Afford Anything - How to Spend Less, Earn More and Grow the Gap

Episode Date: August 21, 2017

#91: Grow the gap between your income and your expenses: How to tackle the 4 biggest expenses in the average American household budget. Also, I share non-obvious tips on how to trim back on these costs. Enjoy! Paula For more details on this presentation, go to http://affordanything.com/episode91 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. And so the question becomes twofold. What's most important to you? And what actions do you take that reflect that? My name is Paula Pant, host of the Afford Anything podcast. And here's how the show normally works. Every other week, I do an interview with somebody, some guest.

And then every week in between, I answer questions that you, the listeners, have sent in. For the past couple of weeks, however, we've made a kind of a tweak to the format. I recently gave a speech in Portland at the World Domination Summit that was three hours long. It was a three hour long workshop. And so for the past two shows that normally would be interview shows, I have instead offered up the presentation. Since it's a three hour long presentation, I've cut it up into three different sections. This week, I am airing part three of three. So what's about to follow in today's episode is the final portion, the wrap-up portion of the workshop that I led at the World Domination Summit, and today's episode is going

to focus on tactics. We are going to cover specific tactics for growing the gap between your income and your spending. Now, some of you are new to this show and some of you have been part of this community for years. Some of you, I know read my blog, Affordainthing.com, and some of you don't. For this section of the presentation for today's episode, I pulled heavily from articles that I've written on afford anything.com over the past several years. So if you are a longtime blog reader, the tactics in today's episode may sound familiar. If, however, you are new or if you're more of a podcast listener than you are a blog reader, then this might sound new to you. So that is the intro background preparation for what's coming up ahead. And without any further delay, let's begin. Okay, let's kick off

this conversation by talking about what we mean by the phrase grow the gap. All right, here's some background. So in the personal finance community, there's this big argument over what's more important, saving or earning more? It's one of those like chocolate versus vanilla, Coke versus Pepsi, cats versus dogs kind of arguments where everybody picks aside and everybody staunchly defends their side. No, saving is more important because of X, Y, Z or no, earning is more important because of ABC. So this is one of those things that people argue about like ad nauseum. And so the way that I like to kind of circumvent this argument, because otherwise we could just get stuck in this forever. But one of the ways that I like to kind of, you know, get to the heart of the matter is through this phrase that I've coined called Grow the Gap. And what that basically means is that what really matters is the gap between what you earn and what you spend.

So some people refer to that gap as savings. but I don't like using the word savings because it's not the concept that I want to focus on. Instead, I want to focus conceptually on increasing the gap between what you earn and what you spend. And there are only two ways to increase this gap. You could either earn more or spend less or some combination of the two. At the end of the day, the earn versus save argument doesn't really matter as long as you're growing the gap. And in fact, the basic formula for growing wealth is grow the gap, invest that gap, and repeat until those investments can sustain themselves. When we talk about wealth, we're really talking about sustainability, financial sustainability.

Once your investments have grown to the point at which they can sustain themselves and, in addition, kick off enough money to cover your own cost of living, that's when you've reached financial independence. That's the end game here. And the way to get to that is grow the gap, invest the gap, repeat. So let's talk about how to grow that gap. Let's start with the spend less side of the equation. First, here's how most people do it wrong. Many people, when it comes to spending less, many people tweak around the margins rather than attacking the big expenses.

In other words, many people focus on the peas rather than the stake. And here are some examples. Tell me if any of this sounds familiar, if any of this resonates. Have you ever gone? onto a restaurant, the entree at that restaurant that you really want is $18. But there's a cheaper option on the menu that's $14. And even though it's not the meal that you really want, it looks good enough. So you order that.

All right. Another example. You're at Chipotle. The cashier at the register asks if you want a $2 fountain drink. You say no, and then you silently pat yourself on the back for being frugal. or you're at the grocery store stocking up for a 4th of July party that you're throwing at your house and you could buy the Coke or the Pepsi but instead you get the big K-Cola because it's 60 cents cheaper or you take out a load of laundry but you leave the dryer sheet in because you figure you can reuse it,

you can use it twice. Or you're at the airport and you're super hungry and normally you pack snacks before a flight but this time you just forgot. And so rather than spending $9 on a burrito, you just stay hungry for the next three hours until your flight lands. Or you could Uber to the airport for $20, but instead you ask your spouse or partner to drive you there even though your flight is at 6 in the morning. And that would pose a huge inconvenience to the other party.

