The Formula for Riches / The Difference Between Rich and Poor - by Dr. Hannes Dreyer / Chapter 10 / Part 3.
The Second Pillar – The Formula For Riches.
Unless you can apply this formula in any investment or business you will never get the return and results that you want. Unfortunately, I had to discover this formula the hard way – by trial and error, but you do not need to go through this learning curve because here it is!
Where:
$ = The desire to become and remain rich
S = Surplus
G = Growth on your surplus
Ri = Risk involved in the investment or business Re = Responsibility to manage the growth and risk nm = Time and personal effort.
Interpretation of The Formula For Riches.
$ = The Desire to Become and Remain Rich.
The greatest gift which we have been given is the ability to make a decision. Unless you make up your mind that you want to do something, nothing will happen. It begins with an idea. And only if you decide to become happy, successful, or rich will something happen.
The same applies to becoming and staying wealthy. Unless you decide to become wealthy you will not succeed. But a decision alone will not help you achieve your goal. It must take shape in a concrete form.
You must act. You must do.
Most people have no plan or strategy to reach their goals, so no wonder they do not get there.
If you don’t know where you’re going, how can you possibly reach your destination?
The reason why I developed The Formula For Riches is to give you a guideline to help you achieve this specific goal. There is a proviso, however: I cannot help you unless you want to become rich.
If this want or need is strong enough you will do the impossible. For most people, it is impossible to become wealthy. This is backed by statistics.
So what you as a Wealth Creator want to achieve will be impossible for the majority of people.
Once you have made up your mind to become wealthy, you can continue. The only way to become wealthy is to follow the formula and to act. Without action, an idea will stay only that – something in your mind, not in your day-to-day reality. In the Wealth Creation Mentorship Course™ you will learn how to make your wealth creation ideas fly.
S = Surplus.
What is a surplus?
It is excess money you have leftover after you have paid your living expenses. It is money that can help you build your wealth.
There are two kinds of surplus:
Income: If your income is more than your expenses, the difference between the income and expense is an income surplus. Normally people will spend this surplus ... buy a more expensive house or car, and end up stretched to the limit again.
This is what we are encouraged to do as consumers, and it keeps us tied to the bank and our job, and vulnerable to the threat of losing our job. Wealth Creators make their income work for them, not the bank or the credit card company.
Capital: normally when you do not spend the surplus income it will become a capital surplus. In order to become capital, the income must vest in your name or in the name of the financial entity in which you plan to utilize it as a surplus.
Before the income can vest as capital, all taxes must be paid. There are different forms of taxes and the tax laws of the different countries will dictate how much of your income or capital will become or remain capital.
After all applicable taxes have been paid on the surplus income, the remainder becomes capital. By using the appropriate financial structures and entities it is possible to create more surpluses.
The right tax plan makes it possible to create a bigger surplus no matter what country you live in, even if your income and living expenses stay unchanged - because you pay less tax on your total income.
So a surplus has two facets, the first being income and the second capital.
The formula does not state what the nature of the income must be. It can be either capital or income or even a combination of the two.
The formula also does not stipulate how big a surplus you must have in order to launch your personal wealth creation drive. So it could be as little as ZERO or like in my case with the challenge 11 cents.
This contradicts the popular belief that one must have money to make money – and that the more money you have, the more you will make.
As we have seen, this myth serves financial institutions, but it is not the truth. It is not what The Formula For Riches says, as you will see shortly.
What is the function of the surplus?
The first and main reason you need a surplus is to offset the risk which you may have in any business or investment.
The second is to determine the pace of growth. Usually in a business or investment, if you grow too fast in relation to the surplus that you have available, you will grow yourself or your business or investment into a position where changes in market conditions could cause you to lose everything you have built up or created.
By managing the surplus against the growth and risk you will find the optimum pace at which you can grow your investment or venture. Each individual or financial entity has its own optimum growth rate. This growth rate will be governed by the availability of income and capital surplus.
In the wealth challenge, I started with a surplus of only 11 cents. That is all.
