The 4 Steps of Wealth Building
The biggest myth about wealth building is that having a “high income” is the same as being “wealthy”. They’re not the same concepts. People with huge incomes are often flat-out broke.
If you keep up with financial news, you’ll hear almost every day about millionaires and billionaires going belly up. You’ll hear about celebrities having money problems even though their incomes are in the tens or hundreds of millions per year.
The reason for all of this is simple — being wealthy requires four steps, and not following any one of the steps will destroy your wealth. Income is just a part of becoming and staying wealthy.
I’m not going to try to reinvent the wheel here — I’m just going to organize the basic steps to wealth building in order to provide a framework for understanding how money works. For a more hands on approach to joining the upper class, check out our how to get rich guide — it’s short on hype and filled with real-world tips.
- Creation of Capital. This is the part most people have figured out — actually getting hands on money in the first place. For the vast majority of humanity, this is found in getting a job. For others, it’s in running/owning businesses or income-generating assets. This is just the first step. Examples: having a job, owning a business, owning dividend stocks, lending money at interest.
- Preservation of Capital. Capital, at least in most countries, automatically loses value with time. In the use, the rate is anywhere from 3-10% lost every year. Taxes take a chunk out of every dollar you earn. Risky investments can completely collapse. Everyone has to spend money on paying debts, obligations, many pay rent or mortgage, food costs, and dozens of other costs. Cutting these costs is essential. If you make 100k but lose 90k per year, you’re worse off than the cautious person who makes 60k but loses only 40k. Examples: cutting living expenses, refinancing a mortgage, using coupons, getting out of debt.
- Saving of Capital. Without savings, you can’t expand your possessions without debt. Being able to save money is outrageously important — whether you’re just managing your personal finances, or are running a business. Either you don’t expand or you use debt. Saving money is important. Cash is, and always will be, king. Examples: automatically putting 20% of your paychecks toward a savings account at a bank you don’t think about constantly. Out of sight, out of mind.
- Investment of Capital. Investing money is essentially putting your money to work to build more income. Buying farmland, dividend-stocks, a small business, getting extra certification for a raise — these are ways to invest your money to increase your income. Doing a bad job at investing guarantees you’ll lie an average or below average lifestyle — doing well can turn your life into a rags to riches story. Learning to invest properly is important on an almost unfathomable level.
In the end, successfully completing all four steps isn’t easy, and can take years — or decades — to learn how to master. They are, however, the only sure path to predictable, systematic wealth building. Make sure to subscribe as in the next few weeks I’ll be covering each step with detailed examples of how to fulfill them — essential to any financial or investing education.
PS: We just recently launched a website completely dedicated to live silver prices. Make sure to check it out, and let us know if you have any other financial and investing topics you’d like us to cover — either with articles posted here on the main website, or a full-fledged website set up to discuss the topic.
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