Wealth Generation Milestones
Most social media wealth advice is context dependent
Hi there, today I want to write about the journey of wealth generation. I’ve been wanting to write something like this for a long time now, but I’ve been waiting for my wealth to catch up a bit so I can speak with at least a minimum of authority and experience.
Truth be told, I believe that the journey towards wealth creation has the same milestones for everyone and are easily observable.
There is no need to achieve all these milestones to understand them. They are easy to understand. Not so easy to achieve.
What changes and is unique to each person is the journey made to achieve each milestone, not the milestones themselves.
These milestones towards wealth generation are the following:
Note: it is assumed that you make more money each month than you spend. If you spend more than you make, the first step would be to correct that.
If you have no job, get one.
If you have a job and still make less than what you spend, cut off unnecessary costs. To be honest, you are in a bad situation and I do not envy you. Work to overcome it.
That being said, and assuming you got the above covered, lets go through each milestone in the wealth generation journey.
Financial Buffer and Financial Safety
Both these milestones depend on how much savings, cash or liquid assets you own to pay for essentials. And for how long.
Essentials are those costs that we all pay by the mere act of living: food, rent, utilities, etc.
If you have enough savings, cash or liquid assets to pay for essentials for three months, you’ve achieved financial buffer. If you have enough for a whole year, you’ve achieved financial safety.
The route to these two milestones is the same one for 99.999999% of people: having a job and saving money.
Both act as a safety net for all those economic emergencies that life throws at us: getting fired, having an accident, medical bills if you’re American, etc.
Even with all the advice out there that holding cash is a poor decision due to opportunity cost or depreciation due to inflation, having some form of liquid assets enough to serve as a safety net is essential.
Many instances which leads people to ruin could be mitigated with a minimum safety net.
While both milestones can be achieved with a job, the next milestones cannot. Enter assets.
For the purpose of this email, the information regarding assets will be simplified. There are more nuances to it, but as I’m trying to paint an overview of the wealth generation journey, simplicity is key.
An asset, according to Investopedia, is “something with present or future value owned by an individual”. Examples of assets are cash, stocks, crypto, real estate, business, government bonds, jewelry, etc.
Basically, anything you can own and which has some form of value. Depending on how the value is generated, and with the idea of keeping it simple, assets can be divided into two kinds:
Assets whose value appreciates over time
Assets that generate cashflow
Assets where the value is tied to their price are stocks, crypto, real estate (when buying & selling), jewelry, etc. These are the assets whose purpose are to be bought at a certain price and with the idea to sell at a higher price in the future.
Assets which generate cashflow are businesses, stock dividends, renting properties, crypto when staked, lending money, etc. These are assets that generate some form of income monthly, yearly, etc.
Note: the two categories aren’t mutually exclusive. As noted, real estate can appreciate in value while also generating cashflow, the same for dividend stocks and crypto, for example.
How you choose which assets to own is entirely up to you, and I assume it depends to each person’s personality, expertise and investor psychology.
Assets have many more categories and differentiations according to liquidity, taxation, classes, etc. If you wish to learn more, let me know if you enjoy this email so I can write more.
Going back to our wealth generation journey, these next milestones necessarily need assets to be achieved.
Financial Independence, Financial Freedom and Financial Abundance
Financial independence is probably the most known out of them all, as it is used as a marketing buzzword. Due to its popularity, it can mean that everyone uses the term for a different purpose.
For this email, financial independence means that the income your assets make can cover your expenses and liabilities.
If you exclusively own assets which appreciate in value, they’ve reached the point where you can take out some profits to pay for expenses and still have enough assets for it to grow for the next time you want to take profits.
If you exclusively own cash flow generating assets, the cash flow has reached a point where it is enough to pay for all your expenses and liabilities.
Financial independence is a goal many of us have in life, and one we actively work towards. Simply put, there is no way to reach this milestone with just a job. You might be able to put your savings to work and invest them, but you don’t have 100 years to live for your initial capital to multiply enough to anything meaningful.
Of course you could just inherit a large amount of money and assets ad live and start way ahead from everyone, but as of the year 2021 you still cannot choose your parents at birth.
For those of us who have to work hard to build our wealth, the most likely the way to achieve financial independence is via business.
Go through the Forbes-Top-Whatever list, take out those who inherited their wealth and everyone on the list got there via business.
Compound interest is great, but ain’t nobody achieving financial independence by investing their savings at 20 years old and waiting 40 years for it to grow to anything important…
Speaking of appearing on Forbes, the next milestone to achieve is financial freedom. Financial freedom occurs when the income generated by our assets not only pays for essentials and liabilities, but also for our ideal lifestyle.
I assume that this is the true goal when people say they wish to achieve financial independence: an ideal lifestyle maintained by your investments, business and assets. One where you can live with almost zero worry.
Last but not least, financial abundance. Here is where the whole “FU money” appears. Where your assets generate so much income you can live a rich life without any worry.
I won’t be expanding much more on financial freedom and abundance because most of us are not even close to achieving them yet. We’re all online trying to achieve wealth, but most social media advice depends on context which often isn’t given.
Common social media advice on wealth generation
The main goal of this email is to illustrate a sort of wealth generation path with milestones to achieve, so that we can all practice some self-awareness and understand where our current point on the journey is.
A lot of advice on social media regarding wealth generation is context dependent. Advice like “don’t cut your costs, up your income” is good or bad advice depending on where the person is.
If you’re at square zero where your costs exceed your income, you most certainly need to cut on unnecessary costs. If you’ve already cut out all unnecessary costs and you can’t save much, you do need to up your income.
Advice like “leave your 9-5 to start a business, nobody got rich off a 9-5” is also context dependent.
If you have financial safety with a good year’s worth of essentials covered by your cash or liquid assets and a side hustle which can’t scale anymore unless you give it your full attention, it is great advice.
If you have no safety net in place, leaving your 9-5 to “be against the wall so I can shine and build my business out of necessity” is incredibly stupid.
Lately, advice like “don’t hold cash as savings, it depreciates due to inflation” is very popular due to the crypto and the stock bullruns that are currently present.
Again, this is good advice if the person has enough of a buffer and is looking to invest in something. Terrible advice if a person is throwing all his or her savings into assets with an extreme volatility.
While “you don’t lose unless you sell” is true, many times you do not get to choose when to sell.
Most social media advice regarding wealth generation isn’t good or bad per se, it is just dependent on where you currently are on your journey. There are certain milestones that can be achieved with a job, mainly the ones regarding how much time you can buy with your savings, but the rest need to be achieved with assets.
If this email helps you in gaining some perspective and taught you something, let me know!
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