It’s a big question, how to become wealthy? In order to become wealthy one much think in terms of financial statements. When I first read this statement I was around 25 years of age. In that age one neither know about financial statements nor becoming wealthy is a priority. Those are the years to enjoy and majority does just that.
It does not take long for young people to realize that money is an important factor of life. Becoming wealthy is not an option it’s almost a necessity. Once people realize this, their endeavor towards wealth building starts.
The first step in wealth building is to define what ‘wealth means’ for an individual. For a person who is already a millionaire, his definition of wealth building will be different than ours.
Definition of ‘becoming wealth’ will be different for Bill Gates as compared to a salaried middle class employee. Its important to first define what to achieve after which one can call self as ‘wealthy’. If you will ask me, most important milestone to becoming wealthy is achievement of financial independence. Instead of focusing on becoming wealthy, one must target a more quantifiable milestone.
Become Wealthy by Setting Goals First
If a person is disorganized, probable he may never become wealthy. This is why to become wealthy one must have definite goal. If goal is strong and self-motivating, realization is automatic. For me, the goal of ‘financial independence’ works like a search-light in the dark sea. It give a sense of direction and focus in times of delusion. The goal of financial independence works like a magic. Working for someone else is like making him rich. Instead, we can work for self and make our self wealthy. When we works for self, everyday we reach one step closer to ‘our financial independence’.
Before Wealthy by Reducing Dependency
Unfortunately, salaried people do not have enough time to work for self. Most of the productive hours are spent in office. For every penny of expense one is dependent on ‘salary from job’. This is what is financial dependency. Its very dangerous. This is where people get used-up by companies as they are helpless. Dependent on employer for the monthly pay cheque is dangerous dependency. In order to manage every expenses of life monthly pay cheque is a must. Many feel satisfied to get a fat pay cheque form their employer. These are people who drive expensive cars. They live in posh homes and enjoy lavish spending habits. But to afford these amenities they pay a hefty price? The biggest compromise they make is with their ‘independence’. The higher one earns from employer, its likely that they are becoming more dependent. All productive time is spent in office. Each day people spend 9/10 hours in office. If one can invested same time working for self, becoming wealthy would become easier.
Become Wealthy by Working for Self?
This understanding is very important Others cannot make us wealthy. To become wealthy we must take the control in our own hands. This is how the concept of ‘work for self’ has developed. But how can salaried men, who spends 10 hours in office, work for self. Important is to turn wealth building into autopilot. Before discussing the autopilot-thing allow me to uncover a big flaw in our personality.
Majority started opting for jobs after industrial revolution. Before that, people were mostly self employed. Industrial revolution made small-earning very simple. Getting a job and earning a mediocre wage became too easy. Soon people started avoiding the painstaking process of working for self. Soon after passing out of college, students are absorbed in industries. Within days, a college-goer starts to earn. It creates a atmosphere of euphoria for everyone. Child is happy because they can now earn by themselves. Parents are happy that child is no more dependent on them. The company is happy that they got one more slave. Its a perfect atmosphere. Situation feels like win-win. But in this euphoria we miss here a very important point. Industrialization created a huge wealth imbalance. Businessmen are the one who are becoming wealthy. Balance working class also earns well. But this happens with a huge compromise on their financial independence.
Today, people have got so used-to doing a job that concepts of financial independence needs to be re-taught. People have un-learnt how to become wealthy. We are too comfortable with average earning levels. Many people believe that high salary means person is wealth. But this is a big fallacy. Level of earning has nothing to do with how wealthy one is. Ones wealth is directly related to the asset they have accumulated. High salary ensures high spending. But if salary stops, spending will stop. On other hand, asset accumulation assures spending’s in all conditions. It means job or no-job standard of living for a financially independent person does not change much. To build asset one needs to think innovatively.
