Maximum financial firepower

Cup of latteIs it better to cut your expenses or focus on earning more?

Yes.

We’re talking here about most of us, not billionaires. If you already have more money than you can possibly spend in your lifetime, you probably don’t need to worry about cutting expenses, although you still may want to pay attention because you’re a prime opportunity for the art of the rip-off.

But let’s say you’re in the want-to-be-wealthy stage. What does that even mean? I think there are a few stages of what might make you feel wealth:

Stage one: Making enough to pay all your bills

Especially depending on your age, this may be a very satisfying stage to reach. For many millennials, and many people older than that, knowing that you have enough coming in to cover everything—without credit cards—would make for a very secure, if not wealthy, feeling.

Achieving this, or exceeding it, will mean keeping a careful watch on expenses, and having a solid repayment plan for student loans. Too many of us have an agenda for what we’re going to do with any cash gift, or tax refund, or salary increase. Achieving wealth means being very careful not to pre-spend anticipated windfalls, especially since if they don’t materialize you’ve incurred debt, and that’s definitely not wealthy.

In the experience of my clients, I’ve seen that it’s generally easier to increase your salary by changing jobs rather than convincing your employer to give you a significant raise, so keep your antennae up and be aggressive about managing your career.

Stage two: Having money beyond immediate needs

The descent into serious debt could have been stopped, for many people, by having an emergency fund. It can be very, very difficult to accumulate this. It seems the emergencies always occur before the fund is built.

Lots of pundits I admire scoff at the “latte factor” but often big wins are based on the accumulation of lots of little wins—so I do think change jars in your kitchen, carrying homemade coffee in a thermos, walking or biking instead of driving, whatever, and saving the difference can help build up this second crucial step. (Even if you’re “beyond” this stage, you can always give it to charity. And less consumption is better for the planet.) Because you’re spending less, you have some surplus to stash that isn’t earmarked for specific spending—so now you’re wealthier.

Savings and increased earnings can now be directed to accomplishing goals (house down payment, travel to dream destination, new car) as well as essential long-term savings for retirement (whenever you aim to retire).

It’s been my observation that no matter how much people earn, they can always spend more. Once you have a solid emergency fund and enough earnings to cover your expenses, you have a little more breathing room for charging ahead or changing your career, or developing a side business, or focusing on making well-thought out investments.

Stage three: making money beyond your time commitment

This stage, which many people never reach, is when your money or business venture is making money for you, without your everyday effort. If you have invested wisely, or have some sort of business that makes money without your continuous participation, your wealth level is enhanced.

This is the level that permits retirement. Of course, people who control their expenses can reach it sooner or more securely. The security is enhanced if you have some sort of guaranteed income (pension, annuity), have fungible expenses, or enough of a portfolio that a huge dip in the market won’t affect you all that much.

The absolute numbers for wealth don’t matter as much as 1) your spending levels and 2) whether you’ve found a way to build a source of income or an investment portfolio. So, someone who’s technically a millionaire, has a paid for house, controlled expenses, and the maximum Social Security may have a yearly income of about $70,000. Is this wealthy or scraping by? Depends on your property taxes, your health care costs, what repairs are needed on the house…for some, it’s a fortune; for others, unthinkable.

Stage four: Never spend it in this lifetime

Well, we can all dream, right? This is a real test of your soul: what do you care about? What good can you do in the world? Have you thought about who really deserves and will benefit by what you leave behind? Unless you’re the kind of person who views this wealth, and the ever-increasing hoarding of it as some sort of superiority marker, you’ll have to do something with it eventually (and please don’t decide to run for president). Think carefully not only about what your legacy will be, but how you pass it on. I’ve seen people whose spouses only married them for the money, who were busy spending the spouse’s money, who were never again taken seriously in a career, who were easy marks for exploiters, who were hounded for donations, and (in the case of trusts) made mostly the bank managers and attorneys rich. Those on the outside may think it’s a nice problem to have, but as the temporary steward of wealth (and we’re all temporary), it requires seeking guidance and developing thoughtful planning.

And for those in stages 1-3, I hope you get here.

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