Get Rich Fast or Slow

The rate at which wealth grows is determined by three things: the difference between your income and your outgoings (that is, how much you save), the nature of your assets and the nature of your liabilities.

Saving

Income is a flow of money which can be either spent or saved. Wealth is like a store of money where savings are accumulated. The more you save, the more your wealth should grow.

The nature of your assets

Assets are things of value that you own. Lifestyle assets are those which decrease in value over time, such as your house contents, your car and many other possessions which add to your lifestyle but not your wealth. Investment assets which produce the greatest wealth are those which grow in value and provide income such as bank deposits, shares, rental properties and businesses. By reducing your holdings of lifestyle assets and increasing your holdings of investment assets you should build wealth more quickly. Your family home falls into a third category called lifestyle property. It will add to your wealth less quickly than investment property as it does not produce income.

The nature of your liabilities

Your debts can be categorised along the same lines as your assets according to the purpose of the borrowing, that is, lifestyle debt (for living expenses and lifestyle assets), investment debt (for rental properties or businesses) and lifestyle property debt (the mortgage on your family home). Lifestyle debt is known as bad debt because it is money borrowed to buy things which go down in value or have no lasting value. Investment debt is good debt as long as the net return from the investments purchased is greater than the cost of borrowing.

Building wealth is about saving more, increasing investment assets, reducing lifestyle debt and borrowing to invest.