You're reading Building Wealth for Freelancers, my free guide to how to generate wealth with your freelancing business.

Why Build Wealth?

Building wealth means different things to different people. What comes to mind when you think of a wealthy person? Do you imagine fancy clothes, a fancy car, and a big house? Unfortunately, that's what we've been taught makes a wealthy person. Owning luxury goods and enjoying material things might be signs of someone's wealth, but they're just as well a sign of their insolvency.

The dictionary definition for wealth is "an abundance of valuable possessions or money." The second definition is "the state of being rich; material prosperity."

Apparently I don't agree with the dictionary.

To me, being wealthy has three pillars:

  1. Material wealth: This is what the dictionary calls wealth. This includes having food, shelter, transportation, clothing, and some luxuries.
  2. Emotional wealth: Being a member of a thriving community. Being able to contribute positively to the well-being of others. Being able to spend time with your family.
  3. Spiritual wealth: Having a healthy relationship with your creativity. Being able to devote time and energy to cultivating your worldview.

So two thirds of what makes you wealthy has nothing to do with money. Or does it?

While enjoying material wealth requires money in order for you to afford a nice place to live, healthy food, and luxuries, enjoying emotional and spiritual wealth require time to contribute to your family, embrace your community, and exercise your creativity.

And if you're spending all your time concerned with building material wealth, you're probably experiencing a deficiency in your emotional and spiritual wealth.

Material possessions don't provide us deep human connection or lasting happiness. According to a 2010 study, our happiness doesn't improve much beyond $75,000 per year annual income. After that, more money tends to yield diminishing returns toward our happiness.

To be truly wealthy is to enjoy a balance of material, emotional, and spiritual wealth. Steering your wealth-building ship too far in any one direction will lead to worry, stress, or hopelessness.

Wealth is Freedom from Material Worry

When you have money in the bank, you're less likely to take work from a client that treats you poorly and you're more likely to attract clients who otherwise would have smelled your desperation. You won't allow your rates to falter because you'll be able to walk away from clients who might lowball you. And when tax time comes, you'll have the money to pay the IRS.

In your personal life, building wealth has similar existential benefits: You'll no longer worry about whether you can pay your bills on time. You'll feel a new sense of control over your time because you won't be stuck on a debt treadmill.

It's important to understand the difference between wealth and income. While income is the amount of money that passes through your hands each year, wealth measures your ownership of income-producing assets. So while we tend to think of our high-income friends as being wealthy, that's really only true if they've set aside a portion of their income to invest in income-producing assets like stocks, bonds, and real estate.

I'll do my best not to rant about the insanity of American consumer culture and the immense waste of time, energy, money, and relationships spent on impressing people with symbols of status. That's a discussion for another time. If there's anything to take away, it's that the colloquially accepted understanding of what it means to be wealthy is flawed.

Your Big Cashout Probably Isn't Coming

I hear it all the time: "I've got stock options and we're going to sell in a few years, so I don't need to invest." "I'm going to start a company and get it sold, so I don't need to plan for my retirement."

Let's debunk these pipe dreams.

Nine out of ten startups fail. Think of ten startups your friends and colleagues have founded or work for. Now pretend nine of them are gone and only one remains. Their founders believe whole-heartedly in their mission and some are even banking on their business's success in order to secure their future. Entrepreneurial spirit is responsible for the immense prosperity we enjoy today. Founding a company to serve the public can be a noble pursuit. But it's also an outrageously risky one.

Your stock options aren't going to save you. If you've been granted 1% of your company in the form of stock options and your company fizzles before it goes public: 1% of $0 is $0.

You have limited shelf life. The half life of a tech worker is a paltry 15 years. As you age, the demands and responsibilities in your personal life grow and your mental acuity will decline. You'll grow wiser, but may become less desirable because you're unable and unwilling to work long hours or travel regularly.

Silicon Valley success stories are toxic because they ignore most of the factors that led founders to their financial wins and often ignore the deep sacrifices and dose of privilege necessary to get there. That's not to say it's impossible to make millions or billions of dollars selling your startup. It's just really unlikely.

Would you rather have a million dollars at retirement age or zero dollars? If you follow the principles in this guide, it's very likely you'll be a millionaire before you retire. The way there isn't going to be particularly sexy or even exciting. Sexy and exciting are usually synonyms for risky. Risky ventures are a sure way to make a million dollars and a sure way to lose it. What I want to instill in you in this guide is that the surest route to becoming rich is to do it incrementally and slowly.

