Everyone wants to get rich, build wealth, and become a millionaire. The good news is 80% of millionaires are first-generation millionaires — meaning they aren’t trust-fund babies. These are people just like you and me that learned to become rich. If you want to be among the 80% of first-generation millionaires, I offer you this one simple IDEA.
4 Basic Ingredients Wealth Building:
- Income – Earn more
- Debts – Pay off your bad debts. Leverage good debts wisely.
- Expenses – Spend less.
- Assets – Invest you money and build wealth.
You can put them together into 2 groups:
- Wealth Builders = Income and Assets
- Wealth Bleeders = Expenses and Debts
This boils down to two basic wealth building strategies: (1) increase your Wealth Builders, and (2) decrease your Wealth Bleeders.
This is the money that come into your household and there can be many sources:
- Your job (as an employee or a self-employed person)
- Your business
- Income generated by your Assets (money working for you!)
For a more comprehensive list, see my post about alternate income streams.
This is everything that you owe to other people. It is important for you to recognize the difference between good debts and bad debts:
- Good Debts. They give you leverage, for example
- mortgage – allows you to buy a house without having the full amount. Even with a loan, you’ll still come out well ahead when you buy a house.
- student loan – allows you to increase your job income. According to Pew Research Center, college grads earn on average $17,500 more than high school grads.
- business loan – let you grow your business and make it easier to manage your cash flow.
- Bad Debts. They put you at a disadvantage, for example:
- credit card debts — these are very expensive and costs you a lot of money if you cannot pay off each month.
- car loan – buying a depreciating asset like a car is bad to begin with, it get even worse if you take out a loan.
Likewise, good debts can turn bad. For example, if you buy too much house and carry a huge mortgage, or you go to an expensive school studying a major that doesn’t have income potential to pay the student loan.
Here is a post from The Digerati Life that offers good explanation: Good Debt, Bad Debt: The Differences, Illustrated
This is the money you spend because of needs (necessities), or wants (discretionary spending).
- Necessities — e.g., food, shelter, clothing, taxes, transportation, etc.
- Discretionary Spending — e.g., hobbies, entertainments, luxury items, etc.
Note that necessities can turn into discretionary spending, for example, eating out at an expensive restaurant to satisfy your need for food.
However, some discretionary spending are essential to maintain happy and healthy life; especially for married couples. Just be sure to do it in moderation.
This is everything you own that has 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:
- Savings — saving accounts, money market accounts, CDs, etc.
- Investments — stocks, mutual funds, ETFs, options, etc.
- Fixed Income Investments — money market mutual funds, bills, notes, bonds, etc.
- Real Estate
- Intangibles — patents, license agreements, intellectual properties, brand names, trademarks, etc.
- Materials of value — your house, cars, jewelries, collectibles, etc.
For a more comprehensive list, see my post about investment vehicles.
Once you understand the basic ingredients, building wealth is a simple matter of increasing your Wealth Builders (Income and Assets) and decreasing your Wealth Bleeders (Expenses and Debts) . This sounds simple; however, it takes a lot of discipline and effort to become rich.
Increase Your Wealth Builders
The basic Wealth Builders Cash Flow is as follow:
- You earn more money than you spend.
- You save and invest the remaining amount.
- Your Assets appreciate in value and generate additional income to feed the wealth building cycle.
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 dividend paying ETF. After 1 year, she invested $2,600 of her own money, the fund value increases to $2,800, and it pays a dividend of $100 (for a net increase of $300). As a smart investor, she reinvested that $100 to buy more shares. In this example, Jane increased her Wealth Builders by saving, investing, and reinvesting her money.
Decrease Your Wealth Bleeders
The basic Wealth Bleeders Cash Flow is as follow:
- Your income doesn’t cover all of your expenses.
- You have to borrow money to cover the difference and add to your debts.
- Your debts cost you more money and further increase your expenses.
- Your finances spiral out of control.
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!
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.