In your quest for wealth and financial freedom, it is vital for you to know the key components or elements of a wealth system.
Your knowledge of these components will help your understanding of how they relate and impact each other and ultimately, how they contribute to your wealth-building endeavors.
This will help you know what to downplay and what to emphasize and focus on.
It’s important to know that the effective management of these components will determine your overall wealth. This is crucial!
Now, here are the four fundamental components of wealth:
- Income
- Expenses
- Liabilities
- Assets
1. Income: This is the first rung on the ladder of wealth-building. It’s your number one wealth-building tool; a vital component of your wealth system.
Though, a vital wealth-building tool, yet, it is not the most vital in your quest for financial freedom.
Many people have ignorantly assumed income to be the most important element in wealth-building; as a result, they are all about salary raises and earning huge income.
Unfortunately, wealth is not so much of how much you earn as income, but what you do with what you earn.
Please don’t get me wrong. Earning a huge income is great, and can be a huge booster to your wealth-building endeavors.
But in the final analysis, it is what you do with your income that determines what impact it will ultimately have on your wealth plan.
What is the importance of a huge income that is totally spent on lifestyle maintenance?
This brings us to the second key component of wealth.
2. Expenses: These are your financial outflows. This is money spent to meet your needs, wants, and experiences of life.
The key differentiating factor between financial success and failure is how you manage your money.
If money flows out of your hands at the rate it comes in, or the rate of outflow is greater than inflow, then you have a financial problem on your hands.
Your key task in your bid to build wealth is to make sure that the rate at which money flows out of your hands is lower than how it comes in.
You can easily achieve this by intentionally living below your means. Budget your expenses in such a way that there must always be leftover funds to invest for financial freedom.
3. Liabilities: Liabilities are things that take money away from you. Generally, a liability is anything that depreciates in value and incessantly takes money away from you in order to service or maintain it.
Liability is about negative cash flow. It is about cash flowing out or away from you.
For example, a car is a liability because it takes money from your pocket. You will always need money to fuel and maintain your car.
Except in a case where the car is used for commercial purposes.
Your residential house is a liability because you will always spend money to maintain it.
Your house ceases to be a liability when you have tenants who pay rent for the use of the house.
Unfortunately, some people have mistaken liabilities for assets.
There is a significant difference between an asset and a liability. This you would soon discover as we look at the fourth component of wealth.
4. Assets: Robert Kiyosaki gave a very simple definition of the word asset that I love so much. He said, “Assets put money into your pocket and also appreciate in value.”
This means anything you created or bought that puts money in your pocket is an asset.
It, therefore, stands to reason that wealth is essentially asset-based and anyone seeking financial freedom should basically be concerned with the acquisition of assets.
This is how wealth is built.
Building a fortress of income-generating assets should therefore be the major goal and task of anyone who desires wealth.
Your ultimate job in your quest for wealth is to have more cash flowing your way from your assets than what flows away from you through living expenses….more money coming in from your assets than what goes out.
Essentially, wealth creation is the process of converting your active income into assets that generate passive income.
So you work to earn money, and then make your money work for you to build wealth.
Wealth building begins with earning an income. Then the income is effectively managed to meet living expenses and to have some funds to invest in income-generating assets that would go on to generate more income.
This is the gospel of wealth.
There you have it.
Now, the ball is in your court. Go ahead and use your understanding of the four components of wealth to build your wealth.
To Your Prosperity
Sharon Akinoluwa
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