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Yesterday was labor day, a day that recognizes the labor force and its contributions to American productivity.
While it is nice to receive acknowledgment for being a productive member of society by getting a day off, I want more.
A lot more.
In the quest for financial independence and potential early retirement, a fundamental transition needs to ccur, transforming from a laborer to a capitalist.
What do I mean by this?
For the vast majority of people the way they “earn a living” is by getting a job and trading time/labor for money.
It is a central tenet to how our economy works.
We try to maximize this compensation by developing skills that are in demand and in which society places as a premium.
But even highly compensated individuals, such as physicians, are laborers at the very heart of the matter.
When a laborer stops working, that income stream dries up.
Unfortunately in this scenario the expenses of living continue and thus the laborer must either rapidly resume working or decrease his or her lifestyle (much easier said than done).
We have all heard of the phrase, “living paycheck to paycheck.”
This phrase describes a delicate balance for which an individual or family basically has no net positive cashflow with expenses either matching or exceeding the income stream.
This is not a desirable situation to be in as the slightest external force can tip the scale into financial ruin.
High income professions are not immune to this phenomena. This most notably happens with “Lifestyle Creep.”
I know of several of my physician colleagues that are operating on razor thin margins with their personal finances.
Human behavior is ingrained with “live for the moment” mentality.
When more money comes in, there is tendency to spend more to match it, and sometimes even exceed it.
In fact I would say that physicians are a group of individuals where there is extreme pressure to “be the Joneses.”
Physicians are expected to have a certain level of housing (aka the physician mansion), drive a certain luxury level of car, and have other outward signs of wealth.
Friends and family expect a physician to have this extravagant lifestyle because being a physician is supposed to denote success.
“Too many people spend money they earned…to buy things they don’t want to…to impress people that they don’t like.”-Will Rogers
By following this vicious cycle an individual will always be relegated to the role of a laborer.
The only hope of leaving this daily grind/rat race is by reaching an age where government social programs such as Social Security and Medicare can subsidize one’s lifestyle.
So what is a capitalist?
When I picture a capitalist I think of some rich guy wearing a monocle.
But in reality anyone can be a capitalist.
A capitalist is someone who has his or her money work for him/her.
What an amazing concept.
When you have your money (“the capital”) working for you what you have in essence is a tireless worker.
One that works 24 hours a day, 7 days a week, 365 days a year.
You have created an employee that doesn’t ask for vacation, doesn’t require a raise, and never has sick time.
This “money employee” even puts the hardest working physician on the planet to shame.
“That’s great Xrayvsn! Now where can I get this ‘money employee?'”
This is precisely why personal finance blogs such as this one are formed. To give examples and advice to help create the “capital in Capitalist.”
Unless you were born with a silver spoon in your mouth, won the lottery, or have received a large inheritance, the key to generating this capital is by creating positive cashflow.
Positive cashflow can only occur when your income stream(s) surpass your expense outflow.
A great analogy is to think of money as flowing water (in fact this is the very basis of how cashflow came about).
In the beginning of your career you trade time for money, creating an income stream.
Depending on your skills that initial income stream can be a creek (think resident’s salary), river (attending), or even rapids (high paying specialties).
Regardless of the amount of water coming in there will never be any net gain if it continues to flow past you (i.e. expenses match income).
For those wishing to start the path to financial independence and perhaps early retirement, you have to create ways of slowing the outflow of that water to create a reservoir (the capital).
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”-Robert Kiyosaki
Creating obstacles in the outflow of water/cash can be best accomplished by reducing expenses.
The higher and stronger you can build a dam to retain this precious water, the more potential energy builds up in the system that can then be put to work, similar in concept to hydroelectric dams.
Similarly increasing the amount of water coming in (advancing in career, getting advanced degrees to increase compensation, or even side gigs) will help turbocharge the system even faster.
There are so many positive side effects that come during the process of this financial dam building.
One of the most significant of these side effects is that this process forces an individual to analyze expenses in an effort to reduce them.
The word “budget” likely causes negative thoughts to arise.
People view budgets as restrictive and as humans we like to be free.
But by utilizing a budget one can achieve freedom much faster. It is a means to an end and is therefore a remarkable positive tool.
“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”-Joe Biden
If you do not take the time to analyze your personal cashflow and create a budget to maximize money retention, than you will relegate yourself to the role of a laborer and be far more restricted in your life.
