The Three Basic Fundamentals of Wealth Building
Money and wealth building topics are generally not covered in school. Our only education comes from the media, our peers and family members. There are two basic understandings of becoming very wealthy; the get rich quick way, and the real way. At the most basic level, building wealth the real way is simply a three step process. We tend to think of building wealth and getting rich as something overly complex and most people don’t ever think they can become rich. The fact of the matter is wealth building is not that complex as long as you know the fundamentals. In the game of basketball, if you know the fundamentals (defend, easy points, free throws), you will likely win the game. If you know the wealth building fundamentals, you will likely win the game of wealth building.The basic fundamentals of wealth building is three steps that are interdependent. The three steps, or processes are; make, save, and invest money. You need to focus on making more money, saving more of it and investing more of it. Over time, compounding interest will do the rest of the job. It sounds like over simplified common sense right? Sure, however many of us get so caught up in life and our finances that we forget these basic fundamentals. We also forget that we need to focus on all three to massively increase wealth. From here I will go through each of the three processes and what they mean then I will put it all together and explain how it relates to one another to ultimately make you very rich. Study the diagram below.
Make Money
Duh! If you make more money, you have more money right? Actually, its not that simple. Notice on the diagram I put a small arrow on top of the make money section. The arrow represents the overall increase in your wealth, or net worth if you focus on just that part of wealth creation. It’s the smallest arrow because its the least important relative to the other two. Just making more money will not make you a wealthy person. Just look at some of your favorite celebrities.
Save Money
Saving money is the second process or step. Another no-brainer right? If you save money, you have more money! Saving money has an arrow that is larger than the make money arrow because it is more important and it increases your wealth more than just making money. Making more money won’t mean anything if you spend it all. However its still not the most important step as you can only save so much.
Invest Money
This is the most important step in the wealth building total process. This is the point where you are no longer working for money. Your money is out there working for more money and that new money is then put to work as well to make you even more money. If you read that line and got confused, read my post about compounding interest.
How it all relates and ultimately makes you very rich
These three basic steps are interdependent. You have to know and work all three to become wealthy, rich, or whatever you want to call it. Here is how they all relate:
Save Money > Make Money
If you just focus on making more money from your job or your business, you will have a good income and a seemingly good life, but that doesn’t mean you’ll be wealthy. Lets say you work hard and focus on making money only. You make a nice $150,000 a year salary and after taxes you take home $10,000 a month (for the sake of this example). What good is making $10,000 a month if you spend $5000 on housing (big fancy house in high class area), $1000 on a car payment (Mercedes S550), and another $3000 on misc junk and extravagances (vacations, eating out, brand name anything, the latest gadget)? You’re left with $1000 and I’m sure you’ll find a way to spend that too. But lets say you focus on saving money more than just making money, and you take home $6000 a month. Because you’re intelligent and frugal, your monthly expenses are only $3500. You may live with less extravagance in the beginning, but in the long run if you make $6000 a month and save, it’s much better off than making $10,000 a month and spending. Know what I’m saying?
Invest Money > Save Money
So now you see that saving money is more important than making money, hence the different arrow sizes. However, you won’t get rich very soon if you just save money. You are one person and you can only save so much each month or year. If you just put that money under your mattress you’ll have a large chunk of money at the end, but you won’t match up with the wealthy guy who invested the money that he saved month after month. That is why the largest arrow of them all goes on top of Invest Money. Investing increases your overall wealth more than just making or just saving money. By investing your money, you are allowing the money to work for you. This gives you more time to focus on making more money and saving more money so you can eventually invest more money. Let the power of compounding interest work, and eventually you won’t have to work for more money yourself since the money will be doing that. Your wealth building vehicle will be on auto pilot. I know someone who makes about $1 Million a year doing nothing. It’s all investment income. Guess what, that number grows every year.
Use these fundamentals to get rich and become wealthy
So there you have it. On the basic level there are only three simple things you have to do. You have to make more money by increasing your income streams, getting a raise, expanding your business etc. You then have to save more money. Stop spending like crazy, you can do that later. Find ways to decrease your tax liabilities and start buying on sale items. Lastly, if you work the first two parts of wealth building, you can then increase your investment portfolio. Your goal should be to increase your ability to invest because, as you now know, investing is the most important part in wealth building.
