THE 3 Principles of Building Wealth

THE 3 Principles of Building Wealth

“These are the habits that brought us to where we are.” – my girlfriend once told me while filling a bottle of water so we don’t have to buy any in an amusement park.

I couldn’t agree more.

Although our principles of building wealth are not exclusively based on saving, any financial endeavor requires starting capital.

That’s why we’ll start there.

Principle #1: Capital

Capital – assets that can enhance one’s power to perform economically useful work.¹

The opening sentence of this post might seem like I’m trying to promote aggressive saving or extreme frugality.

That’s actually far from the truth.

So unlike the advice you’d get from the personal finance police, I back to differ:

Don’t cut your own hair
Don’t wait for discounts
Don’t sacrifice quality to save cents
Don’t cook at home if you don’t feel like it, etc., etc., etc.

But would that mean that you’ll go broke?

Nope.

Just don’t spend emotionally.

That’s it.

Congratulations, you’re frugal now. That’s literally everything you needed to do.

Let me simplify it: each time I get the urge to buy something, I just envision how will I feel a few days after owning it. If the answer is somewhere between indifferent and amazing I buy it. If it’s between indifferent and miserable I don’t.

And the consequence? Yes, I own a few unnecessarily expensive items and pieces of furniture, eat out regularly and don’t save on food, never waited for “Black Friday” or any variation of it to buy anything, and put quality as a higher priority factor than price.

But the best part?

I’m still saving like crazy.

At the same time, everything I spent money on I bought without a blink of an eye. And if the question is “how?”, the answer is simple… And already given:

By asking myself how will I feel after the purchase.

This saves a lot of money that could be wasted on nurturing my (hopefully non-existent) insecurities, alcohol consumption, relationships I don’t enjoy, etc.

Okay, now you may think:

But I’m earning a multiple of the average salary and still struggling to save. What can I do?

That’s why saving comes first and earning second. Making more money will only get you ahead as much as you’ll utilize what you earned.

One simple method of fixing this number yourself instead of experiencing variable savings rate over and over is to pay yourself first. Paying yourself first means setting an amount that you’ll deduct from your salary and put it in a savings or investment account as soon as you get paid.

How high this number will be depends on your income and spending habits. For example, if you decide to save 50% of your salary, the first thing you’ll after receiving it is to save half of it.

And you’re done – you saved enough for this month. Feel free to spend the rest.

And if you don’t, even better. That will just bring you closer to financial freedom.

But saving itself doesn’t mean much. It’s actually a financial mistake to keep large amounts in cash.

That’s why we need the second principle.

Principle #2: Assets

Asset – a resource with economic value that’s owned or controlled with the expectation that it will provide a future benefit.²

People new to personal finance may think that their savings alone make people wealthy.

That’s simply not true.

It actually creates a poverty mindset because it doesn’t help a person realize that time is not money. Even if you save a portion of your income aggressively, the amounts will always be a function of how much life you sold to someone.

But an even stronger poverty mindset is that of high-income earners that are still struggling financially. People who believe that money is the asset… And still, they spend it all.

Of course, in accounting terms, various things can be classified as assets, including cash. But if building wealth and reaching financial freedom is the goal, illiquid and rapidly depreciating assets should be as avoided as liabilities and expensive consumables.

And while talking about liabilities… The only debt that makes sense is the one that has an interest rate lower than the inflation rate and is used to buy you an asset or minimize your opportunity costs. For example, a debt (liability) to finance another liability. I just can’t!

But once you understand the power of assets, you’ll understand how important proper allocation of your wealth is. You’ll understand opportunity cost and that each cent that’s not wasted can make you much more money in the future. And all of a sudden, you have a valid reason to lower or even eliminate any liability you may have, so you can have more cash to buy even more assets with.

And from here, you objectify your wealth. You’re not married to your salary and expenses anymore. The game you start playing is net-worth – accumulating wealth in a diversified portfolio within and across asset classes. To see how much of a difference it can make, checkout the performance of Cash vs Stocks in 30 Years.

I often get asked: “have you returned your initial investment?“. To me, this question doesn’t make much sense. I don’t want to “return” my initial investment. I actually prefer my wealth in assets, not in $, €, £, ₽, ₦, ৳, or any other invention that loses value due to inflation.

At the same time, I love inflation. It drives the price of assets higher and higher. And those that accumulated assets enjoy these benefits, while those who didn’t will need to pay more in order to get them. And remember, you can always turn assets into money. Over time, you can turn most assets into even more money. But not the other way around. The purchase power of any currency becomes less and less over time, so the same amount of money can buy less assets over time.

Assets you should hold appreciate in value or provide a steady cash flow. If you’re a beginner, the stock market is the best and low-barriers-to-entry market to build long-term wealth. And if you need help starting, I don’t only have a resource, but a whole book to kick-start an investment journey for a beginner. Read more here: Become an Investor.

In summary: All capital above your emergency fund should flow into assets, preferably on auto-pilot.

Lastly, I’m keeping this post clean of sentences such as “you yourself are your biggest asset, invest in it“, although I find it true. I just prefer talking about things that work in the real world rather than motivational metaphors.

Principle #3: Patience

Yup, patience is everything that remains.

If your saving and investing are automated, you just need to leave time to take care of the rest.

Of course, given that you’re properly diversified and disciplined, which at this stage should be an assumption.

And don’t forget. Building long-term wealth is a lifelong journey. Way of life I would say. I already described it step-by-step in the post How to Get Rich – The Blueprint. But going into details is not always necessary – keeping it simple is the key most of the time: