Wealth Creation: What They Don't Teach You At School

Go to school, get an education so that you can get a stable job, pay into your pension, retire - That is how it goes doesn't it?

At least that is the way our education system has been programmed - to create employees who will go to work to earn a salary, pay their taxes and bills and, more often than not, have very little by way of savings and investments due to spending money accumulating Liabilities instead of Assets (more on this shortly!).

Is being an employee a bad thing?

Of course not. Without the work force businesses would not survive or thrive; innovation would be stifled; investment into infrastructure would be limited due to tax revenue reduction. The country (and world economy) would be in a difficult place.

However! Educating ourselves on how best to utilise our income to create wealth as opposed to living pay-check to pay-check is something that has fascinated me for a long time and it all comes down to understanding Assets, Liabilities and Cashflow. As an Accountant I am extremely familiar with those terms in a technical sense but I appreciate some readers may not fully understand what we mean by them so let's break them down.

Assets & Liabilities

To understand what an Asset or a Liability is from a personal finance perspective you first have to workout the direction of Cashflow. Is the money moving into your bank account or out of your bank account as a result of owning the Asset/Liability?

Assets put money into your pocket.

Liabilities take money out of your pocket.

So if you want to create wealth all you need to do is buy Assets - simple!

However, most people receive their salary, use it to acquire Liabilities (and other quick fixes) that then result in money being taken out of their pockets, which means they have to wait for next month to do it all again - it is a vicious circle and one that 95% of people do repeatedly until they retire...or die.

Some examples of Asset and Liabilities:

So, based on the definitions above we can start to think about what Assets and Liabilities we have in our lives.

Many people see their home as an Asset. However, with your home, which direction is the money going? We have a mortgage, utility bills, council tax (in the UK), insurance, and maintenance costs. All of these items result in money leaving your pocket. In fact, unless you rent out space in your home, the property is a liability! (Shock!). The same goes for your car (insurance, fuel, road tax, servicing, the list goes on).

Now, I'm not saying having a car or a house is bad thing - of course not. A car enables you to get to places you need to be and a house provides the basic physiological need - shelter. However, there are many other items individuals buy and think that they are adding Assets to their ownership when in fact they are Liabilities. You can easily identify them by asking the question: Does owning this result in positive or negative cashflow?

Delayed Gratification

Another skill to master in the pursuit of creating wealth is a concept referred to as Delayed Gratification - are you willing to sacrifice a current want for something better in the future?

In the current age of social media and instant gratification, it is easy to be swayed by what we see online and then want this - whether it is a fancy car, designer clothes, regular holidays to exotic climes (pre-COVID anyway).

I read an interesting fact recently that mentioned that if at the time Apple had released the very first iPod (in 2001), you had invested the equivalent of its price ($399) into Apple shares you would be sat on an investment that would have appreciated to $58,000 - a 14,500% increase, and a princely sum to use how you saw fit.

Instead that iPod will have probably been replaced by another one, and then another, and then an iPhone as technological obsolescence kicked in.

Delayed gratification is such a powerful tool yet it is under-utilised once we grow old enough to make our decisions. We all remember our parents saying "you can have one sweet now, or you can have the whole packet if you wait until we're home" (or something similar).

So why is it that we don't play the long game? Why do we want something now when we can actually have something much better in the future? Now, I'm not saying that we should never treat ourselves every now and then - Got a new job that pays better? Treat yourself! Aced that exam? Go on a little shopping spree! Having little treats are what keep us going so we should never be discouraged. HOWEVER, everything in moderation - and always have one eye on the future.

Creating Passive Income

So where is all of this leading? Well, for me, this is about setting myself and my loved ones up for a future where we don't need to work until we reach retirement age. It is about not worrying about earning an income through a salary. It is not about working for money. It is not about the so-called 'rat race'.

My aim is to create multiple streams of passive income - Income that is generated whether or not I am working. Income that is generated through Assets working for me where I don't need to be at my desk. Income that is generated whilst I sleep, or I take half the year off to travel the world.

As the greatest investor of modern times - Warren Buffett - says:

"If you don't find a way to make money while you sleep, you will work until you die."

Now don't get me wrong but we have a finite amount of time in this world - do we want to spend most of it working to the bone? I certainly don't. There is an incredible world out there that I want to explore without having to worry about not being paid a salary.

So, how is it done?

I will go into more detail around budgeting in my next article but for now all you need to know is the following:

• Accumulate Assets: Investment property, shares, businesses.
• Minimise Liabilities: e.g. Is the latest iPhone necessary? Do you really need that new coat you saw a celebrity wear on Instagram? Are you overpaying on your household bills? Do you have the most efficient mortgage?

The Assets will work for you to generate cashflow. The key is to then take that cashflow and reinvest some or all of it and let the power of Compounding take effect.

I think this year has taught us many things. One thing that we can all take away from it is the importance of not relying on a single source of income through employment - because if that income stream disappears or is dramatically reduced (redundancy, furlough, ill health) then we leave ourselves in a precarious position.

So, go to school, get an education so that you can get a stable job. At the same time educate yourself on how to create wealth. Then use this income to invest in cash-flowing Assets.

Then live your life with freedom!