The Wealth Creation Formula

Have you ever wondered how the rich keep getting richer while broke people stay broke and the middle class continues to shrink? This isn’t as mysterious as it may appear when you examine the specific differences in how broke people, the middle class, and the rich spend their money.

Today we talk about The Wealth Creation Formula.

If you missed last week’s episode, be sure to listen to Finding The Drive To Be A Huge Success In Real Estate with Rod Khleif.

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Our show is about creating substantial passive income and creating wealth for the long term. That’s the subject of today’s episode. It’s wealth creation, or more specifically, the wealth creation formula. Have you ever wondered how the rich keep getting richer, while broke people stay broke and the middle class continue to shrink? This isn’t a mystery as it may appear when you examine the specific differences on how broke people, the middle class and the rich spend their money. This is such a simple concept, yet it’s so profound. I believe I finally understood this concept on a train ride with my wife from Rome to Florence, Italy. I had picked up a new book called Rich Dad, Poor Dad by Robert Kiyosaki. Once I started reading it, there was no putting it down. What was made clearer to me at the time is how the rich spend their money. What I’m going to explain to you today is why the rich keep getting richer, the broke keep getting broker and why the middle class remain stressed out.

PREI 54 | Wealth Creation — Wealth Creation:
Cashflow, the money that you bring in. Expenses is money that you spend. Asset is something you own or have equity in.

Before we start, it’s important to understand some common financial terms. The reason is many people misunderstand their real meaning. The terms that you need to be familiar with are the following: Cashflow, which is the money that you bring in. Expenses is the money that you spend. Asset is somewhat of a confusing term because most people are familiar with the traditional definition of an asset, which is something you own or have equity in. However, Robert Kiyosaki introduced us to a new definition of an asset in his Rich Dad series of books. Robert defined an asset as something that pays you, and that’s the definition I’ve adopted and the one that we’ll use here. Liabilities, is defined as those things that cost you money. A typical example is one’s house, which is often viewed as an asset, but it can actually be a liability. Anything that costs you money is a liability, not an asset. If you have a mortgage on your house, it’s an asset to your bank because it pays them every month. However, a house or other property can also be considered an asset under the right circumstances. If that property generates income, like a rental property, and it pays you a positive cashflow every month after all expenses, then it would be considered an asset. Just remember that an asset has to put money in your bank account. Cashflow is the money you make, while expenses is the money you spend.

Let’s take a look at how broke people spend their money. Keep in mind that my definition of a “broke person” are not those that are destitute. I’m referring to that large portion of our society that live paycheck to paycheck and never seem to have any money. In fact, they often have to borrow from Peter to pay Paul, run up credit cards and they find themselves with more month leftover at the end of their money. Broke people purchase what I’m going to call stuff. Those things that people buy that they really don’t need to survive. These are the endless consumer items that clutter up one’s house and their life. Some people may even refer to it as junk. It’s just stuff that really has no value and it just clutters your life. What happens with broke people or a broke person’s cashflow is that money comes in through the income column and then it goes straight back out their expense column to buy their stuff. I’m referring to their personal income statement here.

Money comes in, money goes out and it doesn’t do anything other than disappear, and sometimes as quickly as it comes in. They justify buying all these stuff by claiming that it costs so little. Over the years, it’s all they ever have. The problem is their cashflow never produced or created more cashflow. You see, broke people never really educate themselves on what assets and liabilities are. There is a major lack of financial education and financial literacy in this country. It’s certainly not taught in most schools and I’d actually be very surprised to see it being taught in any K through 12 schools today. Financial education is just as important as any academic or professional education, if not more. Creating wealth isn’t magic or a mystery. It’s a formula. The only reason someone doesn’t create wealth is because they either don’t know the formula or they don’t apply the formula.

Let’s take a look at the middle class. This is the group that society mistakenly thinks is rich, but they’re not. They’re often high five to six figure income earners and many of them appear to be rich, but it’s what they purchase with their money that keeps them prisoners of the middle class. What they typically purchase are liabilities. Remember, the definition of a liability is something that costs money, which means that your money flows through the income column and out the expense column. Common liabilities are items like cars and boats, houses, credit cards and student loan debt. What often happens with the middle class families is they purchase and consume so many liabilities that their expenses are often equal to or more than their current income. That keeps people in the so-called rat race, when they have to keep working just to pay their bills and other financial obligations.

Another issue with broke people and the middle class is that normally, all of their cashflow is dependent on their own personal effort. That means that they have to educate themselves to exchange their time, their knowledge and expertise for someone else’s money. In addition, the money they earn is usually in the highest tax bracket. Take for example a doctor or accountant. They are very knowledgeable and have spent a lot of time and money going to school to get their education. Because of that, people will pay them very well for what knowledge they have on an hourly basis. The problem here is that if a doctor or an accountant isn’t sharing or putting their knowledge to work, then they aren’t making any money. Going out to play golf or play tennis is out of the question often as this just translates to lost income. On the surface, it may look like life is all well and fine, but the reality is that it’s a rollercoaster ride for many people in this category.

