Hmm… Quite a few years back, I asked this very same question. I was pissed that I had to get up and go to work everyday, (almost) always paid my bills on time, and had acquired a lot of nice things; but after years of this, we had nothing to show for it except a huge pile of debt and negative equity. In my search for answers, I tried to take an objective look at myself and understand why I couldn’t be rich. I figured I had the qualities necessary; a strong brain for numbers and a willingness to make whatever changes were necessary. I figured I was only lacking the financial education. So I could be rich! But how?

First I had to define what does being rich even mean? You need a target to set goals, right? A simple definition is having great material wealth, but we all know “great” is an ambiguous term with no dollar figure or equation attached to it. Did it mean having Warren Buffet money? That seemed like a ridiculously lofty goal, and frankly there are a lot of rich people in my mind below this level of wealth. Was it about $100,000 minimum annual income from passive investments? This seemed a rather arbitrary figure and one that really didn’t mean anything, plus the number would have to change over time to keep with inflation. Was it being a millionaire? What does being a millionaire matter if you hoard it in a shoe box and don’t invest it? You can easily blow a million dollars on a nice house and then you have no cash to pay your annual tax bill in the tens of thousands of dollars! Broke and back to work!

The more I learned, the more I came to a definition that made sense to me. Being rich means that at a bare minimum you are expected to be financially independent for the rest of your life, able to pay life expenses with passive income from investments and without working income. It is at the point of financial independence that you graduate from the middle class and can choose if and when you want to work. To clarify, I don’t think being financially independent means that you are rich, it simply means you’ve met the bare minimum requirement. Beyond that minimum level, being “rich” is another ambiguous, eye of the beholder term, sort of like saying someone is strong. For example, somebody that is financially independent with a million dollars invested in the stock market and $40,000 of annual passive income from those investments to pay a $34,000 per year lifestyle may seem rich in the eye of a pizza delivery guy struggling to pay his $900 a month rent, but Jeff Bezos would probably chuckle at the notion of a newly minted millionaire being considered rich.

Recognizing that I never had the goal of acquiring Warren Buffet / Jeff Bezos levels of wealth, I now had a target to shoot for. Rather than being rich, my goal became financial independence. So how could I reach financial independence? I needed to purchase investments that would exceed my annual expenses, and this meant fixing both sides of my cash flow / balance statement, income and expenses.

Income sources in the future could be in the form of businesses, stocks, and/or rental properties. Income from these, not a job, would equal the “income” side of my balance sheet. This was for the future, but like many others, my income at the time was pretty well set. Sure I might have gotten a promotion if I was willing to really put myself out there with regular overtime, attending conferences, or adding letters to my title, but these were not in my plans with a new family!

I had a job and could purchase investments to help the income side IF I had cash to do it, but in order to get cash for investments, I needed to fix my balance sheet to go from red to black.

The other side of my balance sheet is the “expense” side of it. This is where things get tricky!

Part 1 – Managing Expenses

Many of us simply ignore the expense side of the balance sheet or pretend that we have no control over it, but in fact this side is usually very easy to adjust if you remove emotions from the equation. Looking back at my family budget in that magical 2007 time frame, we realized in order to improve our cash flow so we could invest, we needed to sell off the new cars and buy a cheaper reliable car with cash, downgrade the full-coverage auto insurance to liability, move out of the posh new house with the $2100 monthly mortgage to a fixer upper close to my job, adjust the thermostat a few degrees down in the winter and up in the summer to save on energy bills, cancel our cable TV and buy a cable modem instead of renting it, and switch from our expensive cell plan with AT&T to a cheap prepaid like Walmart Family Mobile. See how easy that was! 😀

Of course, it wasn’t that easy. We were very committed to maximizing our financial position for investing, but the emotional side of it was still difficult. I won’t pretend the path is easy and without sacrifice because obviously it is, but it CAN be done! Although I was an engineer in a consulting firm with a better than average salary, considering my wife was not bringing home an income, I’m sure we had a very average income level for a family of three, and later, four.

So if you have a job and bills, you can look at your finances the same way we did in 2007 and make similar changes to your expenses. Jacob from Early Retirement Extreme has a 21-day makeover that walks you through a lot of great ways to improve your finances; check it out at https://earlyretirementextreme.com/ (left column, scroll down). Even if you can’t quite take it to the levels he outlines in that makeover for fear of divorce or insanity, at the least you should consider a happy medium between your current situation and the more extreme options he suggests.

I found that taking control of expenses is the easiest way to improve your balance sheet, and I personally review mine annually. Once you’ve started managing the expenses side of the balance sheet, it’s on to paying down debt (Part 2) and investing (Part 3).