When it comes to creating wealth, it’s helpful to understand:
What is a millionaire?
Seems like a pretty simple, straight forward question, right?
Turns out its not. The black and white definition of the word – having one million units of a currency – doesn’t do it justice.
In this country at least, “millionaire” has a special connotation, a special meaning. It is not just a word or a certain amount of money. A millionaire is a status, a symbol, even a class of its own – an exclusive club reserved for seemingly only the smartest and most talented (or some would believe “luckiest”) among us…
How silly is that?
Why do we put the accomplishment of millionaire, the attainment of $1 million so high on the pedestal; why do we admire and give so much respect for people who achieve this level of financial success?
First of all, a million dollars isn’t as big a deal as it used to be years ago, prior to our fiat dollar being so highly inflated (along with all the other currencies of the world as well). When you could buy gas for 25 cents a gallon, a million dollars went a long way, meaning that you if you had a million dollars you could pretty much do as you please and live how you wanted to. That is a lot of the reason why the term millionaire has become such a synonym today for financial success – because of what it afforded you (in the past, anyway).
Back then, a million dollars was enough money to buy someone financial freedom. According to Wikipedia, a millionaire back in 1959 is the equivalent of $7.3 million today (and with inflation that number increases by the second). So when most people only lived a few years beyond retirement years ago, and if they had $7.3 million (in today’s money), you could see how most would be willing to work their whole lives thinking that if they could just make a million dollars – become a millionaire – they would no longer have to work and would be able to live the rest of their life in style!
Does being a millionaire mean you’re wealthy?
But fast forward to 2011, when gas is approaching or has already exceeded $4 a gallon in some areas, and it doesn’t take a genius to figure out that even with this simple comparison that a million dollars won’t go as far today. Looking forward, if we were to experience hyper-inflation like they did in Weimar Germany and many other countries over the years, and $1 million becomes just enough to buy a car or worse groceries, a millionaire would be thought of as poor!
It’s important when talking about money to know the full story, and the numbers are what tell the story. Your income – the million dollars – is only one part of the story. There’s another equally important part of the story that’s missing from the equation…
What’s missing from the equation here are expenses. Everyone just wants to focus on the amount of money only – the $1 million. But focusing your energies on becoming a millionaire is misleading at best, as illustrated by the examples above. Someone who became a millionaire through stocks or by selling their company lets say, might have a million dollars but how long would that money last? As I alluded to earlier, $1 million today is not enough to retire on if you plan on living for more than a couple of years.
For this reason, it is a much better idea to focus on creating wealth, which takes into consideration both income and expenses, not just your net worth today (which in an inflationary period really means nothing anyway).
What is creating wealth?
Creating wealth is the process whereby the goal is to develop assets that produce more (passive) income on a regular recurring basis than your recurring expenses. When you are producing this monthly net or positive cash flow, you are infinitely wealthy! As I referenced in a prior article on creating wealth, wealth is not measured in dollars and cents (or Euros, Yuan, Yen, Pesos, Globos, Amigos or any other currency, or gold or silver for that matter)…
Wealth is measured in time.
So applying this definition of creating wealth to being a millionaire or having $1 million dollars for example, you could determine how wealthy you were by how many months forward you could survive on that $1 million before needing to go out and find some source of income. It might be 3 years, maybe 6 years, or maybe only 6 months. You must take into consideration your expenses when trying to determine how wealthy you are.
This however is where the biggest problems lie. Most people have never been taught or learned what creating wealth is, how to achieve it, how to keep it. There are many reasons for this, but the reality is our country as a whole, from Joe Sixpack and Larry Lawnmower all the way up to our state and federal governments, has a major spending problem.
Everyone wants to focus on the income: “If I could only make more money…”
However, the answer to most people’s money problems is not more money; more money only accelerates or accentuates your current money or financial problems. In most cases, more money would only make the problem worse (just think of all the lottery winners and highly paid athletes who are even worse off a years after the money stops than they were prior to getting all that money…).
More focus needs be on expenses. No one wants to hear this, but it’s the truth.
Personally, I struggled with this for YEARS. I’ve mentioned this in my story, but from day 1 in college I was racking up (bad) debt on my credit cards, thinking I was living the American Dream (and that was before the days when politicians would tell us we just need to spend our way into prosperity or recovery or whatever B.S. they come up with)! I had to keep working harder and harder just to stay afloat because my expenses continually increased – “Oh, I gotta have that computer…I need that new phone…I can’t be successful without that car…”
I was a brilliant rationalizer, let me tell you – I could out rationalize anyone and I frequently did, unfortunately! Thankfully, my girlfriend was able to eventually talk some sense into me, to get me to realize the poor financial path I was choosing - I would never be wealthy without good money habits. It was difficult to do – I can totally relate to Robert Kiyosaki when, after closing a big deal, he would find himself down at the Ferrari dealership thinking about how he’s going to spend the money he had just made only moments earlier!
So, the big question on creating wealth is, how can you be wealthy and yet not a millionaire?
By simply receiving more in income each month (passively – ie, through real estate investments, portfolio income, a residual income business, etc) than you spend on expenses, you are by definition wealthy!
That could mean you receive $5 million a month and spend $3 million a month (regardless of your net worth). But that could also mean making $10,000 a month and spending $9,000 of it a month. Or it could be making as little as $4,000 a month if your expenses are less than $4,000 a month. Any of these scenarios would allow you to begin creating wealth.
The key is the income must be residual or passive in nature (versus earned income), meaning the money comes in whether you work or not and can grow over time whether you work or not. If you have to work to create that money – like at a job or even if you own a small business that requires your presence in order to function – you won’t be creating wealth (that is unless you start a residual income business or start investing on the side to create a passive stream of income).
Originally posted 2011-03-03 09:30:22.