by Jim Stovall
If you were to ask any segment of our population what they believed it would take for them to be wealthy, the vast majority would give the simple answer, “Money.”
Making, earning, or being given more money does not make you wealthy. Wealth is the accumulation of money. I have encountered many people through my work in the area of financial education who make over $1 million in income and have little or no net worth. Some of these million dollar earners actually have a negative net worth.
Building wealth, at some point, becomes a matter of spending less than you earn. Recent financial studies in the professional sports industry reveal that by the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress, and 60% of former NBA players have gone broke within five years of retirement.
Most sports fans and observers of professional athletes mistakenly assume that professional football players or basketball players have it made financially. They assume these ball players are instantly made wealthy for the rest of their lives. Once again, we have to remember that wealth is a process of spending less than you bring in, and accumulating money so that your money can earn more money. This compounding is what creates permanent wealth and passive income.
If you make $1 million a year and spend $2 million a year, or like some of the athletes cited above who make $10 million a year and spend $15 million a year, you are not as wealthy as someone who earns a modest income but habitually saves and invests 15% or 20% of their monthly cash flow.
Wealth is not a function of what you earn. It’s a function of what you do with what you earn.
If you don’t understand these principles, like many pro athletes, a high income will only serve as a counterproductive financial tool to leverage you into more debt and obligations. If we took all the money in the world and divided it up equally among the population, within a few short years, those who are wealthy today would be wealthy again, and those who are in debt today would find themselves in financial distress once again.
Income is not the key to wealth. Knowledge is the key to wealth. But that knowledge will only generate permanent net worth for you when it is applied in the form of wisdom. Most people realize that they’ve got to save and invest to accumulate wealth; however, for a myriad of reasons, they don’t do it.
We don’t fail because we don’t know what to do. We fail because we don’t do what we know.
Someone who knows and understands a financial principle but fails to apply it is no better off than someone who remains ignorant of the financial formula or concept in the first place.
As you go through your day today, commit to learning, understanding, and applying the financial concepts that will turn your income into wealth.
Today’s the day!