In this article I’m going to lay out the basics of building wealth as I understand them. I think this will be of use to a great many people, for a number of reasons.
Firstly, it will be useful because it’s the principles that I use to get wealthier, and so I know they work, and would work for anyone else too.
Secondly, the advice here is not the kind of advice you would hear elsewhere. Most writing on money matters is skewed one way or another, and inaccurate or ineffective. Or just inconclusive or confusing. In short, I guess you could say it’s written by people who are not wealthy and never will be.
Thirdly, this is simple stuff really, although there are subtleties, especially when it comes to understanding things like compounding. This article will neither overcomplicate nor oversimplify.
Fourthly, people are generally poorly educated on money. Not their fault to a large degree, it’s just that schools and universities weren’t set up to teach real stuff. So real education is always useful.
Before we start, I may as well make the usual disclaimer that money is not the most important thing in one’s life. Health is more important, for instance, and has nothing to do with money. And as far as that goes, I would say go vegan for life and you’ll never have to worry about health again.
Sex and relationships, also more important.
But so what? And why do so many people always preface discussions of money with stuff like that?
I mean, other than the things above, it’s super important and something you should keep your attention on closely. The “law of attraction” is real, what you stay focused on gets bigger, better and sharper.
Oh, and some wiseguy may say something like “the best investment is education.” Well yes it is. Or rather, “time spent meditating on good information.” And here it is.
So let’s go.
Money is not one thing, but many things.
The very first thing that needs to be understood is the difference between assets and liabilities.
Understand this division fully and you’re already on the way to being rich.
Best Investments Beginners Map
Let’s flesh this out a bit.
Now we have a map.
At some point I’m going to explain why the single best investment is in leveraged dividend growth shares with reinvestment, but that will come later, probably in another post.
Assets are those things which pay you over time.
They generate positive cashflow.
Liabilities are those things which you pay for, over time.
They incur negative cashflow.
So you can understand why, for instance, your car is a liability. It depreciates 50% the minute you drive it out of the new car lot, it guzzles gas, it breaks down, it needs servicing, it needs MOTing, it needs road tax paying, it incurs insurance premiums and road and parking fees, charges, penalties and so on.
You may say that it is an asset in that it helps you conduct your everyday business. And that’s true. But that’s also true of food and clothing and fresh air.
We’re looking at strict financial stats here. A car doesn’t pay you money. It guzzles it. Period.
Likewise, your home. Whether you own or rent, there’s a monthly outflow of cash.
I’ll make a concession here. Banks treat owned homes as if they were an asset, for some reason, and lend money against them. They call it equity, even though it isn’t equity in a financial sense.
But just for the very fact that you can get hold of loans based on the “equity” in your home makes home equity a quasi-asset.
So you want to accumulate assets, and keep liabilities down.
See, I told you this isn’t rocket science!
Now we should introduce the concept of good debt vs bad debt.
Good debt, bad debt
Debt is so maligned, and that’s the reason why only 1% of the population is rich. As long as you’re scared of debt, you’ll continue to use it wrongly, and you won’t have any concept of good debt.
- Good debt is debt incurred to buy assets (equity)
- Bad debt is debt incurred to buy consumables or liabilities.
You already know what consumables are. They don’t pay you or need any extra payment. They just disappear or hang around being useful in other ways. Like food and clothing, respectively.
Now, money is for the most part backed into existence by one of two things: debt or taxes. That’s why they’re the only two things you can be certain of in life.
Good debt creates money out of thin air
Go ahead, look it up. Money is loaned into existence by banks, backed by debt.
For this reason, good debt is so important that I would rate it as a premier asset.
Likewise, I think everybody already knows that bad debt, ie debt taken out to buy consumables or liabilities, is one of the worst liabilities on the list.
Bad debt creates money too. But you’ll never see any of it.
I know that’s fudging it a bit, because of course even “good debt” incurs interest payments and doesn’t pay you directly.
Trained accountants won’t agree with my classifications here. But then, if they were rich, they wouldn’t have to be accountants.
But I don’t care anyway, these are my rules, and they work. You want to be racking up good debt, and building up your credit rating so you can borrow more. That makes it an asset in my book. Literally.
I’ve probably written as much as you can digest for now, so we’ll leave it at that.
This will be Part One of a series.
There Shall Be Otters…
Look forward to seeing you on the next post. By the way, if you have any comments so far I’d love to hear them.
Whether it’s retirement income investing, or if you want to build wealth after 50, or how to build wealth at a sensible pace, you’ll want to know the best ways. See, the best ways build wealth no matter what’s going on in the economy. And that’s what you’ll get here: the best ways.
Happy money thinking!