Take a second to think about the average American consumer. For the most part, people float through life making money, spending money, racking up credit card debt, waiting for that proverbial raise that never ends up being as good as hoped, only to simply spend more money once that raise is achieved. Think of what our economy and stock market would look like if major corporations were run this way? What if the budding 1950s McDonald’s had spent every dollar of burger and fry revenue on needless uniform updates, accessories, corporate cars, or fancy vacations for executives. The McDonald’s we know wouldn’t exist today.
Instead, it painstakingly allocated profits towards value creating activities – offering simple, affordable, and tasty meals, perfecting assembly line style kitchens, and pioneering the franchise business model. Year after year, profits were reinvested to generate greater profits, so the value of the enterprise grew immensely. It grew from zero to a near $100 billion market capitalization company with $25 billion in revenue. That’s a lot of hamburgers.
Successful businesses understand what it takes to drive dollars to the bottom line. They allocate resources towards ventures that generate a positive return on the dollars spent. They build or buy complementary businesses in order to develop additional sources of revenue. They cut needless expenses. They hire a winning team of motivated achievers. Most importantly, however, they never lose sight of their primary goal – to build value for their owners and stakeholders.
Regardless of the personal wealth we hold, we have the capability to act as owners of our own business each day on our journey to financial freedom. Our life is our business, so we should run it like one. Let’s discuss the details.
1.) Maximize your revenue
Do you have a day job? Good! Maybe you run a small businss. Great! In either case, consider this your primary source of “life revenue.” American businesses try to grow revenue at a rate that exceeds nominal Gross Domestic Product (GDP), and hopefully your income is increasing at a similar rate. 4-5% per year would be great, as this kind of growth will outpace inflation, meaning your real income is increasing. Do you own stocks, mutual funds, or ETFs? Consider any dividends earned as alternative sources of revenue to your personal business of life. Perhaps you own an income-generating real estate investment. Yep, count rent income received as more revenue. Personally, my wife and I generate additional revenue through both of these avenues…easy money!
Everyone who has a blog these days, loves to talk about “side hustles.” I don’t actually have anything like that yet (I’m blogging for the love of it, folks!), but perhaps you do. For example, a teacher friend of mine has a side tutoring business. He’s built it from word of mouth, and now has quite a loyal following. He also does umpire work in the summer for local baseball leagues. Calling him a hard worker doesn’t even begin to explain it.
Getting married? Does he or she have a job too? Well don’t tell your husband or wife-to-be I said this, but think of this union as a corporate merger…ha! We now have two parties with productive and complementary sources of revenue joining forces and sharing resources. Since you’re moving in together, housing, food, and utility costs will be undoubtedly cut. In corporate jargon, we’d refer to this activity as achieving corporate “synergies.” Good stuff.
In any case, your ability to generate income for yourself is key to building wealth. Do what you can to keep it flowing!
2.) Drive down costs
Hopefully by now, this is all beginning to make sense. It’s not rocket science really, but for many, it’s still surprisingly difficult. We already mentioned the synergies above that came from marriage and household consolidation. Let’s go further. Let’s keep cutting the proverbial fat from the budget. Ideally, we’d like to align our total cost of with the primary source of revenue. Yep, what I’m telling you is that you should strive to live off only one source of income. Who in the world does this? Well, people who get rich do this. Realistically, this means that whovever has the highest income, use that for normal, daily, recurring expenditures…housing, utilities, food, etc. Any additional sources of income will be first added to savings and investment, and second allocated towards one-time “surprise” needs (e.g. car needs a radiator, air conditioner blows up, sink hole eats your garage, whatever).
In order to make this happen, you’re going to have to dig deep and reassess what’s important. As I’ve always professed, frugality is key. To be rich, you can’t spend like you’re rich. For example, a couple years back, my wife and I took a deep dive look at our expenses. We altered a few things to save a few hundred dollars a month. Check it out the story here.