Okay, have you ever done any of those things or something like that? because I've done this and worse all the time. I continue to do it. And the thing is, these are all classic examples of things that offer more of a psychological benefit than an actual monetary benefit. You'll feel frugal and you'll feel proud of yourself for being frugal. Oh, I just saved 20 bucks on this Uber. But if you actually calculate the total savings over the course of a month,

all of the dryer sheets and the big K-Cola's and the not getting a fountain drink at Chipotle, if you actually input each one of those values into a spreadsheet and see how much they add up to, we're talking like 20 bucks a month. I mean, $30 maybe? Like how many big K-Cola would you have to buy to make these efforts worthwhile? There is a big difference between feeling frugal because you found a $7 shirt at a thrift. store rather than spending $20 on the same shirt at Target, great, you've saved $13 a month. Congratulations.

Guess what? You're probably still not any closer to financial independence. So if you want to save money, step one is to stop fooling yourself. Stop doing things that make you feel frugal and start doing things that make an actual, monetary, spreadsheetable difference. Quit tinkering around with the small stuff that doesn't matter. Now, on this show, in previous episodes, we've talked about the big three expenses, which are housing, transportation, and food. And in fact, if you want to amend that into a big four, housing, transportation, food, and taxes. Those are the four biggest expenses that the average American has. If you want to save money, focus on the big four. So let's talk about each of those individually. Let's start with housing, because the average American household spends 33 percent of their after-tax income on housing. If you want the actual numbers rather than percentage, the average household spends $16,887 per year on housing, which is $14.07 per month.

Now, let's say that you shave a quarter off of your housing budget. We'll say that you are the average American household. You're currently spending 33% of your income on housing. And you shave 25% off of that. That's a savings of $352 per month, which is 10 times greater than the 30,000. bucks a month that you might be able to save tweaking around the margins. It's literally an order of magnitude more significant. Over the course of a year, that would be a savings of $4,224.24. Again, using stats from the average U.S. household budget. You can see the source chart within the presentation,

which I will link to in the show notes. That's at afford anything.com slash episode 91. So, TLDR, saving money on housing is a huge win. How do you do this? Number one, top tip, live in a smaller space. This saves on everything. You've got the obvious savings, such as saving on the cost of your rent or mortgage, but you also have non-obvious savings, such as saving on your heating and cooling expenses, saving on furnishings, frankly, saving money because you don't have the ability to accumulate a bunch of useless junk. And by the way, for those of you who choose to live in a high cost of living area, when something is expensive, you buy less of it. If avocados were expensive, I'd buy fewer of them. If bags of Doritos were expensive, I'd buy fewer of them.

Right? That's Econ 101. So when square footage is expensive, buy less of it, buy a lot less of it. The problem emerges when people want Kansas City level space in a high density zone. That's when you start getting internet comments that say crazy things like, oh, you can't get anything for less than a million here. Really? Really? Does your city have janitors? Where do they live? Does your city have people who work at Starbucks or Panera Bread or, I don't know, Radio Shack? Does that still exist? Because I bet your retail workers live somewhere. Where's that? When you get into this mode of thinking that you, quote unquote, cannot live somewhere for a less than X, ask yourself what assumptions you are making, what underlying premises you're making in terms of the square footage, the neighborhood, the niceness of the fixtures. the condition of the property, you can find affordable places to live just about anywhere. As long as you're flexible, as J.L. Collins says, flexibility is the only true security. Now, a couple of other tips on how to save money on housing. House hacking is a great way to go about this. Now, house hacking is the practice of, for those of you who are interested in rental property

ownership. It's the practice of buying a multi-unit, living in one of those units, and renting out the rest of the units. That was how I initially got started in rental property investing. Will and I bought a triplex. We lived in one of the units with roommates and we rented out the other two units. And that was how we got our very first foot on the very bottom rung of the ladder and then slowly started climbing up from there. Speaking of which, that leads to another tip on how to save money in housing. I know this is going to be controversial, but I'm going to say it anyway. It is okay to have roommates. No matter how old you are in your 30s, your 40s, your 50s, it's okay. You do not need to bend to social pressure that says that just because you are a particular age, that means

it's somehow shameful. And in addition to that, please recognize that there are plenty of people with kids who also live with roommates. Will's dad, for example, when his parents divorced, Will's dad moved in with roommates, and Will and his sister were children who grew up in a household with their father and their father's roommates. My good friend, Anne, she lives here in Las Vegas. She has a seven-year-old son and two roommates. My cousin Baruna, she's a hairdresser. And when she moved from Kathmandu to Queens with her husband and their son, they split the rent with a roommate and their son slept on a mattress in the living room floor. This is normal. I mean, millions of people do this every day. If you're fortunate enough, that you don't have to go that far. Congratulations. That's great. You're very, very fortunate.

