Money is a seed that generates more money, so gathering cash is key to achieving financial independence. What’s the best way to get started? Budgeting and extreme frugality are options, but the dramatic payoff comes when we stop underearning. Listen to today’s episode to find out how.
Welcome to Rich & Thin™ Radio, the only podcast that helps you get more bank with less bulk. Today’s episode is part 2 of our series on how to achieve financial independence. I’m Kelly Hollingsworth, and I’m glad you’re here because today is the day where we begin talking about how to reliably and ethically gather more cash. And who doesn’t want that? Plus, cash is key when we’re talking about financial independence, because c
Your money will grow more money if you plant it properly.
Cash is like a potato. If you cut a potato in half and stick it in the ground, it turns into a plant that makes a lot more potatoes. Money is exactly the same way—plant money properly and it generates more money. So tomorrow we’re going to start talking about the investing part of getting rich, the planting of the money, but today we’re going to talk about how to gather the money so you can plant it in the first place. And the question here is, what is the best way to begin gathering this money? Is it to earn more, or spend less?
What’s better: Earning More, or Spending Less?
As I’ve been preparing this episode, my mom and I have been having a healthy debate about which is more important for gathering cash. Is it spending less, or earning more?
She falls on the side of spending less. She’s a proponent of extreme frugality. She thinks this way is because what she’s seen in life is that people who overspend always think they’re going to dig their way out of overspending with their next bump in income, but they never do, because they don’t develop the skill of learning to live within their current income. So whenever they start earning more, they spend even more than that. And was also never under the impression that she had any control over what she earned. So she just took what people said they would pay her, and she saved like crazy. She still grows a lot of her own food. She washes and re-uses sandwich bags. She shops the Friday food sales. And all of this it works for her. Before she retired, she never made more than $15 an hour, but her house is paid for, and she has money in the bank.
And I know how this goes. I’ve lived this life of extreme frugality and I’ve seen that you do get somewhere by doing it. When I was in college, for example, I worked as a waitress and I graduated with a paid-for car and money in the bank. No student loans.
But since then, what I’ve found is far more effective than frugality is just earning more money.
So the question my mom and I have been debating is, if you want to make money trees instead of potato plants, what’s the best way to do that? is it to save what you can out of your current income and plant a few trees, or grow your income so you can plant a forest?
I vote for the forest. Why? Because every tree you plant isn’t going to make it, so it’s better in my mind to be able to plant a wide variety of trees. That’s one reason. The other reason is if you just plant a whole bunch of these trees now, you don’t have to work as long.
Frugality has its place, but underearning is far more damaging
Have you ever planted a tree? You need a whole lot of water in the beginning to get the tree going. You’ve got to fill the tree’s planting site with a lot of water so the roots don’t go into shock and they take hold well.
It’s the same with investments. Generally, every time you want to make a new investment, whether it’s in a piece of rental property or maybe a hedge fund or note investing or a stake in some kind of business, whatever kind of money tree we’re trying to grow, we generally need some cash to get it going. So I encourage my clients to think of their bank account as a bucket to collect water to get their trees off to a good start, and their ability to earn as the faucet that fills that bucket.
If we want to plant a lot of trees so we can grow a big, healthy, diversified forest of trees that generate money for us quickly, being able to fill and refill that bucket as quickly as possible is key. If your faucet runs at a trickle, your plantings will be few and far between, and financial independence will be slow to come, if it comes at all.
So to my mom’s point, frugality is part of this—you can’t have a big hole in your bucket so it never fills up–but it’s not the whole strategy. I like to think about frugality as being prudent with one’s resources. That in my mind is the most helpful definition, and this definition is akin to minimizing the slosh in your bucket as you’re walking out to water your trees. You want to make sure that your earnings are used to get your trees going, instead of going down the drain.
Why budgets are optional
Most financial advisors will tell you that a budget is necessary to avoid overspending and make investments. They’ll tell you that everyone needs a budget. In my mind, this is as nonsensical as saying that everyone needs a diet. Not true. If you never want to overeat, you’ll never need a diet. Similarly, if you never want to overspend, you’ll never need a budget. I’ve never been on a budget in my life, and the reason for that is that I just want to water my trees. I’m a money gardener in my mind. That’s my fun hobby. And like any good gardener, I would never slosh all of my water out of my bucket and down the drain and let my plants suffer. So I don’t need a budget to act as an external constraint on my spending. My spending is organic. I just know that I want to water my trees and not blow my cash.
