“I’m ready to get serious about financial freedom!”
I used to be that guy—loudly proclaiming my intentions to build wealth and passive income, with the desire to invest in anything and everything that might grant me the freedom from a life of 9-5 drudgery.
I was working 40-50 hours a week at a steady 9 to 5, earning a nice, median salary. I had an affordable, newish car, a nice apartment, and the best television package money could buy.
It’s a good thing that most people out there are like I was—because I recognize now just how weak and beatable I was. Just how lazy and incompetent. I for sure wasn’t serious. Thank goodness that most people are like I was. Otherwise, financial freedom might be difficult to achieve.
See, as a single person starting from zero, with no dependents and a decent job paying more than $40,000 per year, barring some extreme exception, I should have been building wealth at at least a rate of $10,000, if not $20,000-$30,000, per year—if I were really “serious”.
If I were married with or without kids, then progress towards financial freedom should have been far more rapid. With two people in my household earning serious incomes (and with tax advantages that I can only dream of), we would make our progress that much faster. Again, this is assuming that we truly were “serious” about building wealth.
Now, most people aren’t serious about building wealth, and that’s totally OK. I don’t intend to write for the average person interested in nice cars, fancy hilltop houses, and three meals out a week. I’m not judging them, and financial freedom is not everyone’s goal.
Nope, this article is intended for all the 9 to 5-ers out there, starting from scratch or close to it who really badly want financial freedom. I want to show them that as a fellow 9 to 5-er, there is only one way that truly makes sense for you to get started on your journey to financial freedom.
And you aren’t going to like it.
It’s not by investing or building multiple income streams. It’s a far easier and more common sense approach:
If you stop reading right there, that’s your prerogative. It’s likely that you’ll never, ever have the chance to compete in any serious real estate or business endeavor, and again, that’s totally fine.
Wealth building begins and ends with preservation of capital, and for pretty much all of the people like me out there—those with full-time, demanding, but decently paying jobs—the hard truth is that that first step in the process to escape from a 40-year cubicle life has been and always will come down to preservation of capital. Frugality. Savings. Penny pinching. Whatever you want to call it.
See, when I actually became “serious” about building wealth, I of course realized what everyone else does—that there are three things that all must be applied consistently over the long-term:
- I must preserve more of my current income.
- I must seek greater and additional sources of income.
- I must intelligently apply preserved capital to investments capable of producing outsized returns.
Almost anyone thinking about building wealth understands these basic premises. What most people don’t understand is that for full-time, W2 employees, any hope at real wealth must BEGIN with preservation of current income.
Nope, at zero/negative net worth, you cannot begin by seeking outside sources of income after long hours at your day job with a high probability of success. And no, you cannot expect any paltry investments made from your cubicle to pay off outsized returns (like investing in stocks, for example).
If your plan is to do either of those things, then you will have a long career. I hope that you like your job. You’ll never (or at best, you will slowly) accumulate large amounts of capital because you aren’t working the system correctly, and you aren’t approaching wealth creation in the correct order.
The 3 Secret Reasons Why Frugality is (& Always Will Be) the FIRST Step of Wealth Creation
Reason #1: Frugality exponentially increases opportunity.
If you are like me, then you might have been listening to all those big shot investors and businessmen out there on the forums. Those guys that say things like, “Don’t limit yourself to a scarcity mindset” and “Don’t sacrifice! Build your income!” They’ve convinced you to, “Expand your mind—money is unlimited.” They’ve convinced you that you need to focus on income, not savings.
Guess what? Mr. Big Shot isn’t wrong! Income (and chasing higher and higher investment returns) is a necessary path forward, the path to financial freedom and true wealth. You should build more and more income streams, in ever increasing amounts over time!
But the intimidating big shot investor that looms over you telling you to focus on investments and earning more is forgetting something that is painfully obvious to all of us currently employed in full-time, average, wage-paying work:
You CAN’T seek greater opportunity because if you lose your 9 to 5, you’re screwed! In fact, because you aren’t frugal, you can’t even take a lower paying job with more upside.
Think about that.
Let’s say you earn $50,000 per year. If I offered you a job that would allow you a ton of opportunity over the medium term, but resulted in a short term loss of benefits and pay, could you take it?
I couldn’t—at least not back when I first started working. I had bills to pay. The car, mortgage/rent, the internet, the partying, the cable bill, and whatever else I spent my money on. But fast forward a year or so later, when opportunity approached, I was able to quit my job and do exactly what I describe above. Why? Because I had become frugal. I lived far below my means and saved a ton of money every paycheck. I could afford to take a chance on a startup and to pursue my dreams.
You will never be able to keep up with the frugal, truly serious fellow in the game of long-term wealth creation if you are totally dependent on that reliable stream of income from your employer. You can’t take risks. And scaling your income is a heck of a lot harder to do when you can’t take risks.
If you can easily get by on significantly less income than you currently earn, you open yourself up to an entire world of possibilities or opportunities. I like to call it “luck.” Those possibilities absolutely include jobs and businesses opportunities that offer short-term sacrifice for huge long-term gain.
Are you in enough control of your spending that you can take advantage of opportunity when it comes your way? Or will you take the long way around?
Reason #2: Frugality negatively impacts your lifestyle WAY LESS than trying to build a business.
It’s always fun to hear people talk about how frugal people “sacrifice” and that “life’s too short” to pinch pennies. It’s pretty incredible that most people out there like to say things like, “Yeah, I wish I could save, but I’ve got a family and want to have fun. I need to focus on earning more money instead!”