But recognize that your housing decisions are exactly that. They are decisions. They are choices. And every choice comes with tradeoffs. And that's what the show is about. It's about deciding what tradeoffs are important to you, as well as recognizing that these are fundamentally choices. There is a huge difference between the statement I can't versus the statement I choose not to or this is not a priority because when you are actively choosing not to do something, you are implicitly recognizing, hey, you know what, I'm fully capable of doing this. It is fully within my power. I don't want to. And I'm going to accept the consequences of that decision, but I'm totally capable of doing it. So, soapbox time over, but that is my little, my little ditty

on a little ditty on Jack and Diane. No, that's my little ditty on living with the roommates. No matter who you are, no matter how old you are, no matter what your family position is, it is hashtag totes okay and do not let society shame you into believing anything else. Hey, hey, we'll be back to the show in a second, but first I want to give a shout out to fresh books. They have signed on as one of our main sponsors in 2017, and they have an awesome product. It's meant for freelancers, solopreneurs, small business owners. If you have a side hustle or if you're self-employed and you need to send out invoices to your clients,

yeah, it's necessary. You've got to send invoices to get paid, but it's also annoying and it's time-consuming and nobody really likes doing it. It's just one of those costs of doing the job. Inter Fresh Books. They automate the invoicing system. You type in some basic information and their system handles the rest. It automatically sends follow-ups to invoices that haven't gotten paid. It lets you know whether or not your client has even opened your invoice or not.

Basically, they take the suckiness out of invoicing. Give them a try for free for 30 days at freshbooks.com slash Paula. That's freshbooks.com slash P-A-U-L-A. Expense number two. Most people's second biggest expense are taxes. Where housing versus taxes falls in terms of number one, number two, of course, depends on you. But to figure out how much you pay in taxes, first of all, there's a difference between your marginal rate versus your effective rate. Your top marginal rate, because the U.S.

has a tiered progressive tax system, what it means is that for the first X number of dollars that you make, you get taxed at a particular rate. And then the dollars that you make between X and Y get taxed at a different higher rate. And then the dollars that you earn between Y and Z get taxed at yet another different higher rate. And so just because you are in, say, the 28% tax bracket, that doesn't mean that all of your money gets taxed at 28%. It means that the top sliver of your money gets taxed at that. And then you have this tiered system on down the line. And so once you take that tiering into account as well as your deductions and anything else, you end up with what's known as your effective tax rate. So when you file your taxes, you will be able to see what you

your effective rate is. Housing and taxes are probably your two biggest expenses. So how do you save money on taxes? Well, that's a complicated question. It's more than I can compress into a couple of minutes worth of sound bite. But there are a few pointers that I would like to make. Number one, when you are making decisions, general financial decisions such as buying a house, taking out a student loan, etc., etc. Do not make those decisions based on their tax consequences. I've said this before on the podcast many times. Don't let the tail wag the dog. Make the financial decision that makes the most sense for you

and then figure out how to tax optimize it. So in other words, don't buy a house, a personal residence, just because you think you'll get a tax benefit. Buy a personal residence if the price to rent ratios in your area justify doing so and you expect to be in that area for a prolonged period of time. the tax consequences, while important, are only a very small part of that total mosaic. Now, for those of you who are entrepreneurs or who have a side hustle in any way, you have a lot of

opportunities to legitimately write off a lot of your expenses. You may, for example, be able to deduct the cost of your laptop, a portion of your internet bill, some of your mileage, some of your meals, some of your flights if you go to conferences. For those of you who have a side hustle, which I know is a significant part of this audience, there are many tax deductions that you may legitimately be able to take. In order to make the most of this opportunity, two things. Number one, keep personal, personal and business business. Keep all of your accounts separate. Don't commingle anything. Among its many, many advantages, it makes tracking easy. So if you have take out a business credit card or debit card, either one, and put all of your expenses on it and have that card