You can do the same.
G = Growth (on your surplus).
Unless you can measure how hard your money is working, it is impossible for you to know whether it is working at all ... perhaps it is even working against you. Most people do not know whether their money is working for them because they do not know how to calculate growth on investment.
Most investments are based on emotion. People base the decision to buy cars, houses, insurance policies, and shares on emotion.
For the past six years, I have taught tens of thousands of students how to invest in property. Before the onset of the course, less than one percent of all my students could name a method of calculating the growth and risk on property investment and NONE of those had a proven system to calculate the growth.
The rest bought property based on emotion.
How can you avoid investing based on emotion?
Firstly you must appreciate that no matter what other people do and no matter what you are told, emotion is not a sound basis for investment.
Then you must find a system or program in order to determine the growth of an investment or a business venture. And then you must make your decisions based on this system alone.
Measuring Growth on Surplus (personal investment).
In order to measure an investment growth in an endowment, annuity, 401(k) plan, mutual fund investment, or any fixed contribution saving instrument, one uses the compound interest calculation.
We have discussed this calculation before. It works for the ‘investments’ discussed above, but for many other investments, it is not ideal. The main problem with it is that it cannot handle investments where there are many variables, or many inputs or withdrawals.
The IRR (Internal Rate of Return) is the preferred calculation to use for investments with many variables.
The Property Pro Investment Program™ uses the IRR method, in a very comprehensive way, by which I mean that it incorporates tax and all other variables related to property, making the ultimate result very accurate. It can be used for other investments too.
You can work the IRR out manually, however, you have to do a series of calculations to arrive at an answer. And one of the components of the Formula for Riches, time and effort (nm) can be made infinitely more effective by the well-chosen application of an existing system that someone else has worked out for you.
So you are not only following the formula when you make use of such a system, you are actually turbo-charging it.
This is what computer programs and systems can do for you if they work and if they are proven and if someone else has invested the time, effort, and money in them. Because you save a lot of time and effort and will almost certainly only pay a tiny fraction of the true cost when you buy yourself a licensed copy.
Just make sure that the system you use is proven to work. If you are interested in finding out more about the Property Pro Investment Program™ or the one-day Property Investment Workshop, you are welcome to visit our website;
How do I Calculate the IRR on my Businesses?
I take the financial statements at the end of the financial year.
If I withdrew any money during the year I enter it as a negative value in an Excel spreadsheet. If I did not withdraw any money it will be a zero for the year.
I then take the fair value of the business as the capital (or in the case of my challenge up to now, the cash plus net assets, without goodwill, etc. I am very conservative - I do not use any inflated values).
In my challenge, the investment was 11 cents.
The first year I took out no income or capital.
In the second year I took out no capital or income and the total “cash” includes the value of the properties I bought or developed as part of the challenge at fair market value – which was more than $571,000.
The IRR (average compounded growth per year) over the two years was more than 227, 736%.
Ri = Risk Involved in the Investment or Business
Let’s recap quickly.
What is Risk?
Risk is the chance of losing your capital. It is highly detrimental to investment. Unless you can calculate the risk in any investment or business you cannot make an informed decision as to whether it will be a good or bad investment.
It is impossible to calculate the risk if you accept all the risks and you have no control over it. This sounds like an insanely irresponsible thing to do, but it is exactly what the majority of people do when they give their money to a financial institution to ‘grow’ on their behalf.
By doing this you are breaking The Formula For Riches. And yet this is exactly what all investors in paper assets do all the time. They take all the risks. The financial institutions take none.
This arrangement puts the financial institution in the driving seat because we accept unconditionally what others tell us we should think and do with our money. We do not want to take responsibility for our own financial well-being.
We are too scared, lazy, or simply unaware that it can and should be an option.
The interesting part is that with a conventional ‘investment’ like an endowment or retirement plan, the investor carries all the risk of the investment but has no control and cannot manage it as the financial institution controls the investment. The investor has almost no say in where and how the institution is going to invest, except perhaps for a mandate as to a specific kind of portfolio.
