Stock Market Myths

Walking the Talk

Money In One Basket

A Better Investment

Winning Some and Losing None

2010: The Year That Was Meant to Be

If you want to build your wealth, but find many personal finance books to be boring and intimidating, the following simple concepts will be of use. See, finance books usually go into great detail about setting your financial goals, budgeting, etc. — but they don’t tell you the big picture in a simple and concise way.

Wealth building has 4 basic ingredients:

• Income
• Expenses
• Assets
• Liabilities

You can put them into 2 groups:

1. Wealth builders = Income and Assets
2. Wealth depleters = Expenses and Liabilities

Definitions of the 4 basic ingredients

Income: This is the money that comes into your household and there are many sources:

• Your job (as an employee or a self-employed person)
• Your business
• Realized income generated by your assets (money working for you!)

Expenses: This is the money your household spends because of needs (necessities), or wants (discretionaries).

• Necessities – e.g., food, shelter, clothing, taxes, transportation, etc.
• Discretionary expenses — e.g., hobbies, entertainments, luxury items, etc.

Note that necessities can become discretionary expenses — for example, eating out at an expensive restaurant to satisfy your need for food, instead of buying groceries to cook at home.

However, some discretionary expenses are essential to maintain happy and healthy life; especially for married couples. So don’t overdo it.

Assets

This is everything you own that has cash value. There are many types of assets, and their values can appreciate or depreciate. Good assets not only appreciate in value, but also add to your income — usually as interests and dividends. Some examples of assets are:

• Savings – saving accounts, money market accounts, CDs, etc.
• Investments – stocks, mutual funds, ETFs, options, etc.
• Fixed Income Investments – bills, notes, bonds, etc.
• Businesses
• Intangibles – patents, license agreements, intellectual properties, brand names, trademarks, etc.
• Materials of value — your house, cars, jewelries, collectibles, etc.

Liabilities

This is everything that you are indebted to other people. Just like assets, there are also good liabilities and bad liabilities:

• Good liabilities give you leverage — e.g., home mortgage, student loans, business loans, etc.
• Bad liabilities put you at a disadvantage — e.g., consumer loans, credit cards debt, etc.

Likewise, good liabilities can turn bad. For example, a mortgage that is too large.

Wealth Building

Once you understand the basic ingredients, building wealth is a simple matter of increasing your Builders (Income and Assets) and decreasing your Bleeders (Expenses and Liabilities) . This sounds simple; however, it takes a lot of discipline and effort to build wealth.