It is very common in our society to look at the wealthy people and wonder how they make their money. Some people have concluded that being rich is just out of sheer luck, others often misquote the Bible passage by saying that “money is the root of all evil” and yet others believe that there is nothing they can do to achieve financial freedom. Far from it, you can become a richer you, if you can learn the simple principle of saving money and making your money work for you. If you can learn to spend your money the same way the rich people do, then you can build wealth over time. To start with, there are four core financial terminologies that you need to know. Become accustom to these four terms and you can be guided on how to properly spend your money. The four terms are:
- Cashflow: This is the money you make from your job or career. It is the income that you receive for your efforts, ideas, skills, and knowledge. The higher your cashflow, the quicker you will be able to build wealth if you are judicious about your spending.
- Expenses: This is the money you spend out of your total income on such thing as; food, housing, bills, clothing, transportation, and all other needs and wants. Many people spend more than they earn on a month to month basis. The result of this is that they accumulate so much debt that they need to constantly work and find ways to make more money in order to keep up. To become rich, you need to make sure that your expenses are less than your income, this is what is referred to as “living within your means”.
- Assets: This is something that pays you money. An asset put money in your pocket on a regular basis. The easiest strategy to build wealth is to ensure that you are using more of your income to acquire assets. The more asset you can own, the higher the potential income they can generate, and the richer you can get. Examples of asset includes: rental real estates, equipment that you can lease out, stocks, bonds, or businesses that provide income to you.
- Liabilities: This is something that costs you money. It takes money out of your account. Liabilities includes home with mortgage, motor vehicles, credit card charges, debts, bills and so on.
In order to quickly build wealth, you must ensure that you increase your income, reduce your expenses, acquire more assets, and reduce your liabilities. A lot of people typically deny themselves those things that they want in order to reduce their expenses and live within their means. I am of the opinion that it is better to expand your means by finding ways to add more value to others and increase your earning potential. After increasing your income, the next approach is to start generating residual incomes that will someday replace your earned income. Below is a brief summary of earned and passive income.
- Earned Income: This is the money you earned due to direct application of your efforts and knowledge. You get paid for the hours you work. Most employees falls into this category. To increase your income in this category, you either need to change job/role, or work extra hours. Most middle class are able to work harder by working extra hours, but the problem here is that they mostly end up spending their money to acquire more liabilities, thereby needing to work even longer hours. It is hard to get ahead financially if you as an employee is not intentional about how you spend your money. You need to start accumulating secondary income by buying assets that will someday be able to replace your earned income.
- Passive (Residual) Income: This is the income that continues to be generated after the initial effort has been expended. Residual income can come through royalty, dividends, rent, commissions, annuities, and so on. You do not have to apply further efforts in order to generate the income. This category makes you rich even in your sleep. The approach to take is to find an asset class that interest you, and start pilling on in order to build your wealth. For example, take a 25 year old graduate that decide to make money through real estate asset class. If he earns the average salary of $50,000 per annum in America, and starts saving $10,000 every year. He can buy his first property using his savings after five years of being focused and disciplined. If he continues with the saving rate, he will be able to buy the second property within three and half years by adding passive income from his rental. He will be able to buy a property each year after certain years using this method. Ultimately, he will be in a position to replace his earned income with all the passive incomes coming from the multiple rental properties. Eventually…you wont need a job
2018 is a new year, and it is another good time to make up your mind to become a richer you by spending your money the way the rich people do. Follow the recommendations in this piece by managing your money effectively, and you will be able to experience a positive turnaround in your finances.