Three Rules To Be Wealthy

Three Rules of Wealth - lamborghiniLet me pose a question. What is the sole determination of wealth?

Is a fancy car? A big house? A well-paying job with a high-standing social status? Or is it the dollar sign attached to your bank account?

If you answered "yes" to any of these options, this article is specifically for you! Many would be reluctant to believe that real wealth isn't determined by the amount of stuff you have or the amount you make. And even more have been offended to hear that anyone can obtain wealth regardless of their current financial situation!

See, there's this giant misconception about wealth - that people who make lots of money have respective wealth and that the little guy doesn't stand a chance. This couldn't be further from the truth! Think about it - how many times have you heard of a pro athlete going broke within months of his paychecks being cut?! Often those with large salaries are the first to lose EVERYTHING when their lifestyle is drastically changed! If they were so wealthy, how could they possibly go broke so quickly?!

In fact, the idea that high income and wealth go hand-in-hand together is so commonly believed that to separate the two is considered preposterous! But actually the two are only loosely connected. The REAL truth about wealth is that it is relative!

What do I mean by this? Let's take two scenarios.

 

Moe and Larry

Moe and Larry are two software developers who attended the same school, got the same grades, and had the same opportunities presented to them. After school, Larry moves back to his small hometown to accept a local developing position. After tax, he makes 50k/year and has a lifestyle which requires him to spend 20k of it on living expenses and other purchases. Moe, on other hand, moves to a big city. Here, he receives a post-tax pay of 95k/year for an equally challenging developer's position. However, it takes Moe major money to live in this big city and the cost of living is so high that yearly he spends 65k on the same level of living expenses as Larry. Both employees net 30k/year that they can spend, save, donate, or do whatever else they wish with it. But Larry's 30k is worth considerably more, because it stretches much farther than Joe's 30k! Despite Moe's enviable salary, Larry is wealthier!

If Moe and Larry each have 30k in their bank accounts and they both lose their job, Larry is in a much less dire situation! He can support himself for a year and a half to find a job before he runs out of money. Moe, on the other hand, has less than 6 months to hustle and find a new position.

And this is how the once-rich athlete goes broke! Not knowing any better, they associate their income with wealth, but do not live in a manner that accumulates wealth! When they lose their jobs, they can't (or don't) adjust their lifestyle and it's then that they realize, "I'm not wealthy" - often too late.

Analyzing it, we see a ratio between earning and spending. If Larry and Moe each spent only 25% of their incomes on living expenses, Moe would have more money than Larry. But unless Moe moves to an area with a lower total cost of living, his dollar still stretches just as far as Bob's. And despite Moe's higher salary, both Moe and Larry are now equally wealthy! Wealth is RELATIVE!

Taking this concept of relative wealth, we see that wealth accumulation ultimately comes down to how much you spend. Reducing spending increases wealth. But real wealth isn't gained by throwing pennies into a jar or tossing dollars under a mattress - it's gained by utilizing the dollars you have and putting them to work! When wealth is leveraged, wealth generates more wealth! Which, in turn, generates even more wealth! This compounding interest is what turns your quarters into dollars and hundreds into thousands! This is the secret to becoming wealthy!

 

Bill and Ted

Let's look at another two friends. Bill and Ted have an equal amount of money. Bill spends it on a brand new car, Ted on art from an up-and-coming artist. In five years, who's purchase is worth more? Well, Bill has lost about 65% of the value on his car (not including the cost of maintenance or gas that's he's spent over the years!) Ted's art is now worth more than what he paid for it because the artist's works are in such demand! Bill has lost wealth, Ted has gained it!

Replace "art" with "stocks", "businesses", "real estate", etc. and you have the reason why the rich get richer - because they tale their earnings and spend them on appreciating assets! Everyone can do this!

Knowing what we know now, we can derive our three simplified rules to wealth!

 

Rules to Be Wealthy

1) Wealth is established based on a ratio determined by the amount you spend divided by the amount you earn. Increase your income while reducing your expenditures.

2) The rich buy appreciating assets. The poor buy depreciating liabilities. Buy appreciating assets and avoid depreciating liabilities.

3) Leveraged wealth generates more wealth. Reinvest your profits to leverage your wealth and gain compounding interest.

Attaining wealth is a difficult journey. But live by these three rules and you will attain true wealth regardless of your financial situation!

 

-Phi

 

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