https://youtubetranscript.com/?v=S-rWlajJMc4
All right, welcome back. So what I wanted to cover today is sort of, I’ve covered some of this before about money and economy, but I wanted to give you sort of the difference, some of the pieces such as income, wealth, cash, cashflow and value. So why is it important to differentiate income and wealth, which are two totally different things that have no overlap, by the way, and things like cash and cashflow, and how does that relate to value? And that’s what I want to sort of straighten out, because I think a lot of people are really confused that these aren’t the same things. And so I wanted to talk about how to differentiate income and wealth, which are two totally different things that have no overlap. But I think a lot of people are really confused that these aren’t the same thing. Income is how much money you make on a regular basis, right? It’s how much money you have coming in. Usually we use income to mean, well in business terms we would call gross revenue. Gross revenue is the amount of money that you have coming in. The problem with something like income is, let’s suppose you’re in the United States, There’s no way you’re not getting away with, on standard deductions, less than like 32% taxes on the federal level, plus the state taxes and all the other taxes, right? So the amount of money you have is not 100,000 a year. That’s what you get in, but then you, a bunch of it goes to taxes, right? Without knowing your expenses, knowing your income is a useless piece of information. So there are people, I know them, who make 40,000 a year. Now that may shock you in the United States, but it shouldn’t because it’s doable. The thing is, if you keep your expenses low, you don’t need a big income, right? And so it matters where you live. In the United States, if you live in like Oakland, California, the last time I checked, if you made less than 170,000 a year where I live means you have two houses and an RV. Big difference matters where you live. Expenses are different in different places. How will you get your income matters? If you’re a consultant, you have more write-offs. On average, you make more money for the same dollar income as somebody who’s getting paid by an employer where the taxes are getting taken out immediately. That’s an important consideration. So how you get your income matters. So you can’t judge anything by knowing someone’s income. You need to know their expenses. You need to know how much of that income they actually retain. And that gets us to wealth. What is wealth? Wealth is the total value, I know, but we’ll get there, of what you own. So somebody lives in an apartment and owns a car. Their wealth is their car. Somebody owns a house. The house is part of their wealth. You can argue about, oh, they’re running because you’re paying it off with a loan, whatever. It’s still part of the wealth calculation. And wealth is the stuff that you have that is independent of your income by definition. Now people with higher income tend to have more wealth, on average, sure, but it’s not a very high overlap, actually. A lot of people have a big income and no wealth because they spend all their money and they’ve never saved it. So you make a million dollars a year and you spend most of it and you spend it on temporary things and you don’t buy a house, you might have no wealth. You can have a tremendous income and no wealth. That happens to people all the time. People get wiped out constantly because they fell into a lot of money or they fell into a really high paying job. They never learned how to manage their money, which is what this is really about. And so they have no wealth. They are cashflow rich and wealth poor, which brings us into cashflow and cash. Cash is what you have on hand. So you got 1,000 of cash. That’s great. You should keep that somewhere. You’re gonna need it. Probably gonna need more than that. Depends on where you live and what your expenses are. Not your income, your expenses. Your income’s irrelevant to how much cash you’d have on hand. The only thing that dictates how much cash you’d have on hand are your expenses. So as a consultant for almost my entire career, my rule was I needed to have three months minimum, although you’d have much more of money in case I was at work for three months. I now lived in Boston and except when I was sick, I was never out of work three months. But the rule was keep at least three months. And what that generally meant was I would only spend a third of my net income. So your net income is what you have after your taxes and expenses. So I wanted to keep my expenses to a third of what I earned after all the taxes were accounted for. That meant two thirds of the money that I had in the check at the end of the day went into savings. So you work a month, you could take three months off. Or two months off rather. So roughly speaking. So you work two months, you get four months out of that. So now you can take four months off. That’s how that works. That’s why it’s important to know how much cash you have on hand and it’s important to figure out how much cash you need to save based on your cash flow. So your cash flow is how much money you’re attaching over what period of time. You can’t say well cash flow is weekly or monthly. Cash flow could be either, could be yearly. There’s different reasons why you wanna calculate cash, cash flow and income on different timeframes. So it’s very important for example, when you’re consulting that you don’t try to calculate a yearly income because unless you specialize in long-term year-long contracts, you ain’t gonna make that. It’s not happening. So you wanna be careful and calculate things in months or sometimes weeks. Some people do very short-term contracts although those tend to be higher dollar contracts. Hint, shorter contracts means you charge more money for the same hours, for the same work. Just saying. That’s why that happens. If you wanna know why there’s a discrepancy in skill set contract, it’s because duration matters. You know you’re gonna have a six-month contract. You can afford to charge less because there’s less uncertainty. The way you calculate how much to charge or the value of something is based on what we call the time value of money. How quickly you’ll get the money, when the