The corporate mindset is to eliminate redundancies, needless extras, and wasteful spending. Although I’m not advocating living in a tent and surviving off grubs, do what’s reasonable to cut costs to the maximum.
3.) “Hire” a team of smart, motivated and dedicated professionals.
In business, hiring the right people is a huge key to success. I know, I know…obviously you can’t hire your friends and family. But what you can do is surround yourself with people who inspire, challenge, encourage, and motivate you. Remember, though, that friendship is a two-way street. You must offer the same support and encouragement to your friends and family that they give to you – Golden Rule first and foremost here.
Also, you don’t have to know someone personally to hire them to your team. Read blogs of others in your industry to push you further. Read books by authors you trust on topics that interest you and support your wealth building goals. For example, I glean a lot of inspiration from reading another like-minded finance blogger, Gen Y Finance Guy (www.genyfinanceguy.com). He’s incredibly motivated and consistent, and his posts are extremely educational. I’m also constantly reading about my favorite topic in the investing world – value investing. I maintain a wish list of books on Amazon.com. I find that books not only provide me with valuable insight on investing, but they also keep me excited and fired up about the topic.
I’m at my happiest when I’m learning and growing. Surrounding myself with the right people and right literature keeps my spirits high.
4.) Focus on the goal – maximizing value.
In the corporate world, major companies focus on building book value (aka net worth) by retaining excess earnings. Generally speaking, corporations attempt generate earnings of 10% or more on this book value figure, which is often referred to as Return on Equity. Each year firms strive to grow their net worth by 10% or more, which can be done by generating more revenue, cutting expenses, and/or paying down debt. Whatever excess earnings the firm generates beyond the expenses to run the operation are either invested in securities, re-invested back into the business, or paid out as dividends to the owners of the busines.
Run your personal finances the same way. I like to think of my net worth as my book value, and I’m trying to consistently grow it year after year. As I’ve referenced above, the simple act of spending less than I make, paying down debt, and investing excess earnings in assets that grow in value over time has allowed me to grow my personal net worth at a rapid pace. It’s not rocket science. It just takes dedication. Compound interest is an extremely powerful thing, indeed.
So, be better than corporate America. Strive to exceed a 10% growth rate annually on your net worth.
Also, it helps to monitor your progress by having a system, which brings me to my next point…
5.) Maintain informational financial records
Public companies must issue quarterly financial reports in the spirit of transparency with the investing public. It helps investors and corporate stakeholders understand the inner workings of the business, and most importantly, monitor the progress the corporation is making over time. Monitor your financial progress as well. In addition to regularly monitoring bank and credit card accounts through online access, I use Mint.com and PersonalCapital.com to track financial progress. I love the net worth tracking tool, as I can analyze where and how my net worth is growing (or shrinking) over time. I can track debt paydown as well investment account growth. I can also set up budgets, and Mint will categorize and track spending to make sure I’m within the budget threshhold.
A word of advice as you track your net worth over time – don’t get discouraged by the ups and downs of the stock market, that may impact networth drastically. As you probably are well aware, the stock market suffered a major downward correction during the third quarter of 2015, and personally, my net worth decreased by over 10% in a matter of weeks. Don’t let setbacks like this get your down. Hunker down, continue reducing personal expenditures and allocating capital towards your investments. Additional savings can buttress short-term downdrafts in your stock portfolios within 401Ks, IRAs, and brokerage accounts. Focusing on long term net worth changes rather than short term performance can help curb your emotional response. Over the long term, the direction of your net worth will be up, way up! Stick with the program.
To conclude, each one of us has the capability to grow his or her own financial value in life. A growing net worth is a testament to our hard fought ability to minimize expenses and allocate excess income towards value-enhancing activities – like investing in stocks, mutual funds and real estate. So emulate the corporate profit motive that forms the foundation of our capitalistic system. Keep up the good work!
Please comment and let me know if you have any questions on any of this. I’m always happy to help!