What is first Rule of Building Wealth? Spend less than you earn! It sounds so simple but most people don’t do it. That’s why most are not wealthy. If you spend more than what you earn, then you’ll never be able to build wealth. Period. Doesn’t matter how much you make or who you are. Just won’t happen.
Imagine your wealth is water in a container and imagine that your income (including income from employment, investment income, passive income and business income) is poured into this container. At the bottom this container is a faucet. Your money flows out of this container through this faucet. How much water that flows out is up to you.
If you spend carefully, then the water in this container will increase faster. If you spend lavishly, the level will go down. There is no two ways about this rule. Even if you are a multi millionaire, as long as your expenses is less than your income, your money and henceforth your wealth will increase. If your expenses is more than your income, you are eating into your wealth/assets. Your assets could be your savings, capital gain from sale of an asset, like property or a business.
Understanding this rule is easy. Disciplining your self to do it might be difficult if you have not develop the habit to do so. It is easier to spend your future than to invest for your future. Credit cards and personal loans are easily available. When asked about credit card debts, the answer is “usual-lah!” or “biasa-lah”. Folks, it is not normal to have credit card debts. It is okay to be in debt for acquiring assets but that is another topic. When I hear people say it is normal, I cringe, because it is not normal! The only people who tells you it is normal are the people in the same boat as you.
The road to financial ruin starts when you break Rule No 1
The road to financial ruin starts when you break Rule No 1. These are the steps to poverty and slavery to the banks. Once you get into the habit of spending more than what you earn, you started to dig a hole for yourself. It is very easy to just pay the minimal sum on your credit cards each month when you can’t pay. The just born a monster called the debt monster. At the moment, the debt monster is small. Every month you don’t pay off the credit card debt, you are feeding the debt monster and it is growing. Once your credit card is almost busted, the temporary savior come in the form of a personal loan. After all, it makes sense to pay less interest to the banks. You thought that you have it under control. But actually what happened is the debt monster metamorphosised to another being. You thought you’ve managed to kill the debt monster but it is just hiding, waiting for an opportunity to come back. At this stage, you can kill the debt monster quite easily. However since you thought you’ve gotten control of your spending, you decided to reward yourself with something nice, that you couldn’t actually afford. You still have your all your earlier purchases to settle.
And since Chong at the office with the same salary can afford nice cloths and a nice car, I think I can afford to buy myself something nice. After all, I’ve worked hard all month and I don’t want my buddies to think I’m cheap. So you splurge on something nice with your credit card. By the time the statement come, cannot pay since, you had to take care of some unexpected bills at home. Never mind, I can pay it next month.
Debt monster just reared it head again.
Debt monster just reared it head again. But the next month came by and another unexpected thing happened. Next thing you do is tell yourself it is ok. You I’ll just wait for your bonus to come and settle the whole debt and be done with it forever. By the time your bonus comes, there are 2 roads you can take. If you settle the whole sum, congratulations to you. For some, the whole bonus can’t settle the full sum. But, you’ve already developed the habit to spend more than earn. That’ll take a lot to change. For the majority, since you managed the escape the debt monster once, you think you can do the same the next time round. You have become immune to having consumer debt around you and that is the real danger.
Malaysia, we have a problem! If we don’t, why does AKPK exist? We have a problem and it is growing by the day. But this problem can be solved. In life there are many solutions to problems. There are many ways to solve credit card debts.
First things first, if you are not in credit card debt, then don’t get into debt. If you are already in debt, you have to follow rule no 1 of building wealth. Whatever you do, the most important thing now is to get out. The first thing to do when you are in a hole is to ……….. stop digging. Getting out of debt is the easy part. There are many ways to do it. Making sure you don’t end up in the same hole the next time, that is the difficult part.