The 5 not-so-secret ways to building wealth…

1. Earn good income…

Before you even contemplate building wealth and creating the lifestyle of your dreams, you need to first earn a good income. There are a lot of people who want to be wealthy and who want to invest in property so it can make them rich. Many of these people have very little income and wonder why they are finding it so difficult to create wealth. Famous author Robert Kiyosaki, in his book series Rich Dad, Poor Dad, mentioned often that you don’t invest to make money, you invest to keep your money. He distinctly professes that you should go and get your cash flow sorted first and then invest. However, I see many people attempting to do no-money down, or vendor finance property transactions. While these strategies sometimes work, the question I have is, why don’t you have a deposit or equity in the first place? Get your cash flow sorted first before you invest.

2. Spend less than you earn…

This may sound obvious, but in a world of media and advertising and easy access to credit, this is by far the number one financial problem for people. If you continually spend all you earnings (and some more than their earnings) then you have nothing left to save or invest. In some cases people will accumulate bad debt with credit cards, store cards, personal loans, and car loans. This can severely delay your ability to start creating wealth and achieving your retirement goals. One of the key values that have been identified in the wealthy is the concept of Frugality. This term is very misunderstood and people relate it to being “tight” or “stingy” with money. While there may be some truth to that for some, a better way to utilize the meaning is understanding that you don’t waste money. Have a think about how many times you waste money or bought something via impulse and got no real benefit for it. This doesn’t mean that you don’t spend; it means that you only spend money on the things that actually give you happiness, joy and add value to you. Adopting this value of Frugality will save you a huge amount of money and you will be happier for it. Managing your accounts and money by using a spending/budgeting plan is very important if you want to grow your wealth.

3. Pay yourself first…

This concept has been around since Ancient Babylon and is the crux of the story in George S. Clason’s book “The Richest Man in Babylon”. In a modern day context paying yourself first refers to putting money into an investment or savings account before you pay any bill, buy any food, or have any fun. Think about where you money goes now. When you go out to dinner you get the value of a nice meal, but think in terms of where the money is flowing – it’s actually flowing to the owner of the Restaurant. Now if you spend your income at a Restaurant before you have invested some of it then you have essentially paid the Restaurant owner before yourself. The same goes for a bill. If you pay your phone bill before you have invested some money then you are paying the phone company first. Typically people pay everyone else first then realize there is none left over at the end of the month for their financial future. A good suggestion would be to set up a savings/investment account and have a portion of your income automatically get paid into this account so you ensure you are paying yourself first. When you do this there is one vital concept that you must install into your mindset, which is – the money that you pay yourself into this account, you must NEVER ever spend that money as long as you live! Understand that money is never yours anyway, it is just a commodity that flows and we don’t need to have attachment to it. Make a rule to yourself that you can only ever use this money for investing, which follows onto the next concept of leverage!

4. Leverage…

The ancient Greek mathematician and physicist Archimedes had a famous quote about leverage, he said “Give me a lever long enough and I could move the world”. The concept of leverage is to do more with less. It can also refer to multiplying what you already have. In the context of money we have already realized that you need to save your money and pay yourself first. Remember that it’s not how much money you have, but what you do with it. This money that you have started to accumulate can do one of two things, you can either leave it the bank earning interest or you can invest it (leverage it). Let’s use the concept of investing in property. When you go to the bank with $40,000 of savings (paying yourself first) and say to them you want to buy an investment property, they will typically lend you $360,000(as long as you meet their criteria), which enables you to buy a $400,000 property. Property generally doubles every 7-10 years, which would result in a $400,000 capital gain over that period, so your initial $50,000 has been leveraged to grow your wealth much faster than leaving it in the bank. What’s important to understand is that if you leave your money in the bank, then someone else is using your money to create leverage for themselves, when you could have been leveraging for you and your family.

5. Compound growth…

Albert Einstein is believed to have coined the phrase “Compound Growth is the eighth wonder of the world”. While there are some arguments about whether he actually said this or not, it’s probably wise to adopt the phrase into your own wealth mindset. Compound growth is difficult to explain as there is a mathematical algorithm used to calculate it. Let’s again use the example of investing in property. The $400,000 investment property that we bought in the example above historically grows in value at a conservative 7% per annum. After year one the property should be worth $428,000 at 7% growth. This is where compound growth kicks in. During the second year the 7% growth is not applied to the $400,000 value, but is applied to $428,000. So in the second year you will see growth of $29,960 instead of $28,000. You now have the money that you made in year one, now making more money for you. Confused?? A more simple definition is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. If you are still confused then just trust it is a very powerful formula for building you wealth. If everyone understood it then everyone would be wealthy, right?

A 7% annual growth rate in property equates to the value of the property doubling approximately every ten years. So, if you bought 10 properties for $200,000 ten years ago and they grew at 7% per year then they would have all doubled and your net worth would now be $2million and you would be in the top 1% of wealthiest retirees in Australia. What if that were true? How would you feel right now knowing that you had complete control over your finances and more importantly control over your time!

These 5 no-so-secrets unfortunately seem like secrets to a lot of people, because we never get taught this. They don’t teach it in schools and our parents weren’t taught it either, so don’t blame them. Just make a promise to yourself to live by these principles and you will enjoy a very prosperous life.