The Secret to Building Wealth
Let me ask you a question... would you consider yourself a hard worker? Chances are (considering the fact that you opened this article) you are. Let me you another question... with all the hard work you're putting in, are you where you want to be financially? If not, there is a principle that you must learn to apply... Leverage.
You see, there is only a certain number of hours given to us in a day. And we're human, so there is a limited number of things we could accomplish in one day. Knowing this, you must learn to leverage whatever knowledge and tools that you can to put yourself on a much quicker track towards wealth.
Compound interest would be an excellent example. When your money is earning a high rate of return, your money is basically working for you. Instead of you working for your money, your money is working for you. The more you save, the faster it grows.
Another great area to consider would be technology and the internet. Did you know that you can practically automate your entire business? Getting more and more prospects, presenting your product and closing the sale, and even follow up. These are all tasks that can be automated and ran over the internet. The most beautiful part is that your business can run while you sleep!
You can even learn to leverage the tough times, like this recession that we're going through. The marketplace isn't doing too good and it's the best time to buy. Usually what happens on the downturn of the market, everyone starts to sell. The should have sold when it was high but waited too long and lost. There is only a small percentage of people who actually BUY in these types of times. Buy cheap, sell high. Very simple rule and the perfect way to leverage the downturns of the market.
I think the most powerful source of leverage is knowledge. Did you know that 50% of the people that graduate from high school NEVER read another book? And from the ones who went to college, 80% never read a book after. It doesn't take much to beat the masses. Keep growing yourself as a person and growing your value. The more knowledge you have, the more value you can deliver to people. The more value you deliver to people, the more money you'll make.
Try and think about some examples of leverage that you can use to kick your life into a new gear.Wealth Building Tips
Building wealth is imperative for all the business owners. Businesses should be established in such a way that diversified incomes are created. However, generation of profits should be prioritized here. To attain this goal, an appropriate wealth building program should be created. A portion of net profits should constantly be invested in some or the other investment instruments which would help in the production of sources that can be made available for present as well as long-term needs. Let some light be thrown on various advantages of chalking out a wealth building program.Advantages
The first and the foremost source of income of yours is your business. There are several sources being made available for assisting you in the successful creation and operation of business worth millions of dollars. Certain businessmen would get there, certain won't. Some would be going way ahead. The way by which you would be earning money would be base in wealth building program of yours. Secondly, you should obtain expertise in understanding and controlling the finances of your business. This would be a key factor in attaining a healthy cash flow.
The next thing to be incorporated is gaining knowledge and understanding regarding all tax-free, taxable, and tax-deferred alternative streams of income, and optimizing them completely. Creation of a wealth building program would help you in working effectively towards financial objectives of yours, viz; obtaining financial freedom.
The main objective behind development of wealth building program is less dependence on business income. An appropriate business plan would be giving you freedom on the monetary basis and also safeguard against death, illness, inflation, etc. In other words, you turn out to be completely secured with respect to long-term and short-term wants and needs.
Revenue streams
Remember to ensure of three exclusive revenue streams before starting with the business. They would certainly benefit you a lot. These streams include net profits obtained from your business, income out of personal investments that could be obtained from dividends, bonuses, and salaries from the business of yours, and future income through several tax-deferred investments such as annuities and pension plans. Income streams cannot be equated with building wealth. These can be termed as a subset of the huge wealth building program.
Investment streams
The wealth building program of yours should be inclusive of investment streams such as mutual funds, stock options, forex, penny stocks, high-valued stocks, real estate, bonds, and collectibles such as silver and gold coins. Investing in any one of the above-mentioned instruments would risk your money. Diversification is the best alternative to avoid this risk.
The wealth building program of yours should begin with knowing the needs of yours. Along with that, you need to know the way of fulfilling these needs. There are many programs provided by software companies in this regard. Certain programs happen to be free as well. In short, wealth building program of yours must be inclusive of goals- short-time, middle-time, and long-time. Your business should be such that working on the annual basis for achieving long-term goals can be easily possible. You should be able to project certain amount of income every year, just like the government bonds. If you happen to have deficiency or back-log in the income of yours, you should know how to cover it up by the end of that year. As such, keep going with the wealth building program!
