We spend a lot of time discussing investing and do it even more.
At any given time, our team works with clients starting businesses, selling businesses, buying real estate, or building liquid portfolios.
If the market is open, we are working on this stuff.
It’s the stuff that becomes the heroes of our financial lives.
The things that add zeros to our net worth add more passive income and freedom.
But I want to take a moment and talk about the ultimate villains in our financial lives.
The thing that secretly finds its way in that can work directly against our dreams of freedom and an early retirement.
This villain?
Fixed Costs.
Understanding the Impact of Fixed Costs on Your Future
It’s the things that eat away at not only our month-over-month cash flow but can also eat away at our cash flow years into the future.
Like a seven-year car loan that one can’t afford.
That’s 84 payments towards a car seven years into the future. Those dollars can only go there.
They can’t go towards college savings, a home remodel, a trip, or an investment account.
But let’s pause here and head up to the 30,000-foot view cause fixed costs are not just debt.
Fixed costs happen monthly, limiting our ability to transfer cash to our investment accounts.
The main culprits are indeed debt but also include habits and subscriptions.
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Fixed costs are not just debt. They happen monthly, limiting our ability to transfer cash to our investment accounts.
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You probably have never heard of them this way, but that’s what they are. Debt is paid to someone else for something. Habits, good or bad, are paid experiences. Subscriptions aren’t debt per se, but they act like debt as they happen monthly and limit your ability to invest.
Ok, so we understand what fixed costs are.
So why are they the death of your future self, and how does that tie into software valuations?
Software Valuations and the Role of Fixed Costs
Let’s visit the software business.
It is widely known that software companies are the most valuable companies in the world.
Why?
Well, aside from their utility, they typically have low operating costs.
They have a few employees, an internet connection, and a product, and if enough people like your product, you can make millions with a tiny team.
Not convinced?
Look at META; they will have 25% fewer workers than they did a year ago, and they will watch their revenue continue to grow.
Software companies have low fixed costs and high margins, which in the world of investing equals high valuations.
So why will high fixed costs be the death of our future financial selves?
When we have obligations to someone else, particularly when they can bankrupt us if we do not pay (banks), people pay them.
And what happens when people spend decades paying for bad habits, bad debt, and too many subscriptions?
They look in the mirror, realize they ran out of time, and see the death of their future financial life.
Strategies to Reduce Fixed Costs and Improve Financial Health
So, to avoid this – here are a few things to do to avoid this conversation with yourself.
Pay off debt you know is stupid – credit card debt is the main one.
Cancel subscriptions – go through, with a fine tooth comb, and kill what you don’t use regularly.
Fix your bad habits – this may require help from a team like mine, but seriously, take down one bad habit a quarter.
Treat your financial life like a tech company.
Maintain low fixed costs and lots of margin.
Then, give it time (this is the most challenging part). Doing this will lead to significantly better financial conditions down the road and, in some cases, not that much time.
Take the initiative today and save your future self.
