As a child, I thought about wealth like fantasy. I had this idea that the individuals building wealth were the ones that drove luxury cars, lived in big houses and traveled abroad for vacations.
As I grew up and started to study money and wealth creation, I realized I was wrong. Because what I thought were signs of wealth are symbols of wealth.
There is a difference between building wealth and consuming wealth.
When you create wealth, you get richer. When you are a spender or consumer, you are likely to grow poorer
The secret to building wealth is investing and saving more than you spend. Wealthy individuals have the habit of saving and investing more of their income than the rest of the population
The late Dr. Thomas Stanley bestselling author of The Millionaire Next Door observed that real millionaires lived frugal lives. Stanley also noted that millionaires spent their money differently from the rest of us.
Dr. Stanley’s book is not popular reading for the majority of working adults. But if you are serious about becoming a millionaire you should read the millionaire mind.
Let me make it clear that building wealth is unrelated to appearing to look gorgeous. To create wealth, you must believe in prudence and self-restraint with money.
A US Census Bureau statistics shows that 95 % of working adults will either become penniless, rely on social security or relatives to care for them at retirement.
When you look at the US Census Bureau Statistics, you’ll think anyone was reading them will prefer to choose thrift to a life of hardship at retirement. Right?
Wrong! Because you and I make the same mistakes about building wealth that I thought I should write about them
I have made tons of money in one breath and then lost all the money I made in the twinkling of an eye.
I am wiser about building wealth and much more careful about my money
Here are the mistakes I have made about building wealth you should avoid.
Increasing your spending as soon as your income increases
I have fallen into this trap of spending money as soon as I get raise many times.
Oh yes why not? When your income increases from $2000 to $8000 monthly won’t you feel like a star?
I am sure you will.
What I used to say to myself was “be kind to yourself”… “Life’s too short enjoy it while it last” and before you know it my credit card is maxed. And I am back to the same financial level just like before I had my pay raise.
How do you overcome this urge to splurge whenever you get a pay raise?
The first thing I would suggest: have a wealth-building plan. Why? Because when you have a plan for how you intend to invest your money, it’s easier to save any extra income you earn
Another way you can avoid spending your excess earnings is to have an investing account. As soon as you get any bonus you must save that money in your investing account.
Never use money from your investing account unless you want to invest in your wealth-building plan. If you already have a mutual fund account or retirement account you can also increase the resources, you have with your pay rise.
Sometimes instead of saving money or investing…I just use the extra income I earn to pay the debt. If you think about it, credit card debts loans are obstacles to building wealth. The earlier you can get rid of debt the higher your chances of creating wealth.
If you have a desire to build wealth…you must avoid spending more than you earn. You must learn the habit of saving more than you earn
Thinking Scrimping and Saving will make you wealthy
When you read some of the classic wealth-building books, you’ll find on the New York bestseller list you’ll get advice like “budget and save,” Invest in the stock market with as little as $50 a month and allow the power of compound interest to work on your savings.”
I have no objections to most of the advice about saving your money and investing in the stock market. But the problem this theory of building wealth with saving and investing in the stock market is that it hangs on factors that are beyond your control
The first factor that the savings-and-scrimping-theory relies on is compound interest.
My teenage son will certainly become a millionaire if he starts to invest $50 monthly in an index fund because of the power of compounding.
On the flipside compounding will not work for a 55-year-old man who is ten years away from retirement.
The idea that you can scrimp your way to wealth is also impractical.
Why? Because just like you cannot diet your way to becoming healthy-it’s also nearly impossible to deny yourself of the good things of life.
What’s the point of pinching and saving only to die a miserable person with so much money that your offspring blow in less than three months
I believe in savings and investing. But I disagree that you should scrimp and save to build wealth.
What you need is to adopt a frugal lifestyle.
How? To live a frugal lifestyle means you develop an attitude towards spending money that allows you to enjoy life and at the same time build wealth.
A prudent person does not attach his emotions to material things. A frugal person delays gratification and also avoids impulsive spending. A wise person spends money in such a way that he enjoys life without necessarily going into debt.
A frugal person knows that his future wealth depends on the smart decisions he makes about investing his money
When you think about your life, you’ll see that the things give you the greatest amount of pleasure are not expensive.
For example, you don’t have to have a vacation in Disneyland to spend quality time with your family. Enjoying an evening with your schoolmates in your house or a restaurant will not cost you a fortune
One more thing I will say about saving is that you should find a way to increase your means or reduce your debts so you can have more cash to save.
