If you want to know how to make money and begin making more money, I’ll tell you the secret. There are only two levers you can pull. To understand this simple truth, let’s start at the beginning. To grow richer, the formula looks like this:
The cash flowing into your life (income)
– The cash flowing out of your life (expenses)
= Profit (if positive) or Loss (if negative)
That simple, mathematical statement is elementary school subtraction. But it is powerful because if you think about it – I mean really, truly think about it – you will have a moment when you realize we can break down the components. Doing that uncovers a profound revelation: There are only two ways you can increase your net worth.
Lever 1. Increase the total cash coming into your life
Lever 2. Decrease the total cash flowing out of your life
That is it. You have those two levers, and only those two levers, to pull. The bigger you can make the excess between cash flowing in and cash flowing out, the more surplus you have left over and available to you. In other words, your job is to make sure more dollars come in than go out and to continually widen that spread with time so your family enjoys a larger surplus with each passing year.
[mainbodyad]That surplus is your capital. That surplus is the money you have to build a better life. You can store it (park in savings or Treasury bonds for future consumption), invest it (put to work in productive assets that, you hope, generate even more cash, pulling the first lever), use it to pay off debt (lowering the cash flowing out of your life, pulling the second lever), increase your standard of living (buy new furniture, cars, vacations, clothes, televisions, etc.), or support your favorite charitable organizations.
Making money really is that simple. To drive the point home, here are two examples of putting the levers to use in our my own life and businesses:
- Lever 1: One of our companies recently realized we could supply our customer base with a product they were ordering, anyway. By arranging our own distribution channel, we were able to add hundreds of dollars to the average order without any additional capital investment, pulling Lever 1. Far more cash began to flow into the company coffers and our customers were thrilled to the point of adulation.
- Lever 2: Several years ago, we realized that Voice Over Internet Protocol (VoIP) phone services, which allow phone lines to go through the Internet for pennies on the dollar, had reached a high enough level of reliability that we could switch our customer service department over to it. Money that was going to the phone company remained, instead, in our pocket. We pulled Lever 2. That is extra surplus cash that can be paid to our members in dividends, fund future growth, buy more investments, etc.
A Few Common Pitfalls to Making Money
One area people get tripped up and fail is they try to do something stupid to pull the first lever (e.g., borrowing huge amounts of money to buy investments they otherwise couldn’t afford, not realizing that there are down markets that are inevitable).
Another area that causes people to fail in the making money game is they believe the only way to generate more cash is to sell their time (Lever 1). That lie leads to dependency upon a job from an employer. They sit around waiting for a good job instead of thinking of ways to pull either (or both) of those two levers. You can do more than sell your time. Martha Stewart began by selling expensive homemade pies outside of a retail store. Warren Buffett began by offering to manage money through family partnerships in exchange for some of the profit. Bill Gates sold software. Walt Disney sold entertainment. Howard Schultz sold cups of coffee. John D. Rockefeller sold barrels and tankers of refined oiled. Lady Gaga sells songs.
Still a third mistake when it comes to making money is introducing wipe-out risk. Whatever you do, whenever you are pulling either of those levers, do not introduce wipeout risk. You should never put what you have and need at risk just for a little more money. Time and compounding will do most of the work for you if you’re smart about it. I discussed this in an article called The Two Questions Investors Should Ask Themselves Before Investing Money.
Whenever you are taking an action that you believe will help your family or business make more money, identify which of the two levers you are targeting, and then objectively measure your success at regular intervals.