automatically paid from a business checking account and have both the card and the checking account automatically linked to bookkeeping software. It is the easiest, most automated way to be able to manage and track all of your business expenses and to keep those separate from your personal expenses. So at the end of the year, you aren't digging through your personal receipts going, what was this one for? Was this just, was this a family trip or was that one a, oh, no, I think that was when I did the thing. Yeah, you don't want to be in the position where you have to do that. The more that you have to manually interfere with a system, the more chance you have of overlooking something. Plus, the more time consuming that is. So I'll throw some resources in the show notes related to how to set this up. But that is one of my top tax tips for anybody who is a small business owner, even if it's quote unquote just a side hustle, even if you do something as simple as writing a couple of freelance articles in your spare time or doing, the odd web design project here or there, or doing a little bit of carpentry or home construction work on the side. Whatever it is that you do, make it official. Set up a business, get a business bank

account, get a business plastic card, either credit or debit, whichever you prefer, get a bookkeeping service, and automate all of your record keeping. This will not only help you when it comes time to file your taxes, but it will also help you see how well you're doing. It'll help you track your progress. My other tax tip is hire a CPA. Do not be cheap about this. Do not be like, oh, I'll do it myself. You run a business. Bring in the professionals. Bring in some adult supervision. A qualified CPA is somebody whose job is to stay up to date with all of the nuances and changes. If you are a business owner or an investor, don't act like you're not. Don't file taxes like you're some high school student. So those are a few of my top tips on how to be.

cognizant of your tax situation when it comes to growing the gap. All right. And the next two biggest expenses are transportation and food. Enough has been said about how to save money here, so I don't think I really need to belabor the point. We know the obvious. Don't buy a brand new car. I don't care if you can get zero percent financing on it. Don't buy a new car.

You're going to lose way more money on the depreciation. Don't go to restaurants too often. Blah, blah, blah. You know the drill. because transportation and food are so such visible parts of our lives, you know, our transportation and our food are things that we interact with on a daily basis. They tend to get a lot of attention. That's why so much has been said about them on podcasts and in blog posts and in books. Whereas something that's a little invisible and that we don't feel or interact with on a day-to-day basis, such as taxes,

or such as the interest rate on our mortgage or the insurance premiums that we pay, those are aspects of our financial lives that are not as tangible, they're not as visible, and therefore they don't get as much attention, even though they make a significant difference in our bottom line. My guess is that if you are like most people, you're probably already paying attention to transportation and food. So my recommendation to you is to start paying attention to big-ticket expensive items. interest rates, insurance premiums, taxes, the cost per square foot of your housing. Those are the things that don't generate headlines but make a massive difference. Okay, a couple of other tips.

One thing that I have often recommended is called the anti-budget. Essentially what this means is you choose the amount of money that you want to save, and by saving I mean anything that improves your net worth, whether that's making extra principal payments towards a loan or making retirement contributions or literal savings in a savings account, choose the amount of money that you want to put towards net worth improvement, yank this off the top, and then just chill out about the rest. There is no reason to make a detailed line-itomed budget

that categorizes how much you spend on toiletries versus pet food. The only reason that you would make something like this is to make sure that you are saving enough. So let's cut to the chase and start with the savings. My philosophy, my approach, has always been, reduce the system down to as simple as it can possibly be. Simplify everything. Because the more complexity that you add into a system, the higher your likelihood of noncompliance. People don't eat unhealthy food or spend frivolously because they're unaware that it's bad for them.

People do it because it's convenient. So make the systems in your life as convenient as possible. and the anti-budget is one approach, one way, in which you can do that. Another thing that I recommend is something that I call the 1% challenge. And that is that when you are deciding how much money you want to save, however much you're starting with, increase this by 1% this month. So if you are currently saving 5% of your income, boost it to 6% this month. If you're currently saving 10%, boost it to 11.

Now, how much money is that? In order to figure this out, just take the amount of money that you make per month and lop two zeros off of the end. So if you make $3,000 a month, 1% is $30. If you make $6,000 a month, 1% is $60. $10,000 a month, 1% is $100. That's the amount of additional money that I am challenging you to save this month. Next month, my challenge to you is to then increase your savings by one additional percent. And the following month, 1% again.

