Having listened to many people over the years, it is clear to me that very few people understand wealth or how to grow it. There are those who think that a person with a net worth of $2 million has that amount in cash or in the bank. But that isn’t how it works.
As such, I decided to see if I can help explain as many of these things as possible in simple ways that anyone can understand.
This article about getting a clear understanding of your net worth and how it is key to growing wealth, is the first financial article I am doing. Why am I publishing it here on Mobility.com.ng? Adding another website to my portfolio of sites is tedious. I’d have to register a new domain name, set up hosting, buy an SSL certificate, etc. The costs also add up. Adding a “Grow Wealth” section here is more convenient and definitely makes more financial sense. Let’s embrace the evolution of Mobility.com.ng.
Understanding assets
For the purpose of this article, when I use the word “assets”, I am referring to appreciative assets that increase in value over time and also generate revenue for you, e.g. stocks, bonds, mutual funds, real estate, etc. Depereciative assets like cars, electronics, clothing items, furniture, and the like are not the focus. Remember: appreciative assets are the focus for growing wealth.
What is your net worth?
Net worth is the value of assets that you own minus the liabilities you owe. A positive net worth means your assets outweigh your liabilities, indicating that you’re on track to growing wealth.
To calculate your own net worth, subtract all your liabilities (such as loans, accounts payable, and mortgages, etc) from your assets. Positive and increasing net worth is a sign of good financial health.
Positive net worth is not enough
But a positive net worth is only an elementary part of the journey to financial stability and freedom. Why? You can have a positive net worth of $1, or $500, or even $20,000. That’s a good thing. Your appreciative assets are greater than your liabilities. But the value of your net worth is too low for it to generate you income that you can live on.
A positive net worth is not enough
You see, the whole idea of financial freedom is to have a total net worth that is able to generate money that you can live on. Let me explain.
If you require $2 million per year for your day-to-day expenses, for you to be truly financially free, you need to grow your networth to an amount that will generate that $2 million for you each year. In other words, all the interest, dividends and returns from your assets in one year must total $2 million. When you get to that point, you can comfortably retire and not work another day in your life, if you like.
Take note that I didn’t say you need to have $2 million net worth. No. In order to get $2 million income from your assets each year, you will need to have grown your assets to the tune of $20 million. This is based on the assumption that you are getting a 10% per annum returns on all your assets.
Your net worth is not spending money
Your net worth is not spending money. It is the machine that provides you with spending money. The hen that lays the eggs that you eat. The cow that provides you with milk. You have to keep it alive and healthy, so it can feed you.
The person who is only spending money and not growing their assets is not rich or wealthy. They are a pipe through which water flows in and then out into the drainage.
Earning a fat salary does not mean you are rich
Growing wealth has to be deliberate or it won’t happen. Too many people depend on luck or random events to provide them with wealth. That’s often not how it happens. And even if it happens that a random event delivers tens or hundreds of millions into your hands, it still does not make you rich or wealthy. If you do not have a habit of putting money aside to grow your wealth, you are not likely to start even if a windfall comes along.
This is the number one reason why most people who win the lottery or a jackpot eventually lose it all and end up in the same position they were before, or worse.
As I type this, there are young people who are earning fantastic amounts monthly but who are not putting money aside to grow their assets. They are buying cars, shoes, and living large. The odds are that they will not end up wealthy. Do not be that person who makes a lot of money but ends up poor.
Earning a fat salary does not mean you are rich. If you are spending and not growing your assets, you are not rich. You just have cash to spend, and cash that only goes to expenses will disappear. It will dry up.
Little steps
I will say something here and you need to believe it: you do not have to be earning a lot of money to start growing your assets. As a matter of fact, you may not have enough now, but that is a solid motivation to do something for yourself. It is a solid motivation to put money aside to grow your assets.
Fun fact: the way most millionaires became millionaires is by taking little steps, month after month, year after year. They put small amounts of money into assets every month for years. Little streams really do grow into mighty rivers.
Beware the allure of big steps
Growing wealth is very much like building a relationship. In relationships, many people look for the grand gestures – their partner buying them something expensive, throwing them a big party, etc, when in reality solid relationships are built on the little things – everyday acts of kindness, thoughtfulness, and service.
In growing wealth, waiting for huge amounts of inflow before investing is a bad idea. The secret is to consistently do the little things. Do them religiously, year after year, and grow rich.
One wealthy man who has shared with me said he started putting money aside to grow his assets every month right from his very first salary as a young man. And he did it all through his over 40 years of employment. That was how he grew his wealth. Small, monthly steps, year after year.
Budget 20% to 30% of your income for growing your assets
One good formula for growing your wealth is to budget and include a line for assets in your budget. Financial experts will often recommend that you assign 20% to 30% of your monthly income to growing your assets. If you earn $10,000 monthly, put $2,000 or $3,000 into assets.
Cash in your bank account is not an asset. It will grow wings and fly away. That is why I didn’t say to save it. Put it into assets – stocks, bonds, mutual funds, and other investment vehicles. Do it consistently all your life. That is how to grow wealth. Saving is good; it can be used for emergency funds. But to grow wealth, you need to put money into assets; you must also invest.
For the first 20 years, plough back the interest, dividend, and returns into those assets. This will allow the concept of compound interest to help you grow your assets faster.
Compound interest explained
If you have a chicken farm, and instead of eating the eggs your chickens lay, you let them hatch and grow, year after year, you have more chicken laying more eggs for you, so your farm grows faster than if you were eating or selling the eggs. That is how compound interest works.
Your net worth grows faster when you put the returns back in. The more often interest is added (compounded), the faster your money grows. This is important, because you want your assets to grow to the point where the returns can provide for your needs. Compound interest is the way to get to that target faster.
If you get to that target by 40, you can start eating your eggs from that age. If you get there at 50 or 60, that’s fine, too. The important thing is that you grow your wealth to the stage where the cumulative annual returns is enough to live on.
Compound interest is the system that makes it happen. It is based on the idea of delayed gratification: eat your eggs now or let them hatch and get you more chickens that will lay more eggs that will hatch and lay more eggs, etc, etc.
What of risks?
Of course, there are risks to growing your wealth. The number one is the fear of something going wrong. Sometimes, investments go bust and you lose some money. That is a given. At some point in time, it will happen to you. Everyone who has ever invested has lost some money.
The way to address that is to diversify. In other words, do not put all your eggs in one basket. Invest in different vehicles (stocks, bonds, mutual funds, etc) and in different fields (banking, Medicare, insurance, oil and gas, etc).
That way, if something bad happens in one area and you lose some money, the gains in other areas more than make up for it. This is how those who have successfully grown their wealth have done it. Don’t put all your assets money in one company in the one industry.
I have heard some people say that they lost everything when the banking industry hit a rock many years ago. That’s the kind of thing that happens when you put all your eggs in one basket. I know others who did not lose everything in that same period. They had diversified assets.
Start with one basket, but gradually add more baskets, and spread out your risks. Stay consistent. You will reap the rewards.