How to create wealth is not some mysterious unknown secret that is kept from people. It’s actually a pretty simply formula. The reason more people do not create wealth for themselves or their family is because they don’t know how. It’s not because they are unable to, but because they never learned how to create wealth or possibly did learn how and simply chose to not apply the formula to attain their wealth.
To get a better understanding of the “How To Create Wealth Formula” it’s helpful to review some finance/accounting terms. I have an extensive background in finance but this will be simple and easy to understand.
- Income is defined as money you that you bring in, such as your weekly paycheck
- Expenses are defined as money you spend, such as your rent
- Liabilities are things that cost you money, such as a car lease
- Assets are things that pay you money. This is a bit of a non-traditional definition, so people in the finance industry or accounting field might think it a bit odd. They generally use the term asset to define something you own, but we’ll touch more on this later.
Now let’s look at what the poor and the middle class do wrong when it comes to creating wealth. There are specific differences you will notice between these two groups and the wealthy, but the amount of money they have or earn does not dictate their wealth potential. Wealth actually is not the same thing as money, we just interrelate the two, because money is a means to measure wealth.
How To Create Wealth: Why the Poor Stay Poor
On payday poor people take what is left after they pay their necessary expenses and go buy “stuff.” Generally they buy lower end items and random trinkets that they might find at a garage sale or dollar store. They justify their buying of all this stuff, because it didn’t cost them a lot of money. Usually you even feel better after you get something new, but that lasts short-term. I’m not criticizing this group and there’s nothing wrong with this group at all; I used to belong to this group years ago. The problem is that their income never produces or creates more income, so they can’t escape from the cycle of being poor. This is not how to create wealth.
How To Create Wealth: Why the Middle Class Are Mistaken for the Wealthy
The middle-class is often mistaken to be the wealthy, because they usually earn a six-figure income. The issue with the middle-class, however, is similar to the poor. On payday they spend their money on what we earlier defined as liabilities. The money they earn from their high paying job is immediately spent on items like a car, boat, house, vacations, etc. They wind up spending equal to and in some cases more than they make, so they must continue to work to make enough money to pay off their new shiny liabilities. This is also not how to create wealth.
Another issue with the middle-class is that usually their income is dependent on their own efforts, because they are providing a service of their knowledge and experience to someone in exchange for money. For example, a financial planner provides people insight about how to manage their finances to achieve certain goals, so people pay them to share their knowledge about financial planning. The problem is that if they are not sharing their knowledge and meeting with clients, they are not making any money. Their stress levels actually wind up being pretty high and they rarely enjoy any free time, since that time they take off costs them money as they are not meeting with clients. Again this is not how to create wealth.
Things seem great and hence people assume they are the wealthy, but in reality they are not. The difference between the Poor, the Middle-Class and the Wealthy is that the Wealthy Buy Assets.
Buying assets is How To Create Wealth. Learn more about what types of assets and why the wealthy buy them by checking out my next article in this series – How To Create Wealth: What The Wealthy Do.