As the most important factor in financial planning is to determine and manage the risk, how can we as investors be so blind and neglect this in our daily planning?
Probably because most investors were raised in an era where they were trained to believe that they have no say. And these days, financial institutions make a great show of their ‘risk profile’ which is supposed to give people a sense of having some kind of input into their investment. The investor completes a questionnaire and the information he supplies is used to advise him on what kind of portfolio will suit him best.
These so-called risk profiles have no substance in my opinion, except to give investors the mistaken belief they have a say in managing their investment risk. This is an illusion. The risk profiles are based on emotion. And they give the investor only a kind of cosmetic or superficial involvement in his investment.
I have witnessed investors classified as conservative investors whose money was invested in a so-called conservative portfolio lose more than people classified as aggressive investors.
The opposite also holds true.
Unless you can measure or determine the risk in an investment or business and have full control in managing the risk, it is best to avoid the investment until you learn how to do so.
The Risk Keeps you Poor.
Remember it is the risk that is going to keep you poor, not the growth.
What would you prefer – an average growth of 60% over a five-year term with a risk of 100%, or an average growth of 20% with no risk?
Let’s look at the two scenarios:
In scenario 1 you get 100% growth on your investment for four years in a row and in the fifth year, you get a minus 100% growth (simply because you lose all of your investment up to that point). If we look at averages you will find that at the end of year five the average growth from a percentage point is 60% (4 X 100% - 100%) But you will have no money left.
We know that ignorance is the biggest risk there is to any investor or business owner.
The financial risk is the loss of capital.
How can an investor eliminate all financial risks - 100% - guaranteed?
By applying The Formula for Riches.
The moment you use a surplus it means you do not need it (by definition). It is that simple. In other words, an investor must decide.
Before he enters into a transaction how much of his surplus he can “afford” to lose. Once the investor has determined that magic figure he should limit the investment amount he is prepared to lose to that amount.
In the challenge, I eliminate the risk to ZERO. Allow me to explain.
Worst case scenario.
I was prepared to “risk” $143 in the challenge because that was all I “had” as a surplus according to the formulation of the challenge. That was the amount that I settled on, that I was prepared to risk.
You have to take responsibility first of all in order to determine the amount of financial risk you are willing to take. Once you determine the worst-case scenario it now becomes your responsibility to manage that risk down.
In other words, what can you do by applying different strategies to lower the risk?
The best strategy I am aware of is to invest in yourself. You must know everything you can about what you want to do and how it is going to work out.
I take the time to find people who can teach me what I need to know. Sometimes I pay a fortune for the knowledge, other times people are happy to share the information with me for free.
I limit my risk in all my business and investment dealing by applying The Formula For Riches.
Before I started with the challenge I asked myself these three questions:
Question 1 - Is it possible to invest less than $143 and turn that into more than $1,500,000 in less than five years?
The answer to the question is “Yes!”. I know this because I have done it before by applying The Formula For Riches. History is full of stories of entrepreneurs and investors who started with less than $100 of their own money and built billion-dollar enterprises.
These enterprises have an investment value.
Question 2 – Can I make it happen? I cannot base my future on what someone else can or cannot do, or on promises they make. The moment I rely on someone else to give me what I want I am breaking.
The Formula For Riches simply because I must take full responsibility to get the maximum growth on my surplus, taking risk into consideration.
I must put in the time and effort to manage the risk down and the growing up.
If someone else – an expert or financial institution – makes decisions on my behalf then I do not have any say in the return they are going to give me. At the same time, I am taking all the risks.
In life, if you want to achieve your goals or PowerGoals™ you must be in a position to determine the outcome. You cannot expect someone else to achieve your goal on your behalf.
The same is true when you invest. It is your investment - you must make it come true because to become rich is your goal.
Question three – Do I have control over it happening? Unless you have control over the investment or the business it will not happen. It is your responsibility to put in the time and effort to lower the risk and increase the growth.