So if you continue this pattern for a year, then by the end of that year, you will be saving 12% more than what you're currently saving today. If you're currently saving 20% of your income, within a year, you'll be saving 32%, almost a third. Now, because of the longevity of this challenge, you cannot build this on a foundation of not buying fountain drinks at Chipotle. That might work for a month, but it won't continue the longevity. It won't continue the trend. So the 1% challenge forces you to find automated systematic ways of trimming your budget. For example, calling your utilities providers to negotiate your bill. Because I bet you can get, if you pay for cable, I bet you can get cheaper cable.

Or you can drop it entirely and just watch Netflix and Hulu and YouTube. What about your cable provider? I bet if you called them, you might be able to get a discount on their services. And that's not just a one-time thing. that's an ongoing automated form of savings. Ditto with the insurance premiums on your home and auto insurance. Again, this is the stuff that doesn't get headlines, but it is how you are able to actually make a difference.

The thing is, if you order a slightly cheaper glass of wine at a restaurant once, that's not going to matter 10 years from now. But if you add a bunch of weather stripping to your home, and that reduces your home's energy consumption by 5%, month after month every month for the next 10 years, that is actually going to matter. And so the point of the 1% challenge largely is to encourage you to systematize the way in which you find these small savings.

So it's back to the peas rather than stake analogy. I guess it's like hashtag systematic peas. Visualize systematic peas. Okay, those are my tips on how to spend less. Now, in terms of the earning more side of the equation, we recently did a podcast interview with Nick Lowe, from side hustle nation. That was episode 85. We'll link to it in the show notes. I highly encourage you to listen to that one. Again, episode 85 because Nick dove deep into strategies on

how to earn more. And he did a much better job. I mean, if I were to go into it right now, I would just be summarizing what he said, which I'll do for you very quickly. Essentially, he said there are three different types of jobs that you could do. There's gig economy type of side hustles like Uber, Lyft, Upwork, Rover. You know, these gig economy things have low barriers to entry and you trade time for money. And some other gig economy things such as Airbnb or VRBO or Turo, they also have low barriers to entry, but rather than you trading time for money, you capitalize on your existing assets. So those are the two types of opportunities within the gig economy. And the gig economy is great if you are looking for something that you can start

right away. However, because it has such low barriers to entry, the payout that you'll receive from them is also relatively low compared to other stuff that's out there. That's not to say that you shouldn't do it. It's just to say that if you begin down this road, if you begin driving for Uber or renting out a place on Airbnb or advertising your services on TaskRavit, and then you start to get frustrated at the amount of money that you're making, please don't conclude that side hustling inherently is limited. It's just that the channels that you are using have inherent limitations to them. They have downward pressure on supplier prices and you as a gig or are a supplier, because of the high supply of suppliers. So moving up the value chain, the next kind of bucket is the

expertise economy. And that's where you take a hard-earned expertise, a skill that you have, such as tutoring calculus or teaching people how to play the piano or consulting for a small business startup or writing the types of freelance articles that require a basis and foundation of expert knowledge those are the things that fall under the purview of the expertise economy so freelancing consulting and high-skill professional services things that you find on websites such as thumbtack or wisint or clarity.fm. Those all fall under the purview. view of the expertise economy. You are still trading time for money, but you're doing so at a much higher rate. And the reason for that is because you are essentially getting paid for an expertise,

a skill that you have spent many years developing. There's that famous story about Picasso quickly sketched something on a napkin and somebody wanted to buy it from him. And he said, all right, that'll be, and he quoted some very high number, like, that'll be $5,000. And the person was like, what? It just took you a couple of minutes to draw that. And he said, no, it took. me my entire life to draw that. The moral of that story, of course, is that once you develop an expertise, your hourly rate can be high because essentially you are getting paid for all of the years of training that you spent developing that expertise. So for those of you who are listening, who are thinking, oh, I don't have any expertise, you could, building blocks, right? You could

be in the gig economy as you develop and hone a more niche expertise. One stepping stone leads to the next. And then finally, you've got opportunities within the stuff economy. So selling physical goods on websites such as Etsy or the fulfillment by Amazon program. And again, the more that you can niche down, serve a demand in a space that doesn't have too many other suppliers or too many other competitors, you know, the better your chances. Again, I would encourage you to listen to episode 85 with Nick Loper for a much more detailed synopsis of all of this. So finally, I want to close out with, we've talked about growing the gap by spending less. We've talked about growing the gap by earning more. Your wins are going to come from some combination of the two.

