I want to build my wealth, but I found many personal finance books to be boring and intimidating. They usually go into great detail about setting your financial goals, budgeting, etc. — but they don’t tell you the big picture in a simple and concise way. As the most financially astute person in my family, I use the following explanation to help my family gain a better understanding. Here it is, building wealth in a nutshell…
You can put them into 2 groups:
This boils down to two wealth building strategies: (1) increase your Wealth Builders, and (2) decrease your Wealth Bleeders.
That’s the whole idea. Now let me explain…
This is the money that come into your household and there are many sources:
For a more comprehensive list, see my post about alternate income streams.
This is the money your household spend because of needs (necessities), or wants (discretionaries).
Note that necessities can become discretionary expenses — for example, eating out at an expensive restaurant to satisfy your need for food, instead of buying groceries to cook at home.
However, some discretionary expenses are essential to maintain happy and healthy life; especially for married couples. So don’t over do it.
This is everything you own that has cash value. There are many types of assets, and their values can appreciate or depreciate. Good assets not only appreciate in value, but also add to your income — usually as interests and dividends. Some examples of assets are:
For a more comprehensive list, see my post about investment vehicles.
This is everything that you are indebted to other people. Just like assets, there are also good liabilities and bad liabilities:
Likewise, good liabilities can turn bad. For example, a mortgage that is too large. Here is a post from The Digerati Life that offers good explanation: Good Debt, Bad Debt: The Differences, Illustrated
Once you understand the basic ingredients, building wealth is a simple matter of increasing your Builders (Income and Assets) and decreasing your Bleeders (Expenses and Liabilities) . This sounds simple; however, it takes a lot of discipline and effort to build wealth.
The basic Wealth Builders Cash Flow is as follow:
For example, Jane used to spend all of her $500 weekly paycheck. After reading this article, she decided to save $50 a week and invest it in a mutual fund. After 1 year, she saved $2,600 of her own money, and the mutual fund appreciated to $2,800. Additionally, it provided her with a distribution of $50 (passive income). As a smart investor, she reinvested that $50 to buy more shares. In this example, Jane increased her Wealth Builders by saving, investing, and reinvesting her money.
The basic Wealth Bleeders Cash Flow is as follow:
The problem with people who struggle financially is that their money is tied up in the Bleeders cycle.
If you haven’t done so already, now is the time to make wealth building YOUR BUSINESS. Happy wealth building!