Maybe Spending to Broke Isn’t So Bad

The new get rich quick scheme: spend all your money.

Many experts advise to save piles of money diligently and invest in slow money. This is terrible advice for many people. It creates a conservative mindset that can adversely impact their finances and the rest of their lives.

Staying off-balance slightly and pressing forward can be more important than having a huge savings account. Many potential investments require a bit of bravery, such as real estate or starting a business that can be super rewarding.

Keeping your money in the field keeps you hungry

As the most interesting man in the world says, “Stay thirsty, my friend.”

One of the challenges incumbent businesses face is how not to become fat, happy, and lazy. Keeping lean is something that can apply to finances.

By turning money back around and re-investing, you will be energized by looking for new opportunities for that money. This keeps your mind sharp and helps prevent you from getting fat and sassy.

Cash is a depreciating asset

While cash seems safe, it is steadily losing value. In addition, the constant forces of inflation will erode wealth stored in cash over time.

I view cash in a stockpile as an expensive luxury. It has a very high cost for just sitting there. To justify the cost, it either needs to be providing an important role as a safety net or just being temporarily there while I search for suitable investments.

Liquidity is overrated

Sure, you need enough liquidity not to go broke, but beyond that, I much prefer illiquid appreciating assets that generate cash flow. My preferred vehicles are real estate and closely-held business assets. Both of these assets focus on cash flow rather than liquidity, and they offer great rewards for making that trade-off.

Liquid assets usually lack the ability to put in sweat equity. But, at the same time, semi-passive investments like real estate offer ways to increase the returns over time by properly managing them and making great acquisition and disposition deals.

Simply self-managing real estate for a period of time can save 10% of incoming rent directly to your pocket. This can do great things for cash on cash returns and the growth of your portfolio.

The Dead Sea Mentality

It's beautiful, this is my first trip to Israel, and Dead-sea is such amazing place. \unfortunately it's decreasing, I wish we can protect this amazing place.
Photo by Keith Chan / Unsplash

The Dead Sea is fed by the Jordan River but has no outflows. So it continually gets saltier, and nothing lives in it. Focusing too much on saving can create a similar toxic mentality.

By changing your mentality to not spending that money, to how you can receive the greatest return, you will have to make a paradigm shift in your mind. To create a money mindset. It will break your way of thinking and force a new reality.

It’s Not Just About Money

To invest instead of holding your money in cash requires an abundance mentality. It also requires you to come from a place of understanding how your money can grow and hopefully should build some gratitude towards the system and your ability to save. This can impact your overall happiness. It is not just about amassing a huge amount of savings so you can retire. By investing in growth, you are actively putting money back out into the world. Thus, avoiding the damage to your mind that can be negative and fearful by holding only cash.

Cashflow is King

If you live off cash for too long, you will find yourself without it. Now living off cash flow, that is a beautiful thing indeed. So the goal is to build cash flow. The best time to build cash flow is when you are trading your time in for the cash you live off.

Let’s look at this model a bit.

Assume you are making 100k a year and can save 20% of it a year. If you save it under a mattress, at the end of 20 years, you will have 400k. With a very liquid and conservative investment earning 4%, you will have 595k. With an 8% annualized return, say of stocks, which can pose liquidity issues in a down market, you will have 915k at the end of 20 years. With something illiquid, like real estate earning 15% a year, you end up with 2.05 Million.

Compound interest really takes off here.

As you can see, through the magic of compound interest, the higher return of illiquid assets dwarfs that of cash savings. Thus, even a moderate liquid investment like an index fund more than doubles cash savings over the 20 year period.

The assumption of a 15% annual return on real estate may seem a bit high, but with the right technique, it is certainly attainable. With techniques that leverage market know-how and your efforts, it is possible to achieve returns higher than 15%. This is, of course, only a semi-passive investment and relies on your ability to make sure the asset is performing. Which will take a much larger investment of time, research, and knowledge than investing in money markets, index funds, or similar.

Hopefully, this gets you thinking about how you can create more wealth by putting your money back into the world rather than holding onto it like the Dead Sea.

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