money starts flowing, et cetera, et cetera. I had a contract years ago to a company called Equalogic. Equalogic was awesome. Loved working there. They got bought by Dell. You might have heard of Dell. In the largest or second largest cash tech buyout in history, by the way, which I did not benefit from one little bit because I wasn’t an employee. Upsides and downsides to being a contractor. When they bought the company, they said, oh, we’re happy to keep you on for, I think another three months, although it ended up being six, if I remember. But we pay net 90. So what net 90 means is that when you send us a bill, that bill gets paid 90 days later. In bill invoice, whatever you want to call it. I didn’t care because again, I keep at least three months, 90 days, of money in the bank in cash, right? In case my cash flow goes to zero. Then I have three months to get the cash flow back, right? In this case, it was no risk because I had the money. Yeah, I’m not buying any fancy dinners for three months, but whatever, the check is coming and I know exactly how much it’s gonna be because I billed them three months earlier, wasn’t a problem. That’s why you do things like that when you’re a contractor. So understanding cash flow and cash on hand, right? It’s important. Then you can calculate your income, right? So cash flow can determine your income. And again, the way you calculate the value of something is based on not how long it’s going to take you, but the risk involved plus the time. So if somebody wants you to come in and do an analysis for them and it’s two weeks with the work, that’s two weeks where you could be looking for longer term work. You have to charge them a lot more money for that. Maybe double, maybe triple. I’ve seen that. I can’t say I’ve done that because I never did that, but I’ve seen people do that. Like, oh yeah, normally my analysis, I would do it three a month. If you want the same work done in two weeks, we can do it, but it’s gonna cost three times as much money because I’m losing the opportunity to find longer term work elsewhere. So that’s a problem. You don’t wanna run into that problem. That’s why you charge more money, right? The value of your time determines how much cash the person has to pay for your time. Also the risk. That’s how you value your time. You value your time based on risk and amount of time spent, not just amount of time spent and skill. In fact, you almost never use skill. If you’re skillful at something, you can do something quicker, but then you should charge more money for it. That’s why you skilled people charge more money, right? Because they spend less time at it and they give you a higher quality product. It’s not the quality that you’re paying for, right? It’s the time that you’re paying for. And less time equals more money because they lose the opportunity to do longer term things or maybe something they prefer. Very good at a lot of things that I don’t like to do. That happens for everybody, by the way. Sure, there’s tons of things you’re really good at that you don’t like to do. You should charge more money for that because you don’t like to do it. Also the way you calculate value. So value should be based on a number of factors. Should be based on the cash on hand. There’s sometimes, hey, I can’t do that job cheap. I have to do it for this much money because I don’t have cash on hand and I need the cash. That affects the value too. How long it’s gonna take you to do the job affects the value, right? The shorter the time period, actually the more you charge in some cases, not in all cases, right? You don’t wanna charge somebody $300 for a 20 minute job. That’s not very nice, not very fair. But when you’re dealing with consulting and they want a three month assignment done in a month, charge them three times as much money because a three month contract is worth more than a one month contract. Even if the three month contract is less money, having a stable cash flow for three months is worth a lot of money, right? Up front. Not always calculation you make. You’ve got a lot of wealth, a lot of cash on hand, right? Maybe you take the higher dollar approach and the shorter contract. I usually took longer contracts because I like the stability when I could. It’s all up to you. So that’s what changes value. You know what doesn’t change value? How quality your product is. That actually doesn’t change the value. It’s not that it doesn’t have an effect, but really value is about risk and time spent. So hopefully, I’m not trying to give you a big treaty on this. Look, I’ve talked about money before in a couple of different videos and that plays into this. And then if you want to understand this topic better, you should probably listen to my economy video, right? I talked about it there too, very important stuff. With those concepts in mind, I think that will give you a better understanding of how and why value changes, why different people at different skill levels are charging different amounts of money, right? There are certain things that I do, for example, that if it’s a certain person that I’ve known for a while, I will charge them less money, right? Long-term customers of mine, you usually get a break on the rate. Newer customers usually pay more money because they don’t know how stable they are. I don’t know how it is to work with them. There’s all kinds of risk involved in taking a new contract. So you want to charge more for that. And that’s what determines value. So hopefully that helps you out. Again, I’m not trying to be complete. You got questions or whatever, leave them in the comments. I’ll try to do more on it or answer those questions in the comments. If you want me to do other videos, comment. I do take requests. I can’t guarantee I’ll do any of the requests, but I do at least listen to them and consider them. So far I haven’t actually not done any requests, I think. I think every video everyone’s requested I’ve done. I’ve been able to do, thankfully, very grateful for that. And do like, subscribe, tell your friends, threaten people at gunpoint, whatever it takes. Always trying to go to the channel. And look, I hope this is helpful to you. And if it is, spread the word. There’s lots of helpful stuff, I think, on the channel, hopefully. And thank you very much for your time and attention.