Due to CruiseSheet growing and my new coaching project, my income has gone up quite a bit compared to previous years. This has been a strange transition for me, as I’m used to being the guy who doesn’t really make much money, but does clever things to maximize it. Now I have a more normal income.
So far I haven’t really changed, but I suspect that if things keep going well I will be less relatable to people who don’t make too much money when I talk about money. For that reason, I’d like to freeze this moment in time and explain how I think about and use money. I suspect that my habits will mostly stay the same, but you never really know.
People think about net worth and income, and while those numbers are useful, they’re just a small part of the picture. Focusing on them will cause you to make mistakes.
The two factors I always think about are runway and quality of life. If those numbers are high, then nothing else matters. They are a complete picture.
The worst thing about not having a lot of money isn’t that you don’t have a Ferrari, it’s the stress surrounding finances. Will you have enough to pay next month’s bills? Even if you’re pretty sure you will, you still have to think and worry about it.
Runway is how many months you can live your current lifestyle based only on savings. If you spend $2000 per month and have $20,000 in the bank or other liquid assets, that’s a 10 month runway. That’s pretty good.
Your first goal should be to build a 12 month runway. Your number may be different, but a year is a pretty good first goal. At that point you will still be motivated to make money, you’ll also have the freedom to sink time into projects and education that may take time to pay off. That freedom allows you to explore all of your options.
It takes discipline to not blow your 12 month runway on something you couldn’t previously afford. That’s a good thing, though, because you want to develop that discipline before you make more money. People who make a lot of money but spend all of it are barely better off than people with no money. They have more stuff, but they also have higher maintenance costs, which add stress.
You should first look towards reducing your monthly cost of existence. You can make your own rules for yourself, but I’ve always felt that the standard “30% of your income” on housing was extremely high, especially because it doesn’t include utilities. I’d stick closer to 15-20% including utilities.
Adding money to savings adds months to your runway, but cutting monthly costs multiplies it. If you go from $3000 to $1500, you’ve just doubled your runway. If you add $15,000, that’s only five months more. Always work on your biggest leverage point.
As rent is probably your biggest cost, it’s worth going a little nuts to cut it down. It’s also worth trading savings. You could buy an RV, move to Vegas, move to some random rural place, get a roommate, move in with family, move in with a significant other, etc.
Some of these things may not sound so appealing. But you’re not doing it because it’s appealing, you’re doing it because it’s a step towards having a rock-solid financial future FOREVER. Just about any short term effort is worth it if it results in a permanent life improvement.
If you don’t have a long runway and your runway isn’t getting longer, you are almost certainly making a mistake. You will have to sacrifice something if you want a good financial future. Bite the bullet and do it.
Remember that quality of life is often correlated to monthly expense, but is not linked directly to it. My monthly costs all-in are probably somewhere around $500 plus food (which I don’t spend much on), and that includes having a place in Vegas, a car, a motorcycle, a share of an island, and a share of a place in Budapest. I spend more than that on plane tickets and other things, but that’s discretionary and can be eliminated without really lowering my quality of life.
Once you get your year of runway, start thinking about how you can trade that money for a lower monthly cost. I’ve done this to an extreme by buying everything in cash. With no car, house, or motorcycle payment, my costs are very low. The point of doing this is to lock your lifestyle in and to make it really easy to extend your runway further.
Never lease or finance anything unless it is required for you to make money. If it’s totally infeasible for you to pay cash for a car AND you need it for a job AND there’s no other way to get to that job, then finance the cheapest crappiest used car you can. If you have to finance something, that’s how you know you can’t actually afford it, so it had better be earning you money. We all want cool cars, but if you can’t pay for that car in cash and not cripple yourself, you can’t afford it and the “status” it’s showing off is a lie.
Speaking of debt, if you have any debt you need to kill it before you do anything else. Move back in with your mom, work two jobs, eat beans and rice, and pay off that debt. Debt is proof that what you were doing wasn’t working, so it’s time to tighten up that buckle and do something different.
This doesn’t apply if you have debt that’s 5% APR or less. It’s not great, but it’s not hard to get more than 5% out of your money, so don’t bother paying it off faster than necessary.
Along with trying to lower your runway, you should also be thinking about ways you can get some low-maintenance income. Passive income is nice, but in my experience there are probably 10-20x more ways you can make low-maintenance income than totally passive income.
One good example of low-maintenance income is writing books. Books sell worse and worse every year, but if you write a new one every couple years, that income will slowly grow or at least stay the same. It’s not a full time job, but it’s something you can always find time in your year for (if you’re a writer). Another example might be buying a property and renting it out on AirBnb. CruiseSheet is another example for me. It does better when I put time into it, and there’s always a bit of monthly work to do on it, but I can focus on other things for weeks and not hurt it.
If your monthly low maintenance income is higher than your expenses, then congratulations, you have an unlimited runway. I think of this as “phase one” of personal finance. Get to the point where, all other things remaining equal, you have no financial stress and have control of almost all of your time.
This sounds like a dream for people, but it’s actually not that hard. Find a job that pays you $3000 per month. Live for $1000. In six months you have a full year of runway. Cut back on the job (or quit), and spend a year building some low-maintenance income. If you can get it to $1000 per month, you’re done.
If you can only find a $2000 a month job, then it takes a year. Even still, in two years you could have an infinite runway.
Having cool possessions like cars and clothes do make your life a little better. I like that stuff, too. But having an unlimited runway makes your life WAY better. It’s not worth trading runway for those things.
Once you have unlimited runway, you have a lot of options and you have the time with which to execute those options. Increase your income and invest it. Spend your money on fixed assets that will permanently make your life better. Volunteer your time. Spend time with people you love. Make more money and spend part of it to increase your quality of life (still don’t lease or finance anything!). Dedicate all of your time to your dream business or project.
The worst possible situation to be in is to have a job you don’t like and to not be saving money. This is how you ensure that you do not enjoy your life. If you have a job you don’t like, you had better be cutting your expenses to the bone so that you can find a way out. On the other hand, if you have a job you love than maybe these ideas aren’t as relevant for you. All you need is enough runway to guarantee that you could find an equally good job if you lost yours.
This may not be the right formula for everyone… but then again I know a lot of people who do this and they’re all pretty happy with their lives. Once you get to unlimited runway it’s very hard to imagine going back.
Photo is the Parliament building in Budapest. They do an amazing job with the landscaping.