These people have created an argument that I am unable to comprehend. They claim that both financial security AND family/recreational time are priorities in their lives, yet they somehow believe that being frugal will hurt their lifestyle more than attempting to earn more money. These people must be living on a different planet than me.
Imagine this scenario:
You currently work a 40-50 hour per week job, and though it pays at or near the median US income of about $50,000 per year, you spend almost everything you earn and live paycheck to paycheck. Also, you live in the United States of America where employers don’t take too kindly to you working on outside businesses or freelance work while you sit at your cubicle.
For those living in a world like the one described here, there are only two times during which they can work on this whole “earning more money” thing:
- After work, during those times when they would have otherwise been relaxing with friends or family
- During the time they would have been sleeping
Now, I don’t know about you, but having attempted to do those things, I can tell you that working harder and longer hours for my own side businesses was WAY more intrusive to my lifestyle than cutting back on certain physical amenities.
You know what affected my life way less than working really hard to start a business after work? When I moved my work closer to home (new job) and then moved my home even closer to work (new home). I did both and now bike to work.
This approach to wealth creation creates both more time and money. Contrast that to me driving an Uber after work. Or trying to build a website from scratch. Or starting a tee-shirt business. All of which I tried. All of which were hard. And all of which produced taxable income. All of which were not fun in the slightest.
Biking is easy. It’s also fun and healthy and FREE. It actually doesn’t negatively impact life at all. When I’m forced to commute via vehicle because of snow, that affects my life. I have to sit in a traffic jam, get no exercise, and deal with parking and the rest of it.
I’m not sure where the word “sacrifice” comes in for you, but you are out of your mind if you think that cutting back on spending in the ways that I’m talking about—intelligent frugality—are hurting my lifestyle, especially in comparison to trying to develop outside income streams from scratch.
But let’s say that you hate biking, love your big swanky apartment/house, and love eating out, even on your own. Think about this: Is it easier to found a business that creates a meaningful income or to get happy with a bike commute, some cheap and healthy lunches, and a slightly smaller, but 2x cheaper apartment/house? Which of those activities allows for more quality recreational time and more financial comfort?
If you think you are going to build a business that will earn you hundreds or thousands of dollars per month while maintaining your quality of life, think again.
Reason #3: Becoming frugal does NOT preclude you from earning more income!
I somehow had the ridiculous proposition in my head that frugality excluded me from focusing on earning more and achieving excellent investment returns. Wow! I hope you’ll laugh at my ridiculousness and learn from it. The complete opposite was actually true.
See, instead of trying to start side businesses and invest with close to nothing, as I became frugal, I started to accumulate thousands of dollars with which to get “serious” about investing and building businesses. Then, I started to accumulate tens of thousands of dollars, which allowed me to get even more serious. Give me another year or so, and I plan to have accumulated hundreds of thousands of dollars.
I’m not talking about taking the employer match on my IRA or building up an emergency fund, which everyone should do regardless of what their other life goals are. No, I’m talking about building up large, liquid capital, enough for you to consider buying things like real estate and small businesses.
If you’re really serious about building wealth, then go out there and earn more and spend less. As I see things, there are really only three logical ways to build wealth, assuming you have low to no liquid assets with which to currently invest:
- Save more and earn the same
- Earn more and spend the same
- Spend less and earn more
Of these approaches, the only approach that seems absurd to me (as someone who wants the maximum financial gain at the least cost to my quality of life) is option two. As someone just entering the game of wealth creation with low to no assets, that is the lowest marginal use of my time of those three approaches and the one most likely to frustrate me.
Trying to earn more money after work starting from scratch is the approach that will have the largest negative impact on your lifestyle with the lowest impact on your financial position. You’ll give up after six months. And you’ll pay a hefty amount of income tax on your earnings.
It’s amazing to me that I even considered doing the really hard stuff involved in becoming an entrepreneur from scratch, when tens of thousands of dollars I was already earning were begging to be rescued. And it was so easy. And it made my life so much better. And enabled me to buy real estate, which I guess made me an entrepreneur automatically.
Before you write off frugality as a limited mindset befitting only the narrow-minded, remember that in this article we are referring specifically to the case of those who currently work full-time jobs. These are the people who currently have no or low liquid assets and live paycheck to paycheck.
For these folks, I believe that for the reasons stated above, starting with frugality is the fastest, highest probability way to accumulate large amounts of wealth quickly and to increase income and investment opportunities exponentially. It’s also the way that they can do that without significantly hurting their lifestyles. To repeat what we all know, building wealth comes down to two things:
- Accumulating larger and larger amounts of capital
- Investing accumulated capital at higher and higher returns
For the employee with low assets, there really are few good ways to accumulate wealth by focusing in on investing or building additional income streams after work hours. Sure, it’s possible and you’ll hear about those stories from time to time, but I’ll bet you that those stories exemplify extraordinary hard work or some little known advantage.
Why do all that hard work and not take the easy pickings of giving up needless luxuries that really don’t improve your quality of life at all? If you really want to get rich that badly while also living the good life, why would you work long hours on earning taxable, after-hours income, when you can put in far less effort for a far greater marginal return by focusing on preserving what you already have?
Want to live comfortably with more free time and experience the magic of exponentially increasing control over your own destiny?
Cut back on needless expenses. Become frugal. Build assets.
Then, build businesses!
Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s book Set for Life is now available! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.
[We are republishing this article to help out our newer readers.]
Do you agree with my assessment? If not, I want to hear your rationale!
Leave me a comment, and let’s get a conversation going.