Unless I can answer all three questions in the affirmative I will not proceed to the next stage because I know I am going to break The Formula For Riches.
The next step.
So after I asked these questions, I took the responsibility of applying The Formula For Riches.
I knew the maximum risk which I could take was - $143.
The next thing was to manage the risk down. How can you do that? There are different ways, but let me give you a quick way (if you are willing to think outside the box).
Statistics show that most new businesses fail.
If I invest the whole $143 and what I invested it in does not work – then the challenge would be over. I would lose the $143 as well as my dignity and in the process lead people to think that The Formula For Riches is just another hoax.
So how can I manage the risk down?
If I can find a way to limit my investment (the surplus which I start with) to only $1 it will mean that I will have 143 chances. In other words, I could apply The Formula For Riches to 143 different investments. This gives me a far better chance of beating the new business statistics.
The trick is to manage the risk down. The only risk we have financially is to lose capital.
So how can I lower my risk even more?
I always work on the worst-case scenario in order to determine the risk. In the case of the challenge, the worst-case scenario was $15. That is what it would cost me to set up the financial structure in which I would run the challenge so that auditors could verify the outcome of it.
Because I invested in myself I could do it myself. All I had to pay was the actual stamp duties of the trust.
So the worst-case risk was 10.49% or the $143.
The next step then would be to see if there were other ways to reduce the risk even more.
How can you lower the risk even further?
What if you start with an investment of only 11 cents? If you have $143 but you start with only 11 cents you will have 1300 chances to make it a success.
This is compared with the usual way which is to put all your money into a business – in this case, if I invest the full $143 and I fail the risk would be 100%.
I hope you are still with me because in understanding this basic truth you will discover how powerful the application of The Formula For Riches really is.
The question then is how can you actually do this?
I will try to structure the deal so my risk becomes even smaller. There are several ways to do it and I explain them all in the Wealth Creators Mentoring Course™, but let me show you my approach in a quick and simple way.
What if I go to a friend (or bank or solicitor) and pledge my $143 as security (with interest) and borrow the $15 with interest?
Let’s assume the interest from the time that I borrow the money till the time that I repay the money is 11 cents. What did this investment cost me, in other words, what was my investment?
You’re right, it is 11 cents.
What was the risk? It is $15 plus interest, but was it a risk? No, because I had a $143 surplus to start.
I did what you would call financial structuring to lower my risk and therefore my investment.
Is this how most people go into business?
I hope you’re learning because this is an approach you will not find in a textbook. This approach does not make the banks rich and it does not keep you in your place, as a quiet and well-behaved consumer who never sticks their nose out. This approach frees you. It works. It builds riches!
But it even gets better – let’s go back and look at Responsibility (Re) and why it will exponentially affect your investment.
Re = Responsibility to manage the growth and risk.
It is impossible to manage the risk and growth potential in any investment or business unless you can identify it.
Once you have identified the risk and growth potential of any investment it becomes your responsibility to manage it. No one else can take that responsibility. The moment you give the responsibility away you lose control and in doing so you break The Formula For Riches.
A formula for responsibility is:
E+R=O
Where:
E = Event
R = Response to the event
O = Outcome
In other words, if you do not get the outcome (growth) that you want on the surplus then you can:
a) Change the event (the investment medium); or
b) Change the response to the event (different strategy); or
c) Change both the event and the response.
In short, it boils down to taking action when it is needed to reach your goal. If you do not have control over the management of the investment you cannot apply The Formula For Riches.
With paper assets, you cannot change the response to the event and therefore you cannot take responsibility for the growth of the investment. Someone else (the financial institution) will always control the outcome of the investment.
The only control you have is to decide whether you are going to invest in the first place, or whether you will withdraw an existing investment with a financial institution.
Your responsibility then is to manage the risk down so that it is as small as possible and to manage the growing up so that it is as big as possible, in order to optimize your investment. You can’t do this with paper assets.
You already know how to manage the risk down but how do you manage the growth up?
The quickest way to get the growth up is to manage the risk down!
The answer is so obvious most investors will overlook it.
