Think of the last 10 pieces of personal finance advice you've read. Do any of these sound familiar?
• Cut back on lattes!
• The world's top 10 coupons
• Don't go on vacation this year!
• The world's top 10 coupons
• Don't go on vacation this year!
If you boil all the advice down, there are just two ways to improve your financial situation: earn more or cut costs. So why don't more personal finance experts talk about earning more? Because most of them don't know how.
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And so we get lectures on frugality, giving us obscure advice like how to save on paper towels. With each tip, we get diminishing returns. And we start to believe that personal finance is about "No, No, No!" No, you can't spend money on lattes. No, you can't go on vacation. No, you can't buy those ans.
It's no wonder that most Americans simply ignore their finances. We don't want someone constantly lecturing us on what we can't do.
I believe personal finance should be about saying "Yes."
Yes, you can afford that extravagant coat, or iPhone or even a trip to the Bahamas. In fact, I believe in conscious spending, or spending extravagantly on the things you love -- as long as you cut costs mercilessly on the things you don't.
Once you've cut on the basics, the single best way to live a rich life is to earn more money.
The Myth of Frugality
Let's take a look at a typical person who tries to cut back to save money.
Jack has to cut back on a lot of things in order to save significant amounts of money.
| What he does | Monthly amount saved |
| Drink 1 less latte per week | $20 |
| Buy groceries in bulk | $30 |
| Go out 4 fewer nights per month | $200 |
| Cancel cable | $50 |
| Eat out five times a month instead of eight | $100 |
| Total: | $400 |
Not bad. $400 saved. But at what cost? Each morning, Jack has to decide if can buy that latte. He has to consciously cancel his cable. He has to decide if he can afford that dinner out. On and on -- and he has to do this every month.
Jill can focus on one thing to get the same result:
| Action | Amount Earned Per Month |
| Finds an area she likes, spend five hours each weekend and charge $20/hour | $400 |
| Total: | $400 |
Jill found something she was good at, turned it into a small side business, charged a reasonable amount and found a client willing to pay.
Cutting back may be easier for the first month. But it's likely unsustainable. After all, there's a limit to how much you can save. But there's no limit to how much you can earn.
Earning More: The Numbers
Let's consider three goals for your personal finances. If you could charge $25/hour for your services and work enough hours each month to generate an extra $500/month after taxes, what could that additional money do for you?
Let's say you're paying off a $10,000 credit card debt at 15 percent interest and want to add that $500 to your payment.
| If your monthly payment isÂ… | You'll pay this much interest | Over this time period |
| The minimum | $11,979 | 35 years and 4 months |
| The minimum + $500/month | $1,085 | Only 16 months |
That's over $10,000 in savings on interest alone.
Invest the Extra Money
When you earn more and invest the extra money, the results are incredibly powerful. Here's what extra income can do for your investments.
| Additional income | Value if invested for 40 years with a 6 percent annual return |
| $100 / month | $156,122 |
| $300 / month | $468,367 |
| $1,000 / month | $1.5 million |
Pay off a mortgage
Putting even $100 extra per month toward your mortgage can dramatically decrease the amount of time it will take you to pay it off.
| Additional monthly mortgage payment | Mortgage will be reduced byÂ… |
| $100 / month | 3 years, 8 months |
| $300 / month | 8 years, 8 months |
| $1,000 / month | 16 years, 11 months |
*Based on a 5 percent, $300,000, 30-year fixed rate mortgage.
How to Earn More Money
The simplest way to earn money on the side is to turn your existing skills into side income. Nearly everyone has skills that others would pay for. Can you play an instrument? Consider being a music instructor. Are you obsessed with personal organizing? Hire your services out as a personal organizer. Do you have expertise in Excel, Web analytics or even free-lance writing? Many employers would love to hire you as a free-lancer.
This is a new way of thinking, and it makes many people uncomfortable. "That's ridiculous," they say. "Nobody would pay me $25 per hour."
To them, I say two things:
1. You already pay service providers for things you could do yourself. Have you ever eaten at a restaurant? Changed oil? Gotten your hair cut? We all pay others for their services. Now, I want you to flip this around and charge for your own services. People will pay -- as you already pay others.
2. You don't know if your offer of services will work until you test it.
Twelve months ago, I declared it the year of earning more money and wrote a series ofposts on the topic. I then launched an online course on earning money, in which I took hundreds of people from around the world and taught them how to turn their skills into side income.
Dean Soto was one of them. He has a wife, two children and a demanding full-time job. How could he find enough time to earn money on the side? Dean went through several exercises to determine which of his skills would be profitable. He realized that the information technology skills he used at his day job could also earn him money on the side -- if he found the right clients. But his side income needed to be worth giving up his scarce time with his family.
Once he figured out a potential idea, he used his network to meet people and ask what their needs were. He found his first client by accident. When he heard Dean's asking rate -- $30/hour -- he scoffed and insisted Dean charge more.
To account for his busy schedule, Dean used a clever retainer technique, which lets him work flexibly as long as he gets the work done. "I come home from work around 5 p.m.," he said. "Then I spend time with my family until about 9 p.m. and spend about an hour a day on my side work."
"I never thought I could do something like this," he said. "Now I'm like a boxer, looking to take little jabs and see where there's an opening."
Last year, Dean earned $22,700 on the side. He raised his hourly rate from $30 to $60 and then $150 per hour. The best part? "My wife loves it," he said. "She's able to stay home, which is her dream, and my kids have their mother all day."
There's nothing unique about Dean. But he is remarkable for taking action instead of being blinded by the frugality brigade that so permeates personal finance.
Frugality is important -- to a point. But after we cut back to a reasonable level, our biggest win will come from earning more money.
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