Creating Wealth 101

+Hans Schoff wrote:

Creating wealth is a process, not one particular strategy or technique or asset class (like real estate, stocks, bonds, gold, silver, etc).

It is also a mindset.  It is not just having or getting a lot of money.  Many people have come into apparent wealth overnight (rock stars, lottery winners, inheritances, etc), and yet as fast as it appeared it also disappeared.

Creating wealth is a discipline.  It is something you must continually work at, continually improve on and learn about.  Accumulating wealth does not happen over night; for some it takes a lifetime.  For others, it never happens.  In fact, 96% or so of all people die broke.  3% or so are financially secure and only 1% is rich or wealthy.

How does one measure wealth?

I like to measure wealth in time, as in the number of months forward you can survive financially (without having to work).  If you have more money coming in each month passively than you have going out and you only see that gap growing over time, you are by this definition infinitely wealthy.

For some, that may require a passive income of $10,000,000 a year.  For others it may be less than $100,000 a year.  It all depends on your lifestyle and expenses.

Creating Wealth is all about cash flow: assets and liabilities and the difference of your passive income (from your assets) less your expenses (from doodads and liabilities).  The greater your lifestyle or the greater your monthly expenses, the more assets and more passive income you will require in order to achieve wealth.

You have two choices for creating wealth:

1) Reduce monthly expenses. The least favorite of the two options for creating wealth, but depending on your circumstances and surrounding environment, you may need to start with this option.  Of course, you can also focus solely on option 2 if your expenses are not out of whack or growing out of control; the fastest way to become wealthy is to combine option 1 with option 2.

Side note: cutting up your credit cards and living below your means may technically make you wealthy, but at the expense of how many other areas of your life?  Financial wealth is important, but don’t overlook the other areas of your life as well.  Money isn’t everything as we know; money simply has the ability to help you enjoy the things you have in your life and makes the journey more enjoyable than not having money and financial wealth. 

You must learn to be disciplined with your money, bank accounts, credit cards, etc and know the difference between good debt and bad debt, good assets and liabilities and bad assets and liabilities.  Increase your financial education, don’t be financially ignorant with your credit cards, thinking that simply cutting them up will make you financially secure or is somehow creating wealth.

2) Increase passive income. This of course is what everyone wants to do.  Who doesn’t want to have more money?  But not everyone is willing to do what it takes to create or increase their passive income or cash flow.  Creating or increasing your income to exceed your expenses to become wealthy involves business building and/or investing money.  Either or both of these options can create a residual or passive income for you.  Business Building is how the majority of the super wealthy and rich achieved their wealth; by investing money the wealthy are able to hold and multiply their wealth.

Once your passive income surpasses your monthly expenses you, you are then creating wealth and a whole new world of opportunities opens up to you.  You no longer have to clock in, check in, or answer to anyone.  You are in complete control and are now on the fast track (versus the rat race).

To get to this stage you must also constantly increase your financial education, to learn the strategies and principles to become financially independent. Once you have mastered these creating wealth fundamentals, your education will pay you royalties in the form of solid investments and business opportunities which will further increase your net cash flow.  Increasing your financial education will begin to attract these profitable investments and business opportunities and your net wealth and passive income will continue to grow.

Always remember, when it comes to money and finances, cash flow is king and is the key to creating wealth – especially in these uncertain and volatile times!

To learn more about creating wealth, read the next article in this series: 1st Steps in Creating Wealth

Originally posted 2010-10-07 06:09:56.

Related posts:

1. Creating Wealth With Inflation – Lessons from Weimar Germany

Original post can be found here: “Creating Wealth 101