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The myth perpetuated today is that wealth building is about money accumulation and retirement. Accumulation has its place but it isn’t the same as wealth building. But most people don’t understand the difference and try to achieve wealth using accumulation strategies. Accumulation strategies are about preserving wealth that you have created elsewhere, not really building it. This is the basis for 401(k)s and IRAs and the like. The problem with only having this strategy is when the funding stops, you have to switch to the consumption stage. If you are a successful saver, your personality will resist consumption.
Wealth building is about cash flow. Specifically cash flow that supports your lifestyle that doesn’t require you to consume your assets. Cash flow is how we live and enjoy our life. Real wealth is created when we have more cash coming in than we have going out every month. Cash flow that isn’t dependent on us exchanging hours for those dollars.
And it is not about living a life of scrimping and saving. It is about living the life that brings meaning and fulfillment…However you define it.
Business vs. job or self-employment
A business is different from a job in that a business can provide you cash flow, even if you aren’t there every day. A business is really a set of systems and processes developed by the owner to deliver value to customers. It isn’t dependent on any one person performing tasks. That is not to say that the owner doesn’t work in the business. Often times he or she does. The difference is that if you have a business, you could hire someone to perform any and all activities required in the business.
If only you can perform the services of the business, you are self employed. And there is absolutely nothing wrong with that, it just isn’t the same as a business. Specifically, you have the same limitations as someone with a job – when you quit working, the cash quits coming in. But a business will be able to run without you. If you quit working, someone else can be hired in your place and the business still makes money.
Value Creation
Business is about creating value. Your ability to create value for others through a business is infinite. I know that that sounds like a bold statement…but it is true. Just not easy. If you are trying to build wealth through employment, you will have some kind of a limit. Maybe if you take the next step up, you can get a 10%, or maybe even a 20% raise. But it isn’t likely that you will get a 1,000% raise. This isn’t true with business. The value you can create is only limited by your imagination in serving others.
Cash flow – the real wealth
It has been said that cash is king. But really it is cash flow and the predictability of that cash flow that is king. When you have a job, you have predictable cash flow…which is awesome. But when you no longer have that job, either because of retirement or job loss, your cash flow is gone. But you still need money each and every month to pay for your basic needs and whatever else you want in life. Without cash flow, you must start consuming assets that have been accumulated.
Once you have a finite resource that has to fill an unknown need, the scarcity mindset takes over. The future contains too many unknowns to reasonably predict if you will outlive your money. The normal human reaction to this circumstance is hoarding. You may have seen elderly people with more money than they could possibly spend, become so frugal that they are afraid to enjoy their money. It may seem unreasonable to you but the truth is that it is a reasonable and common reaction.
Leverage – the magical tool
The reason that businesses have such an upper hand when it comes to wealth creation is one key thing – leverage. You have the ability to leverage financial and human capital to produce something that creates the value that the market is willing to pay for. Your financial capital can purchase buildings and machines to build the business. It can also be used to hire people with skills of all varieties. Putting together all of those assets in the right combination is what business is all about. Your ability to strategize the right framework and resources is how real wealth is created. Each resource and skill set combination produces a different result. The possibilities and potential return are endless.
The hard part is always identifying what the market is willing to pay for. And they must be willing to pay more than it is going to cost you to produce. What it really comes down to is helping people solve their problems. The more people you can help, the more you will be rewarded. In business the “thank you” from your customers comes in the form of dollar bills. So if you want to make more money, focus on helping more people…that is you’re only limit.
How many people can you help?
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