The Two Financial Games You Play (and How to Win)
Whenever I think about the big picture of real estate investing, I like to remember a very important reality before getting into the nuts and bolts. The reality is this:
We are trying to win two different financial games.
Just like basketball and baseball, these two financial games have very different rules, “equipment,” required skills, and ways of keeping score. If you show up to play basketball with your baseball glove, bat, and cleats, you’re in trouble!
So, before beginning to invest in real estate you need to understand the two different financial games you are playing, and then you need to study and emulate other successful game plans so that you can win each game.
The two financial games as I see them are the following:
The game of active income. It’s all about receiving max cash for your time, energy, skill, knowledge, and effort.
Success = earning much more than you spend
The game of passive income from assets. It’s all about using capital to buy or create assets that produce income.
Success = quality, long-term assets that produce more income than you personally spend
I’ll unpack and explain each of the two games a little more.
Game #1 - Cash Now
Most of us play this game daily. We wake up. We rush to work. We earn a paycheck. We pay the bills. We fitfully sleep. We start over again.
There IS a reason this game is called the rat wheel. It just keeps going and going. Even a big salary is just a bigger, faster rat wheel if you never learn how to get off (more on that in Game #2).
But, you can and must get better at Game #1. It’s the foundation of all other financial success. In fact, being successful at Game #1 is the growth engine of everything in Game #2.
Society may tell you that the most important way to keep score in Game #1 is your yearly salary. That’s only a half-truth.
The all-star players in this game do earn good salaries, but most importantly they KEEP a large portion of the money they earn and reinvest it in Game #2.
After doing my own study of all-star “Cash Now” players, I noticed that they:
- possess in-demand but difficult to obtain skills (which often require lengthy education and training - i.e. highly skilled doctors, lawyers, nurses, engineers)
- are self-disciplined and persistent
- never stop learning or growing
- remain flexible and adapt to an ever-changing economic market
- keep personal overhead low
- have little or no personal debt
- live comfortably but simply
- maintain cash reserves, including a large emergency fund
- build side businesses for multiple streams of income, even while working a job
The important fact here is that these all-star qualities are personal. YOU are the asset. Your consciousness, your energy, your skills, and your habits are the engine that will ultimately win this financial game.
The book The Millionaire Next Door does an excellent job of profiling the personal traits of true financial winners. You might be surprised what you read. Sneak preview: most do NOT drive Mercedes or BMWs.
You can also read my article called 5 Steps to Job Security For Life where I explain my own strategy to build these personal skills and to work on my own job security for life.
So if you aren’t doing well in Game #1, look in the mirror. The one who needs to get better is YOU.
Game #2 - Cash Flow
This is the game entrepreneurs and investors dream about. “Some day I will have enough net worth and passive income to sit on a beach, sip margaritas, and finally relax.”
Actually, I don’t believe that not working is the real goal of Game #2. Sure, a nice long vacation may be needed to detox from the rat wheel you just escaped from. But, after the fog clears, entirely new life and work possibilities await.
My goal in Game #2 is to be financially flexible enough to only do the work that most inspires me, that uses my skills the best, and that makes the biggest difference for others. At one point in my life this may be teaching my kids algebra and at other times it may be writing and speaking to others about winning their own financial games.
For those at retired ages, do you really want to stop contributing and using your skills? My guess is that you just want to do contribution in a new, better, less draining way.
Being stuck in Game #1 is horrible because it sells all of us short. Few of us want to be defined primarily by our jobs for our entire lives. Even if we love what we do, we want to take a sabbatical, try new things, do the same job in a different way, or just do something impractical.
Winning Game #2, i.e. generating passive income from assets, gives us that needed flexibility to jump off the rat wheel (short term or long term) and look around at the world from a new perspective.
The Synergy of the 2 Financial Games
Of course these two games aren’t completely separate. When you win at Game #1 and earn more than you need, the savings are the fuel and seed capital for Game #2.
On the other hand, I see some people try to jump straight to Game #2 without paying their dues and mastering Game #1. The games ARE sequential to some extent.
For example, if you start buying leveraged rental properties while you still have shaky income, lots of personal debt, and no reserves, you may crash and never be able to build your way back again.
Like in a 10k road race, don’t be the sucker who sprints ahead in the first 100 yards only to sit down huffing and puffing after 1 kilometer. Pace yourself and be honest about your financial abilities in this moment.
This leads me to my primary goal for this article. I want to help you think about which financial game you need to work on most. Which one of these common situations seems most like you?
- You are just barely surviving and putting food on the table, so Game #1 and building your personal skills should be your focus.
- You are surviving fine, but you have little or no passive income. So you need to continue improving at Game #1 while starting to plant seeds in Game #2.
- You already have large chunks of capital but you’re hanging on to stale or worn out life or job patterns. So Game #2 is your pathway to new horizons.
For now think about which stage seems to fit you best, and in my next two articles I will share basic game plans to succeed at each of these two financial games.
Enthusiastically your coach,