How To Build Wealth So You Can Achieve Financial Freedom

Part One of a Two-Part Series

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If you are new to investing and wealth building, you’ve come to the right place!  This article will be your guide to success on your journey!

Most people get stuck on all the details and complexity that seem to be part of investing.  But at its core, successful investing is not difficult.  It’s just following certain simple financial and money principles consistently throughout your lifetime.

These are principles that the wealthy used to build their wealth.  They absolutely will work if you apply them.

Make sure you read this article carefully.  This is the stuff they don’t teach in school but you have to know it to succeed financially!

The Big Picture

Before we get into how to actually build wealth, it’s important to step back and view the big picture.  When planning any journey, you have to know both the purpose of making the trip and where you want to end up.

So, what is wealth?

What does being rich really mean?

Being rich and being wealthy are related but actually mean different things.

Someone who is rich is usually defined as someone who makes a lot of money or has a lot of money.  Being rich, to most people, means they can afford a fancy lifestyle – a large expensive home, luxury cars, private schools, etc.

However, being wealthy means having sustainable wealth that can last a lifetime or more.  It is often measured in passive income, or income that comes in without you physically having to work for it.

It’s important to know that it’s possible to be rich but not really wealthy.  Many people make a lot of money from their job or work, but they don’t manage it well.

The crucial difference is that if they stop working, the money stops coming in.

This is how many celebrities and sports figures end up bankrupt.  They assume the big money will always continue to come in and thus they create a very expensive lifestyle.

Everything is fine until the day arrives when the money stops coming in, and they discover they are actually broke.

Now, someone who is wealthy not only understands how to make money, but also how to keep it, grow it, and have it produce more money of its own.

The wealthy are the ones who take the money they make and turn it into more money and income, rather than spend the majority of it.

Though many of the rich are also wealthy, the wealthy don’t usually earn their way to wealth; their wealth comes from learning and applying the principles of investing so that their money makes money consistently and automatically.

Become Rich Or Wealthy?

When all is said and done, the main difference between being rich and being wealthy is financial education.  The rich know how to make money, but the wealthy know how to grow their money into more money.

Working to become rich involves improving your job skills so you can be paid more for your work.

Working to become wealthy focuses on investing, managing, and growing the money that you are already making.

So, rather than have an initial goal to be rich, I think it’s better to work towards becoming wealthy.

Wouldn’t you agree?

Become An Owner

The secret to becoming wealthy is to shift from spending – from being a consumer to being a saver and investor – to being an owner.  Specifically, you must become an owner of assets.

Owners of real estate properties receive rents from tenants.

Lenders receive interest income from borrowers for the use of their money.

Shareholders receive dividends from stocks.

What’s better?  To be the tenant or the landlord?  The lender or the borrower?

Meet The Wealthy

Here are some interesting statistics on the wealthy:

  • In 2007, the richest 1% of the American population owned 34.6% of the country’s total wealth.  The top 20% owned 85% of the country’s wealth!
  • The wealthy are not always the high-profile people you read about or hear about.  They are many times the owner of a small factory, a chain of local stores, or a service company.
  • Less than 15% of millionaires have incomes over $500,000.
  • The wealthy are financially independent.  They can in many cases maintain their current lifestyle indefinitely without relying on earned income from a job.

As you will learn later, most of the wealthy didn’t inherit their money, didn’t win the lottery, and didn’t necessarily even have highly paid jobs

It’s just that they did things differently with the money that they earned than most people.

The Mindset Of The Wealthy

To become successful financially, you must understand how the wealthy approach money so you can do what they do and think like they think.  This mindset is very important because to succeed financially, you must believe that you can succeed financially.

So, let’s get you to think about money differently and empower you to take action on your path to financial success! 

The Path To Financial Independence

You’ve heard the saying, “The rich get richer and the poor get poorer.” This saying is true.

It is true because the rich and wealthy take the time to get an education in money, personal finance, and investing.

Because of this education, they think differently about money than the poor or middle class. They do things with their money that the poor or middle class don’t do.

It’s these differences that create financial abundance.

The wealthy use certain financial tools and understand certain investing principles. They also adopt an investor’s mindset that leads to profitable investments.

If you want to become wealthy, you must follow in the footsteps of the wealthy.  Let’s see what they do and how they do it.

Financial Freedom & Financial Independence

For most people aspiring to become wealthy, the goal is not to just accumulate lots of money but to achieve financial freedom and financial independence.

Financial freedom means having more money coming in from investments each month than is going out with your monthly expenses.  You are then free.

