Real Estate

The First Law of Money: Wealth Creation Starts With 9 Words

Wealth creation is a process described by some essential laws of money. If you live by these rules, your chances of financial success are very good. And yet, most people will have financial difficulties throughout life. Why is this?

You may have the desire to earn more money and fulfill all your dreams, but if you don’t know how to start the process, you can’t expect to achieve your goals.

Wealth creation has to start somewhere. Identifying where and how to start is probably the most difficult step. But once you get the ball rolling, it becomes very easy from there.

Let me try to shed some light on this:

Suppose I ask you to paint a newly constructed brick wall in a color of your choice. Will you be able to do it? I’m sure you would if you’re familiar with the process of preparing and painting a wall. Once you know where to start, the process becomes much easier: buy the plaster and paint, select your brushes and construction tools, get a ladder if needed, plaster the wall, apply a coat or two of primer and then the final coats of paint. Wow, job well done!

The point is that if you know how to do a certain task, all you really have to do is get off your butt and do what you have to do. The same works with making money.

As a hard-working individual trapped in the rat race, wealth creation is governed by a standard universal framework. There are 9 words that describe the whole process:

Use (1) your (2) surplus (3) income (4) to (5) buy (6) income (7) by generating (8) assets (9).

Wealth creation is commonly understood as an investment exercise. Take a look at the figure below.

Conventional thinking is to save part of your monthly salary in a 401k/pension fund over a long period of time so that when you retire one day you’ll have something to live on.

One can see that investing is planning for the future. It’s a delayed wealth creation strategy. Instead of accumulating wealth This dayinvestors set aside cash to use in retirement 20 or 30 years later.

With this approach, the hope is that one’s investments will increase in value over time.

Wealth creation starts on a completely different path. While investors save part of their salary (before costs) in a savings vehicle like a pension fund, wealth creators focus on spending part of their salary (after costs) on income-generating assets.

It may not make sense, but spending is the name of the game, not saving. How much you spend and what you spend it on is critically important to achieving financial success. I can’t stress this enough.

Building wealth begins with excess income, the money left over in your bank account after covering all your necessary living expenses. These can include things like health insurance, fees and taxes, food, and housing expenses. They exclude luxuries like travel, eating out, buying fancy shoes or bags, and buying expensive motorized toys like boats and cars.

How you spend your active income will have a direct influence on how much excess income you have. Do you really need cable TV? What about those party nights? Are they really all necessary? What monthly expense can you cut?

  • You need to take a critical look at your spending patterns because excess income determines how quickly you can begin to accumulate wealth. The less you spend on the things you want (as opposed to the things you need), the more income you have to spend on assets that will make you rich.

It goes without saying that if you are unemployed or earning no income, it is impossible to create wealth. When I started my journey, I was working as a full-time researcher at a university in Johannesburg.

My excess income was far from being classified as desirable, which meant that my potential to create wealth was literally zero.

As difficult as it was at that stage, I only had one option, and that was to increase my disposable income. Over the next few weeks, I began looking for work. Yes, a better paying job, one that would give me a significant amount of surplus income to help me escape the rat race. I eventually found something in the financial industry, and I am grateful to say that formal employment was exactly what I needed to help me start my journey to financial freedom.

The important question to ask yourself is, ‘How will I increase my excess income?’ It may mean finding another job or changing your spending behavior. Every dollar saved is an extra dollar you can use to start building wealth.

But that’s only possible if you spend every dollar on the right things, namely income-producing assets.

When starting out, it won’t do you any good to spend your free money on non-income producing ‘assets’ like vacations or expensive clothes.

After I started working for a boss, I invested all my surplus income in real estate. I cut out all unnecessary expenses, set a budget, and used all my extra money to generate streams of rental income.

This did not happen overnight. It took me about four years to get to a position where I could use rental income from my real estate deals to buy more assets. At this stage, the income from your assets (along with the excess income from your salary) can be used to purchase more income-producing assets.

This is an essential point to be reached by every wealth creator. It represents a new stage, one of accelerating wealth and essentially early retirement.

To summarize, the first law of money highlights two important points:

  1. Surplus income is the catalyst to build wealth.
  2. The excess income must be used to purchase income-producing assets, which in turn must be used to purchase more assets.

The resulting stream of income will help you achieve financial independence and eventually freedom.

Leave a Reply

Your email address will not be published. Required fields are marked *