How The Wealthy Get That Way
Posted by Rasheed Balogun on May 5, 2008
Why is it that 5% of the population controls 95% of the wealth? For starters, the are not lucky or accidentally become wealthy. The wealthy get that way by doing things in a certain way. Let us begin with a quick lesson on financial literacy.
To begin your road to riches you must first understand how your wealth is determined and know how to create wealth. Tracking your net worth is the key to determining how wealthy you are. Your net worth is the value of all of your assets, minus the total of all of your liabilities. Put another way, it is what you own minus what you owe. If you owe more than you own, you have a negative net worth. If you own more than you owe you will have a positive net worth.
Income is simply money you bring in.
Expenses is money you spend.
An asset is any item of economic value owned by an individual which pays them. The tradition definition is simply anything of value that is owned. The tradition definition is perhaps why 95% of the population is not wealthy because they don’t understand it’s true meaning.
A liability is an obligation that legally binds an individual to settle a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. A liability is basically something that is costing you money over a period of time.
So what are people buying on payday?
The poor class of people buy stuff on payday. You know, the stuff that they find at the flee market, garage sales and the dollar store that they really don’t need to survive, yet their homes are filled with these stuff. I remember when I lived this way…always looking for the bargains and buying stuff because it was so cheap.
The middle class are mistaken as the wealthy because they buy a lot of flashy liabilities. Their income is probably near or above the six figure mark, however due to their spending habits their income is being put into liabilities resulting in that same six figure income going right out through their expenses. These liabilities include the fancy cars, the 50-feet yacht, the 2 week vacation at a 5 star resort, all which have probably been purchased with their favorite credit card.
Now by no means am I trying to make anyone feel bad about their spending habits. I am just trying to educate you on why the rich are getting richer, the poor getting poorer and the middle class is stressed out and slowly being eliminated.
The wealthy buy assets with their income. These assets then generate more income and they use that to buy more assets. As an example, Joe Millionaire earned $15,000 last month. After paying his monthly expenses he was left with $10,000. Joe took that $10,000 and bought himself a coin-operated car wash that generates on average $4,500 per month.
The following month Joe earned $15,000 + $4,500 from his car wash (which he did not have to be there to operate) for a total income of $19,500. After paying his monthly expenses, Joe had $14,500 left over. With that he put a down-payment on a rental property which generates $2,500/month after his mortgage and other cost associated with owning that rental property is paid.
On the third month, Joe earned $15,000 + $5,000 from the car wash and $2,500 from his rental property for a total monthly income of $22,500. Joe is pleased with his results over the past 3 months so he decided to buy himself a brand new luxury car that will cost him about $1,100 per month to own and operate. Joe doesn’t mind though because the income he makes from his rental property alone will cover those expenses with money left over.
What are you buying on payday? A bunch of stuff, liabilities or assets? It’s your money, you decide how you want to live…poor, middle-class or wealthy?
Have A Wealthy Day!