And here I’m not saying that you shouldn’t budget. To each his own, and if budgeting works for you to limit your slosh, and you enjoy using it, by all means feel free. But if you don’t want to think about budgeting, if that sounds like dreary torture to you, what I’d suggest for you is to try my approach. Just find the fun in investing rather than spending, and leave the rest. Let your friends and neighbors worry about how to minimize their consumer spending b/c they think that’s where the fun is, and you just focus on the fun of growing a garden that grows money for you and your family. It’s possible for every single one of us to do this, and once people realize that this is possible for them, that’s when they start to think that that’s where the fun is, and blowing money on consumer spending isn’t fun at all.
The fastest and easiest way to gather cash and get started investing
So what I would say to my mom, and what I would say to you today, is that the fastest and easiest way to get a money garden going is not to budget every penny, but to stop underearning. Underearning is what happens anytime you could be making more for what you’re currently doing, but you aren’t making that money simply because you don’t want to ask for it. This is about negotiating for more, and the second you do it, the payoff is huge and it continues forever. Your faucet stops running at a trickle and your bucket fills up much faster, which means more trees more quickly.
Thoughts that lead to underearning
If you haven’t done thought work related to your earnings, I can promise you that you are underearning, and the first step in getting out of it is to figure out the market rate for what you do. The market rate is what a willing buyer would pay to a willing seller in an arms-length transaction. Anytime you’re getting less than market rate, you’re underearning.
So how can you tell if this is happening with you? A bunch of ways. Conventional wisdom is to check your competitors, and this is a fine place to start. If you were to fall off the face of the earth and your customers had to deal with someone else, what would they pay to that someone else? If it’s a lot higher than what you’re charging, you’re underearning. You’re subsidizing the success of your client’s business at the expense of your own. (By the way, if you’re employed, you have a single client. It’s your employer. If your paycheck is less that what your employer would have to pay if they had to go out on the street and hire someone to do what you do, you are subsidizing your employer every day you go to work.)
So that’s one way to look at it. The cost of replacing your service, that’s a handy way to determine the market rate for what you do.
I think a more reliable test is to look at what you’re thinking. If you’re thinking things like:
- They wouldn’t pay me more. Maybe they’d pay it to someone else, but not to me.
- They won’t like me if I ask for more.
- This is fine. It’s not really enough, but I can get along with it. I don’t really need any more.
These thoughts are the hallmark of underearning. You’re exhibiting the classic mental signs of underearning, and it’s almost assured that your work is unnecessarily subsidizing someone else’s business, someone else’s family, and someone else’s dream at the expense of your own.
A more effective way to think about underearning
If this doesn’t seem like a big deal (and it probably doesn’t because your brain is in the place of telling you that it’s not a big deal right now), imagine for a second that you were earning market rate. There’s a check coming to you for the full amount and you’re writing a check back for the amount that your client is currently underpaying you.
Would you write that check? In most cases, the answer is no. When you think about underearning in two transactions—one with the full amount coming your way and a second where you send some of the money back, the harm of underearning becomes instantly apparent, and most people want to stop doing it. If this is you, the next step is to look at the thoughts that are causing you to underearn. Remember, our thoughts create our emotions which drive our actions which create our results. A very common underearning thought is “they won’t pay that. They might pay it to someone else, but they won’t pay it to me” When we think this, we feel resigned to accept less, and we do accept less, and then we get exactly the result we are thinking. They won’t pay that.
But the truth is, more often than not, they will pay it. Especially these days—we’re at a state of full employment. They need what you do. I’m sure you’re great to be around, but they didn’t hire you for pure amusement. Once you realize that, it gets a lot easier to bring your compensation up to market rate. But first you have to dig into your particular reasons why you think they won’t pay that in your case. That’s the next step—when you know the thoughts that are leading to your conclusion that they won’t pay you, you then look at why you’re thinking them so you can begin unraveling what’s causing you to underearn.
