I’ve spent a bit of time learning about money and finances in the last year. Specifically, learning how to manage money by making money work for you, and how to be wealthy.
Those are pretty well covered subjects, and common rhetoric around any financial/business topics. However, what I’ve learned so far, is that they really do mean something useful.
Income Alone Doesn’t Make you Wealthy
The main thing I’ve learned is what I believe to be a very good definition for wealth. Wealth is the ability to live for a period of time without actively exchanging labour for reward, or without any income. A wealthy person can live for many years without having to work for money, a poor person cannot.
It’s easy to think about wealth as flashy cars, mansions, luxury yachts etc, but those are perhaps the opposite of true wealth, or the prize objects of the extremely wealthy, imitated by the less wealthy.
The key point about wealth is that it has nothing to do with quantity. You can have £10 and be wealthy, if that £10 will last you for 10 years.
Therefore, the key point about being wealthy is not how much you earn, but how much you spend. Spending, and spending alone is the difference between being rich and being poor.
Income alone does not, and can never, make you rich.
Making Money Work for You
The second thing I’ve learned is about income and expenditure, or assets and liabilities. Rich Dad, Poor Dad says that an asset is anything that makes you money, a liability is anything that costs you money. I really love this analogy.
If you ask an accountant, the traditional definition of an asset is something with re-sale value. However, if you buy a car for £30,000 – it probably loses £5,000 on day 1, another £5,000 on day 365, and then continues to diminish throughout it’s life. It also costs you for servicing, petrol, insurance, etc etc. Not much of an asset, if you continually spend and lose money on it!
A rental property, on the other hand, might cost you £100,000, but if it makes you £10,000 a year in rental income – it both costs you money and makes you money. The balance between those figures gives you the value of that and how quickly you can expect a return on your initial investment. Herein lies the understanding of the common phrase ‘making money work for you’.
Spending money on things that make you money, not cost you money, is making money work for you.