Yesterday I wrote a post about how to not live paycheck to paycheck but it is important to learn why you don’t want to live paycheck to paycheck. This post will discuss the WHY in the form of the benefits that come with not living paycheck to paycheck and strapped for cash.
Allows you to take high risk for high returns
We are all familiar with the maxim “high risk high reward” and it is very true. the problem is that when your ends are low you have to preserve everything that you have which means you can’t take on high risk and you can’t get high returns that could change your life. When you are aiming to preserve you choose low risk stocks like Young Blue Chip. Young Blue Chip isn’t rich but he never loses money. You don’t get rich aiming to not lose money though. You get rich by aiming to make as much money as you can which means that you have to be willing to go all in on a deal that might not work but if it did it could change your life. To be this bold you have to be able to afford to lose money.
“I have never met a rich person that hasn’t lost money but I have met a lot of poor people who have never lost money, investing, that is”
When I was living in my efficiency apartment I bet big on Tesla. At that point in my life my rent was at 30% of my income, I was on a less than $5 per day budget for lunch and I had no car note. My personal financial position was not dependent upon my paycheck. This positioned me to stack as much money as I wanted into my brokerage and then bet that large sum on Tesla and other high risk stocks. As a result, I picked up a 25% gain overnight when they released earnings. I went on to make even more money in the same stock, ultimately using that money to pay for a portion of law school. No way I get a 25% return in a blue chip or living in fear of losing money.
Allows you to invest using other people’s money
Another thing that not living paycheck to paycheck allows you to do is you can now afford to invest on margin. When you invest on margin you are able to take the cash you invest and double it. This could now allow you to double your returns because you are investing with the banks money. I say that you have to have a financial cushion because investing on margin is a loan and you will have to pay interest. You might also experience a margin call on the shares if they turn against you. When stocks turn against you this could just be part of the game, if you have the money to withstand the risk you can always pour more funds to cover the call. If you are living paycheck to paycheck you can’t do that though. Having money allows you to double your returns AND support your investment if it turns against your short term. You hedge your bets with your reserves because you can afford to do so. Having the excess allows you to take the risk and then manage the risk. Risk never goes away, the wealthy just learn to manage it. That is why we have risk management not risk avoidance.
Allows you to work WHERE and WHEN you want to
A lot of people are forced to work in places that they hate just to make ends meet. I have a theory on this that work is called work for a reason and the concept of not hating work would make it not work. That isn’t the point here but having wealth and a cushion allows you to work jobs that you want to work, when you want to work. Having a cushion allows you to turn down opportunities that don’t serve you. Having a cushion allows you to wait for the best opportunity not just hop on the first thing that presents itself.
Allows you to create other income streams
Not only should you have a cushion you should also have multiple streams. I like knowing that my job can fire me tomorrow and my life wouldn’t change because of cash reserves and alternate sources of income that I have positioned to take care of me as a form of employment insurance. Multiple streams can come in a lot of different forms. Ideally they are passive streams that come from a business or real estate but a lot of times those streams can come from picking up extra hours in the evening or weekends. You will look crazy to your friends, but your friends are broke, they just don’t know it yet. If you are doing what everyone else is doing, you too will be broke.
Allows you to do the things that liberate you
We live in a nation that wants you to have the best and the flashiest. Having the best and the flashiest ties you to things you don’t want to be tied to (crappy jobs, unhealthy relationships, dangerous neighborhoods). It also prevents you from doing the things that could liberate you from those ties (starting a business, investing, taking a pay cut for a better opportunity). You have to adopt a frugal mentality, which will then allow you to avoid living paycheck to paycheck so you can then live life on your own terms. This will give you leverage in all areas of your life. This will allow you to stand up to your boss who might be mistreating you (read FU money). This will allow you to hop into opportunities that could change your life. This will allow you to invest in your community and become a resource not a charity case. Financial freedom is the only hope, [forget] living rich and dying broke. If you want to work with one of our personal finance consultants please email us at firstname.lastname@example.org we would love to work with you.