Another beneficial side effect is that as you learn to reduce your negative cash outflow (i.e. expenses), you soon adapt to that lower expense lifestyle and thus require far less capital to maintain it.
Using the standard 4% safe withdrawal rate for retirement, every $10,000 of annual living expenses you can lower equates to $250,000 of less capital needed at retirement.
“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.”-Dave Ramsey
The process of building your financial damn will also force you to first attack debt obligations that try to weaken your dam’s foundations.
By plugging these leaks (constant cash outflow from interest charges) you also set yourself to be more flexible in retirement as you no longer have these fixed obligations requiring money.
Stay tuned for subsequent posts for examples of how this reservoir of capital can be deployed.
Superpower Take-home points:
- The key to financial independence is to have money working for you so you don’t have to (making you a Capitalist rather than a Laborer)
- A strong financial dam will give your money vast potential energy that can be deployed to create more income streams.
- Creating a budget is a strong tool to maximize positive cashflow by highlighting unnecessary expenses.
(And don’t forget to subscribe to this blog to be always notified of new posts)
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Good post xrayvsn. It’s tough not letting lifestyle creep. This happens to you whether you work as a barista, a doctor, or an NFL football player. It is human nature to consume what we make and to spend little time thinking about our future self. Creating a vast lake that we can slowly drain through a dam is a great analogy. I feel like I have a giant crater that I am very slowly filling from a hose at this point, but that will someday turn into a much large monsoon pouring into that lake when my student loans are… Read more »
Hey TPP thanks for stopping by and commenting. I too was in that predicament being way underwater in life. We are fortunate to have large income streams that can rapidly fill up a reservoir if we are smart enough to identify the leaks we can fix. Once your capital starts earning capital it is a wondrous event and you know you are in the process of achieving true wealth
Great analogy! It is so common for people to wonder where their money went, no matter their income level. Thinking of your earnings and your spending in a strategic manner makes a huge difference. Budgeting doesn’t get enough love, IMHO. The concept of your money making money is important too, but too often, you just don’t see the benefits of this unless you’ve already made the effort to set money aside to invest.
Thanks for the comment and stopping by. My money making money has changed my view of a lot of things. It actually has helped me loosen the purse strings as well as this money is almost like “free money” as I don’t have to trade my time for it. Passive income is really a huge boost to financial happiness
Excellent post. Sometimes I feel like I’m still trying to clear the land so that I can start building my dam, but I love the metaphor.
The idea of a “money worker” ceaselessly laboring for you is very appealing. Unfortunately that same “money worker” can work just as hard against you when you take on debt.
I guess that’s all the more motivation to cap your lifestyle.
Thanks Ray. Yeah, you need to be on the right side of the lender/borrower equation which unfortunately in the beginning of a physician’s career is heavily tilted to the wrong end. Fortunately our income allows us to tip the balance in our favor if we choose to deploy it wisely. Passive income is amazing (and tax advantaged too).
Great post as always, either choose to be stuck on the hamster wheel, chasing happiness from stuff and keeping up with others.
Or put your hard earned dollars to work, and build a life that doesn’t require you slaving away for hours and hours a week. Cheers!
Thank you so much for the compliment. Yeah if I had a choice between me working hard for the money or money working hard for me, the latter wins in a landslide. Thanks again for stopping by and hopefully can keep posting good content (so far the well hasn’t run dry yet)
I’m gradually trying to be less of a laborer and more of a capitalist by using money to make more money. But before you can do that, you need to have a pile of money. The first ten years out of training was building and filling that dam. Now, the investment returns are growing larger than I can save. The key is to filling that dam first.
Exactly. Just like Hoover dam took a long time to build, the end result was to provide power that has now far surpassed the initial investment. I know my investment returns will never match my primary income but to be honest, they don’t have to. Right now they have already built up enough potential energy to provide a nice basic income floor which I only can see that growing in the future as I keep adding more and more water to it prior to retiring.
It sounds like you have almost built up your dam. You are correct that many of us could not make our investments supercede our practice income. However keeping your living expenses below your income floor will allow the dam’s energy to build up even if slowly over time.
