A lot of people dream of making money and sometimes hoping to be wealthy but never really get the understanding between money and wealth. There are 3 facts I want to let you know about wealth:
- Wealth is not the same thing as money.
- Wealth is not measured by the size of income.
- Wealth is measured in time.
For example : If all I have in my name is $1,000 in savings and checking combined, and my living expenses are $100 a day, then my wealth equals ten days. Wealth is the ability to survive so many numbers of days forward. Ask yourself; “if I stop working today, how long could I survive financially?” your answer is equal to the wealth at this moment.
Actually, let’s deepen that definition. Wealth is measured by the richness of your life experience today plus the number of days into the future that you have the capacity to continue living at the level of experience.
One reason the rich get richer is that the rich work for a different kind of money. They don’t work to generate income, they work to build wealth. There is a vast difference between the two.
My simple Four-Step Path to Financial Freedom
You can retire early in life without jobs, without government assistance, and without any trading of stocks or any mutual funds. Why no trading of stocks or mutual funds? Because we believe they are risky investments. In my opinion, mutual funds are some of the riskiest of all investments.
Retiring financially free without a single share of stock or mutual funds. It goes like this:
1) Build a business
2) Reinvest in your business
3) Invest in real estate
4) Let your assets buy luxuries
Let’s look at how this sequence works.
1) Build a Business
Building a business allows you to generate a lot of money. A business is like a child: It takes time to grow. While it can take less time, and can certainly take more, getting a business off the ground typically takes about five years.
2) Reinvest in Your Business
The key to this process is that you don’t try to use your business as an income source to live on. A lot of first-time business owners make this mistake. As soon as they start seeing an income stream develop from their new business, they use that new income to expand their living expenses: buy a second car, buy a bigger house, and take expensive vacations, and so forth.
Why do people do this? It’s not because they’re idiots: I’ve seen very intelligent well-informed people follow this pattern. They do it for one reason and one reason only: They are still living, breathing, and thinking in one direction. If you want to build wealth, you have to get your head out of the left-hand side of direction and start thinking investment.
First, keep your day job. Your goal is not to replace your job with your business―that’s just treating your business life like your new job. You’ll never build wealth that way. Instead, once your new business is making some money, go right to Step 2: Reinvest your new income in that business in order to grow it still further.
“But I don’t want to keep my day job―I hate working there! Isn’t that the whole point? I want to stop working as an employee!”
Fair enough: You want to quit that job. Maybe you hate your job. Or you may be like a lot of professionals I’ve met who actually love what they do, but don’t love the fact that they have to keep doing it forty, fifty or sixty hours a week. Whatever your reasons, here’s a blunt truth: If you suck all the income out of your new business to burn on monthly living expenses, then you’re not building a business; you’re just building yourself a job.
A true business owner will never stop investing and reinvesting to build the business. The reason so many people fail to achieve great wealth in any business is simply that they fail to reinvest continually in the business.
How do you reinvest in your business then? There are certainly places where you can invest some money wisely: on training and educating yourself, on travel to support your growing network in the cities, on promotional and educational tools and resources to help nourish the business.
The better part of your income becomes available to you to feed the serious process of building your wealth. But notice, I did say “building your wealth”, not “squandering your wealth”!
Don’t make the mistake I’ve seen people make, start spending every last money from your profit and investment on a bigger car, bigger house, bigger lifestyle. Don’t abuse your new business income by pouring it into bigger holes in the ground.
Treat it with the respect it deserves. Invest it.
3) Invest in Real Estate
As your business income continues to grow, you begin using that supplemental income to buy real estate. You’ll notice there are no mutual funds, stock portfolios, or other paper assets in this plan. That’s because even though they are the easiest assets to build (all you have to do is buy them), trading in stocks and mutual funds is risky, profits made are taxed at the capital gain rate, and investing takes financial education to lessen risk. The idea here is to use your new supplemental money to build an income-generating asset. There are many types of assets that can generate income, but one I recommend most often is real estate, for two principal reasons.
First, the tax laws are written in favor of business owners who invest in real estate. Second, your banker loves to lend you money for real estate. Try asking your banker for a thirty year loan at 6.5 percent to buy mutual funds or stocks. They’ll laugh you out of the bank.
People often ask me, “How can I buy real estate when I barely earn enough money to pay the rent?” Good question; you can’t, that is, until you have the extra cash. That’s why this step comes after building a business and reinvesting in its continued growth: so you have the extra cash.
But let me explain what I mean when I say, “Invest in real estate,” because many people completely misunderstand how real estate works as an asset. Most people think that the point of real estate is to buy a property at one price and then sell it (either quickly, after some hasty improvements, or at the later time) for a higher price. Wrong. That’s just buying a cow and then selling it for steaks. What you want to do is buy a cow and keep it forever so you can sell its milk.
The purpose of buying real estate is not to sell it; the purpose of buying real estate is to build an income-generating asset.
Learning how to do this takes time, education, experience and money. As with learning anything new, its’ difficult not to make some mistakes― and mistakes in real estate (especially in property management) can be very expensive. Unless you have the extra steady income and the tax advantages that come with the business, real estate is either too risky or too slow.
The reason many people fail to become rich in real estate is that they don’t have the cash it takes. The truth is the best real estate deals are usually expensive. If you don’t have much money, often the only real estate deals you can get are deals that people with real money have passed on. The reason so many people try looking for “no money down” investments is that they have nothing to put down! Unless you are really experienced and have plenty of cash on hand to use when you need it, putting nothing down could be the most expensive investment of your life.
4) Let Your Asset Buy Luxuries
Now you can live in a large home and have luxury cars―but you didn’t buy that house or those cars. Your assets bought them; you just enjoy them.
When I say “luxury”, I don’t necessarily mean something extravagant or ostentatious. I mean something that you want and enjoy, and that exists beyond what you “need”.
I’ll give you an example. Think of anyone you know who works for a living but does not have a job. If you told them― “Hey, you don’t like your job, you should just quit”! what would they say?
I’d love to―but I don’t have the luxury.
That’s right: for many people, simply not having their job is one of the very first luxuries they want. How do you get that luxury? The same as any other: You let your business or your real estate holdings buy it for you. For that to happen, you have to build those assets to the point where they can buy it for you. You see how it works?
You don’t use your income to buy yourself luxuries. You use your income to build your assets―your business and real estate investments―and then, once they’re sufficiently built to be able to do so, you let them buy your luxuries. This brings us to financial freedom.