Monthly Archives - September 2020

You know how rain barrel systems work, right?

You start with a barrel, typically a 55-gallon drum.  You could go smaller with the 30-gallon size, or larger with one of the big tanks.  We've got a 1500-gallon tank on our homestead which we’ve used to collect water in over the years.  It's now been converted into an animal shelter.  But whatever size barrel you choose, the important thing is that it's watertight and made to hold large volumes of water.

You then hook the barrel up to whatever rain collection source you've MacGyvered.  For most people that’s going to be the gutters on their house. Whenever it rains, your barrel fills up for you to use for whatever future need you have.

If you put a good valve on your barrel, you can use it to water your garden, you can use it to supply water to your animals, or, when we were using our 1500-gallon tank before we hooked up to our well, we used the rain water for potable household use with the help of a couple filters.

It's a pretty simple, pretty common, pretty reliable system.  A lot of people out there use rain barrels.

Well, guess what?  If you can wrap your mind around how a rain barrel system works, you can wrap your mind around getting ahead financially.  The same principles apply.  Except, instead of storing up a water surplus, what you’re doing is storing up a budget surplus, which, like the water barrel, can get you not just to the next time it “rains” (i.e. your next payday), but, ideally, if managed well, can get you a lot further down the road than that.  So much so, in fact, that if you had to you could even skip a couple of those income periods and be just fine because of the financial “rainy-day fund” you’ve stored in advance.

I think it helps if you think about your finances in three parts, at least in respect to the idea of getting ahead:

1. Determine What Size Barrel You Need.

I’m convinced a lot of people have trouble making progress in their finances because they've never given sufficient thought to this question.  They've never defined, and they've certainly never calculated, what their needs actually are.  And, understand, when I use the word "needs," I don’t mean to put that contrast to a person’s “wants.”  There is a difference between needs and wants, but here I’m just lumping them together because I understand, realistically, life is more than just survival.

Another way to put it is, you've got to start by determining in hard numbers what “standard of living” (encompassing both needs and wants) that you envision your family operating on.  Is it going to be a 55-gallon drum, or a 1500-gallon drum?  Do you need a net-cash flow of $40,000 a year or $140,000 a year? A lot of that depends on the family. Some families can get by with a lot less than others.

On this point, I'll let you in on a little secret.  One reason a lot of people feel they can never get ahead financially isn’t because they've underestimated their barrel size but because they've overestimated it.  Don't get me wrong, you can easily underestimate what your family needs and settle with bringing in a lot less than you really should be.  But, there are a lot of people out there ambitious to bring in a lot more than they really need to because they’ve chosen a standard of living  unnecessarily and unsustainably higher than it needs to be.

Many people choose to have a bigger and more expensive house than they need.  They choose to drive the newer model car and accept the normalcy of car payments.  They choose to eat out on a regular basis.  They choose to furnish their home with expensive Pottery Barn décor and flat screen TVs.  They choose a lot of the amenities, comforts, and conveniences that are just luxuries they could honestly do without.  As a result, they size up their barrel so large that it requires a lot of work to keep it filled.  They then complain they can never get ahead because getting ahead for them means  being able to afford new forms of pampering.

I've found the winning strategy that would serve a lot of families well is to select a more modest standard of living that doesn't require such a large cash flow, which makes filling and maintaining the barrel a lot easier.

Of course, it's not just choosing a practical standard of living, but it's also estimating those extra “special needs costs” that inevitably come up in life.  I’m talking about those special emergency, special savings needs that every family has, from unknown medical needs, to kid’s college needs, to retirement planning needs.

You've got to think about all those numbers.  Every family will look different.  Obviously, the further out your planning the more your numbers will be approximations, but the point is you’ve got to pick the right size barrel.  So, get a piece of paper and calculator and map it all out in hard numbers.  Yes, it takes some metal energy.  Yes, it involves math.  But, listen, if you want a handle on your finances, you’ve got to run the numbers and size up your barrel.

2. Tap into a Suitable Stream of Income.

If you're working with a rain barrel, what’s the best way to fill it up?  You've got to connect to a good water source.  If you’re working with finances, you’ve got to connect to a good income source.

What qualifies as a good income source?  I would say two things: (1) the reliability of that source, and (2) the volume potential of that source.

In terms of the reliability of your income, by that I just mean, do you have a steady job?  Are you working for a stable business, even if that business is your own?

I’ve met people who are the “holding out for management type,” or the “I’d rather be my own boss type,” who seem to be content just sitting on their backside waiting for the skies to open to pour forth blessings freely into their lap.  If that’s you, you can certainly sit on your porch and wait for the big rain to come, but just understand you could be waiting a while.