I would encourage you to find the opportunities on both sides of that that are automated, systematic, and give you the biggest return for your time and mental cognitive space. Because you could spend your life hustling or you could systematize your wins. and it's far better to systematize. So think about the opportunities on both sides of that. Find one thing that you can do to earn more and find one thing that you can do to spend less and start there. And that is the wrap up of part three of three of my presentation from the World Domination Summit.

Thank you so much for joining me. My name is Paula Pant. This is the Afford Anything podcast. Coming up, we have an interview with Jen Graniman, She is the author of The Secret Lives of Introverts. She's going to talk about what it means to be an introvert and how that affects your work in your life. We're also going to be talking to Jay David Stein from the podcast Money for the rest of us. He's going to be sharing his investment philosophy.

And we'll be chatting with Pete McItis from the podcast, How to Be Awesome at Your Job. I'll let you guess the topic of that episode. We also have another round of Ask Paula episodes. Again, thank you so much for joining in. My name's Paula Pan. This is the Afford Anything podcast. I'll catch you next week. Expense number two. Most people's second biggest expense are taxes. Where housing versus taxes falls in terms of number one, number two, of course depends on you. But to figure out how much you pay in taxes, first of all, there's a difference between your marginal rate versus your effective rate.

Your top marginal rate, because the U.S. has a tiered progressive tax system, what it means is that for the first X number of dollars that you make, you get taxed at a price. particular rate. And then the dollars that you make between X and Y get taxed at a different higher rate. And then the dollars that you earn between Y and Z get taxed at yet another different higher rate. And so just because you are in, say, the 28% tax bracket, that doesn't mean that all of your money gets taxed at 28%. It means that the top sliver of your money gets taxed at that. And then you have this tiered system on down the line. And so once you take that tiering into account as well as your deductions and anything else, you end up with what's known as your effective tax rate. So when you file your taxes, you will be able to see what your effective

rate is. Housing and taxes are probably your two biggest expenses. So how do you save money on taxes? Well, that's a complicated question. It's more than I can compress into a couple of minutes worth of soundbite. But there are a few pointers that I would like to make. Number one, when you are making decisions, general financial decisions, such as buying a house, taking out a student loan, et cetera, et cetera, do not make those decisions based on their tax consequences. I've said this before on the podcast many times. Don't let the tail wag the dog. Make the financial decision that makes the most sense for you and then figure out how to tax optimize it. So in other words, don't buy a house, a personal residence, just because you think you'll get a tax benefit. Buy a personal residence,

if the price to rent ratios in your area justify doing so, and you expect to be in that area for a prolonged period of time. The tax consequences, while important, are only a very small part of that total mosaic. Now, for those of you who are entrepreneurs or who have a side hustle in any way, you have a lot of opportunities to legitimately write off a lot of your expenses. You may, for example, be able to deduct the cost of your laptop, a portion of your internet bill, some of your mileage, some of your meals, some of your flights if you go to conferences. For those of you who have a side hustle, which I know is a significant part of this audience,

there are many tax deductions that you may legitimately be able to take. In order to make the most of this opportunity, two things. Number one, keep personal, personal, and business business. Keep all of your accounts separate. Don't commingle anything. Among its many, many advantages, it makes tracking easy. So if you have take out a business credit card, or debit card, either one, and put all of your expenses on it, and have that card automatically

paid from a business checking account and have both the card and the checking account automatically linked to bookkeeping software. It is the easiest, most automated way to be able to manage and track all of your business expenses and to keep those separate from your personal expenses. So at the end of the year, you aren't digging through your personal receipts going, what was this one for? Was this just, was this a family trip or was that one, oh, no, I think that was when I did the thing. Yeah, you don't want to be in a position where you have to do that. The more that you have to manually interfere with a system, the more chance you have of overlooking something. Plus, the more time consuming, that is.

So I'll throw some resources in the show notes related to how to set this up. But that is one of my top tax tips for anybody who is a small. small business owner, even if it's, quote, unquote, just a side hustle, even if you do something as simple as writing a couple of freelance articles in your spare time, or doing the odd web design project here or there, or doing a little bit of carpentry or home construction work on the side, whatever it is that you do, make it official. Set up a business, get a business bank account, get a business plastic card, either credit or debit, whichever you prefer, get a bookkeeping service and automate all of your record keeping.

