There are five aspects of wealth creation to consider:
- Generate revenue
- Manage expenses
- Maintain and increase assets
- Manage liabilities
- Manage risk
If you asked 100 people about what wealth creation strategies give you, a good majority will use terms such as:
Creating wealth is improving your lifestyle with the financial means to do this.
Some of the world’s leading financial mentors often assume that wealth is an opportunity to do what you want, when you want with who you want.
Let’s take a closer look at the five key aspects that should be part of your wealth creation strategy (updated until 2019).
1. Generate income
Please note that we are not told to increase revenue. The fact of creating wealth is that you really need to bring some income, but many very rich people have received a standard salary their entire working life.
Increasing your income is often seen as a way to get more money.
While this may be true, the increase in income for many people does not solve their problems.
Help. I can’t save a cent for $ 100,000 a year.
I’m sure you know someone earning more than $ 100,000 a year, and they say it’s hard to save on their income.
Often, their incomes increase and their expenses increase. It makes no sense to earn 1 million dollars a year, if you spend 1.1 million dollars.
The best way to increase your income is to generate multiple streams of income or to receive money from different areas.
James Altucher, one of the most prolific financial authors, stresses that the average millionaire has seven sources of income.
If for any reason one of your income streams stops, you still have another income to rely on. If you are looking at retirement planning, creating multiple sources of passive income is the way to go.
However, many households have one source of income. Their work.
If something happens to this income stream, financial stress can be huge. That’s when the “financial plan” goes to the window.
Wealthy people do not rely on income from one area, because a successful business does not rely on income from the sale of only one product.
Start with investment, property or business.
Start investing in stocks in the stock market, real estate or cash to increase your sources of income.
Currently, the cost of creating an online business is quite low. Consider options for creating additional revenue streams through the business.
2. Manage expenses
By focusing on increasing your income, it is also important to manage your expenses. There is a very simple rule for creating wealth.
Spend less than you earn, and invest the rest.
It’s easy to say, but not so easy to do.
Don’t like budgeting?
If you had 10 minutes to calculate how much you earned last year, it’s very likely that you could do it very accurately.
However, if you were given 10 minutes to calculate how much you spent last year, you will fight.
How do you know that you spend more than you earn?
Keeping track of where your money goes is an important part of creating wealth.
There is a great book called “The Richest Man in Babylon” (link to the Amazon on the right), which describes in detail the process of accumulating wealth.
Your biggest expense in life
What are the biggest expenses for your life? Many people answer that this is their home, their children or their partner.
These are all expensive items, but these are not the biggest expenses you will face.
The biggest expenses that you will encounter in life in developed countries are taxes.
If you pay the highest tax rate in Australia, then almost half of your money will disappear before you see a cent. That is, before you pay taxes GST, gasoline or alcohol.
The tax is by far the largest expense that you will incur throughout your life. It is important that you pay attention to tax cuts.
Do not make this error limiting wealth
Many people drive around the city to save one cent on gasoline, or visit various supermarkets to save a few dollars on grocery stores.
If they spent the same amount of time to legally reduce their taxes, then they would be in a much better financial position than they would save a few dollars here or there. Don’t get me wrong, savings accounts are great, but needs more attention.
We will look at various structures in which you can invest to minimize taxes.
Maintain and increase your assets
The goal of a person seeking to create wealth is to increase their assets so that they can receive income from them.
The starting point is the recognition of what is an asset. The real definition of an asset is what puts money in your pocket.
Anything that takes money out of your pocket is considered an obligation. Many of the things that you consider to be assets are in fact obligations, because they cost you money.
Assets can be divided into two categories:
- Lifestyle assets; and
- Investment assets.
Car house and boat – all this is a way of life. Renting property, shares and cash is considered an investment asset.
People who struggle to become rich make a critical mistake during their best income-generating years.
They strive to have:
- beautiful house (you should have a McMansion in 2019, right?)
- modern car with all accessories or even several cards
- boat for an ocean cruise (true freedom, yes)
- Critically Missing Wealth Creation Strategy
- But they are missing an important link to wealth creation.
They get a high-paying job and buy a house, a boat, and a car behind the wheel. The link they missed was that the rich man bought investment assets to pay for the house, the boat and the car.
The rich do not buy these “dads”, as Robert Kiyosaki would say, for their salary. They buy them through their business.
Debt is not right or wrong. It will depend on how debt is used, whether debt will be beneficial to you or damage your financial well-being.
If you borrowed $ 10,000 and spent it on holiday abroad, how much will it cost in a year? Perhaps you will have memories and photos, but no money. If you borrowed $ 10,000 and bought a car, how much would it cost in a year?
