Wealth creation is a process described by a few essential laws of money. If you live by these rules your chance of financial success is very good. And yet the majority of people will struggle financially as they go through life. Why is this? You may have the desire to make more money and fulfil all your dreams, but if you don’t know how to get the process going, you cannot expect to achieve your goals. Wealth creation has to start somewhere. Identifying where and how to begin is probably the most difficult step. But once you get the ball rolling it becomes very easy from there onward.
Let me try and shed some light on this: Suppose I ask you to paint a newly built brick wall with a colour of your choosing. Will you be able to do it? I’m sure you would if you are familiar with the process of preparing and painting a wall. Once you know where to start, the process becomes a lot easier: Buy the plaster and paint, select your paintbrushes and building tools, acquire a ladder if necessary, plaster the wall, apply one or two layers of undercoat and then the final coats of paint. Whola, job well done! The point is if you know how to go about doing a certain task, the only thing you really have to do is get off your butt and do what you have to do. The same thing works with making money. As a working individual caught in the rat race, building wealth is governed by a standard universal framework. There are 9 words which describes the entire process:
|Use (1) your (2) surplus (3) income (4) to (5) purchase (6) income (7) generating (8) assets (9).|
Wealth creation is commonly understood to be an exercise in investing. Have a look at the figure below. The conventional thinking is to save part of your monthly salary in a pension fund/401k over a long period of time so that when you retire one day you have something to live on. One can see that investing is planning for the future. It’s a delayed wealth creation strategy. Instead of accumulating wealth today, investors set cash aside for use during retirement, 20 or 30 years down the line. With this approach the hope is that one’s investments will increase in value over time. Wealth creation sets off on a completely different path. Where investors save part of their salary (before costs) in a savings vehicle like a pension fund, wealth creators focus on spending part of their salary (after costs) on income-generating assets. It may not make sense but spending is the name of the game not saving. The amount you spend and what you spend it on is vitally important to achieve financial success. I cannot stress this enough.
Building wealth begins with surplus income, the spare cash in your bank account after catering for all your necessary living expenses. These may include things like health insurance, rates and taxes, food and housing expenses. They exclude luxuries like travelling, eating out, shopping for fancy shoes or handbags and buying expensive motorized toys like boats and cars. How you spend your active income will have a direct influence on the amount of surplus income you have. Do you really need cable TV? What about those nights out? Are they really all necessary? What monthly expense can you cut out?
- You must have a critical look at your spending patterns because surplus income determines how quickly you can start building wealth. The less you spend on things that you want (as opposed to things that you need), the more income you will have to spend on assets that will make you wealthy.
It goes without saying that if you are unemployed or do not earn an income, it is impossible to build wealth. When I first started my journey, I was employed as a full-time researcher at a university in Johannesburg. My surplus income fell way short of being classified as desirable, which meant that my potential to create wealth was literally zero! As tough as it was at that stage, I only had one option, and that was to increase my disposable income. Over the next few weeks, I started looking for a job. Yup, a higher paying job, one that would give me a significant amount of surplus income to help me escape the rat race.
I eventually found something in the financial industry, and I am grateful to say that formal employment was exactly what I needed to help kick-start my journey to financial freedom. The important question you need to ask is, ‘How will I increase my surplus income?’ It may mean finding another job or changing your spending behaviour. Every dollar saved is an extra dollar you can use to start building wealth. But that’s only possible if you spend each dollar on the right things, namely income-generating assets. When starting out, it won’t do you any good to blow your free cash on ‘assets’ that don’t produce income, like holidays or expensive clothing. After I started working for a boss, I pumped all my surplus income into real estate. I cut out all unnecessary expenses, put a budget in place and used all my spare cash to build rental income streams.
This did not happen overnight. It took me about four years to get into a position where I could use the rental income from my property businesses to purchase more assets. At this stage, the income from your assets (together with the surplus income from your salary) can be used to purchase more income-generating assets. This is an essential point to reach for every wealth creator. It represents a new stage, one of wealth acceleration and essentially early retirement.
►To summarize, the first law of money highlights two important points:
- Surplus income is the catalyst for building wealth.
- Surplus income must be used to purchase income-generating assets, which in turn must be used to purchase more assets.
The resulting income streams will help you reach financial independence and eventually freedom.
Cheers for now.