Creating wealth is not just about making money (see my previous post: You Don’t Have To Be A Millionaire To Be Wealthy). Creating wealth requires one to examine their own financial statement to understand the relationship between their assets and liabilities, their income and expenses.
Primarily, creating wealth is achieved by developing more passive or residual income (income that you no longer have to work or be present for to receive it) than you have expenses. So while most people are focused almost exclusively on increasing their passive income it’s also important to examine your expenses which could shortcut or speed up the time frame for you to become financially free.
This is best illustrated with Robert Kiyosaki’s Cash Flow 101 game (which I highly recommend if you’ve never played it or even heard of it before. Essentially, the next best way to learn something apart from actually doing it is through simulation, ie, games. This is one of the most effective ways to learn something, ie, learn the money patterns, attitudes, skills, and beliefs necessary for creating wealth, since most of us were never taught about these things. Books are great, audios too, and of course seminars – but simulating real life through games is much, much more effective. This game is so important and powerful that best selling author Robert Kiyosaki wrote 3+ best selling books – Rich Dad, Poor Dad; Cashflow Quadrant; RichDad’s Guide to Investing – specifically with the purpose to help people understand the importance of this game he spent years creating and perfecting….).
In the game Cash Flow 101 (you can purchase the board game now like I did over ten years ago when I was 20 to begin my creating wealth journey or sign up for my newsletter in the upper right corner of this page under the video to get free access to try it out and play the full-version game online), you are a rat in the “rat race” of life trying to somehow get ahead and break out of the rat race and into the “fast track” – where you finally get to live out your dreams and goals. You get to play the game by stepping into someone else’s shoes so-to-speak – you might be a doctor, a lawyer, a teacher, a policeman, a business owner, an airline pilot, etc. You not only receive their pay and any accumulated assets (most people don’t really own any assets though), but you also have to pay for their expenses, and carry their debt load.
You play the game like most people live their life: by running around the rat race month after month (dice-roll after dice-roll), chasing a paycheck to pay your bills and manage your debt and you have to choose how you want to react to opportunities that may get you ahead or put you further behind.
The only way out of the rat race however is to create enough passive income to exceed your expenses – that’s how you escape the rat race (both in the game and in real life) and move up to the “fast track” – the world of the wealthy.
Now going back, there are two ways to get out of rat race, either by increasing passive income or decreasing expenses. For most people, it may be much faster and easier to simply pay down debt and/or lower their expenses rather than accumulating or developing assets that produce passive income. However, the problem with this approach alone is that you cannot get out of the rat race by only cutting expenses – you also need to create passive income from either real estate investments, gas or oil wells, a dividend-paying stock portfolio, a residual income business, interest from notes, etc., because realistically you can only cut your expenses so far.
A good illustration is to take your annual amount of expenses and multiply that by 20 to get a figure of how much money you would need to have invested in order to have enough money coming in passively to pay for all your expenses without you having to work, with a net return on your money of 5% (as a side note, make sure to take into consideration taxes and inflation, etc when calculating your net return).
For example: $100,000/yr in expenses requires $2,000,000 invested producing a net annual return of 5% ($100,000). However, if you cut your expenses in half to $50,000, a 5% net return would only require an investment of $1,000,000, meaning you only need a one -million dollar cash-producing asset, and not two million dollars worth. But of course you can only cut expenses so low, but it’s important to understand what role they play in the process of creating wealth. (Keep in mind you will need an investment that will yield a much higher gross return – as inflation and taxes are likely to increase – to achieve a net return of 5%)
So really the key to creating wealth – both in the game Cash Flow 101 and in real life – is to not only create passive or residual income but to also reduce your expenses to reduce the amount of residual income you need in order to become financially free and infinitely wealthy (remember, wealth is measured in time, as in the number of months forward you can live without having to go back to work – see Creating wealth 101 article). This way you are working smarter to reach your goals faster by spending less of your time, energy and resources.
How can you both increase your passive income and reduce your expenses simultaneously?
There is one investment vehicle where you can both increase your passive income while also decreasing your expenses to help you arrive at your goal for creating wealth that much faster.
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