Taking aggressive risk with your money
I have seen many individuals who know nothing about investing money take the stupid risk with their life savings and ruin their health and family.
Why? I think because you can get trapped into thinking with an attitude of getting something for nothing. There is a common misconception that investing is like playing the casino or roulette.
This misconception is far from the truth about investing because fear and greed drive investing decisions.
The key to becoming a smart wealth builder is to keep your emotion in check at the same time working with them
Anytime you decide to bet all your money on a stock or a “the next billionaire maker product” watch it!
Why? Because greed is your dominant feeling.
Greed is what makes you want to do stupid things with your money.
Greed is what keeps you awake with cha-ching ringing in your ears. And when all hell breaks loose because you made the wrong bet…greed’s cousin fear takes over your emotion. Then you start to panic and do worse thing than stupid with your money
How do you avoid taking an unnecessary risk with money? The answer is being conservative.
Do your due diligence before investing your money. Never allocate more than 10 percent of your investable money to a stock. Do asset allocation.
The advice I learned recently from Mark Morgan Ford comes to mind when I think about avoiding taking unnecessary risk with money
Mark Morgan Ford, Publisher of Palm Beach Newsletter says to build and preserve wealth you should divide your earnings into three golden buckets
The first portion of your income should be your spending money. Next you should have a savings bucket that takes care of emergencies and medium term expenditure. The third bucket Mark suggested should be your investing bucket. Your investing bucket as it’s called is money that you only use to invest.
By dividing your earnings into three separate categories…you avoid taking the unnecessary risk with your money.
I think Mark Ford’s suggestion makes sense. I have been practicing this idea of having three buckets for my money for the past one year, and it has made a difference
Looking for a one-time hit to get rich
The worst way to think you can get rich is looking for a “home run” or a “hot pick “stock. I think you know my thoughts about getting-rich-quick already. If you are still not convinced that looking for hot stocks is not the way to go then look back at what happened in the days of the dot-com boom.
I have a friend who has lost a fortune betting on one of the dot boom stocks. He is yet to recover financially.
I am still recovering from the financial disaster of my first real estate investing deal.
I am glad I had that experience because it saved me from a real estate wealth guru who wanted me to put my money into flipping properties in Phoenix Arizona
Here is my advice when you get the itch to try your luck at becoming a one-hit millionaire in the stock market: say to yourself “Warren Buffet is not a one hit wonder. He is smarter than I am so why should I do foolish things with my money.”
Thinking that accessories of wealth make you wealthy
The symbols of wealth like luxury cars, living in a mansion, flying first class or having an office in an exclusive part of town do not mean you are wealthy. The fact that an individual drives a Bentley does mean you are rich. The actual reflection of wealth is your balance sheet (that is the sum of cash and net assets you have).
The greatest mistake you can make when you think about wealth is to judge someone as wealthy by only looking at his or her outward appearance.
The bestselling author of The Millionaire Next Door and Millionaire Mind Dr. Thomas Stanley, who studied the lifestyle of real millionaires in America, found that millionaires had a different thinking about what constitutes wealth.
Thomas Stanley found that real Millionaires were balance sheet affluent. But that the individuals that the majority of us thought are millionaires were income statement rich.
Why? Dr. Stanley in his study of wealthy neighborhoods found that most of the individuals who drove flashy cars and lived in the high-class areas were either high-income executives or professionals who bought these symbols of wealth by taking out loans.
On the other hand, the real millionaires who lived in the affluent neighborhoods are either business owners, or self-employed.
These individuals were more likely to have bought their properties at below market value, had no little or no outstanding mortgage and drove 5- 10-year-old automobiles.
There was another thing that hit home when I read Dr. Stanley’s findings: A large share of the wealth of income statement rich individuals –are held in personal homes.
The balance sheet rich individuals held a large share of their wealth in their businesses and other investments
Dr. Stanley’s study of millionaires confirms that my belief about money is right.
Why? His findings from tax filings with the Internal Revenue service (IRS) records.
How do you avoid or eliminate this bad thinking that looking wealthy is the same thing as being wealthy?
Here’s what you do…
The first thing you must do is to know the difference between looking wealthy and becoming rich.
How? Realize that because you want to drive a luxury SUV will make you feel prosperous. But remember that you are buying a liability that diminishes in value over time.
To become wealthy, you must invest your money in something that adds value to your money.
The key phrase you must remember when you think about looking rich is to ask yourself ” am I adding more value to my money and getting richer buying this toy?
I hope you will heed my advice and not make these mistakes. Because if you do you may wake up later in life broke and confused about what happened to all the money you earned