Thanks MB for stopping by from up North 🙂 The great thing about this financial dam is it really starts working at any height. Sure the potential energy is not as impressive as Hoover Dam, but even a small dam in the beginning can grow to a massive hydroelectric one as you add layer upon layer. My hope is to get my income floor high enough that even if there is a market downturn that I know will eventually happen, I can live off the distributions and not have to withdraw capital when it may be at a low point.… Read more »
A reverse little Dutch boy, where plugging the dike with your finger drowns you in wealth. Well done!
Thanks CD. We all can take pointers from the little Dutch boy
Great analogy. I try to employ all of my dollars to work for me. My money works like eager beavers working tirelessly to build my financial dam.
And when the time comes for me to tap into this large reservoir, it will be a financial waterfall… cascading and flowing for me until “my cup runneth over” as I will have more than enough for my needs!
Capitalism is indeed a wonderful thing. Goal is to get enough capital to let money do the heavy lifting. Congrats on being on the right side of the financial equation
Great post and so many good points made here. I love reading your blog I have honestly learned a lot from your perspective. Thank you!
Thanks Andrea. Really appreciate the feedback. I enjoy your blog as well and glad we connected on Twitter
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Very nice article mate! All valid points. The moment my net worth starts fluctuating more based on market movements …I would be come a capitalist. As of today I can easily steady the boat by dumping some more cash.
Appreciate it ?
Thanks for stopping by and commenting. Well here’s to the capitalist in all of us. Wish you much success
Great post. Love the section where you illustrate creating a tireless worker (the capital)…one that works around the clock to generate more money for you.
Thanks for stopping by James. It is a wonderful feeling when you go to bed and know that somewhere out there your money is still working and bringing in more money for you. Have a great weekend.
This is spot on! I also like the subtle jab at communism if that’s what you were doing 🙂
LOL. I did think of that when I created the title 🙂 Appreciate the comment and thanks for stopping by! 🙂
Great post! There is nothing sadder than a physician living paycheck to paycheck. Living below your means is a key component of a successful financial plan. When it comes to my side hustle income, I took the Live on None Challenge – I funnel 100% of the stream to my Hoover Dam. I can’t wait to see how hard my money’s money makes more money.
Thanks for stopping by SHS. With that kind of money being funneled, I think you are going to surpass Hoover Dam in no time 🙂
[…] for you instead of the other way around. Xrayvsn has an excellent post on this topic entitled Become a Capitalist, Not a Laborer. He talks about creating a financial dam to harness your income stream and convert it into […]
There are three or four posts worth of great advice here! Lifestyle creep is always a challenge. In my experience, the best way to combat lifestyle creep is to stick to a good budget.
I am in complete agreement. Build a damn dam (budget the gap you need), fill it with a balanced/savings/spendings rate, and stay ghe course to FI.
Yup. If what comes in exceeds what does out you make financial progress.
Totally agree on all of this – my wife is a surgery resident (PGY2) and while I was looking for job, we were much more careful with our monthly spending. Fast forward 18 months – I have a great job with a tech firm and our monthly spending has definitely accelerated.
Something we’ll have to pay attention to as we journey on in the later years of residency, fellowship, and then attending life.
Yes it is quite easy to jump on the hedonic treadmill and wipe away any financial progress you get from salary increase.
Some great advice I heard is that you can spend 10% of any increase in salary or bonus on lifestyle stuff and the rest attack debt and invest with.
Thank you for sharing your thoughts. It is said brilliantly: ” If you do not take the time to analyze your personal cashflow and create a budget to maximize money retention, than you will relegate yourself to the role of a laborer and be far more restricted in your life.” Now you have one regular visitor to your site for new topics.
Thank you for the kind words and hope you find the rest of the content on my site as interesting. Have a great day!
Very succinct summary of just about everything a person needs to do to succeed financially! I like that financial dam analogy, being a fishing fanatic I just keep trying to figure out a way to extend that to the fish in my financial lake. Dividends maybe?
Dividends certainly help add more to the correct side of the dam for sure. The biggest mistake people make is they tend to open the dam more when more cash flow flows in, negating it. Takes a lot of discipline to resist that temptation (I have failed many times in the past). Have a great day!
Money is literally the best employee ever. It doesn’t complain and works when you don’t even ask it to. The tax codes surrounding capital gains aren’t too shabby either as compared to labor tax codes.
Yes the tax code punishes those who actively work for w2 money. Im a huge fan of passive income with its preferential tax treatment