When it comes to money, there are few among us who don’t find it desirable to get more of it.
However, many people strive to be rich, only a few strive to be wealthy.
Being rich is measured by the amount of money you own. Borrowing Buckminster Fuller’s definition, being wealthy is measured by the amount of time you can live without changing your lifestyle, if you’d stop working.
By this definition, it’s possible for someone to own a lot of money, and not be wealthy. High expenses could run a rich person out of money quickly once they stop working.
On the other side, it’s completely possible to not own a lot of money, but live a wealthy life by keeping expenses down to the level of passive income generated by assets.
To get a deeper understanding of this concept you’ll have to understand the difference between assets and liabilities.
Big fat disclaimer: I am by no means a financial expert / advisor nor do I have a financial degree. This article is meant to get you thinking different about wealth, do your own research and find out what works for you.
Assets vs liabilities.
Assets are the things you acquire that end up making money for you. Popular assets to invest in are: businesses, property you rent out, stocks, bonds, loans and perhaps the most important one: an investment in yourself.
Assets generate income.
Liabilities are the things you acquire that end up costing you money. Popular liabilities are mortgages and consumer loans (e.g. a car loan). Liabilities become a problem once your income dries up.
Liabilities generate expenses.
People who strive to be rich maximize Income.
People who strive to be rich often apply an ‘earn more to spend more’ strategy. They focus on maximizing income.
Whenever they succeed, they’re keen to show off their new found riches in order to impress other people by acquiring more liabilities (e.g. a bigger mortgage, a loan for a fancy car or a boat) and increasing their expenses (e.g. buying designer clothing, eating out in fancy restaurants, going on luxurious vacations).
This doesn’t mean you can’t become wealthy by maximizing earnings of course. As long as your income grows faster than your expenses, you’re good to go. However, when the day comes when the water stops streaming in, the pond will dry out quickly.
And make no mistake, that day will come eventually.
People who strive to be wealthy maximize time.
People who strive to be wealthy maximize the time they can live without working. They invest in assets, while at the same time try to keep liabilities to a minimum.
People striving for wealth, realize the window of opportunity to convert their skills into money will eventually close. They invest a percentage of their income in assets, so these assets can earn money for them when they themselves can’t.
‘Status’ and impressing others, is of lesser priority.
It’s the more effective path to financial freedom.
Note: Owning a home is often seen as an asset, because property tends to go up in value. However, if the crisis of 2008 thought us anything, we now know this is not necessarily the case. As long as mortgages and property taxes take money out of your pocket, a home remains a liability, not an asset. This doesn’t mean you shouldn’t buy a home, it just means it’s not an asset (unless you decide to rent it out, because then it actually makes money for you).
Ask yourself: if your job gets taken away from you unexpectedly, how long would you be able to continue without changing your lifestyle?
What liabilities and expenses can you cut to increase this time span? What assets will you be able to invest in when you do? Can you start building a small additional income stream over the next three years?
Building wealth is not easy, but it can be done if you train yourself to see opportunities everywhere and are willing to take the steps necessary to seize these opportunities.
Also read: Seven Ways To Invest In Yourself (On A Budget).
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