HOW TO BECOME RICH: INCOME STATEMENT OR BALANCE SHEET?

  • Post category:Investment
  • Reading time:9 mins read

How to become rich is a common question that many people cannot seem to get the answer to. However, to become rich, you have to understand the difference between the income statement and the balance sheet.

This article will teach you how to become rich easily and with what you have.

How to become rich

When it comes to personal finance analysis, many people get confused. They do not know how to judge how wealthy they are. Most think that having a high paying job, a house, and a car is being wealthy. This is why they become contented and stop working towards wealth creation.

A high paying job is important but it is not an indication of your net worth. Most people take a good job as the end goal. This is the wrong approach and it only leads to financial struggle. A good job is only supposed to be a means to the end. The end in this case is wealth creation.

Therefore, people with high paying jobs should work hard to protect the income they get every month from loss through unscrupulous spending. After protecting the income, let them invest it for purposes of multiplication.

I have seen those who take a big job as a sign of wealth and they end up in a financial struggle when the job is gone. I have seen senior managers retrenched during tough economic and business times. These people would be the least to expect a retrenchment. To them, their jobs are very secure.

If these workers never had another source of income, they end up struggling for the rest of their lives. I have also seen footballers, boxers, athletes, etc. struggle after retirement because they over-relied on the high salary they get every week. They end up in depression doing menial jobs. This is not what anyone would wish for.

To overcome all these, you have to judge your net worth the right way. Do not think that you are doing well off when your finances are on the death bed.

Personal income statement

This is what we call a statement of financial position. This one deals with cash flow. How liquid are you as an individual? How much do you get from what you do? What about your expenses? What additional income do you have?

A personal income statement deals with everything to do with income and expenses. For example: how much income do you have? Let us see an example on monthly basis:

  • A salary – 100,000
  • Second job – 20,000
  • Bonuses – 10,000
  • Gifts – 5,000
  • Interest from bank savings – 1,000

Look at such an example, this person is really poor. Although this person seems to be doing well in life, the reality is the opposite. The fact is that this person is not in control of his/her financial life. As Robert Kiyosaki says, the facts are presented by the numbers because numbers do not lie.

This person makes 136,000 every month, which is relatively impressive. However, 130,000 of that is gotten from jobs. As we all know, jobs are never secure. This is because you are not in control of what happens tomorrow to your job. During COVID-19, hundreds of millions around the world lost their jobs. Although these people wanted to continue working, their employers and the prevailing conditions could not allow them.

5,000 come from gifts. This is also controlled by other people. They can choose to continue giving you gifts or not. 1,000 come from interest from bank savings. This is mostly eaten up by inflation. As the prices of goods increase over time, banks’ savings end up losing their purchasing power. This is because banks offer an interest rate on savings that is less than the prevailing inflation rate.

What happens to this person? The moment the jobs are lost, poverty sets in. Now, let us look at their expenses (Per month):

  • Mortgage payment – 50,000
  • Car fuel and maintenance – 20,000
  • Car depreciation – 30,000
  • Food – 10,000
  • Entertainment –  10,000
  • Clothing – 10,000
  • School fees for children – 20,000
  • Family upkeep – 15,000
  • Unscrupulous spending and donations – 10,000

The total expenses are 175,000 per month. This means that this person is living in debt. They are consuming their future. Therefore, a big income is not a sign of wealth. This means that no one should use the income statement to gauge whether they are wealthy or not. The income statement will lie to you. Even if your income is more than your expenses, it does not mean that you are wealthy. This is because having money is just part of the process of getting wealthy. To fully understand your net worth, you have to look at your balance sheet.

Balance sheet

The balance sheet is the real indicator of wealth. This is because the balance sheet shows the number and quality of assets and liabilities a person possesses.

As we said, having a high income is part of the process of getting rich but never the end goal. The end goal is to accumulate as many assets as possible. A person who has accumulated assets over time is wealthy.