Let me give you a practical example.
Let’s take the challenge again. If I invested $143 to make let’s say $100,000 in the first year, what was the risk and what was the growth on my investment?
The risk was 100% on the $143 if the investment did not work as planned, as I explained already.
What was the growth of the surplus?
The net profit was $100,000 - $143 = $99,857.
Divide this by the investment and times it with 100 to get the percentage growth on the investment. ($99,857 / $143) * 100 = 69,830%
Mind-boggling growth you would say but there is still the question, how do you get to the $100,000 you need? At this stage don’t worry about it, I will show you how to do it, and I will show you different ways regarding how you too can get incredible growth!
Let’s see how we can manage the risk down.
In the worst-case scenario, the investment would be $15 (in the case of using financial structuring, as I explained earlier). I would still get the $100,000 in the first year – so let’s see how by doing the calculations.
The risk was 10.49% as calculated before on the $143 surplus. ($15/$143 * 100)
Because the risk decreases, the growth will increase.
The net profit was $100,000 - $15 = $99,985.
By lowering my risk to 10.49%, I have increased my growth by 596,737% (666,567% - 69,830%).
So you see that the lower the risk the higher the growth! And do you see also that this means the less money you put in, the better your growth? Which means that the myths “It takes money to make money” and “The higher the risk the higher the reward” are 100% wrong?
I think you may be getting the hang of it, so let’s take it one step further. The assumption is that I know how to get a $100,000 profit in a year.
What if I can structure the deal so it will cost me only 11 cents?
The risk will go down to 0.0769% as explained before. (.11/143 * 100)
Because the risk decreases the growth will increase.
The net profit was $100,000 - $0.11 = $99,999.89.
Divide this by the investment and times it by 100 to get the percentage growth on the investment. ($99,999.89 / $0.11) * 100 = 90,908,991%
So by lowering the risk to 0.0769%, I have increased the growth by 90,839,161% (90,908,991% - 69,830%)
What if I use a paper asset to give me a $100,000 return on my investment?
If you look at conventional investments and you want to get a $100,000 return on your investment, how much must you invest?
You must invest $1,000,000. This is because you can expect to get a 10% return, which is considered to be good (and in fact any figure that beats inflation is considered to be a good investment).
This is the assumption most people make because they have been trained to think this way by the “experts” and their employers, the financial institutions.
Do you understand now why they will never be rich?
So what is the risk? If you said $1,000,000 you are wrong because you had the $143 surplus.
The risk would only be $999,857 which is 99,915,870% higher than on the $143 investment. This is the true price of not taking responsibility!
To make it even simpler – which would you prefer? Would you rather invest 11 cents to make $100,000 - or $1,000,000 to make $100,000?
The next question will be but how do you make the $100,000?
Again if you know how it is simple and easy, if you don’t know (in other words are ignorant) then it is impossible.
I will show you at least two strategies later on in the book which you can follow that will give you at least 1000% growth on your surplus but for now, I will summarize the answer by saying you must apply the Accelerator principle.
What is the Accelerator Principle™?
In my Universal Formula For Riches, I make use of the symbol ‘m’.
n = time.
m = effectiveness.
This symbol stands for effectiveness and it represents a formula within a formula.
m = PTq
where:
P = physical resources (including your specific talents and gifts)
T = technology
q = power of the technology, system, or process you use
m = PTq where P is physical resources, including your specific talents and gifts. ‘T’ stands for technology. The ‘q’ next to the T represents the power of the technology or system you use.
Unless you know how to become extremely effective in what you are doing, it becomes difficult to sustain growth over time. The better the systems you build, the easier it will be to sustain growth over time.
What is the effectiveness factor ‘nm’?
It is the relationship between time and effort. If you are close to retirement or have little time left to reach your goal the only way to achieve wealth creation is with more effort.
So you will have to work harder and more efficiently.
There is a big difference between working hard and being efficient.
I teach my students that they must learn how to enhance the power of PTq.
T = technology (system or process).
