Keys to Building Sustainable Wealth - Key 2 A System For Wealth

A system for wealth ... sounds a bit like a grandiose claim, I have to admit.  Is it really possible to follow a system that will make you wealthy? If so, why do so few mention it? What does such a system look like in operation, and how do we implement it? Can it work when I am in debt?  

Firstly, I think that there are many ways to achieve one's goals.  In this posting (disclaimer time!) I am sharing information I found helpful to me, please speak to qualified financial experts before you bet the farm on my advice

(Actually, please don't bet the farm on my advice, the world's financial experts are well adept to lose our money if the 08 crash is anything to go by, you don't need my help to do that).

Before outlining the system, I want to look at some hindrances to wealth building. I will propose that a system for the accumulation wealth will run into much of the same problems a system used for losing weight does. 

We all know the story ... You start a new diet and exercise system (often involving awful green smoothies and modified medieval torture machines you buy online). It goes well for the first week, maybe the first month. And then something happens, our latest diet system crashes, we revert back to old habits, marry the coach and attack the refrigerator, gaining back all the weight we lost. 

I am no expert on health and fitness, but personal experience tells me that going to the gym and busting my chops for 5 hours is not sustainable. Overtraining leads to pain, demotivation and injury, which is a dead end for your exercise program.    

Healthy nutrition and exercising has to be sustainable,  day after day, week after week, month after month, and so forth... Consistent long term efforts produce much better results than crash dieting or  working yourself to death every now and then in the gym. 

Same goes for a system of wealth accumulation, consistent small steps should always outperform inconsistent big steps.      

A Sustainable System for Wealth Accumulation     

To be effective, such a system cannot ignore human psychology. An effective system has to motivate us to keep building wealth. Such a system has to balance our current needs and desires with providing for our future. Such a system has to allow us to enjoy the benefits of money we make now, while not slicing into our future provisions.  

As a starting point, let's consider three legs of our system for building wealth, we will only do the first, Growing in Discipline, in this post: 

1) Growing in Discipline, 

2) Developing a Positive Money Mindset, 

3) Growing in Our Money and Entrepreneurial  Skills 

1. Growing in discipline

Ouch! sounds painful. But the reality is that those of us fortunate enough having to build wealth from scratch, will 1) have to control our spending, 2) accumulate a surplus of funds, and 3) wisely invest those funds for growth (so we are told in Investing 101).  Controlling our spending  is the first step and that requires discipline.  

It is at this point where I often sabotaged my personal efforts at building wealth, I did this by:  

Overspending - overspending leads to debt, just as overeating leads to fat!  Debt decreases our ability to accumulate a surplus of money to invest.  If you're in debt, don't feel bad. Many of us are.  This system also has a solution for that. 

Misunderstanding why I had to save.  When you save money and that money has no purpose, you will surely use it for the first good enough reason you can think of. If you save for a rainy day, "it's going to be raining pretty soon". 

Trying to pay off debt before beginning to save for a surplus to invest. I think we have to start accumulating a surplus to invest at the same time we are working to pay off debts.  

Many investment pro's will lynch me for saying this. They will tell you that the returns you make on your investment will be reduced by the interest you have to pay on your debt. 

For example if you owe an amount on your credit card, at a 17% interest rate, and you invest a similar amount at 20%, you will only earn 3% interest on your portfolio (combined debt and investment). 3% will not even beat inflation, they will tell you.   

Investment pro's will often tell you to pay your debt of first, then to invest.  I don't really care. While their view makes perfect sense from a portfolio perspective, I have only been able to pay off one loan that way.  To me it was mainly a psychological thing.  Paying everything you can into debt is soul deadening to me. I felt like I was making no progress financially and ended up deeper in debt.            

Now, onto the system we can use to accumulate a surplus and pay off debt. 

This system is based on the The Richest Man in Babylon: The Success Secrets of the Ancients which I found incredibly motivating and helpful.    

Principle 1: Pay Yourself 10% of Everything You Earn

Make a commitment to keep 10% of everything you make "as yours to keep". This means that you actually pay 10% of all your earnings to yourself first.

See this 10% as the "seeds to your money tree". This is your surplus that must start to earn more money for you. Like a "golden slave" this stream of money that has to earn money for you.  Stated simply, this money has to earn more money for you. It is not money for a rainy day, it's money that has to slave for you.

Principle 2: Learn to Control Your Expenses

This requires discipline to live on 90% of your earnings (or 70%, if like me you want to get out of debt). Remember, we have to grow in wealthy disciplines, part of that is learning to live on 90% of what you earn.

To start with this, make a list of your necessities and your desires. At this point we have to give up some of our desires in order to make our greater desire, such a financial freedom, come true.

This is also where a budget is needed.  A budget is tool that helps us to delay a multitude of desires for the attainment of a bigger one.

Then, after you have done that, enjoy the 90% (or 70%) of your money as far is it permits.
  
Principle 3: Make Your Surplus Capital Multiply

After having saved a surplus, we have to put our surplus to work for us. To do this, we have to invest. There are many options wherein to invest money, but I think one rule is crucial.

Never ever invest into something you do not understand. Make sure you can identify the risks and workings of an investment before investing. Or else, your money will surely be lost. Also, be very careful of whom you take financial advice.  Don't listen to the broker who is broker than you are. Listen to those skilled in the workings of making money.    

I have once heard of an old farmer who made a fortune investing in peaches. When asked why he invested only in peaches he stated that it was the one thing, the one market, he knew very well.  Let's learn from him.  

So, at this stage the 10% portion you saved should start to earn money.  We then have to reinvest those earnings to earn even more. "This is where money earns for you, and his children earn for you, and his children's children earn for you" (Clason, 2008)    

A Word on Debt ... 

I like the system suggested in The Richest Man in Babylon. For those of us seeking to get out of debt the book recommends that we save at least 10% of our income and use an additional 20% to pay of debt.  The 20% is evenly applied to all debt one seeks to pay off, until it is paid off.  

This allows the simultaneous growth of a money surplus and the paying off of debt. The growing money is good for your soul, it motivates us when we see our bank balance increasing and it feels good to receive money from investments. For that reason. I find the system to be sustainable and not burdensome. Read the book if you need more information on this part of the system.  

Thank you for bearing with me through this lengthy post.  I would really like to hear any comments, insight or advice on this topic.