(This is Part 2 of a multi-post series about how I manage my money. If you landed here without context, catch up on what you missed in the introductory post on the Levels of Financial Wealth.)

The next phase of our journey is to stabilize your income and expenses. Learning to live within your means is equal parts art and science, from identifying creative opportunities to make your time, effort, and well.. money go further, to critically executing experiments on your life and measuring the results like a scientist. The secret here is to approach the process with an open, curious, nonjudgmental mind, like that of a child. If you’ve heard of Carol Dweck’s Mindset, this is classic growth mindset stuff.

Balance = Income - Expenses

The goal of this phase is to reach a positive cash balance, which implies two strategies for doing so:

Let’s talk briefly about each.

This is one of the highest leverage long-term ways to generate cashflow, but it’s going to take hard work. Like I said upfront, your mind is your strongest asset, and your ability to learn continuously throughout your life will heavily influence your income earning potential. This is why people invest into higher education, but I also think we place too much value into a college degree compared to the ability to keep learning post-college, especially in an age of YouTube and online learning.

Job seekers often mistakenly attribute more value to the college brand than they should, thinking that if they didn’t attend a top-tier ivy league school, then they’ll never qualify for a well-paying job. In my experience, this isn’t true. The further you get away from your college years, the more employers are far more focused on what you’ve accomplished lately and your potential to grow now than a piece of paper you earned years ago.

This is why the most successful people I know are avid readers, and the people who struggle to become high income earners haven’t picked up a book in the past year. If you want to earn more, then you must increase the scale of impact you’re having on the world. That scale comes from thinking in ways you’re not thinking today. Thinking in new ways requires knowledge found in books, blogs, research, case studies, online courses, etc. Money spent here will pay for itself when it unlocks that job promotion, triggers that conversation in the interview, uncovers that business opportunity. Commit yourself to being a lifelong learner.

Learning is great, but it’s not enough just to be a consumer of information. You need to turn it into something that applies what you learned. When I was little, I loved reading books about programming my own computer games. I’d spend days absorbing knowledge about graphics rendering, input processing, and game design, accruing (what I thought to be) an impressive stack of thick technical books. And I had absolutely nothing to show for it except for some conversational familiarity with the topics. Because I wasn’t making anything out of it. It took many more years before I produced a game that I wasn’t completely embarrassed to show anyone. But once I did, opportunities started appearing more abundantly because I could point to something I’d made myself.

This part is tough when you have a full-time job, but if you want to increase your earning potential, you need to invest time into making something of value. Tech is great for this because the tools keep becoming more accessible, but you need to find what works for your field. If you want to earn more as a lawyer, get out there and start helping your enterprising friends interpret business contracts. If you want to be a writer, start writing! You don’t need to become a hermit and destroy your social life to do this. Just try watching an hour less of Netflix and YouTube, and spend that hour making something. The guy’s polarizing, but if you need inspiration, watch a Gary Vaynerchuk video and start hustling.

I believe you should always be evaluating your next professional chapter, whether that’s in your current company or elsewhere. This doesn’t make you an inauthentic, untrustworthy employee. In fact, I’ve found that having my eye on where I want to go in the future unintuitively makes me more engaged in my current role because it inspires a new sense of purpose to what I’m doing.

There’s a great book called Designing Your Life that encourages readers to interview people in professional roles that interest them. Make this a normal part of the way you work. It doesn’t need to be an actual interview or plea for a referral; in fact, don’t go looking for this at first. Just start meeting people who are doing something you might want to do in the future. Just like dating, you’ll learn just as much about yourself in the process, and your future opportunity will appear at the right time when you’re in an open-minded, confident state having evaluated your options.

Finally, remember that growing income is a marathon, not a sprint. Don’t think for a minute that you’ll retire one day and never have to learn anything again. Life itself IS a learning journey. The people I know who struggle most with income are the ones who have given up on learning. This journey is frustrating, and some days it feels impossible. On those days when even getting out of bed and reading ten pages seems like a lot, just keep going. Brighter days are on the horizon as long as you don’t give up.

Now we come to the other side of the cashflow balance equation. I like to think of decreasing expenses as a combination of prioritization, aligning spend with my life values, and running rapid experiments to learn where I can save. Let’s talk about each:

In your budget, I like to sort my expenses from highest to lowest dollar amounts. This way, the places where I can most drastically decrease expenses bubble up to the top. For me, categories like rent, eating out, and groceries emerge. This leads me to ask myself, “Could I find a cheaper place to live? Could I cook more often at home to save money on eating out? Do I really need to be buying as much wine every week?” These questions become opportunities for experimentation later on.

For each row of my expenses, I like to ask myself, “Why am I buying this?” By connecting my spend to a higher level purpose, I can get a better sense of where I want to be over-indexing compared to where I could potentially save, especially in the categories that are subjective discretionary spend.

For example, “Why am I buying an Audible subscription?” Well, Audible let me listen to audiobooks, which provide a source of entertainment and education, in a way that integrates into my lifestyle and fits reading into other activities like running or cleaning my home (as long as I can pay attention to it). Education is important for my lifelong growth, and entertainment is also important for giving me some occasional unproductive play time for my mind. Therefore, Audible is well worth the ~$200 yearly subscription.

On the other hand, HBO, also a ~$200 yearly subscription, doesn’t provide nearly as much value. When Game of Thrones was on, it created a weekly opportunity to invite my friends over for a Sunday dinner, and cultivating those relationships is very important to me. Today, not so much. So cutting HBO could be a great opportunity to decrease my expenses.

The Lean Startup popularized the concept of treating business as a science lab with the goal of rapidly iterating on experiments to learn how to sustainably deliver value and generate resources. The same analogy of experimentation can be applied to your expenses to discover and execute on ways to decrease spending.

All the questions I’ve been asking myself in the previous sections can be treated like hypotheses: “I’m guessing that buying slightly more groceries would let me eat out less often and overall decrease my expenses.” Then I put this assumption into action over the next week, cooking more, ordering takeout less. The following Sunday, I measure the results, taking note of what I spent on eating out and groceries, as well as taking stock of how satisfied I was with the change (“It turns out I’m a pretty good cook!”). I adjust my budget accordingly, and then move on to the next experiment.

Again, balancing my income and expenses is an ongoing process that I’m still working on today. The danger of income growth is that it creates the risk of lifestyle inflation, allocating the increased pay for things like a nicer place to live, more tech gadgets (my weakness), and more nights out with friends. It takes real discipline to fight this urge to keep up with the Joneses and keep finding creative ways to decrease my spending.

Rightsizing living expenses is important in this phase, but we’ll actually revisit it later in Phase 8 of reaching minimal financial independence where annual living expenses will factor into calculating a target net worth. But if you’ve reached a net zero (and ideally positive) balance, then congrats, you’ve reached financial stability.

Next up is Phase 3: Financial Security (coming soon).