Nobody I know “likes” to budget; however, we all enjoy the freedom it brings. How can budgeting bring freedom? When you have extra cash flow at the end of the month, it gives you a sense of freedom that most will never have.
As a heads up, I will have to make this a short article. I am heading back to the States to see my wife and kids for the first time in one year. Exciting times for all. I’ll write a follow-up to this on the airline ride home.
As much freedom that budgeting brings, there can be a downside. There can be a tendency to over budget. Over-budgeting is the act of relying solely on budgeting to obtain financial freedom. When we over-budget, we do not learn how to create money.
6 Types of Income of Streams
The complete quote to the article’s title is “You can only cut so much before you start to bleed.” I always have loved this quote because of its simple nature. I love staying on budget as well. I have an $800 budget for my food, some small bills, and my entertainment.
I had $150 left this last month, and I put that money into the crypto market. It felt good to turn some money into an investment. Now, some questions for you. How do you feel about budgeting? Do you ever have money left over?
Again, the problem with over-budgeting is that it gives a false sense of control that we don’t really have. You can build power by learning how to create multiple streams of income. When we know how to create streams of income, nothing in life can phase us. We become planners and long-term thinkers. We become entrepreneurs.
I got the idea for this article because I was reading about the FIRE movement. The FIRE movement stands for the Financial Independence Retire Early movement. It is a cohort of people who usually budget themselves for early retirement.
The problem I have is that many of them over-budget themselves to freedom. They reuse toilet paper or eat out of trash cans. Yes, these are extreme cases, but you get the idea. I also don’t like the idea that they only use index funds as their investment pathway.
It is a lot faster to reach a certain financial number with capital gains from index funds than reaching a cash flow number with dividends. When people use index funds as their wealth generator (scary), they rely on the 4% rule for the rest of their lives.
I Live Paycheck to Paycheck
The 4% rule says you can withdraw 4% of your principal investment per year, and the assets will continue to grow. Using this method, you SHOULD be able to live off your investments for your lifetime.
The problem with capital gains is that they can come and go. Depending on when you start investing, you can amass a nice nest egg rather quickly. You retire, and wham, a recession hits, and your account is cut by 40%. The problem is, you still need to make withdrawals from your principal because that is how you survive.
If you had $1 million of index funds, you might only have invested $650,000. The rest is capital gains. You are expecting to live off of $40,000/year. However, you have factored in the capital gains in your nest egg. It can be very risky.
With dividends, you wouldn’t retire until you had $40,000 in dividend income. Like, when you actually have the money in your account. When a recession hits, you would probably lose 40% of your dividend income, but your principal is still safe. Hopefully, you have a 6-12 month emergency fund to rely on. Or better yet, other sources of passive income like rents, royalties, or an automated business.
Should You Consolidate Debt?
This all plays back into the over-budgeting mindset. I am all about budgeting and tracking my spending, dividends, rents, and royalties; however, we need to create money. The more we over-budget, the more we lose focus on the bigger picture.
The world is full of so much money. If we become over-budgeters, we focus on coupons, discounts, and freebies. Don’t be that person. Don’t be the person that only goes to places that offer military discounts. Again, I like a good bargain or freebie in passing, but enough is enough.
I am learning how to create money. As an entrepreneur, we generate money by creating value. Every day, I wake up and write to add value to someone else and myself. This article may be the one that helps someone decide to start a passive income stream.
As dividend investors, we invest in companies that create value for customers. As landlords, we create value for tenants. When we invest in cryptocurrencies, we are looking for coins that will produce value for the future of decentralized finance.
When we over-budget, we focus on our little world instead of making the world more prominent by adding value. We also commit ourselves to a life of living in a box. One day you won’t have your earned income job; you may only have a small pension, a small 401k, and social security. Let’s say that is $4,000/month.
The Truth About Discretionary Income
Well, you are now on a fixed income for the rest of your life. What if the sink breaks or you have to visit your children? Your budget for the month is already cut in half. Trust me; I see this every day in the neighborhood we live in. Now, what if you had the same $4,000/month plus a paid-off rental home bringing in $1,800/month? Throw in $1,000 in royalties and $500/month from a vending machine you own.
Do you see how your quality of life improves as we branch out and add value? Who would you want to be in your 60s, the person on a fixed income, or the person who can grow their revenue as they choose?
Okay, I am going to save the rest for Over-Budgeting 2. In the next part, we will focus on becoming rich by budgeting AND increasing our income. That’s right; we can do both. And, why would we want to do both?
Wealth is having excess income vs. expenses. It stands to reason, if you keep your living expenses low but keep increasing your income, then you will become wealthy. That’s our goal in Over-Budgeting 2. See you then!
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