Managing Expenses to Build Wealth

When looking at expenses in relationship to saving and building wealth it's natural to think the best approach is to cut or eliminate expenses across the board and sacrifice spending to save more money.This is often a precursor to scarcity thinking. You will hear the terms "scarcity thinking" and "scarcity mindset" as a reference to ideas like "less (spending) now is more (money) later". This approach won't lead to wealth, however learning about the four types of expenses and knowing which ones to eliminate,manage, and even increase can help you on your path to better financial decisions and your way to wealth.

 

Before we talk about expenses, let's clarify borrowing and credit card expenses. When referring to these we are specifically talking about expenses that don't get paid off at the end of the month or billing cycle that you purchase them. If you make purchases but pay them off every month because you have the funds to do so this is not the borrowing or credit card expenses referred to below.

 

1. Destructive Expenses:

These are expenses that can destroy wealth. Whether borrowing cash or using credit, unchecked consumer debt can be destructive. For example, using credit cards to finance a trip, an experience, and unhealthy or unnecessary "wants" creates a loan that doesn’t include an asset and doesn’t create cash flow. This boils down to wasted money.Try to cut down and eventually eliminate these types of expenses.

 

2. Lifestyle Expenses:

These expenses make life comfortable, fun, and add value. At the same time they don’t directly build assets or income. They include things like upgraded phones, after market accessories for your vehicle, clothing, utilities, dining out, vacations, concert tickets, etc. We encourage you to never borrow (credit card) to pay for them, and use them wisely to create the quality of life you want. In other words, don't put a vacation on a credit card, but don't put off a vacation for 5 years. Do what you can afford without borrowing. Make it a habit to consider the price, cost, and value of an expense.

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PRICE: What you pay to purchase something.

COST: The net financial impact. The basic economics behind the choice.

VALUE: The personal enjoyment or fulfillment you receive from the purchase) of your expenses and manage them wisely.

 

Auto and home loans are an exception. Cars depreciate in value but it makes sense to finance them with a lender or better yet use Prosperity Economics and the Infinite Banking concept to keep your money working for you. A mortgage on a personal residence usually does not create cash flow but is an asset that will likely hold value and appreciate over time.Manage Expenses to Build Wealth

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3. Protective Expenses:

These are things that protect your property and human life value from damage or loss. Protective expenses include insurance: life, disability, health, auto, home, liability and others.They also include your liquid savings, estate planning, corporate structure, and emergency preparedness. Many people overlook or dismiss them as unnecessary or unimportant expenses but the truth is they are extremely valuable because they allow you to transfer risk ensuring you can protect and preserve your assets. They are a necessary part of financial health and offer peace of mind. At some time we will all experience a financial hardship or emergency. Most of these situations can be addressed with proper planning and savings, but for those we cannot manage, protective expenses can prevent us from being financially derailed or devastated. You won't know their worth until you need them and don't have them in place. Plan to have them and be efficient with the policies you choose.

 

4. Productive Expenses:

Productive expenses are the key to creating wealth. They allow you to build assets, increase your profitability, and cash flow. They also enhance your life now and in the future. These are expenses that, if you spend a dollar, they produce more than a dollar - like any asset that creates cash flow and appreciates in value. They may have a liability attached to them, such as a mortgage on a rental property, but the key factor is the asset produces more than the liability. It is counter intuitive for many who are in the scarcity mindset trying to cut expenses at all costs, but you want to increase productive expenses as much as possible. This could include purchasing a rental property or business. If you own a business, hiring a new employee may cost you money, but the increased productivity may make you more money overall. If you own an asset that allows you to put in one dollar and get two dollars out, how many dollars would you want to put into it? As many as still profitable and manageable, right? But people stuck in that rigid “stay out of debt” mentality often don’t consider this as a possibility and miss out on wealth building opportunities.

 

Once you understand the four types of expenses, it’s time to classify your spending. Look at your credit card and bank statements and categorize your expenses into one of the four quadrants, as outlined in the illustration.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This simple chart is a way to help you quickly see where your expenses fall within our four categories:

• If the expense creates scarcity or is a strain on your production and value, it’s destructive and wise to eliminate.

• If the expense is of value to you, but doesn’t always increase production, it’s a lifestyle expense.

• If the expense works to defend your production, but doesn’t technically bring value, it’s a protective expense.

• If your expense increases value and production, it’s a productive expense.