The situation can leave people feeling like they will never get ahead as their expenses seem to eat most of the financial pie chart.
But it’s a fallacy to think all expenses are evil, says a successful entrepreneur and angel investor. In fact, he says, nearly all of them are necessary, and if managed correctly, they can even help you win financial freedom.
“It’s critical to understand the difference between debt and liability,” says Nik Halik, also an adventurer, speaker and co-author of 5 Day Weekend: Freedom To Make Your Life And Work Rich With Purpose (www.5dayweekend.com). “The goal isn’t to simply pay off all loans, but to maximize the efficiency and production of cash flow.
“We’re taught to believe that expenses are bad and to cut them as much as possible, but that perspective is simplistic and misguided. In reality, there are four types of expenses, and only one of them needs to be cut.”
• Lifestyle (consumptive) expenses. These include dining out, vacations, concerts — fun expenses that help you build memories. “If you never spend any money, you won’t be fulfilled,” Halik says. “To pay for these expenses, never borrow and always use cash. Lifestyle expenses should be managed wisely.”
• Protective expenses. These are the expenses that protect your property, your life and your health. “This is the financial area that often gets overlooked — especially by the middle class,” Halik says. “Affluent people don’t compromise with their protection.” One example of a protective expense is your liquid savings, which Halik says should be enough to cover a minimum of six months’ expenses. Other protective expenses include life insurance, medical insurance and auto insurance.
• Productive expenses. Essentially these expenses symbolize the adage, “Spend money to make money.” Productive expenses, Halik says, “allow you to build assets, expand your cash flow, and grow your business. This could include purchasing rental property or hiring a great employee. These are expenses that are going to enhance your life now and in the future.”
• Destructive expenses. Halik saves the worst expense category for last. These are the only expenses, he says, that should be eliminated. “They include consumer debt, vices, overdraft fees, the gym membership you don’t use — anything that subtracts value from your life instead of adding it,” he says.
“When you understand the difference between true debt and mere liabilities, you begin to see that in many instances the way to become wealthier is to increase, not decrease, your liabilities,” Halik says. “A liability can come with an asset that can make you more money than it costs. Your goal isn’t simply to get out of debt, but to achieve financial independence.”