192. You don’t get wealthy on income (Building Finance Intuition Series)
#MakingBetterDecisions, #Goals, #focusonwhatmatters, #Wealth, #Careers
“You’re never going to get rich renting out your time.” — Naval Ravikant
Few of the richest people in the world are Elon Musk, Jeff Bezos, Mark Zuckerburg etc from the US and Mukesh Ambani, Carlos Slim, etc are a couple of long-standing names from outside of the US. I don’t think anyone from this list really became wealthy on income. But then these are extreme cases of wealth – hard for most people to relate (certainly I can’t) to such astronomical levels of wealth. But when I tried to think of folks within my extended social/professional circles, the few folks who seem to have made it in life (financially speaking) do not seem to have done it on income too. Sure, a good number of these folks made excellent income during their careers but their wealth certainly seems disproportionally large with respect to their incomes.
“It is not the man who has too little, but the man who craves more, that is poor.” — Seneca
To be sure, this blog is not about being rich vs being wealthy. I think of all financially independent people to be wealthy i.e., those who do not have to expend efforts to make money in order to live what they consider to be a materially comfortable life. With this definition, being wealthy need not be a monopoly of the world’s richest folks. It is my belief that most people who are educated enough to read this article have a real chance at becoming wealthy. But it is almost impossible to become wealthy on income alone. Higher income surely increases the potential to become wealthy but for this potential to have any real chance at getting realized, one will have to necessarily generate capital from this income and then invest this capital wisely. Income is probably the most important precondition to become wealthy but by itself, it does not guarantee wealth creation.
One determinant of income is the amount of your time you can rent out. We all have only twenty-four hours in a day. Once you account for sleep, commute, social activities etc, you will be able to spare only about ten hours a day on a sustained basis. Clearly, income is a limited leverage activity.
“Money often costs too much.” ― Ralph Waldo Emerson
So, growing income essentially boils down to growing your value per hour. This means either you keep increasing your expertise level or your accountability/ownership/responsibility level. Either of these is not easy. Increasing expertise requires a constant learning mindset. Increasing ownership requires deftly influencing other people. Sustaining either is not easy. It requires ambition and compromise in other aspects of life. Not many can sustain this for a long time.
Income is not just low leverage activity but for most people, their value per hour hits a ceiling soon enough for various reasons like demanding family obligations, limited innate risk-taking ability, health issues (diabetes-2 and blood pressure are increasingly common), personal competence etc.
So, how to get wealthy? By investing wisely.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger
Capital comes from the savings from your income. So, income backstops your wealth creation journey. One will have to generate savings from their income. Then these savings will have to channeled into right kinds of investments. And this process should be repeated regularly, probably in cadence with the timing of your income flows.
This sounds simple because this is simple. However simple rarely means easy.
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What makes this hard?
“No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.” ― Morgan Housel
Life style creep is a real feature of many lives. As income increases, our desires increase; our sense of entitlement also increases. We may want to live in a bigger house and we may feel that we deserve a bigger car and probably more exotic vacations too. We may want to send our children to international schools or universities. It increasingly becomes difficult to translate the increase in income to increase in savings. This increases the size of required retirement corpus and at the same time reduces your ability to create it.
When it comes to investments, higher the return on them, higher your eventual wealth. However, investments not done wisely may significantly dent the size of the eventual corpus. Many reasons come in the way of wise investments: not realizing the significance of investing, investing randomly, getting lured into speculative investments, belief that thinking or talking about money is beneath oneself etc. Wise investments typically lead to wealth but only after a long period of investing. This means investing should start early and one will have to be patient for a long period – both very hard things to do.
Bottomline
“If you don't find a way to make money while you sleep, you will work until you die.” ― Warren Buffett
The anatomy of wealth creation is rather simple. You work hard to get income which will lead to savings which in turn becomes your seed capital. You invest this capital wisely which eventually creates wealth. Income provides capital and investment multiplies it - wealth requires multiplication. Focusing on growing income is critical to creating wealth but it is just a necessary condition. The real grunt work of wealth creation is shouldered by your investments. Income is created by the amount of effort you put in – an inherently limited activity. Wealth is created by taking suitably calculated risks with your capital – with potentially uncapped upside. Focusing on growing income is important but ensuring that capital is allocated to risk suitably is even more important for wealth creation. Income creation is a labour and time intensive activity. Investing is a thought intensive activity – it does not entail much time; it just takes diligence and basic wisdom. Are you getting wise and being diligent? Something to ponder on as you get into the “introspective” holiday session ahead.
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