What's more important to achieving Financial Independence, a good offensive strategy (in
other words finding ways to generate an income) or a good defensive strategy (in other words
finding ways to lower your expenses)?
There are certainly some good points on both sides of this debate so today we're going
to look to find an answer to this often debated question.
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
investing, debt, retirement, and many other financial topics besides, because, let’s
face it, the school's aren't going to teach it for us.
So if any of those topics sound interesting to you or if you want to learn how to better
handle your money and have more financial freedom be sure to hit that subscribe button
and the bell next to my name to be notified every time I upload a video.
And if you want to further support the growth of this channel you can check out some of
the links I’ve left down in the description below which includes a 30-day free trial of
Audible and 2 free audiobooks of your choice as well as a list of some books on money I’d
recommend checking out with your free trial, or you can smash that like button if you haven’t
already, share this video with a friend, and leave a comment below letting me know what
topics you’d like me to cover in future videos.
When you're looking to achieve Financial Independence there are really only a few things you need
to consider.
You need to consider how you're going to make money, how that money is going to make you
more money, and how much money you need to make in order to be financially independent.
Essentially you need to figure out how to generate an income both through your own labor
and without the need for your own labor (since there eventually will come a time where you
simply can’t keep up the workload) and figure out your expenses.
So before we answer the title question of whether it's more important to have a good
offensive or defensive strategy when it comes to your finances let's first look at what
goes into each side of the debate.
On the one hand, you have people who propose that having a strong offensive strategy is
more important than a strong defensive one when it comes to achieving Financial Independence.
A strong offensive strategy requires you to focus primarily on raising your income and
finding ways to generate extra income off of that income.
Income earned through your own labor is usually generated through a job or some sort of a
business.
Income not generated through your own labor, commonly known as passive income, can be generated
in many ways but usually, it's through some sort of a business wherein you are the owner
as opposed to the boss or manager, or an investment of some kind.
The biggest pro to this side of the debate includes the fact that income, particularly
in highly profitable businesses, can be generated in effectively limitless amounts for all intents
and purposes.
This level of income is made possible through something called The Law of Effection.
The Law of Effection states that the more people whose lives you effect in an environment
you control, the more money you will make.
Say if you were a really knowledgeable and skilled personal trainer that wanted to play
your financial strategy primarily offensively and so you went into business for yourself
in an attempt to raise your income above what you could make working at a gym.
You could do very well for yourself as a consultant working with individuals one-on-one or in
small groups but your income would be very limited in that scenario compared to if you
instead wrote and sold books or online courses on how to lose weight, or gain muscle, or
put together a good meal plan or all of the above.
Why?
Because there's only so much time in the day and you only have so much energy at your disposal.
Say you're able to help out five people at once in one of your small group sessions and
each session lasts an hour and costs the client $50 to attend.
Even if you only slept 4 hours a night, took no time away from work to eat or run errands,
and worked for the other 20 hours of the day, you still would only be able to help a maximum
of a hundred people a day and thus earn $5,000 which granted is nothing to sneeze at but
it's not the same as being able to sell a book at $20 a pop over the internet to a worldwide
audience of 7.5 billion people that can be buying from you 24 hours a day 7 days a week
365 days a year without taking up any of your time after the initial amount you spent to
write the book.
And that’s not even to mention the fact that you could go back to your group consulting
gig after finishing writing the book or just pour that time into making another passive
income generating product allowing you to reach and help even more people and continue
to raise your income, rinsing and repeating until your income is at a level that you are
happy with.
Having this level of income will not only enable you to live a much finer lifestyle
than someone who chose to play primarily defensively, but gives you the opportunity to generate
massive levels of wealth over time thanks to the miracle of compound interest.
Eventually, it may get to the point where you have so much put away that it doesn't
really matter how much you spend.
Now obviously that's only ever going to be true to a certain point because you have to
live within your means in order to have money at the end of the day but there's a big difference
in having means of $40,000 a year and means of $40,000,000 a year.
The biggest con or potential con to playing primarily offensively is that there's a lot
more risk involved, theoretically.
You see there just aren't that many jobs out there that pay good money at least when compared
to the potential payoff of having your own business.
Which usually means in order to take full advantage of your offensive potential you're
usually going to find yourself starting your own business in one form or another and not
all businesses work out the way you wanted them to.
Now to someone who has a truly relentless offensive mindset towards their finances is
probably not going to be deterred by this.
