Do this right, and wealth will follow

2015-06-09 06:45

The ‘not-very-secret’ mathematical formula for creating wealth and achieving the future you’re hoping for is not a complicated one, which is why this is probably the shortest post I’ll ever write.

Here we go…

“To build long term wealth, you need to consistently spend less than you earn.”


Sorry if you were expecting something more, but this is the unexciting and simple truth.

If you don’t necessary believe me, take it from the former CEO of one of South Africa’s leading asset management companies.

Spending less than you earn sounds easy. But if it’s so easy, why is it that so many people battle to consistently make this mathematical exercise work?

To answer this question, I’ll break it up into its two components: “spending less” and “earning more”.

Spending less:

Addressing this half of the ‘wealth equation’ is perhaps the easiest to do in the short term. Assembling a plan to curtail your use of a credit card and manage your impulse spending can be achieved with a relatively small degree of self-control and self-awareness about where you spend your money.

The unfortunate thing is that there are only so many costs to spend less on and only so many practical ways to reduce your monthly costs. Once you’ve hit your limit on how much you’re willing to cut, you have to start focusing on ways to grow.

Earning more:

Earning more is the side to the wealth equation that offers unlimited possibility. The only limit on earning more money is you. This starts overlapping with something I will discuss in the not too distant future; the value of you. Your ability to earn an income is likely the single most valuable asset you possess.

Your best chance to create wealth over the long term is to strive not to “spend less than you earn”, but to rather “earn more than you spend”.

This flips the equation on its head and turns this entire pursuit from a race to the bottom for the cheapest cost of living, to one in which you value ‘brand you’ and work your ability to earn an income, with the ultimate goal of having enough to live the life you really want.

To believe from the start that your ability to earn an income is capped and focus only on reducing your expenses will limit your ability to engineer your wealth equation. I’m not saying that you need to necessarily work two jobs, as this might mean you put money in charge.

No, this is about positioning yourself to look for opportunities to grow, to add to your skill-set, polish your reputation, explore your entrepreneurial side and let the side of you that wants to ‘make things happen’ loose.

It’s all about you.

Consistently engineering a positive difference between what you earn and what you spend over the long run will create savings and in turn, wealth.

On a related matter, it occurred to me while watching a television ad for a savings and investment product that many people are under the impression that choosing the right financial services company is their ticket to the financial future of their dreams. I’ll go there in more detail in the months to come, but it’s relevant to say this now:

Nobody else can generate wealth for you. Please let me know if you find a life assurance company that makes pro bono deposits into your account, or a bank that adds a zero to your savings balance.

Institutions can offer you products and services which play a crucial role in your financial future, but they cannot spend less for you, or pay you a thirteenth cheque. They have a very valuable role to play in the personal finance space, but their job is not, and cannot be to make you wealthy. That’s your job.

Spend less and make more. Easy to say. Not so easy to do.

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AB praises selfless skipper

2010-11-21 18:15

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