One of the most important things you can do in aligning your finances to be more productive is define what wealth means to you. Obviously being wealthy is something of a relative term. Someone at the poverty line in the US would be seen as extremely rich in other parts of the world.
The Rich Dad Poor Dad books give an interesting definition of wealth. They say that wealth is determined by how long you can survive at your current standard of living if you quit your job today. So once you stop getting your regular paycheck, how long can you live off your savings and passive income sources before you go broke.
I think this is a very healthy description of wealth because instead of focusing on being rich, it focuses on having the freedom to do what you want while maintaining your quality of life.
Once you’ve come up with your definition of wealth you’ll start to see that there are multiple ways of achieving it. With the definition above, you can become wealthy by making more money, but you can also increase your wealth by lowering your cost of living.
Lets say you normally spend $50,000 per year on living expenses and you have enough money in savings to go 6 months if you quit your job today. If you change your lifestyle and drop your expenses to $25,000 per year, you’ve effectively doubled your wealth. You can now go 12 months without going broke (actually a little longer because your money should be earning interest). If you work for a year and set aside the extra $25,000 you can now go for 18 months.
By working to increase the amount you make (and save) while decreasing the amount you spend, you can increase your wealth from both sides of the equation. The trick is to lower your costs in a sustainable way. You can’t just stop spending money, but you can cut out things that can be replaced with better alternatives. For example, if your current entertainment is to sit and watch cable television, you could replace that with going on walks in the evenings. It is better for you and will save you around $50 per month.
As your wealth increases so does your freedom. If your wealth is 2 weeks (the amount of time before you’d go broke without a job) you are very much a slave to your employer. If your wealth is 1 year, you have the opportunity to take career risks that other people just can’t. Once you get to the point where you can go 5 years without a job, it frees you up to make financial decisions like starting a business, taking a sabbatical, or taking a risky job with the potential for very high payouts in the future.
What is your definition of wealth?
Good management of your finances can have one of the biggest impacts on your productivity because it determines how efficient you convert your time into money into the things you need. On Wednesdays we are discussing the financial aspect of productivity. Watch for more Wednesday financial posts in the future.