This will not only help you when it comes time to file your taxes, but it will also help you see how well you're doing. It'll help you track your progress. My other tax tip is hire a CPA. Do not be cheap about this. Do not be like, oh, I'll do it myself. You run a business. Bring in the professionals.

Bring in some adult supervision. A qualified CPA is somebody whose job is to stay up to date with all. of the nuances and changes. If you are a business owner or an investor, don't act like you're not. Don't file taxes like you're some high school student. So those are a few of my top tips on how to be cognizant of your tax situation when it comes to growing the gap. All right. And the next two biggest expenses are transportation and food. Enough has been said about how to save money here so I don't think I really need to belabor the point. We know the obvious. Don't buy a brand new car. I don't care if you can get zero percent financing on it. Don't buy a new car. You're going to lose

way more money on the depreciation. Don't go to restaurants too often. Blah, blah, blah. You know the drill. Because transportation and food are so, such visible parts of our lives, you know, our transportation and our food are things that we interact with on a daily basis, they tend to get a lot of attention. That's why so much has been said about them on podcasts and in blog posts and in books. whereas something that's a little invisible and that we don't feel or interact with on a day-to-day basis, such as taxes, or such as the interest rate on our mortgage or the insurance premiums that we pay, those are aspects of our financial lives that are not as tangible, they're not as visible, and therefore they don't get as much attention, even though they make a significant difference in our bottom line. My guess is that if you are like most people, you're probably already paying attention to transportation and food. So my recommendation to you is to start paying attention to big-ticket expensive items, interest rates, insurance premiums, taxes, the cost per square foot of your housing. Those are the things that don't generate headlines but make a massive difference.

Okay, a couple of other tips. One thing that I have often recommended is called the anti-budget. Essentially what this means is you choose the amount of money that you want to save, and by saving, I mean anything that improves your net worth, whether that's making extra principal payments towards a loan or making retirement contributions or literal savings in a savings account. Choose the amount of money that you want to put towards net worth improvement, yank this off the top, and then just chill out about the rest. There is no reason to make a detailed line-itomed budget that categorizes how much you spend on toiletries, versus pet food. The only reason that you would make something like this is to make sure that you are saving enough.

So let's cut to the chase and start with the savings. My philosophy, my approach has always been reduce the system down to as simple as it can possibly be. Simplify everything. Because the more complexity that you add into a system, the higher your likelihood of noncompliance. People don't eat unhealthy food or spend frivolously because they're unaware that it's bad for them.

People do it because it's convenient. So make the systems in your life as convenient as possible. And the anti-budget is one approach, one way, in which you can do that. Another thing that I recommend is something that I call the 1% challenge. And that is that when you are deciding how much money you want to save, however much you're starting with, increase this by 1% this month. So if you are currently saving 5% of your income, boost it to 6% this month. If you're currently saving 10%, boost it to 11.

Now, how much money is that? In order to figure this out, just take the amount of money that you make per month and lop two zeros off of the end. So if you make $3,000 a month, 1% is $30. If you make $6,000 a month, 1% is $60. $10,000 a month, 1% is $100. That's the amount of additional money that I am challenging you to save. this month. Next month, my challenge to you is to then increase your savings by one additional percent. And the following month, 1 percent again. So if you continue this

pattern for a year, then by the end of that year, you will be saving 12 percent more than what you're currently saving today. If you're currently saving 20 percent of your income, within a year, you'll be saving 32 percent, almost a third. Now, because of the longevity of this challenge, You cannot build this on a foundation of not buying fountain drinks at Chipotle. That might work for a month, but it won't continue the longevity. It won't continue the trend. So the 1% challenge forces you to find automated, systematic ways of trimming your budget. For example, calling your utilities providers to negotiate your bill.

Because I bet you can get, if you pay for cable, I bet you can get cheaper cable. Or you can drop it entirely and just watch. Netflix and Hulu and YouTube. What about your cable provider? I bet if you called them, you might be able to get a discount on their services. And that's not just a one-time thing. That's an ongoing, automated form of savings. Ditto with the insurance premiums on your home and auto insurance.

Again, this is a stuff that doesn't get headlines, but it is how you are able to actually make a difference. The thing is, if you order a slightly cheaper glass of wine at a restaurant once, that's not going to matter 10 years from now. But if you add a bunch of weather stripping to your home, and that reduces your home's energy consumption by 5% month after month, every month for the next 10 years, that is actually going to matter.

