There are two financial flywheels that you can add to your routine cycle of earning and spending money. One of them you want to avoid and the other you want to employ.
The Hamster-Wheel Cycle
This is the so-called rat race which consists of earning money and then quickly spending all of it. Since all of your earnings are spent, so there is no extra money for maintenance, saving, or investing. If you remain in this earn-spend cycle for your entire career, you will likely experience financial struggle and it may be very difficult to ever retire.
2. The Debt Flywheel
This is borrowing money in order to spend more than you are earning. The more money that you borrow, the more interest expense will be devouring your disposable income, leaving you less to spend. This is a negative flywheel, one that damages your financial life as long as it exists. As this flywheel grows in size, you are pre-spending more of your income and the more you’ll experience financial struggle. Simply having this flywheel makes your earn-spend cycle more difficult.
3. The Investment Flywheel
This is earning income from investments that regularly pay you income (interest, dividends, rent, etc.). By routinely feeding this wheel with new additions of money, and re-investing all of the investment income into more investments, your investment income will become an ever-growing flywheel. This is a positive flywheel, enhancing your financial life as long as it exists. As this flywheel grows in size, its investment income provides more financial options, more financial stability, and the possibility of an early retirement. Starting this flywheel is the most certain structure to break the earn-spend cycle.
If you are having trouble saving any money to start or grow investment flywheels, then I offer the two easiest potential sources of funds:
- Cut your taxes. There are several types that you can actively minimize, such as income tax, sales tax, property tax, etc. and then save that money or use it to pay down debts.
- Cash back credit cards. Instead of using a credit card that provides airline miles or other non-cash benefits, search for a credit card that pays you at least 2% back in the form of cash.
Years ago, I assisted someone in setting up her investment flywheel in a tax-free retirement account (basically a fixed-income portfolio with auto re-investment). She just told me that her investment income is now increasing by $46 per month. She had not added any new money recently, her investment flywheel is compounding upward on its own, every month. So she receives a pay raise of $46 each month, and this raise becomes a little larger each month. It is my best advice to start and build your own investment flywheels. Even if you can only add just $20 a month to an income-producing investment, over time you will be improving your financial stability.