Rather, it may be a better idea to start collecting gradually, but with the guarantee of the light rains that come and the regular morning dew that you can count on.  It may take longer to fill your barrel, but you will eventually fill your barrel if you learn to be consistent.  Honestly, if you don’t learn to discipline yourself with a lower income, it won’t do you any good when you do earn a higher income since you won’t know what to do with it.

Then, once you have learned the importance of steady reliability, it’s not a bad thing to focus on the volume of your income, because while you don’t have to have a hard rain to fill the barrel, a hard rain does speed up the process.  Thinking about how much you're earning, and how you could be earning more in less time, is a valid thing to consider.

How can you make more money in less time?  The way I see it you have two options, and there’s nothing that says you can’t try doing both of these things at the same time:  (1) Deliberately position yourself in the path of higher earnings (i.e. pursue a raise), and/or (2) add a second or even third source of income to what you already have (i.e. get an additional job).

In terms of pursuing a raise, my best advice is not just to wishfully expect a raise, but to take the initiative upon yourself to stand a little higher, or to stretch a little further in your work, to warrant a raise.  Don't expect your bosses, or your customers or client if your self-employed, to just divert funds to you for no reason.  You need to take the steps to make yourself more valuable.  The more you put yourself where the water is most likely to fall, the more you're going to collect.  Set up shop where the rain falls. Don’t expect the rain to come to you.

In terms of finding that second or third source of income, that’s as simple as working an extra part-time job or side gig.  Hook up to as many different gutters as you can feasibly hook up to.  I say “feasibly,” because you can only stretch yourself so far.  Don’t overdo it.  If you're going to work multiple jobs, I'd encourage you to do so only as long as it takes to accomplish whatever “getting ahead” you’re trying to accomplish.  Don’t assume that the extra money is always worth the extra time.

Ideally, if you’re trying to bring in additional streams of income, what you want to do is get to the point where some of those streams turn into a passive income.

What is a passive income?  A passive income is one that brings in an income somewhat automatically and works independently of you having to clock the time.  I mean, there is time involved, but most of it is automated.

What are examples of a passive income?  Rental property, investment dividends, the sale of certain products or commodities, etc..  There are lots of different things that can generate low time-required, passive incomes.  Just stay away from pyramid schemes out-there.  Those drive me crazy.  But options exist, if you can just tap into the right ones.

So, tapping into suitable streams of income is key.

3. Plug as many holes in your barrel as possible.

The best time to do this is when you're young, before you ever get started, when you're first picking out what size barrel you want for your life.  Pick a barrel (standard of living) that doesn't leak much.  Pick a barrel that has the best quality valve you can have that you can control how much you allow to flow out of your possession.

Even the smallest drip, or the smallest financial waste, if left unattended, will eventually drain the barrel.  Ideally, you already know that and have taken steps to avoid the leaking before the leaking ever happens.   My guess is, though, for a lot of people out there, they weren’t careful in what barrel they chose and their earnings are gushing out as fast as it’s coming in.  If that describes your finances, you will never get ahead.

You've got to plug the holes. You’ve got to identify where all the waste is happening and fix it.

I'm convinced one of the biggest sources of waste in a family's finances is the amount of interest they spend on cars, credit cards, and the dreaded 30-year mortgage.  If you've still got your calculator out, just add up how much you're paying the bank in interest alone from all that you're borrowing, and think about how your life would be different if, instead of paying the bank, the same amount was being saved or invested.

Interest is usually one of the biggest holes that needs to be plugged, but there are others too.  Just think about your utility bill, your TV bill, your grocery bill, your gas-guzzling car's fuel bill, and on and on we could go.  Just audit sometime all the different places your money is going and ask yourself if it's really all necessary.

Put a valve on your spending and apply a little more control in what leaves your barrel.   That usually takes the form of a good, solid budget and a little bit of accountability to stop you from spending more than you should be spending.

The point isn't to live like cheapskates but to live within your means because it's by living within your means and spending less than what you earn that you start to get ahead.  Like a good rain barrel system, when you apply these principles, you begin to see the volume of your savings gradually increase to the point where you may even be able to upgrade your barrel.  Or the way I see some rain collection systems work, you can add a second barrel onto what you already have for all the overflow.  When the second barrel fills up, you can then add a third barrel, and then a fourth, and eventually have a series of barrels to be overly charitable with.

In my opinion, the great objective isn't to get ahead financially so we can better spoil ourselves, but to get ahead so that we can be of some practical good to those around us who are continuing to struggle themselves.