Finally, let’s take a look at how the rich people spend their money. In short, rich people acquire assets. Once again, an asset is something that puts money in your pocket. If you want to become rich, then you must buy assets that earn you more money. If you want to look at this as a money cycle, it would look like this: acquire assets that produce cashflow, invest those profits to acquire more assets that produce cashflow, invest those profits to acquire more assets that produce cashflow and so on and so on. Basically, the rich spend their money and acquire assets that produce more money. Some examples of assets that can produce more money include stocks that pay dividends,

bonds and income generating real estate.

Let’s pause for a second. Finish the following sentence for me. Ignorance is _. Most people will reply with, ignorance

is bliss. The fact is, ignorance is expensive. What you don’t know is costing you money. Worse yet, what you don’t know is costing you lost opportunities. Remember, the more you learn, the more you earn. Therefore, education is another asset, if you learn how to do something that produces more money for you and you actually take action on it. A business is another great cash generating asset. Businesses can create cashflow once they’re built. A mature business continues to generate that passive income whether you’re building it or not.

Take this simple example. Let’s say you buy a pinball machine and you put it in a barbershop, then you take the profits from that pinball machine and you go out and buy another pinball machine and put that in a barbershop. That’s how Warren Buffett, one of the top two richest men in America started out. That was his first business. He clearly understood the value of income generating assets. You see the rich are eager to find passive income generating opportunities and investments. Those that continue to pay them month after month and year after year. We see this often with our clients who acquire multiple properties. Their goal is to build up a passive income stream that continues to pay them month after month. Many of them take their income and the equity and multiply it into additional income generating properties. This is how you stack and build your portfolio and your returns.

As long as you’re open-minded, you will find many great opportunities out there. Once you found what makes a good fit for you and your goals, then you must take action. You see knowledge and a plan without proper execution will not get you any further ahead than where you are today. You must pull the trigger and take action.

As a summary, remember that broke people continue to buy stuff, the middle class buy liabilities and the rich acquire assets. Ideally, income generating assets that create passive cashflow. They then take that cashflow and any other profits and reinvest it into additional assets. This has a very powerful multiplier effect and explains how many rich people become richer. That’s the wealth creation formula. It’s rather simple once you know it. Let’s remember how we defined wealth on my recent episode that was about three, four weeks ago, on the difference between being rich and wealthy. If you haven’t listened to that episode, I suggest you do so soon.

Wealth is measured in terms of time, not dollars. Having enough passive income to pay for all you’re living expenses is how we define wealth. The emphasis is on passive income. The one similarity the wealthy of the world have in common is how easy it was for them to succeed financially when they finally understood how wealth creation works. Now, it’s up to you to use it. Obviously, I believe the greatest wealth creating vehicle is rental real estate. Congratulations if you’re already investing in rental properties. If you’re not, then why not? It’s never too late. Get started right away. If you need a little help, then reach out to our team here. We’re here to help you anytime.

One quick update on something we covered several months ago. We had done an episode on the “low down” Memphis investment opportunities. These were effectively what we referred to as $6,000 total out of pocket. When I say six, I’m referring to a range. It’s typically $6,000 to $7,000 total out of pocket. There was such huge demand and a backlog that we had to tell some clients that we were over one year out in delivering on that product. We were not expecting such a massive demand for it. The problem was is that the backlog was actually caused by a lack of capital with our team out in Memphis. I’ve actually been working for weeks trying to resolve that issue. I’ve solved it by bringing in particular hard money lenders that will allow us to continue this program with subtle differences. The biggest difference is that the total out of pocket is now more of a variable than a somewhat fixed amount. Instead of that $6,000 to $7,000 range, usually closer to $6,000, we’re now looking at typically a $7,000 to $9,000 range.

What I’m basically saying is this, your total out of pocket at the end of the day to acquire these three bedroom cashflow generating homes is going to be in the range of $7,000 to $9,000. It could be a little less, it could be a little more, but that’s generally the range. The first three that I’ve seen here this week were in the $8,000 range total out of pocket. Think about that. In the grand scheme of things, that’s a relatively small amount of investment capital to acquire an income producing rental property that you own 100% in decent neighborhoods in the greater Memphis area. We’ve finally loosened up that bottleneck. If this is something of interest to you, contact one of our investment counselors at our office to get more information or you could just submit your request through the contact form on our website and we can set up a time to go over the program with you. It’s rather simple. Like I said, the cashflow and the rate of return are extremely attractive because of the low down.

If you have any questions about real estate investing, I’m happy to hear from you. I get questions from time to time from people who just click the Ask Marco link at the top of the website. By all means, shoot your question over. If I can answer it, I will. If not, I’ll try to cover it on a future episode here where I’m going to just batch some listener questions.

If you haven’t downloaded and read The Ultimate Guide to Passive Real Estate Investing, it’s a free download on our website. Please go there and just get yourself a copy. Remember to subscribe. We love it when you give us a rating and review on iTunes, that certainly helps us spread the word and expose this information that I’m giving you to more listeners. Thank you for listening. I love having you here. We will see on our next episode.