Fintech: A Wolf In Sheep's Clothing

If you work in tech, I'm sure you've heard of or used one or more of the "automatic savings" apps that have flooded the market in the past few years. Companies like Digit, Acorns, Robinhood, and Betterment claim to make saving automatic. Digit's slogan is "Save money, without thinking about it."

News flash: You should really be thinking about it.

These platforms monitor your checking account and removes a few dollars if you can afford it. They then save the money or invest it for you. But they don't address the reason you weren't saving money in the first place:

You weren't thinking about it.

Saving money requires modifying your behavior. It cannot be done automatically. You must tend to your budget every month. You must be fully aware of the flow of your money. This awareness is what empowers you with the understanding of the tradeoffs inherent to spending and saving.

Plus, these services don't want you to know how expensive they are. For instance, Digit doesn't charge you anything to be your savings fairy, but they also don't pay you interest on the money you've saved—interest you could be accruing in a bank or investment account.

Take control of your money. Keep it away from these newfangled services and save money like your grandpa did. I'll show you how.

Personal Finance is Personal

As with any self development effort, building wealth hinges on managing tradeoffs. The decisions you make with your money now will determine the possibilities for your future self. Spend too much now and you'll find yourself in a bind later. Save it all for later and you might regret not living your life now.

The truth is, no one can tell you what level of wealth and saving is right for you. Pundits like to use rules like "save 15% of your income for retirement" because they're easy to understand and generally work reasonably for everyone. But no one can tell you what's right for you. I know people with my income who own expensive luxury cars and I know people with my income who own no car at all (like me!). Some people value taking extended international vacations and some people want to save for a down payment on a house. There's no right answer except one: Always spend less than you earn.

When considering your situation, begin by asking yourself the following questions:

  1. Do I want to stop working someday? For most of us, the answer to this question is "yes!" For all of us, a better question to ask is "Is it possible I'll be unable to work someday?", to which the answer is a resounding "YES!".

  2. How much of my income can I afford to save for tomorrow without making today uncomfortable? Building wealth is all about deferring pleasure. How much pleasure are you willing to sacrifice now so you're sure you'll be secure later?

  3. If I didn't have to work, what would I do instead? This is the question most people aiming at retirement can't answer, and when they get there they find you can't drink margaritas on the beach every single day. If tomorrow you didn't have to work anymore, what would you do instead? And how much money does that require?

Two Extremes of Personal Finance

To help illustrate to you the tradeoffs in personal finance and wealth building, imagine two freelancers named Penny Pincher and Sandy Spenditall.

Penny grosses, on average, $6,000 per month. She has no debt. Her monthly expenses are as follows:

  • Apartment rent: $1,200
  • Utilities: $100
  • Groceries: $300
  • Bus Fare: $100
  • Entertainment: $100

Penny's total monthly expenses are $1,800. Each month, Penny pays herself a salary of $4,000 (more on this in Take Care of Your Best Employee. She saves and invests the difference in a tax-advantaged account.

Day-to-day, Penny lives very frugally. Her friends get confused when she declines going out on Friday nights despite always talking about how good business has been. She shops at secondhand stores and rarely goes out to eat. Some day she wants to open a gallery cafe, but only after she's financially independent and can finance it with cash.

Penny's neighbor, Sally, also grosses $6,000 per month on average. She leases a current-year Mercedes-Benz and has five credit cards, each carrying a balance. Her monthly expenses are as follows:

  • Loft apartment rent: $2,400
  • Car lease payment: $500
  • Credit card minimum payments: $600
  • Groceries: $100 (Sally doesn't cook)
  • Entertainment: $3,000

Sally's monthly outlay is $6,600—more than she makes in an average month. She finances her lifestyle using credit cards. She knows she should be saving for retirement but figures she'll do it when she's older. Her response to whether she's saving for retirement is "I'll just make more money."

Are you a Penny or a Sally? It's likely you fall somewhere between these two extremes, and only you can decide how much risk you're comfortable with, the lifestyle you want for yourself, and the hours and years you want to work.

Later, I'll show you how to come up with a savings rate that balances immediate wants with future needs so both Present You and Future You are happier together.

Next: Freelancer, Inc