The year 2008 marked a pivotal moment for many Americans. When the financial crisis hit, the public struggled to grasp what had just occurred. While an extreme situation, the event highlighted how little most people understand economics and wealth building. Contrary to popular belief, a good job and a degree do not guarantee riches. In fact, our current financial system makes it very difficult for the average person to become truly wealthy. However, by acquiring assets and learning to capitalize on them, you can break free from the shackles of the traditional employee mindset and achieve financial freedom.
Why the Middle Class is Disappearing
The saying “the poor get poorer and the rich get richer” has never rung more true than it does today. Regular working people constantly lose wealth because of the way our system operates. One of the main wealth destroyers is inflation. Inflation{keyword} causes the money you work hard for to become less valuable over time. To make matters worse, inflation encourages people to save more. But increased savings contributes to further inflation, creating a vicious cycle.
Banks are a major driver of inflation. Before the 2007 financial crisis, banks were allowed to lend out $34 for every $1 deposited. When banks lend out money that did not previously exist, the money supply expands, leading to inflation. This makes everyday items more expensive, and your existing money buys less.
Another poverty creator is bank bailouts. Bailout funds come from taxpayer money. So working individuals foot the bill when banks engage in excessively risky lending practices, then require government assistance to stay solvent. Between inflation and bailouts, the system steadily siphons wealth away from the middle class. Statistics demonstrate this stark reality. In 1970, 50.3% of Americans earned a middle class income. By 2010, that number plummeted to just 42.2%.
Challenging Traditional Notions of Wealth
Perspectives on wealth building vary greatly. However, most agree that becoming rich is a widely held goal. Unfortunately, the education system does not provide the financial knowledge required for wealth creation. Instead, schools prepare students to become employees and taxpayers.
Many presume a quality education guarantees increased earnings and wealth. But simply earning degrees does not translate to riches. You can hold multiple master’s degrees and still find yourself unemployed, buried in student loan debt, and financially insecure.
Certainly, being a diligent employee and taxpayer is noble. But those qualities alone will not make you wealthy. Traditional schools do not teach the concepts required to profitably manage money. This educational deficiency leaves generations vulnerable when financial disasters like the 2007 crisis occur. With proper financial literacy training, individuals may have recognized the impending derivatives market crash and prepared accordingly.
Other persistent money myths further highlight the need for financial education. Some vilify the rich, insisting they intentionally create poverty. While greed certainly motivates some, many wealthy individuals help others prosper. For example, John D. Rockefeller became extremely rich by selling affordable gasoline, greatly improving the lives of working-class Americans.
Assessing Your Finances – Income vs. Assets
When determining someone’s financial standing, income and net worth numbers don’t tell the whole story. You can earn a high salary and still be poor. Likewise, individuals with modest incomes can be wealthy. True wealth stems from assets that provide passive income, not the size of your paycheck.
To accurately evaluate your finances, you need an income statement documenting earnings and expenses. You also need a balance sheet detailing assets and liabilities. As an example:
- You earn $110,000 monthly from your job
- You collect $1,000 in rent from an apartment you own
- Your monthly mortgage payment is $2,000
- You lease a Ferrari for $1,000 per month
Many would assume all those are assets boosting your net worth. But in reality, only the rental apartment is an asset. The others actually cost you money or require active work.
The Four Asset Classes – Your Path to Wealth
After reviewing your financials, shift focus to acquiring assets. The four primary asset classes are:
- Businesses
- Real estate
- Paper assets (stocks, bonds, etc.)
- Commodities (precious metals, oil, etc.)
Choose the asset class aligning with your interests. You’ll achieve greater success investing in areas you care about.
Remember, gathering assets is the first step to building your wealthy future. But how exactly do you obtain those assets?
Dropping the Employee Mindset
If you want financial freedom, you must abandon traditional employee thinking. Regular jobs – even high paying ones – will not make you rich because the system is designed that way.
To become truly wealthy, get into business ownership or professional investing. You won’t succeed in those areas without proper education. Learn the skills of an entrepreneur.
Unlike the self-employed, entrepreneurs take a generalist approach, overseeing diverse business functions while delegating specialized tasks. When launching a venture, they handle everything from product development to team leadership.
Strive to foster cooperation instead of competition within your team. The employee mentality teaches that you must compete against co-workers to get ahead. But skilled entrepreneurs know how to unite groups behind shared objectives.
Intelligence in the Real World
In school, strong memorization and academic performance get you labeled as intelligent. But different abilities drive real-world success.
For entrepreneurs, intelligence means effectively managing risks and losses, learning from failures, and remaining level-headed. They build businesses utilizing practical skills far more applicable than remembering historic facts.
How do you obtain those critical skills? Learn from coaches, friends, and expert-led courses. Improve through hands-on practice – experience sticks better than information memorized for tests. In the real world, mistakes provide invaluable lessons that prevent future errors.
Using Debt as a Tool
Conventional wisdom states you should avoid debt, work hard, and save to buy assets. But for entrepreneurs, debt can be a powerful asset creation tool.
Most believe working harder earns more money. In reality, increased earnings often push you into higher tax brackets where you take home less money. Using debt prudently allows you to accomplish more with less effort.
Consider a musician who transitions from only playing live to selling albums. He now shares his music with more people while performing less. Likewise, properly leveraged debt helps you achieve goals not otherwise possible by saving income alone.
Escape the Wealth-Destroying System
In summary, our current monetary system subtly drains wealth through inflation and bailouts. Meanwhile, traditional education deprives you of financial knowledge needed to thrive.
To build wealth, understand which asset class best fits you. Research appropriate strategies and acquire assets leveraging debt. Chart your path to the lifestyle you desire and financial freedom.