A car will probably cost $ 5,000 and, of course, less than $ 10,000. If you borrowed $ 10,000 and bought real estate or stocks, how much would it cost in a year?
The exact amount is unknown, however, it is likely to cost more than $ 10,000. Thus, borrowing to buy an asset makes debt “good” or profitable for your financial situation, and borrowing to spend, making debt “bad” or detrimental to your financial situation.
Manage your risk
If you are a supporter of Murphy’s law, then everything that can go wrong will go wrong.
Risk management comes down to reducing the impact on your financial situation when something goes wrong. Risks are divided into two categories: insurable risks and uninsured risks.
Insurance is an important aspect of creating solid wealth.
Most people have home, car, and property insurance, but fewer people protect things that can have a huge impact on your financial well-being. The main asset of most people is their ability to earn income.
This can be protected by income protection insurance, which will replace income if you cannot work for a period of time.
Life and health insurance
Life insurance becomes important if you have children or a partner who depends on you in their lifestyle. Medical insurance may be useful to you for possible medical expenses.
Insurance can be used to minimize the impact of unforeseen events. However, there are some things that you can not insure.
Insurance is not readily available for your business if it has a severe recession or lawsuit due to a traffic accident.
To protect your assets and income in a situation where you are not insured, you need to use structures to isolate various activities and keep assets away from creditors.
Creating wealth-life cycle
There are four stages of wealth creation throughout your life.
- Broke from 0 to 20 years
- Financial survival from 20 to 40 years
- Financial stability from 40 to 60; and
- Financial freedom from 60 years.
Obviously, age is indicative, and this will vary from person to person.
One of the most inspiring things in life in 2019 is the number of opportunities to create wealth. Watch YouTube. There are many examples of how 20-year-old “children” earn a serious income from a video posted on YouTube. Just amazing.
Not only that, but the bitcoin millionaire craze. It was one of the most volatile asset classes, but it undoubtedly brought many benefits to many people.
Let’s look at each step in creating wealth in more detail:
Phase 1 of building wealth – broke
Oh, the irony of the first step in creating an asset-rich, income-generating lifestyle. You start with a break. Well, we all have to start somewhere.
Most people are born in this world with nothing. Very few people arrived with a wallet when they were delivered, and most people do not have a significant income in the first years of their lives.
At this stage of life, income is equal to expenses, since most of the money earned is spent. A person does not have significant assets or liabilities.
Stage 2 – Financial Survival
Phase 2 is often worse than breaking. The person now has a steady income, and he or she can borrow to buy a car or a house.
At this stage, he or she also creates his life by buying furniture, household appliances and often having children. There are many expenses to pay, and often a young person borrows to cover these expenses.
This can cause a downward spiral when a person’s expenses exceed his income. The only way it is sustainable is if the person takes more to pay off his debts. If this remains out of control for a long period, then the person can go bankrupt, since he is no longer able to pay his debts.
Stage 3 – Financial Stability
As people grow older, their income increases, and their expenses decrease.
It is at this stage of life that people are in a better position to accumulate assets and increase their superfund.
The property they own increases in value and increases their income. This allows them to reduce the level of debt and further increase the asset base.
You may want to increase your contribution to super-managed funds. This can often be a great tax strategy. But it is better to first talk with a financial planner.
Stage 4 – Financial Freedom
Financial freedom arises when a person’s income from his assets exceeds his expenses.
At this stage, a person can freely stop working if he decides and earns on the income derived from his assets.
In the game of Robert Kiyosaki, Cashflow, the most difficult professions that can be chosen from the rat race are the doctor, the lawyer and the airline pilot. Does anyone even remember this game?
If your expenses are out of control
The costs of highly profitable workers are usually very high, so a large return on their assets is required to get out of the rat race.
Cleaner, teacher and truck driver is much easier to get out of the rat race, because they have much less expenses.
This is confirmed by the book “Millionaire Neighborhood”, which examines the profiles of millionaires.
Most of them own their business and do not drive expensive cars, or live in expensive homes.
Focus on investing your savings as a key wealth creation strategy.
Millionaires are focused on investing their money to increase their wealth.
You can browse the best investment books to help find the right thinking and asset management strategies for long-term success.
When it comes to investing books, you will learn from such great investors as Warren Buffet, Peter Lynch, Benjamin Graham and others.
In addition, you will learn how to invest in a managed fund, learn about business consulting strategies, and understand how the real estate plan looks.
Mark your starting point on your wealth creation strategy.
Everyone is at different stages on the road to financial freedom. It is important to determine where you are on the current path.
If you do not know your starting point, it is difficult to achieve the right direction to achieve your financial goals.
The best thing you can do now is start building your wealth creation strategies. Think about where you are on your journey, earn extra income and do your best to get additional sources of income.