If one business fails or doesn't go the way they expected they just start another one,
learn from the mistakes of the first business, and keep trying until they eventually get
it to work, but it is something to consider because there's always going to be speed bumps
on the road to success.
However, another thing that I would like to point out here is that there's going to be
speed bumps on the defensive path as well.
Sure you may not have the failed business or the potential lawsuits from a failing business
but you also don't have much control over your job security either when playing defensively.
You may get fired due to a poor economy or heck just having a co-worker in a position
of power that doesn't like you.
Office politics are, unfortunately, very real.
So just because there are risks associated with the offensive approach don't just assume
that there aren't risks with the defensive approach.
The biggest pro to the defensive approach that I’ve heard mentioned a lot, aside from
the perceived lack of risk that I've already covered, is that learning to live happily
on less gives you more leeway in achieving Financial Independence (and possibly more
happiness, though it’s arguable whether this is because of the confidence you gain
from learning to live well on less or from the large stack of cash in the bank account…
maybe it’s a bit of both).
But coming back to the idea of leeway, it all goes back to the 4% rule which I've covered
in previous videos.
It states that you need roughly 25 times your annual expenses in retirement saved in order
to have a reasonable chance of not running out of money after you leave the workforce.
What this means is that for every dollar you cut back you save yourself from the need to
acquire $25 worth of savings in your retirement funds.
I've covered how staggering of a difference this can make in the video I did a few weeks
ago on how to stop wasting money which I'll leave a link to in the description if anyone's
interested in finding out more about that.
Cutting back also means that you have an extra dollar to put into your retirement funds,
which can help you reach your goal that much faster.
However, the biggest potential con to this defensive strategy is that you can only cut
back so far.
Now there are people who cut back way farther than you would think possible, as little as
$7,000-$8,000 a year, but as impressive as that may be, there's still a limit to how
far you can cut back (and there’s an even stricter limit on how much we can cut back
in a healthy manner without putting ourselves at higher risks for financial regression and
spending sprees later in life).
In comparison to the offensive strategy which as I said is for all intents and purposes
limitless.
And let's face it none of us wants to live in destitution.
I don't think any of us really wants to have just barely enough money to survive in retirement,
even if it might seem like it some days for some of us who really don't like our jobs
and just want to get out of it as soon as possible, but in truth I don't think that's
what any of us wants.
If for no other reason than, if we're honest with ourselves, we would eventually realize
that retirement, especially early retirement, is long.
For the first time since being a kid, you have too much time on your hands and if you
never have any money to do anything, if you aren’t able to join your friends for any
fun activities that cost money, it can become quite difficult finding ways to enjoyably
fill the days after a while.
Sure there’s a lot of fun things that you can do for free, but we could be talking about
50-60 years or more of living on that tight of a budget.
I don’t know, maybe I’m wrong, but that’s not the life I want to live.
So there's only so much that you can cut back and if you cut back too much the quality of
life diminishes…
Does that mean I think that playing offensively is the superior strategy?
Well, not exactly.
I actually think that we're asking the wrong question.
The question shouldn't be which one is better the question should be how can we pull off
both?
How can we find a way to cut back on our expenses and stop wasting money while simultaneously
generating more?
Because in the end, that's the best strategy.
They offset each other's weaknesses very well and the same is true for enhancing each other's
strengths.
There isn't as much true risk to you and your family if a business or side hustle fails
if you've learned how to stop wasting money and you're living on less then you make at
your job.
And your means that you have to live below are higher than they would be if you just
played defensively because you have diversified your revenue streams at least to some extent.
In addition to that, since you've learned to live on less by not wasting money, the
extra money you're generating is then able to be put into your retirement accounts and
help you achieve Financial Independence that much faster.
After all, it’s not really how much we make that matters, it’s not even necessarily
how much we spend that matters… it’s the difference between the two.
It’s how much we keep that matters.
So, yes, continue to focus on your budgets and other defensive tools, continue to learn
how to stop wasting money on things you don't value.
Never buy things with money you don't have because you're trying to impress people you
don't even like.
But also continue to research ways to diversify your revenue streams not only so that you
can make more money but also so that you can be better protected in the event that life
happens...
Because let's face it at some point life happens to all of us.
But that'll do it for me today once again if you enjoyed this video be sure to smash
that like button if you haven’t already, subscribe, and hit that Bell next to my name
so that you'll be notified of all my future uploads.
I generally upload every single Monday, and if you have a friend that would be interested
in this kind of content be sure to share it with them and let's really get this information
out there and start our own Financial revolution.