The financial plan sold to most of us by our parents and the authority figures in our lives involves going to school, getting a good job, saving 10% of our paychecks, and ultimately investing our savings in the stock market. Then one day, say 45 years from now, we would retire rich.
Unfortunately, as laudable as this plan may seem, its ability to deliver the expected wealth and financial freedom is very pitiable and unreliable.
First, it’s important to note that paper assets (stocks, bonds, mutual funds, and other traditional investments) are not great wealth-building vehicles. This is because of the mathematical limitations to their growth.
Consequently, paper assets are better used as a parking place to preserve and grow the purchasing power of wealth that has been made through real estate and business ownership.
To fully understand the power and the importance of this insight that I’m sharing with you, pick up your phone and call a stock broker or financial planner and tell him or her of your desire to achieve financial freedom, and that you need their help to achieve this. Also, let him or her know that you are presently finding it difficult to eat and pay your bills.
After this revelation, watch his attitude and disposition towards you. It will take God for him to pick up your calls again.
This is because stock brokers and financial advisers are in the business of helping you manage the wealth you already created. And are not in the business of helping you build wealth in the first place.
One truth you must embrace is that rich people simply use paper assets to stay rich and not necessarily to create wealth.
In this article, I will open your eyes to some of these mathematical limitations of paper assets as a wealth-building vehicle.
Fundamentally, there are two major variables to every plan:
- The primary income source
- The wealth builder
For every employee, the job is the primary income source. Unfortunately, just saving a part of your salary would never create wealth for you nor would such a strategy position you for financial freedom.
This is because financial freedom is the point where the PASSIVE income from your ASSETS is equal to or greater than your living EXPENSES.
It is simply to have the cash flow coming in every week or month from your investments, whether or not you work.
The Wealth Equation Of An Employee
So as an employee who seeks to build wealth and achieve financial freedom, you would need to leverage your primary income through a wealth builder to create sources of passive income streams.
And for most employees, market investments such as stocks, bonds, mutual funds, and other traditional investments are the way to go.
So the wealth equation of an employee looks like this:
Wealth= Primary Income Source + Wealth Builder
Meaning…….
Wealth = Job + Market Investments
The success of this financial strategy is predicated on the ability of compound interest to turn $X invested in the stock market today into $X million decades (TIME) from now.
So the wealth equation becomes:
Wealth = [Job (Yearly)] + [Compound Interest (Yearly)]
Now pay attention to the word “Yearly” as it relates to your job and compound interest. This means your primary income stream and wealth builder are both measured in TIME.
Your take-home could be daily, weekly, monthly, or yearly; the key thing is that it is tied to TIME. Daily, weekly, monthly, or annually are all units of time.
Unfortunately, you don’t have control over time, and neither can you leverage it.
This time element in the calculation of your take-home is one of the major downsides to earned or active income (income you earn from a job). This is because you don’t have control over time. You also can’t leverage time.
The maximum number of hours you have in a day is 24. You can’t expand or extend it. Unfortunately, you can’t even work the whole 24 hours of the day. Let’s put the maximum number of hours you can work in a day at 12. Even if you earn $500/hour, you still cannot work for 50 hours in one day. In the same vein, you can’t work for 150 years, even if you are earning $200,000/year.
This simply means that time has no leverage. As a result, it can limit or set a ceiling on your take-home per day or year.
Understanding The Weakness Of Paper Assets
Now don’t forget that the focus of this article is on the mathematical limitations of paper assets as a wealth-building vehicle. So let’s look at creating wealth through paper assets.
As already stated, the ability of paper assets to create wealth is predicated on the power of compound interest. But it is important to note that as powerful as the principle of compound interest is, its major downside is that its success is also predicated on TIME.
This has to do with how long you invest; the duration time of your investment is a critical factor in how much your capital compounds. The longer it does the better.
Building wealth through the use of compound interest requires the passing of time and lots of it. Unfortunately, you don’t have control over time.
For example:
Who told you that 40 years from now you will still be alive to witness your $X invested in XYZ stocks appreciate to $5 million?
Who told you that 20 years from now your company will still be in operation?
Who told you that 15 years from now you will be healthy enough to be employed?
This time element in the equation of your wealth is one of the major downsides to this strategy of using paper assets as a vehicle to create wealth. This is because you don’t have control over time.
Apart from the fact that you can’t control time, you can’t also leverage it. The maximum number of years you have to invest is limited. For example, you cannot invest for the next 150 years.
This simply means that time has no leverage, and it is also outside your control. As a result, it can limit or set a ceiling on what your investment grows to become. It’s also important to remember the effect of inflation on what becomes the result of your investment.
This makes paper assets a very weak and unreliable wealth-building vehicle. This is a key limitation to every attempt at building wealth using paper assets as a vehicle.
Also, this financial plan is exposed to failure because it is predicated on the performance of the market, which, unfortunately, you don’t have control over. That the market or your investment will appreciate can never be guaranteed.
Investment advisors, financial planners, and brokers likewise don’t have control over market investments. The truth is that the stock market has lost over 30% and 50% of investment value at different times. Some individuals have had their entire investments wiped out.
This article is to empower and position you to create wealth and achieve financial freedom, and I believe this is your goal for coming to this site. But you must understand that to achieve this goal you must be able to control and maximally leverage the variables of your wealth plan.
When you don’t have control over your financial plan, then, what you have cannot be considered a financial plan but a financial plan of hope. Unfortunately, hope is not a good strategy for wealth building.
Also, every attempt at building wealth without the use of adequate leverage can be very frustrating and futile.
Please understand that an effective wealth-building strategy or plan must have the capacity to attract large sums of money. And to effectively do this, two things are crucial: 1) Control and 2) Leverage.
In conclusion, you need to understand that for your financial or wealth plan to be effective and potent, the variables inherent in the equation must be such that they could be leveraged. Also, you must have control over these variables.
There Is An Escape In Real Estate And Business Ownership
Please know that there are three wealth builders from which you can choose.
1) Paper assets (stocks, bonds, and so forth)
2) Real estate (not your home)
3) Owning your own business
Of these three paths, you have now understood that paper assets (stocks, bonds, mutual funds, and other traditional investments) are not great wealth-building vehicles because of the mathematical limitations to their growth.
And that paper assets are better used as parking places to preserve and grow the purchasing power of wealth that has been made through real estate and business ownership.
This means real estate and businesses can be leveraged, and you can also control their operations.
As a result, using any of these two vehicles as a wealth builder might just be the way to go in your wealth-building journey.
If you would like to have a comprehensive teaching on this topic that would empower and position you to create wealth and live in financial freedom, then this online course, Financial Freedom Blueprint should be your choice.
To Your Prosperity
Sharon Akinoluwa
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