Wealth creation is a process described by some essential laws of money. If you follow these rules, your chances of financial success are very good. And yet most people will have financial difficulties throughout their lives. Why is this?

You may have a desire to earn more money and fulfill all your dreams, but if you don’t know how to get the process going, you can’t hope to achieve your goals.

Wealth creation has to start somewhere. Identifying where and how to start is probably the most difficult step. But once the ball rolls, it becomes very easy from there.

Let me try to shed some light on this:

Suppose I ask you to paint a newly constructed brick wall in a color of your choice. Will you be able to do it? I’m sure you would if you are familiar with the process of preparing and painting a wall. Once you know where to start, the process becomes a lot easier: buy the plaster and paint, select your brushes and construction tools, purchase a ladder if necessary, plaster the wall, apply a coat or two of primer, and then the final coats of paint. Whola, job well done!

The point is that if you know how to do a certain task, the only thing you really have to do is get up and do what you have to do. The same works with making money.

As a hardworking individual caught in the rat race, wealth creation is governed by a standard universal framework. There are 9 words that describe the whole process:

Use (1) your (2) surplus (3) income (4) to (5) buy (6) income (7) generating (8) assets (9).

Building wealth is commonly understood as an investment exercise. Take a look at the following figure.

The conventional thinking is to put part of your monthly salary in a pension / 401k fund for a long period of time so that when you retire one day you have something to live on.

You can see that investing is planning for the future. It is a delayed wealth creation strategy. Instead of accumulating wealth today, investors set aside cash for use in retirement, 20 or 30 years later.

With this approach, the hope is that one’s investments will increase in value over time.

Wealth creation takes a completely different path. When investors save part of their salary (before costs) in a savings vehicle like a pension fund, wealth creators focus on spending part of their salary (after costs) on income-generating assets.

It may not make sense, but spending is the name of the game, not saving. How much you spend and what you spend it on is vitally important to financial success. I cannot stress this enough.

Wealth building begins with a surplus of income, the cash available in your bank account after covering all your necessary living expenses. These can include things like health insurance, fees and taxes, food, and living expenses. They exclude luxuries like traveling, eating out, buying fancy shoes or bags, and buying expensive motorized toys like boats and cars.

How you spend your active income will have a direct influence on how much excess income you have. Do you really need cable TV? What about those party nights? Are they really all necessary? What monthly expense can you eliminate?

  • You need to take a critical look at your spending patterns because excess income determines how quickly you can start building wealth. The less you spend on the things you want (as opposed to the things you need), the more income you will have to spend on assets that will make you rich.

It goes without saying that if you are unemployed or have no income, it is impossible to generate wealth. When I started my journey, I was working as a full-time researcher at a university in Johannesburg.

My surplus income was not classified as desirable, which meant that my potential to create wealth was literally zero.

Despite how difficult it was at that stage, I only had one option, and that was to increase my disposable income. Over the next several weeks, I started looking for work. Yes, a higher paying job, one that would give me a significant amount of surplus income to help me escape the rat race. I finally found something in the financial industry and am grateful to say that formal employment was exactly what I needed to help start my journey to financial freedom.

The important question to ask is: ‘How am I going to increase my excess income?’ It may mean finding another job or changing your spending behavior. Every dollar saved is an extra dollar that you can use to start building wealth.

But that’s only possible if you spend every dollar on the right things – income-generating assets.

When starting out, it won’t do you any good to spend your cash on non-income producing ‘assets’ like vacations or expensive clothes.

After I started working for a boss, I invested all my excess income in real estate. I cut out all the unnecessary expenses, set a budget, and used all my spare cash to generate rental income streams.

This did not happen overnight. It took me about four years to get to a position where I could use the rental income from my real estate businesses to buy more assets. At this stage, the income from your assets (along with income surplus from your salary) can be used to purchase more income-generating assets.

This is an essential point for all wealth creators to reach. It represents a new stage, one of acceleration of wealth and essentially early retirement.

In summary, the first law of money highlights two important points:

  1. Surplus income is the catalyst for wealth creation.
  2. Surplus income should be used to buy income-generating assets, which in turn should be used to buy more assets.

The resulting income streams will help you achieve financial independence and ultimately freedom.

Leave a Reply

Your email address will not be published. Required fields are marked *