Become Wealthy by Thinking Innovatively
Financial creativity and innovation has stopped functioning in common men. Study hard, get good grades and joins a big company, this is all what is taught in schools. Job market has made easy-money too accessible. People have stopped thinking innovatively about becoming wealthy. One can be excellent in solving complex calculus but when it comes to financial innovation they fail miserably. Today if people loose job they will fall into peril. This society trains people to follow and not to lead. Industrial revolution & education system generated more of financially illiterate and dependent people. To become wealthy one must first get out of this dependency trap.
Path to become wealthy is not so difficult. To begin with, one should give one hour each day to self. Increasing ones financial database is all one has to do initially. One must start reading as much as possible about financial independence & money management. This journey is slow, but it will produce sure-sort results. The main problem with wealth building is that, people take one step forward and two backwards. But financial know how ensure that there are no backward steps. Why financial know-how is so important to become wealthy? Increasing ones financial know-how means one is learning to manage money better. Money management mean more savings, profitable asset accumulation & increasing passive income. Financially illiterate person will only spend more. Financially illiterate person will accumulate more liability. Financially illiterate person knows only salary and doesn’t know passive income. These are few realization those are essential to become wealthy. Spending one hour each day in reading good articles on finance will do a world of good.
Become wealthy by ASSET accumulation
To become wealthy we must have portfolio full of income generating assets. What is an asset? Definition of asset is very simple. Any thing that generates passive income is an asset. By this definition our job is not an asset as it do not generate passive income. Salaried people shall channel their salary income to buy assets. Several small-small assets generates passive income. The higher is passive income, the wealthier one becomes. A stage come when passive income will be higher than ones salary. If passive income is enough to support ones life style, person is financially independent. This will be a big milestone in becoming wealthy.
Since the age of industrial revolution people have started considering financial richness and financial independence as two separate phenomenon. If we have to become financially rich we cannot think about them in isolation. In reality financial richness and financial independence are interrelated such that one feeds the other. The richer one is, the more financially independent he/she must get. At one stage the person becomes so financially independent that they start affording luxury from their portfolio income. The final stage of becoming rich is when one begins to save from their portfolio income.
Become Wealthy by Controlling Needless Spending
Financially illiterate people earns money without ensuring their financial independence. Who does not want to become rich, but we fail to realize the important milestones of achieving this goal. Without first achieving financial independence we cannot become rich. Instead of taking steps to achieve financial independence we keep dreaming about getting rich. We continue to spend money on everything except assets. The more we earn the more we spend needlessly. Instead of accumulating we continue spending money like trash or else we accumulate only liabilities. If we sit back and think what we gathered we will find a list of only liabilities. Some common liabilities are like home, cars, tv, frigde, air conditioner, mobile phones etc. These are those items which increase our spending.
It is not that rich people do not buy liabilities. But in their priority list spending on liability comes after financial independence. Rich people spend on luxury items after they have ensured financial independence for themselves. The difference between a financially illiterate and financially intelligent person can be understood form this example. There were two friends Jack & Sam. Both friends need $1000/month to manage their livelihood. Sam being financially illiterate, decided to search for a job to generate $1000. But Jack being financially intelligent thought of doing job to develop a portfolio full of assets. Jack’s target was to build a portfolio big enough that it can generate income of $1000/month. Whether Jack works or not his assets will earn him sufficient income to manage his liabilities. But as Sam was not focusing on building asset, his dependency on his job will be maximum.
People must develop their financial intelligence to realize the importance of asset. In the process of getting financially intelligent we start thinking about money in terms of financial statements. Financial statements are Profit and Loss accounts, Balance Sheet & Cash Flow Statements. I know it may look intimidating to think money in terms of financial statements, but this habit is worth developing. I learnt this concept from Kiyosaki, and I am complete in debt for this man. In terms of financial statements, a poor man, a middle class man and a rich man will look like this:
Achievement of financial independence is the way to become financially rich. After one achieves financial independence only then they can think about getting rich. Financial independence can be achieved by building assets. The degree of richness will be decided by the value of extra cash getting generated from the assets (income from assets). This extra cash will enable individual to spend on luxuries of life. A stage will come when, even after spending on luxuries as per satisfaction, individual will be able to save money. This is the moment when a person really start becoming rich.