I once worked with a programmer who doubled his income after a few hours of coaching with me. He was thinking that his client wouldn’t pay more, and his reason for thinking this is because he thought that he wasn’t sufficiently up to speed on new, widely used computer languages. But this was just a thought that had no bearing on the situation, because he was one of the only people in the world who knew the arcane language his client’s systems were running on. So through our coaching sessions he was able to see that his services, his expertise in this arcane language that very few programmers know, warranted a premium, not a discount. And by shifting his thinking to a more accurate and lucrative version of the facts, he was able to renegotiate with his client based on this new thinking, and he instantly doubled his income from then on.
This kind of thing—cleaning up your thinking to cure a lifetime of underearning–has a much bigger impact on your wealth than washing out sandwich bags, and it requires a lot less effort over the long haul. So why don’t more of us do it? Because we’re worried.
They might not like us, and that’s okay.
Worry is an emotion that comes from our thoughts, and in the underearning context, the thought that generates worry usually includes something like, “They won’t like me if I ask for that.” Essentially, our brains are thinking that they’ll only like us if we let them keep more of the cheese than they would get if they hired anyone else. And our brains think that it’s terribly important that they like us. Even more important than what they pay us, they should like us.
The way you get out from under this thought is to direct your brain to who you’re actually working for. Is it for them? Is your role and responsibility in life to educate their kids? Cover their medical emergencies? Grow their money garden? Or is your role and responsibility in life to do these things for your own family?
When we underearn because we’re worried about people not liking us, we’re worried about the wrong people. The way we get out of this is we direct our attention to the folks we’re actually working for—our spouse, our kids, and ourselves. Maybe it’s extended family, too. It’s the people that we care about, our near-and-dear. They’re the priority. If other people don’t like us for that, that’s their privilege, but this is commerce. The worst thing that’s going to happen is they’re probably not going to dislike you if you quit subsidizing them. More likely, they’re going to be a little irked for a little while, but that will go away as soon as they realize that it was just a matter of time before you figured out that what you were charging was too low. More importantly, you don’t have to feel bad if someone else has thoughts, even negative thoughts, about having to pay more. They can feel bad if they want, and you can feel fine if you clean up your thinking, from “Oh no, they don’t like me. They’re having thoughts about me,” to “They can think what they want. I’m not subsidizing their profits at the expense of my own family.”
Once you’re in a clean state mentally, the next thing to do in stopping underearning is work on your message—how you’re going to communicate the price increase. This is where many “experts” will lead you straight into a hole of additional underearning. Recently I watched an employment expert on the news advising people how to ask for a raise, and the first step was to make sure that your client or employer can afford it. If they don’t have the money, it’s not the time to ask for it. That was this adviser’s message. And I wanted to reach into the TV and smack that adviser firmly on the nose. What your counterparty has or doesn’t have is none of your business. The truth is that when they need money because prices have risen, they’ll come up with it. If the cost of fuel goes up for an airline, they deal with it. If the cost of food goes up for a restaurant, they deal with it. But too often we don’t want their costs for our services to rise, so we, at our own expense, hold those costs artificially low for their sole benefit. We don’t want them to deal with that cost increase. We take it onto ourselves and we make it our problem.
When we do this, we’ve gotten out of our business and into theirs, and then what happens? Our business—the business of earning the current market value for what we do so we can grow our own wealth–falls to the wayside. This happens to way too many of us. So here’s the thing: you watch your bottom line, advocate for yourself and your own business, and let your counterparty—your client or employer–watch theirs. If they want what you do, they can pay market rate for it, or you should go sell whatever it is you do to someone who will pay market rate.
This is where our brains really start freaking out, isn’t it? Especially for the employees among us. There’s something about the idea of a job that makes us feel beholden. Like we should be more loyal than that. So if this idea of insisting on market rate when your counterparty is struggling to pay it seems harsh to you, maybe this story will help. I once worked with a woman whose employer had a substance abuse habit. It wasn’t immediately apparent, but as the course of her employment it became clear that all his money was going straight up his nose. And those expenditures for cocaine were a major reason he couldn’t “afford” to pay her what anyone else would have happily paid. She felt sorry for him and wanted to be loyal. That’s why she stayed in that underearning situation for so long. But then very quickly when she started coaching with me, she saw that that she was essentially taking a big chunk of what should have been her salary and buying his drugs with it. Not directly, but that was the essence of the transaction. When she saw what was really happening, then she lost her feelings of obligation and misplaced loyalty and had no problem leaving for greener pastures. She was a single mom, and she stopped underearning by looking at what her thoughts were getting her. “I should be loyal to him” and “he’s struggling and can’t afford this” changed to “I have a responsibility to my daughter not to get sucked into this” and that changed everything.