The better the system you use, the easier the work usually becomes. At the same time, the power of your system (or technology) will decrease the time needed to complete a task and so increase effectiveness.
To optimize a business or an investment it is vital to discover and develop the optimum application for the PTq formula in a given investment or business.
In any business or investment, it is the lack of adequate effectiveness or efficiency which leads to the ceiling of complexity. The ceiling of complexity is discussed in detail in the Wealth Creators Mentoring Course™.
Effectiveness is the last part of The Formula For Riches. This is the process of optimizing the relationship between time and effort.
Time.
A fact most people ignore is that with Wealth Creation there is no such thing as a quick solution. It takes time and the more effectively you use your time and resources (effort) the more dramatic the results will be.
But people forget or never notice the time successful people spend in preparation. They focus on the results, not the process. Warren Buffet, the world’s greatest investor, has been working diligently for more than 50 years to build his empire. It is important to note it takes time and effort (work).
Most people do not want to wait that long. They do not want to put in the effort and they don’t want to work. In the process, they hop, skip and jump from one investment to another hunting for a quick solution. This costs them money and they lose time.
If you have a surplus and you can identify the risk and growth potential in an investment and you have strategies in place to manage the growth and risk but you do not have enough time, you will not become rich.
It is however sometimes possible to buy time. If you can be more effective, you can increase your results.
Personally, I never forget to ask these three questions before I invest money or time in any venture to ensure I will be able to manage it effectively:
- Is it possible and legal?
- Can I make it happen?
- Can I make it happen?
If the answer to any of these questions is “no” it means I will not be able to manage it and I may lose a lot of time and money or both in the investment or business.
I believe that by asking and answering these questions a Wealth Creator or investor will be able to control and manage the effectiveness factor of the investment or business.
Please note that nowhere in this list of questions does it stipulate that you must be able to do the work yourself. Most people associate work with effectiveness.
This is simply not the case.
In fact, it leads to major mistakes when people who are used to doing the actual work in a company think that they are qualified to run the company as a whole. These are two different things and should not be confused.
By taking and managing the responsibility and by creating systems you can manage a company without doing any physical work yourself.
The saying goes: “He who controls the money makes the rules”. With Wealth Creators this is true. Once you have systems in place to control the cash flow and the people, you are managing your investment or business.
The outcome must be positive.
If you cannot apply the formula (in other words, if you are breaking The Formula For Riches) then you know that the asset type or class will not help you create financial riches.
The biggest difference between a Wealth Creator and an investor is the application of the surplus in The Formula For Riches.
A Wealth Creator must learn how to create a surplus. Unless the business gives the Wealth Creator the ability to generate a surplus, it will never become feasible and sustain the Wealth Creator.
An investor must have a surplus as defined in The Formula For Riches otherwise he cannot become a Wealth Creator. It is interesting to note that you do not need to be a Wealth Creator in order to become extremely rich.
You can create riches by simply following The Formula For Riches strategy. I choose to be a Wealth Creator because it means a life of abundance and fulfillment in all areas – relationships, spiritual health, physical health, finances, making a contribution, etc. It’s your choice too.
You can be an employee and still become rich - on condition that you have a surplus and apply The Formula For Riches to the surplus.
It is also possible to be an entrepreneur and remain poor. The reason is not hard to find.
Unless you learn how to apply The Formula For Riches and learn how to get your money (surplus) to work for you, you will remain an entrepreneur who will have to work for your money.
There are two ways to be an entrepreneur.
- The conventional way. This is where you buy or start a business but you have to keep working for your money. If you are not physically there to do the work the busines stops.
2. The Wealth Creator’s way. This is where you build a passive income without the need to actually work in the business.
The main difference between the conventional entrepreneur and the Wealth Creator is that the conventional entrepreneur is working in the business and the Wealth Creator is working on growing the business.
Unfortunately, many businesses fall in the conventional category where business people become slaves of their business.
A true Wealth Creator must learn how to let the business and his money work for him instead of the other way round.
For more information on the Formula for Riches book;