Principle of Wealth Building

Introduction

We all want to reach financial independent, thus this topic is relevant regardless of where you are in your financial journey. While it is good to do in-depth analysis of the companies you invested in, i think is also important to understand the basic foundational principle of wealth building.

I had previously shared on how to guage your wealth building process by calculating your networth. Time value of money and planing your budget using your financial roadmap. (Link below)

https://seedly.sg/opinions/calculating-net-worth-concepts-of-wealth-building/

Understand Cashflow

Nobody can pick the circumstances you grow up in. Some of us are grown up in a wealthy household, most of us are grown up in middle income household and some people, unfortunately, might born in a very poor household, very disadvantaged. Everybody circumstances are different when growing up, that is something we can't control.

Some people may tell you because you are born into a poor household, you will never be able to transition into a wealthy household, worst, when you believed in the lie . I think it is still possible, even though it is challenging and more hurdles.

Cashflow of poor households

Below shows the typical cashflow of a poor households, you get a job, get a salary every month and majority of your income are used to pay bills and whenever you have extra money it will almost go to liabilities and in turns create addition expenses.

This is the most difficult cycle to break as the earned income is usually low and most of the income is used to pay the bill, leaving you with not much to work with. The only solution is increase your income.

You should alway look for a job that have a career progression, where you will be able to have a chance to be promoted to a higher level. This in turns will increases your income over time. After you, have a stable career, you may look for extra income in the gig industries. I know lot of professional with a full time job, that do food delivery, tuition, photography.... to boast their income.

Cashflow of "Rich" households

After you increased your income, you are now "Rich" but you are not wealthy. As your income increases, you channel more money into liabilities, bigger house, bigger car..... which also increases your expenses. The cashflow of a "Rich" household is no better than poor households, they are trapped in the exact same loop. The liabilities are the black holes for money, it is the major obstacle that prevent you to become wealthy. If they continue this way, i am sure they will have a difficulty retiring as they will always dependent on earned income.

Cashflow of Wealthy households

In appearance, these people may not look wealthy, they may be just like you and me, they don't like to fund expenses & liabilities. Most of the earned income is used to buy asset. Stocks and real estate are by far the most common type of asset people invested in. Some of these assets generate passive income, now you have dual stream of income (earned and passive). Portion of the passive income is used to fund the liabilities, while most of the income are used to acquire more asset which create more passive income.

The cycle of acquiring assets to generate passive income, to buy more assets to generate more passive income will lead to tremendous amount of wealth, you will be trap in this loop. When will this happen differ from individual because the amount of earned income and investment decisions are different, but it will eventually happen.

Once the passive income, surpass the liabilities, expenses and you have extra money to continue to invest, even without earned income, you will never be afraid to run out of money, you are financially free and truly wealthy.

Conclusions

• Wealth is acquring assets that generate cashflow.
• Keep expenses & liabilities low

• Cashflows determine your wealth, not just the amount of cash you have.

Reference

https://www.businessinsider.com/how-cash-flows-2015-1