- Personal Finance»
- Income & Making Money
What You Need to Know to Become Wealthy
The 3 Financial Concepts Everyone Must Know and Understand in Order to Gain Wealth
Due to financial recessions, unemployment and inflation, most people find it difficult to gain wealth and become financially prosperous. In fact, in the recent financial recession, more people lost their homes and became financially devastated than ever before. The US economic situation has changed dramatically, and the changes are here to stay. Luckily, there are some very powerful cashflow techniques that you can use to benefit from all these economic recessions. In this article, I will share with you the three major concepts that you can use to remain financially well-off even during the most difficult economic times.
Concept # 1: Acquire new knowledge and grow. Do not get stuck in the morass of old financial ideas advocated by your parents or old-fashioned economic advisers. Many people become financially misinformed because they do not educate themselves enough or take advise from financial planners who themselves struggle financially. Here's why you need to be financially educated. Imaging a situation in which you are trying to find a job in the computer industry. You are completely confident you'll get that job of your dreams. You don't really stress about the fact that the most recent computer course you took was more than 24 long years ago. Why should you worry? After all, just how much could things change? Dial-up modems, floppy discs... you know all this stuff! However, when you come to the interview, your prospective employer asks you about things like cloud technology, customer management databases, SEM, SEO, and social networking. You scratch your head and leave the interviewer's office with embarrassment. Of course, you didn't get the job!
Exact same analogy could be applied to the area of personal finance and investing. The investing concepts that worked perfectly ten years ago, or maybe as little as a couple of months ago could be entirely outdated by now. In today's field of finance, economics and investing, change is a constant and expected occurrence. Your economic understanding must be constantly updated or you'll become a prey to those who understand way more than you do.
Concept # 2: Even though savings are important, hoarding money will make you go broke.
Money can be easily compared to milk. You constantly need to have some milk in the refrigerator, but it doesn't last for long because it expires. The same can be said about money! The United States government is gradually doing certain things that erode the value of the US dollar. Why they do it gradually? If the government erodes the value of money too fast, that can cause a serious revolt. However, by gradually devaluing the dollar, two magical things happen. First, the exports get cheaper so more goods can be sold to other countries and more jobs can be supported as a result. Second, the United States national debt becomes much smaller as the US dollar loses value. The government could only pay off the debt by eroding (inflating) the dollar.
And here's why you need to understand this. Although money gives you more safety in uncertain or challenging times, the value of that money is being lost every single second due to inflation. I recommend that you put aside just enough money to help you make it through the hard times, such as the periods when you are unemployed. However, any extra cash in addition to what you need for the occasional times of emergency is considered to be a liability due to the fact that it loses its value even when you sleep.
While the US government is attempting to keep the inflation at a certain level (normally 2-3 %), they need to increase the volume of cash in circulation during hard financial times when corporations find it difficult to stay afloat and require extra supply of money to stay in business. I can predict that the next series of cash printing may be forthcoming in the near future as the US government will try to bolster the value of real property, which in turn will trigger the increase in prices you'll need to pay for food and other products and services.
So, while it's true that without an appropriate quantity of cash in your savings it will be extremely challenging for you to survive in the times of emergency, if all you do is invest in CDs and savings, your wealth will be destroyed by inflation. Therefore, save just enough for emergencies, and spend the rest on cashflow producing assets. You could try investing in business or dividend paying stock. Real estate investing is another option, and if you find it too complicated to invest in businesses or real estate you can buy gold and silver coins to preserve your wealth.
Concept # 3: Make sure you build at least a few inflation resistant cashflow generating vehicles.
As I've mentioned already, you need to invest in cahsflow-generating assets to be financially secure in both good and bad times. By buying or developing a few streams of inflation-resistant cashflow, you will also enjoy the monetary freedom and security that comes with it. If you invest for positive cashflow, you don't have to stress about the monetary value of assets because no matter what the prices are, you'll always receive the check at the end of the month. There is no point in having a widget making equipment that does not produce widgets. You should convert unproductive equity into a cashflow producing vehicle. You need to turn the piles of unproductive money into a cashflow stream. Many " rich" people had to declare bankruptcy because they had a whole lot of equity which they wanted to sell and turn into cash. However your grocer will not accept a portion of your equity as a form of payment; the grocer only accepts cash. You don't want to ever wind up in a situation when you are required to liquidate your asset so that you can purchase groceries. You must only liquidate your assets at the top of the market when you are sure the price is right.