This is difficult to do on our own, because we are socialized to underearn. When we’re toddlers, we reach out and take whatever we want, even stuff that’s not ours, and we’re taught to stop doing that, which is good, but the bad part is that this teaching typically goes too far. We go from grabbing everything in sight to giving it all away. Our parents, our teachers, everyone around us rewards and praises us for giving our stuff away, and that continues into adulthood. We do it in commerce where it’s not remotely appropriate. In commerce, everyone advocates for themselves, and if you don’t advocate for yourself, if you think you’re just going to be given what’s fair, that’s going to hurt you. Thoughts like these are so damaging and they are why most of us will never reach financial independence.
We’re also taught that a little is safe, but a lot is dangerous.
A lawyer I worked with was earning less than a well-paid secretary because her parents had taught her that a job—any job–is safe. She accepted a ridiculously low salary because then she’d be more assured of always having a job. Who would ever fire her at that low rate of compensation? But real safety comes not from a job that underpays you, but from money in the bank. As soon as she saw this, she renegotiated, she quadrupled her salary, and bought herself three years of not working for every year that she worked under the new compensation arrangement. When you’re paid properly, you can see the danger in underearning. Every year you work for less than you should makes you that much more desperate for the job that’s causing that situation. It’s a vicious cycle that gets worse and worse and worse as time goes by.
Getting help creates an exponential return on investment
These examples are just a fraction of what I’ve seen. I could give you so many examples of underearning that are easily fixed through coaching that I can’t even begin to tell you about all of them. But to summarize them, what inevitably happens is that In a few hours’ time, and for a relatively modest investment, you get a lifetime of increased earnings because you learn to stop thinking in ways that undermine your earnings. The return on investment is astronomical, and the sad thing is that most people won’t ever achieve this return because they refuse to get help in this area. Or maybe they don’t even know it exists. Often though, I think they do know that help is available and they don’t want to avail themselves of it so they continue to underearn throughout their lives.
This is one place where frugality and financial independence diverge. I said earlier that the best definition of frugality is that it’s the prudent use of resources. This type of frugality enhances wealth. But there’s another type that cuts wealth off at the knees, and it’s the sparing use of resources. This is when we refuse to part with a small amount of money even though it would bring a multitude of cash back to us.
One of my hedge fund manager clients calls this tripping over dollars to pick up pennies. I think this is where frugality hurts people like my mom. She never earned what her work was worth because she truly believed that the amount of her compensation was wholly outside her control. It was entirely in the hands of someone else, and she got to her current state of relative safety exclusively through sheer force of will—saving every penny she could scrape together for her entire life, and hoping it would be enough. That’s one way to do this, but having lived both lives, one where my focus was on saving and the other where my focus was on maximizing my earning, what I’ve learned is that frugality without more is the hard way. If we clean up our thinking to earn more, and we renegotiate with an effective message so we can stop underearning (I can help you with this too, by the way), we enjoy a huge payoff that lasts forever. And then our cash snowballs. It’s easy to fill and refill our bucket so we can plant more trees and then they start generating cash, and that cash generates more cash. That’s a giant snowball that any of us can make happen in our lives. But if our faucet is running at a trickle, if we’re underearning and we don’t have any cash to begin growing more cash, then we make everything more difficult for ourselves and we just keep working and working and working for the rest of our lives and getting nowhere. So stopping underearning is key to gathering more cash, and it’s something I can help you with (I would love to help you with it). If you want to discuss working with me to stop underearning, let me know. I’m at firstname.lastname@example.org. And please join me for the next episode where we’re going to talk about investing. It’s the third in our four-part series on financial independence, and I look forward to connecting with you for that one. And thanks for joining me today. It’s been my pleasure to talk with you. I appreciate having you as a listener, and I’ll see you next time.