The important point is that this income is not income earned from working at a job or from self-employment but from investments, whether stock dividends, bond interest, real estate rents, tax liens, or ownership interests in a business.  This is a key distinction.

The result?  Financial independence.

Financial independence gives you the ability to live the lifestyle you desire without having to work or rely on someone else for money.

And the earlier you begin, the better your results will be. 

The earlier you start, the longer you have to compound your investment earnings, as time becomes your best ally in achieving financial success.

Passive Income And Portfolio Income

There are two types of income that investments can generate: passive income and portfolio income.

Real estate generates passive income, which is income from rents.

Stocks, bonds, tax liens, and gold and silver generate portfolio income, which is income from dividends, interest, royalties and capital gains.

Capital gains are just a fancy way to describe the gains from selling an investment for a higher price than what you paid.

The key to financial independence is passive income and portfolio income, which I like to call mailbox money.

The #1 Rule Of Building Wealth

Success is a learnable skill.  There are certain rules or laws of money that if applied can change your financial picture completely.  The first and most important rule of building wealth is:

You have to spend less than you make.
You can’t become financially free without having money to invest.

 

Think about it – in actuality, a single person making $25,000 a year and who manages to save $2,000 each year is far better off than someone making $200,000 a year but spends $200,000 a year.

For a detailed step-by-step plan on how to master your personal finances, please see this article: 19 Ways To Reduce Debt, Control Spending, And Save So You Can Invest For Your Future.

The Two-Part Formula For Building Wealth

The rich follow a simple two-part plan for building wealth:

  • They convert their earned income into passive or portfolio income.  
  • They buy assets that put money, or potentially can put money, in their pocket.  They take the income they earn from their job or business and invest it in assets that pay dividends, rents, royalties, and other forms of income.  This is called cash into assets.

This is why the rich get richer!

In contrast, the middle class and poor buy things that lose value or are consumed immediately, or they purchase liabilities – things that take money out of their pocket each month via debt or credit card payments.  This is sometimes humorously called cash into trash.

Assets & Liabilities

Now, you may be wondering exactly what an asset is. Assets and liabilities are two key concepts you must understand on your journey to becoming financial independent.

Robert Kiyosaki has written extensively about this in his Rich Dad, Poor Dad books which I highly recommend.

He describes them as this:

An asset is something that puts money in your pocket.

It is something that increases in value or provides a return on your investment in that asset.

liability is something that takes money out of your pocket and puts your money into someone else’s pocket. It is money you owe to someone else.

Most liabilities are debt, such as the balance you owe on a credit card, car loan, medical bills, student loan, or a home mortgage.
Let’s do a simple quiz to determine which items are assets and which items are liabilities.

A car loan is…. a liability.  It is something that takes money out of your pocket and puts your money into your lender’s pocket.

A bond is…. an asset.  It is something that puts money in your pocket and takes money out of the borrower’s pocket.

A dividend stock is…. an asset.  It is something that puts money in your pocket.

Credit card debt is… a liability.

Rental property is… a liability if it loses money each month.  Or….

Rental property is an asset if it is profitable and cash flow positive each month.

Net Worth

Net worth is one way to see your assets and liabilities in action.

If you were to put together a financial statement – say if you were applying for a loan – you would list all of your assets and your liabilities.  The bank or lender would look at this statement to see your net worth.

Net worth is simply adding up your assets – home equity, cash in savings, values of stocks, cars, furniture, a business, etc. – and subtracting your liabilities – what you owe to banks, credit cards, and other institutions.

If the number is positive, then you have a positive net worth.  If it is negative, you owe more to others than what your assets are worth.  You unfortunately have a negative net worth.

The Key To Financial Freedom

So, purchasing assets allows you to build wealth and create a positive net worth.

The key to financial freedom is this:

To become financially independent, you must work to buy assets and investments, and later those assets and investments work to buy you the lifestyle you desire.

You are wealthy when your income from investments and assets meets or exceeds your monthly outgoing expenses.  You are then financially free.

If you stopped working today, how long can you survive financially?

Summary

You’ve learned the difference between being rich and being wealthy.

You’ve also learned how the wealthy approach money and investing by using certain principles.

By understanding and using the same principles, you can start on your own path to financial freedom.

In Part 2 I’m going to teach you the Three Pillars To Financial Success, as well as an overview of the most common types of assets the wealthy use to make themselves wealthy.

It’s these three pillars that form the basis of true wealth.

Let’s move to Part 2!