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.