Road to Making Millions: Foundations
Now that you have cleared some major misconceptions, lets lay the foundation to build your multi-million dollar empire!
If you haven’t, I recommend you go read my previous article first, about clearing some misconceptions you might hold:
Okay let’s get down to business
Its all about assets.
Let me ask you this, you just bought a new house at 27, is that an asset or a liability?
Now that you have an answer, hold that thought and let me define some key terms in that question.
Asset:
Noun | /ˈæs.et/ | something valuable belonging to a person or organization that can be used for the payment of debts.
Liability:
Noun | /ˌlaɪəˈbɪləti/ | the amount of money that a person or organization owes; legal responsibility for something.
After reading these definitions, does this change your answer?
If your answer was an Asset, it should be changed by now. If it's not, let me explain why it should.
At 27, chances are you aren’t buying a house upfront(paying the whole thing at once), you’re putting down some money as a downpayment, and the rest you’re taking a mortgage from a bank or an independent firm. A mortgage is a loan and you’re paying that back, for a minimum of 5 years with interest. So until the age of 32, you don’t fully own the house.
So here is a clearer definition and distinction between Assets and Liabilities:
An asset is something that makes you money, a liability takes money from you.
For the next 5 years, you’re paying bills, the mortgage, and taxes. Your house is taking money away from you and is not an asset until it starts adding money to your bank account.
So which assets should you acquire?
When talking about financial assets, the human mind goes intuitively to things like stocks, bonds, ETFs, mutual funds, etc. but remember an asset is anything that can make you money. All those things will make you money but something people wouldn’t consider a “financial asset” is actually your mind.
With stocks, you make money by selling at a higher price than what you bought the stock for and/or by dividend income. With your brain, the buying-more-stock equivalent is acquiring knowledge, and the ways you make money from it are endless.
That is the first foundational pillar:
Invest in your mind because that will lead to more income streams than any other asset.
Continuing the idea of ‘abstract assets’, another one which seems obvious, and people realize it, but don’t fully internalize: TIME!
To me, the cliche: “Time is money” is partially true. A more accurate version would be, “Everyone’s time is worth a certain value(amount of money)” and that it is subject to change. Having a job where you make $30/hour is still an income stream and at that point, 1 minute of your time is worth 0.50 cents. Instead, if your income stream is through a business(dropshipping, for example) or facilitating a deal, you could make over $120/hour. At that point, 1 minute of your time is $2.
Economically, there is always a greater return on capital than labour; it’s better to own productive capital than get money in exchange for your labour.
Putting in a 4-hour work session at the job will make you $120, and the chances of it going up are small and it will take a while. Whereas from your own business, with the same 4-hour work session, you can make $480. And that value can go up depending on how scalable your business is and how much you reinvest.
Higher pay-per-hour jobs also tend to require higher valued skills/intelligence, however, your labour will always be rewarded less than how much value it produces. If you didn’t make a company profit(you made them more money than you took from them), why would they even keep you?
Using higher valued skills/intelligence to acquire more productive capital will make you more money than any job of the same threshold.
The second foundational pillar:
Allocate time efficiently to generate the most value from it.
Now onto more concrete assets: Real-world financial skills
Simply, if I know how accounting and how to make a balance sheet, that's a skill I can use to make money.
As boring as accounting is, it is an essential skill to have to be able to maintain your own finances and analyze the financial status of companies(as potential investments).
The other key skills are:
- Understanding other financial statements.
- Understanding market trends and being able to extrapolate.
- Laws regarding taxation and administrative barriers.
- Why investors/consumers make the decisions they do.
The first 2 are quite self-explanatory, but the last 2 are a bit harder to wrap your mind around.
Have you ever wondered why the rich don’t pay as much(if any) tax on all the money they make?
Income is taxed for various reasons from healthcare to public services to other government uses, but the revenue generated by a business isn’t subject to such high taxes rates.
In Canada, if you make over $214,368 in income from a job, you are subject to a 33% tax, which is about $70,741. If you make the same amount in revenue through a business, you are subject to an 11% tax, which is about $23,580. That is almost a $50,000 difference. Imagine how many more assets you can get with an additional $50,000!
The rich will often shelter their incomes through a corporation, or directly put them in assets, under the name of the corporation, so that they are never taxed on any of their revenue/income. Through this, they go from a measly 11% to virtually none(since small businesses don’t pay much taxes, as a way of letting them grow faster).
Learning about taxation systems will help you retain more of the money that you earned.
Learning why consumers do what they do, more commonly known as behavioural economics, can be extremely useful to maximize yields on assets like stocks.
Let’s take this to the real world: the recent pandemic that has everyone scared.
If you read the news or glanced at the market this past week, you would’ve seen a lot of red. This is due to 2 factors symbiotically growing: loss aversion and herd behaviour.
Due to China being the epicentre of this pandemic, and also most of the world’s production of raw materials/manufactured good, speculators think that production will fall and so will the price of the stock. The sense of loss aversion kicks in and they start selling. This signals others to sell as well and a herd forms, behaving the same way. As stock prices fall due to this rampant sell-off, more people sell to avoid losing more money and the cycle repeats.
This is beneficial to new and smart investors. This cycle will eventually run its natural course because other factors will stop it. Essentially right now, there is a sale in the stock market, and after this pandemic scare wears off, the prices of these stocks(which have fallen by thousands) will return to its original price, making the investors that buy right now, a shit-ton of money.
(Don’t invest in airline stocks though, their stocks were steadily falling even before this virus became an issue, and I doubt it will go up by a lot after the scare wears off.)
So the final pillar of the foundation:
Get as many financial skills as you can in your intellectual arsenal.
Recap:
- The difference between Assets and Liabilities: An asset is something that makes you money, a liability takes money from you.
- Foundational Pillar 1: Invest in your mind because that will lead to more income streams than any other asset.
- Foundational Pillar 2: Allocate time efficiently to generate the most value from it.
- Foundational Pillar 3: Get as many financial skills as you can in your intellectual arsenal.
This entire series is inspired by Rich Dad Poor Dad by Robert Kiyosaki. I highly recommend you read this book on your own time. There are so many lessons about mindset and financial literacy, it is a very good start to becoming a successful millionaire.
One very important thing that was highlighted in the book is that this journey is one of constant learning. If you have some interesting insights on this, feedback on the things written in this article, or just want to chat, feel free to connect with me on LinkedIn.
What to do next:
- Stay tuned for the other articles in the series.
- Read Rich Dad Poor Dad by Robert Kiyosaki.
- After you have a plan and the knowledge, go out there and take action! Greatness awaits you.
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