A lot of people judge how rich a person is by their salary and the stuff they have. To them, “rich” means champagne breakfasts on a private yacht, getting your hair done every other day, and wearing fabulous clothes. But all those material things can be an illusion. There are many people who live the high life but aren’t wealthy.
The danger is thinking that having all that cool stuff makes you wealthy. It doesn’t. In fact, the opposite is often true, because you can get yourself into debt living a lifestyle you can’t afford.
The richest people on earth aren’t measured by their income, and that’s because income is actually a bad way to measure how rich you are. Instead, rich people talk about their “net worth” or their “wealth”.
In the finance world, we understand it like this:
Wealth = Total assets － Total debt
To calculate your wealth, you take the valuable stuff you have (total assets) and subtract the money you owe (total debt) from that. So, if you got into a whole lot of debt to buy all your fancy stuff, you aren’t wealthy. You just look it.
On the flip side, if you start out earning a lower salary than your friends, you may actually grow wealthier than them over time, simply by making good financial decisions.
How is being rich different to being wealthy?
You may think of these as being the same things, but for us we see a big difference between looking rich and being wealthy, and the difference is called “financial freedom”.
Often, when people ask how they can get rich, what they’re asking is “How can I just enjoy life without worrying about money?”, or “How can I follow my dreams but still pay the bills?”, or even “How can I have enough money so that I never have to work again?”
What people really want are choices about how to live their lives, and you can only truly make those choices when you’re financially free.
How do I become financially free?
This is a much better question than asking how to get rich, because although true financial freedom won’t happen overnight, it can definitely happen for you if you apply some of the basics. The first, most important, principle is to always spend less than you get paid. No matter how high your salary is, you’ll never grow your wealth if you spend more money than you bring in, because you’ll just have to borrow even more to fund your lifestyle. That’s how people get trapped in a debt cycle, which leads to financial slavery.
The second important principle, is to work on getting good assets (stuff that increases your wealth) and avoiding bad assets (stuff which eats up your wealth). (We talk more about this in the What are assets and how do I get them? article, later in this series.)
Good assets are important, because you need them to earn a passive income(regular cash you earn with little to no effort). And, if you use your passive income to create earn even more passive income, you’ll be growing your wealth exponentially. You might even reach a point where your spending is so much lower than your passive earning that you’ll never have to work again.
Keeping your spending under control can be really hard to do without keeping a budget. Creating – and sticking to – a budget will help you spend less than you get paid. To find out how, check out How do I make and use a budget?.
So, don’t you think it’s time you ditched the idea of getting “rich” and replaced it with the goal of growing your wealth? To shift from a mindset that could keep you enslaved to one with which you might become financially free? We do. Which is why we’re here teaching you how.