And so the point of the 1% challenge largely is to encourage you to systematize the way in which you find these small savings. So it's back to the peas rather than stake analogy, I guess it's like hashtag systematic peas, visualize systematic peas. Okay, those are my tips on how to spend less. Now, in terms of the earning more side of the equation, we recently did a podcast interview with Nick Loper from Side Hustle Nation.

That was episode 85. We'll link to it in the show notes. I highly encourage you to listen to that one, again, episode 85, because Nick dove deep into strategies on how to earn more. And he did a much better job. I mean, if I were to go into it right now, I would just be summarizing what he's. said, which I'll do for you very quickly. Essentially, he said there are three different types of

jobs that you could do. There's gig economy type of side hustles like Uber, Lyft, Upwork, Rover. You know, these gig economy things have low barriers to entry and you trade time for money. And some other gig economy things, such as Airbnb or VRBO or Toro, they also have low barriers to entry, but rather than you trading time for money, you capitalize on your existing assets. So those are the two types of opportunities within the gig economy. And the gig economy is great if you are looking for something that you can start right away. However, because it has such low barriers to entry, the payout that you receive from them is also relatively low compared to other stuff that's out there. That's not to say that you shouldn't do it.

It's just to say that if you begin down this road, if you begin driving for Uber or renting out a place on Airbnb or advertising your services on TaskRavit, and then you start to get frustrated at the amount of money that you're making. Please don't conclude that side hustling inherently is limited. It's just that the channels that you are using have inherent limitations to them. They have downward pressure on supplier prices and you as a gig or are a supplier because of the high supply of suppliers. So moving up the value chain, the next kind of bucket is the expertise. economy. And that's where you take a hard-earned expertise, a skill that you have, such as tutoring calculus, or teaching people how to play the piano, or consulting for a small

business startup, or writing the types of freelance articles that require a basis and foundation of expert knowledge, those are the things that fall under the purview of the expertise economy. So freelancing, consulting, and high-skill professional services. Things that you find on websites such as Thumbt or Wisent or Clarity.fm. Those all fall under the purview of the expertise economy. You are still trading time for money, but you're doing so at a much higher rate. And the reason for that is because you are essentially getting paid for an expertise, a skill that you have spent many years developing.

There's that famous story about Picasso quickly sketched something on a napkin and somebody wanted to buy it from him. And he said, all right, that'll be, and he quoted some very high number. that'll be $5,000. And the person was like, what? It just took you a couple of minutes to draw that. And he said, no, it took me my entire life to draw that. The moral of that story, of course, is that once you develop an expertise, your hourly rate can be high. Because essentially, you are getting paid for all of the years of training that you spent developing that expertise.

So for those of you who are listening who are thinking, oh, I don't have any expertise, you could, building blocks, right? You could be in the gig economy as you develop and hone, a more niche expertise. one stepping stone leads to the next. And then finally, you've got opportunities within the stuff economy. So selling physical goods on websites such as Etsy or the fulfillment by Amazon program. And again, the more that you can niche down, serve a demand in a space that doesn't have too many other suppliers or too many other competitors, you know, the better your chances. Again, I would encourage you to listen to episode 85 with Nick Loper for a much more. more detailed synopsis of all of this. So finally, I want to close out with, we've talked about growing the gap by spending less, we've talked about growing the gap by earning more. Your wins are going to come from some combination of the two. I would encourage you to find the opportunities on both sides of that that are automated, systematic, and give you the biggest return for your time and mental cognitive space. Because you could spend your life hustling

or you could systematize your wins, and it's far better to systematize. So think about the opportunities on both sides of that. Find one thing that you can do to earn more and find one thing that you can do to spend less and start there. And that is the wrap-up of part three of three of my presentation from the World Domination Summit. Thank you so much for joining me.

My name is Paula Pant. This is the Afford Anything podcast. Coming up, we have an interview with Jen Granaman. She is the author of The Secret Lives of Introverts. She's going to talk about what it means to be an introvert and how that affects your work in your life. We're also going to be talking to Jay David Stein from the podcast Money for the rest of us. He's going to be sharing his investment philosophy. And we'll be chatting with Pete McKitis from the podcast, How to Be Awesome at Your Job.

I'll let you guess the topic of that episode. We also have another round of Ask Paula episodes. Again, thank you so much for joining in. My name's Paula Pant. This is the Afford Anything podcast. I'll catch you next week.