Are you looking for ways to get your money working for you, instead of you just working hard for your money? American financial guru and self-made millionaire Michael Masterson has a few useful pointers in his book 'Automatic Wealth'. He describes his book as a 'how to' for anyone who has the drive to achieve financial success.
'At first glance, the title 'Automatic Wealth' could indicate a 'get rich quick' approach, though Masterson clarifies what he means with both words:
- Automatic - having the ability to develop independently - without conscious effort.
- Wealth - Masterson defines wealth as a store of something valuable you can enjoy later. In other words, wealth is the amount of money, or other assets such as real estate, shares, etc., you put aside to be used in the future. He does not count your house, your car, or any other key possessions that you wouldn't be willing to get rid of someday in order to earn an income. You are always going to need your house and your car, so you can't really count them as your wealth.
In this book, Masterson outlines a realistic program for achieving financial independence. He describes it as a balanced system that is based on a multi-tiered approach:
- Increasing your income;
- Saving and investing in a combination of real estate, stocks, bonds, and other alternative investments; and
- Using your spare time (and some of your spare money) to start your own business.
Let's take a closer look at areas of the book that Masterson spends most of his time on: increasing your income, controlling (and minimising) your spending, and then prudently investing the surplus funds.
Increasing your income
Increasing your income is easier said than done. However, Masterson identified several ways this can be achieved. It can start from the improved performance at work, which can give you a pay rise or earn you a bonus. Alternatively, you may set up a 'side-line' business. Another option is to make yourself more valuable with formal courses and qualifications.
Regardless of your strategy, the key is to form a good starting point towards building your wealth.
Saving most of that extra money (controlling your spending)
People can increase their income, but this is a mere tool to help you build wealth. This becomes irrelevant if you increase your spending in proportion to your income which is often called lifestyle creep. Making more money is no guarantee of financial success, but the combination of controlled spending and increasing income is a good foundation.
A good illustration of how someone can spend more than they earn, and consequently end up in a lot of debt, is the story of Mike Tyson. During his 20-year career Mike's total income exceeded $400 million, yet in 2004 he was $38 million in debt. Even after taking into account some assets he managed to retain, such as a mansion, cars and jewellery, his personal net worth (value of all assets minus debts) was minus $32 million. The obvious question is, how can someone who made so much money during his career end up in so much debt? Here are some examples of things he spent money on to put him in such a dire position:
- $4.5 million on cars and motorcycles (depreciating assets)
- $3.4 million on clothes and jewellery
- $7.8 million on "personal expenses"
- $140,000 on two white Bengal tigers and $125,000 a year for their trainers
- $2 million on a bathtub for his first wife, actress Robin Givens
- $410,000 on a birthday party
- And much more, but I think you get the idea?
Now, this is an extreme example of someone who made a lot of money and then spent it all. The purpose of this is not to ridicule Mike Tyson, but to alert you to the dangerous temptation of increasing your spending as your earnings increase.
Modest living, including the rejection of modern consumer society, is a key pillar to building wealth. Some examples include buying a used car instead of a new one then saving or investing the difference, or buying the house you would be comfortable living in instead of the flashiest one in the neighbourhood.
Across the developed world, most people live payday to payday. There are several likely reasons for this type of lifestyle: people could be inundated with daily responsibilities of looking after their families; not having a budget or sticking to one; or people may simply be following the old motto of 'keeping up with the Joneses'. In other words, spending money they don't have to buy things they don't need to impress people they don't like. In any case, being smart about your personal finances and controlling expenditure are good starting points for a wealth-building strategy.
Once surplus cash is generated from a combination of increased income and controlled spending, the next step is to apply the principle of smart investing.
Investing your surplus income prudently
So how do we achieve this if we are just starting out, or living payday to payday?
According to Mike Masterson's wealth building strategy, surplus wealth should be invested prudently in the stock market, real estate, and other alternative investments such as a business or a franchise. If invested wisely across these assets, it can provide an individual investor with a steady growth over the long term, and improve their overall financial position, not only in retirement but a lot sooner.