Look at all super-wealthy people, they may not have high income but their assets are worth billions. For example, Jeff Bezos, the richest man on the planet today is paid 200,000 dollars every year as the CEO of Amazon. This is very little compared to other CEOs or even other executives. However, the 11% shareholding that Jeff Bezos has at Amazon is worth more than 100 billion dollars. This is what makes him wealthy.

Mark Zuckerberg is paid 1 dollar as the CEO of Facebook. However, his stocks at Facebook are worth billions of dollars. Donald Trump is paid 1 dollar as the President of The United States. However, his real estate portfolio is worth billions of dollars.

These are just examples of the difference between what the income statement tells you and what the balance sheet is showing. The facts about wealth are shown by the balance sheet. If Jeff Bezos wants to do something capital intensive in life, he usually sells part of his shares at Amazon. This means that he does not have any other major sources of income outside Amazon.

This is how wealthy people think. They all think in terms of assets. Poor people and the middle class think in terms of income. They are usually obsessed with a high income. This is why most of them have no assets. This is because they achieved their goals a long time ago. Their goal was to have income flowing in every month to finance their lifestyle and give them a comfortable life.

Let us look at the balance sheet of a wealthy person.

  • Stocks in different companies – 100,000,000.
  • A startup business – 5,000,000
  • Real estate investment – 20,000,000
  • Gold and Silver – 10,000,000
  • Patents and copyrights – 10,000,000
  • Government securities – 15,000,000
  • Money market funds and accounts – 10,000,000

The total of all tangible assets is 165 million. In this figure, we have not included intangible assets like reputation, social media following, investment education, etc.  This is how people get rich.

Let us look at the income statement of such a super-wealthy person:

Income (Per year)

  • Dividends from stocks – 5 million
  • Profits from the startup – 0.5 million
  • Rent from real estate – 1 million
  • Royalties from copyrights – 0.5 million
  • Interest from government securities – 1.5 million
  • Income from the money market fund and accounts – 1 million

Even without including the appreciation of assets over the year, this person has an annual income of 9.5 million. This is enough to fund a comfortable lifestyle. However, rich people will only use 0.5 million as expenses and invest 9 million to create more wealth. This is how the rich get richer by the day. A person with such a balance sheet will become a billionaire in 10 years or less.

The solution (How to become rich)

As we have pointed out, do not focus on your income statement, focus on your balance sheet. If your balance sheet is poor, then you are poor. It does not matter what your income statement says, it is the balance sheet that determines the level of your wealth.

Therefore, start accumulating assets today. Assets are things that increase your economic value and put money in your pocket. Avoid consumer liabilities like mortgages, consumer loans, big cars, mansions, etc. These things only take money out of your pocket. They make you poorer by the day.

Even if you are employed as a salaried worker, you can build your assets column by living way below your means and investing the difference in assets. After you have accumulated multiple sources of income from your assets, you can then quit your job and focus on building your asset column on a full-time basis.

In all you do, make sure that you are growing your asset base over time. To grow your asset base, you need the following:

  • Financial intelligence – You can get this from books, magazines, seminars, courses, etc.
  • Risk tolerance – Investing is risky. You, therefore, need to tolerate some risk. You will lose money sometimes and gain money most of the time if you have financial intelligence.
  • Patience – It takes time to build your wealth base. It is not as easy as having a salary. You need to be patient with your money. Do not quit just because you are making no money in the short term.
  • Resilience – Since it is hard to accumulate assets, you need to be resilient. When you lose money, invest again without giving up. This time, you will be wiser.

Final thoughts on how to become rich

Are you wealthy or you just look wealthy? You have to differentiate the two. Average people focus on looking wealthy while wealthy people focus on being wealthy.

Do not buy big cars to keep up with the Johnnies. Buy big cars because your financial position allows you to do so. Your financial position is determined by the quality and quantity of your assets. There you go, that is how to become rich.

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