see how many books you can read?
00:58:36.440 | How far you can go?
00:58:37.440 | How much you can earn?
00:58:38.440 | How many friends you can make?
00:58:40.280 | How much personality you can develop?
00:58:41.960 | Influence you can have?
00:58:43.280 | How many things you can accomplish?
00:58:44.520 | How far you can go and what you can see?
00:58:46.160 | Why not?
00:58:49.420 | You got to stay here till you go.
00:58:53.320 | Why not?
00:58:55.780 | The third question is why not you?
00:59:00.920 | Why not you?
00:59:01.920 | Some people have done the most incredible things with limited start.
00:59:07.560 | Why not you?
00:59:09.120 | Some people have done so well.
00:59:10.120 | They get to go.
00:59:11.120 | They get to see it all.
00:59:12.120 | They get to do it.
00:59:13.120 | They get to be there.
00:59:14.120 | They get to have it.
00:59:15.900 | They get to enjoy it.
00:59:17.000 | Why not you?
00:59:21.640 | Why not you watching the morning mist rise over the mountains of Scotland?
00:59:28.000 | Exploring the mysteries of Spain, soaking up history in London.
00:59:32.200 | Why not you?
00:59:33.640 | You got to take a stroll through the palace of Versailles.
00:59:38.320 | Why not you?
00:59:41.200 | You got to have lunch in one of those neat little sidewalk cafes in Paris.
00:59:46.080 | I mean, Denny's is okay, but you got to try Paris.
00:59:51.760 | Someday you got to gaze directly at the Mona Lisa.
00:59:58.560 | I can show you where to find the most exquisite seashells in Miami and the Bahamas.
01:00:04.880 | I know where they are.
01:00:07.600 | Why not you?
01:00:09.380 | You got to shop on Fifth Avenue in New York.
01:00:13.240 | You got to stay at the Waldorf Astoria.
01:00:18.040 | Have dinner at Lou Chow's.
01:00:20.040 | Slice roast goose on a bed of apple stew.
01:00:25.880 | Why not you?
01:00:27.760 | You got to drink in an Arizona sunset.
01:00:31.480 | You got to see the world.
01:00:32.680 | You got to read the books.
01:00:34.400 | You got to do the enterprises.
01:00:36.160 | You got to be involved in commerce and love and travel and experiences.
01:00:41.460 | You got to do it all.
01:00:42.560 | Why not you?
01:00:43.920 | You got to know the results that come from splendid discipline.
01:00:47.080 | There's nothing like a view from the top.
01:00:53.560 | And the last question is, why not now?
01:00:58.760 | Don't postpone your better future any longer.
01:01:03.840 | Get at it tomorrow with new vigor.
01:01:08.420 | Start to make changes, have conversations, make contact, and do it now.
01:01:15.200 | And if you will, I have a feeling one of these days we'll be hearing your story.