Generate Income

Increasing your income is often seen as the way to having more money. While this can be true an increase in income for many people does not solve their problems. I am sure you know someone that earns over $100,000 per year and they say it is really hard to save on their income. Often what happens is as their income increases their expenses also increase. It is of no advantage to earn $1 million dollars a year if you are spending $2 million.

The best way to increase your income is to generate multiple streams of income, or to have money coming in from lots of different areas. Then if one of your income streams stops for any reason you still have other income to rely on. Many households however have one source of income and that is their job. If something was to happen to this income stream then this can create financial difficulties. Wealthy people do not rely on income from one area as a successful business does not rely on income from selling only one product. Start investing into shares, property or cash to increase your sources of income.

Manage Expenses

While focusing on increasing your income it is also important to manage your expenses. There is a very simple rule for creating wealth. Spend less than you earn and invest the rest. This is easy to say but not so easy to do. If you had 10 minutes to calculate how much you earned last year it is very likely that you could do this very accurately. However if you were given 10 minutes to calculate how much you spent last year then many people would be unable to do this and very few would be able to accurately record their spending. How do you know if you are spending more than you are earning? If you don’t how do you know if you are getting wealthier or poorer. Keeping track of where your money goes is an important part of wealth creation. For more background reading there is a great book called the Richest Man in Babylon which details the process of accumulating wealth.

What is the biggest expense that you will face in your lifetime? Many people respond that it is their house, their children or their partner. All of these are expensive items but not the biggest expense that people will face. The biggest expense that most people in the developed world are subject to is tax. If you are paying the highest tax rate in Australia then almost half of your money disappears before you see a cent of that income. That is before you pay GST, petrol or alcohol taxes. Tax is by far the largest expense that you will face during your lifetime. It is important that you spend time focusing on reducing your tax. Many people will drive across town to save one cent on their petrol, or visit many different supermarkets to save a few dollars on groceries. If they spent as much time focusing on reducing their tax then they would be in a much better financial position than saving a few dollars here or there. We will take a look at different structures that you can invest in to minimise your tax.

Maintain and Increase your Assets

The goal of a person looking to create wealth is to increase their assets so they can generate an income off their assets. The starting point is to recognise what is an asset. The true definition of an asset is that it puts money into your pocket. Anything that takes money out of your pocket is considered to be a liability. Many of the things that people consider to be assets are in fact liabilities as they cost them money.

Assets can be classified into two categories lifestyle assets and investment assets. The car the house and the boat are all lifestyle assets, while rental property, shares and cash are considered investment assets. The middle class make a critical error when they aim to achieve wealth. They strive to have the nice house, the nice car and the nice boat that the wealthy have, but miss a critical link on the path to creating wealth. They get a high paying job and buy the house, the boat and the car that the wealthy drive. The link that they missed was the wealthy person bought investment assets to pay for the house, the boat and the car. They did not buy them out of their salary.