Disclaimer: Neither Charley nor James are offering financial advice. This is a discussion and opinion only. Please consult a professional financial advisor for your own situation.
Editing note: Charley’s site is now Business & Investing
In the first half of this two-episode series on wealth creation, James Schramko and Charley Valher discussed how to earn more from your business, in order to have something to invest. Now they explore six critical wealth creation concepts that may guide you in your wealth creation journey.
Among these ideas affecting wealth creation are the ever-present factors of inflation and tax.
You’ll discover, too, how different kinds of leverage can be great tools in growing wealth.
Our two entrepreneurs will touch on, as well, the impact of time and of opportunity cost on wealth building efforts.
Beware this mistake of newbie investors
The tendency for many business owners, once they’ve earned some extra, is to jump right into the tactics of wealth building – Bitcoin, shares, property, whatever asset class it might be. What they fail to consider are the concepts behind wealth creation.
Business & Investing’s Charley Valher wants to protect people from the attendant risks of indiscriminate wealth creation investing. To do that, he shares a list of six key concepts to take into account:
6. Opportunity cost
Knowing and respecting these factors that impact wealth building may offer a helpful guide, and save you a world of pain and regret in your bid to be wealthy.
It pays to consider these key concepts…
The first concept has been present from the start of your existence, and you may knowingly or unknowingly have either benefited or suffered losses from it.
Inflation is a huge factor in wealth building. It affects the worth of your assets over time, it affects money in the bank, it affects your prospective cost of living.
What’s interesting, though, is inflation also has a personal aspect. Your lifestyle can determine how much it affects you.
And in any given period where some people are struggling with inflation, there are opportunities for other people to make fortunes.
There are various forms of leverage that you can use in wealth-building, one interesting one being the leverage of debt. If you bought a house, for instance, and took out a mortgage on it, over time the debt on it has devalued.
Leveraging debt in that manner will carry more or less risk, depending on the amount you use and the position you’re in. And while it is done and can be an area for research, it’s not something Charley is recommending.
James likes using leverage. One form in particular he favors is recurring income, both in terms of money earned and returns on investments.
There’s a lot of leverage, too, in higher price points. To make $100K a month, it’s easier to get 10 clients paying $10K each than 10,000 clients paying $10 each.
Another big concept is probably the biggest thing you’ll ever pay in your life – tax.
So far, James hasn’t discovered any tricky way around tax. But he’s sure there are things you can do to pay tax more effectively.
Charley says avoiding taxes isn’t something you should do. What he and James do recommend is getting a good accountant, even multiple accountants or a tax lawyer, if necessary, to guide you.
Different asset classes take different lengths of time before you can capitalize on them. So knowing the best time to invest can make a massive difference on the investment choices you would make.
Are you willing to wait 30 years, or are you looking to retire in the next 24 months? Then there’s compound interest to consider, which can give you exponential returns over a longer period of time.
In his own wealth journey, James is doing what might be considered just seedlings now, but expects oak trees in the future. They’re optional extras, he says, a fallback, because he’s learned that unplanned things can happen any time.
Team is another form of leverage, and it’s not just your business team, but the experts you recruit to advise you.
A good broker versus an average broker makes a huge difference, as does a good accountant versus an indifferent one.
f. Opportunity cost
When you choose to invest in something, you’re choosing not to invest in something else by default. Say, instead of buying a property, you chose to pay off your credit card – if you extrapolate the potential value of the former, that difference is the opportunity cost.
It’s always worth considering the alternative, says James, although sometimes, in hindsight, you can’t possibly know what might have been.
Of course, there’s a limit to what we can do. So when we’re looking at opportunities, we have to analyze and score that opportunity versus other potential opportunities, or versus doing nothing.
This episode’s takeaway that Charley would like for listeners, and business owners in particular, is an appreciation of how hard it is to pick a wealth tactic, if you haven’t taken the six concepts into consideration. These concepts, plus some good advice, might save you from making some costly mistakes.
Missed the first episode of this series? Listen to How to Earn More now
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