adminResearch and history have shown that there are essentially three ways to become wealthy; that is being an entrepreneur, an artist (you should have extraordinary talent) or through real estate ownership.
This article looks at various ways of building wealth in a modern economy including owning property. Property ownership is a proven means of accumulating wealth.
Wealth is defined financially as the residual income after deducting all the expenses. As such, wealth is defined as the net worth, which is the accumulation of your residual income over a period of time.
Therefore, to create constant and lasting wealth, you need to add value to all your financial resources. Wealth is, however, not equal to richness.
Richness is a vague, relative, subjective and ill defined term which has no definite meaning except in generalised speeches. Wealth is also not just equal to income that one earns or generates. A huge income does not guarantee that it will generate wealth.
Wealth creation is largely dependent on personal consumption habits and strategy. Property is a leading wealth building vehicle due to its power and capacity to generate income while holding expenses.
Property as a wealth accumulation vehicle refers to real estate beyond one’s home/house. If you want to use property for wealth accumulation you need to buy other properties in addition to your home and it’s normally wise not to include your home as part of an investment drive to avoid encumbering it or play Russian roulette with family home.
Since time immemorial it has been shown that creating wealth is not the only way to get wealthy. For most of human history it has not even been the most popular or common.
Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only way to acquire these rapidly was through inheritance, marriage of convenience, conquest or confiscation.
Naturally wealth had a bad reputation because of how it was acquired which is even true today. However some things changed.
The first was the advent of the rule of law. For most of the mankind history, if you did somehow accumulate a fortune, the ruler of the land or his henchmen would find a way to steal it.
But in medieval Europe something new happened. A new class of enterprising merchants and industrialists began to grow in numbers in towns.
Together they were able to resist local feudal lord who attempted to loot their wealth. Secondly, progressive societies were no longer letting a ruling class of warriors and politicians squash the entrepreneurs.
It had been observed that if you take away the incentive of wealth, technical innovation grinds to a halt. The same recipe that makes individuals rich makes countries powerful by having wealthy citizens.
Internally most companies are run like communist states without any clear incentives for high performers which results in bigger companies trailing small start- ups.
This makes startups another clear way to create wealth. The financial journey through life’s timeline starts at different levels, depending on whether you were born with a plastic or a silver spoon in your mouth.
As you travel through your life, your investment options change and vary. Knowing where you are and what options are available will helps you make the right choices.
According to research, the best proven best financial plan is to create the maximum wealth during this aggressive investment period of your life.
Design and build financial security for yourself, do not subcontract such an important area of your life. Don’t rely on others to do it for you.
Many people who relied on major banks and insurance companies for financial security ended up short when these institutions failed or when the cost of living increased or currency as the case with the Zimbabwean dollar that was demonitised and replaced with multiple currencies.
Those who had relied on pension funds, insurance companies, etc, were left destitute compared to those who had bought several properties. It does not matter where the property is. Even high-density area property can give you a decent lifestyle in retirement with a steady stream of rental income.
Steady cash flow — This is when a property is rented out and there is more income coming in each month than expenses going out. A properly selected single investment property typically offers several different avenues to build wealth.
Value appreciation — When property values rise the difference between what you owe (cost) and what it’s worth increases, thereby adding to your wealth.
Certain tax benefits — Owning investment properties helps offset income from other revenue streams that you have.
Self-liquidating and principle reduction — Borrowing to invest in property that you will rent out will result in your loan balance decreasing slightly every month. For example, if you buy a home with a 15-year mortgage, after that time the loan would be paid off (partly by the tenants’ monthly rent payments) and you will own the property with additional wealth created.
Investment properties can utilise any of the above four avenues, but an ideal investment property will have all four qualities. The wealth accumulation process compresses your whole working life into a few years. Instead of working at a low intensity for 40 years, you work as hard as you possibly can for four.
There is a conservation law at work here, if you want to make a US$1 million, you have to endure a million dollars’ worth of pain. For example, one way to make a US$1 million would be to work for the Post Office your whole life, and save every penny of your salary.
Imagine the stress of doing a boring job for 40 or 50 years. In a startup you compress all this stress into three or four years. Wealth has been created and destroyed (but on balance, created) throughout human history.
In the modern world, you sink or swim, and there are no excuses. When those far removed from the creation of wealth – undergraduates, reporters, politicians – hear that the richest 5 percent of the people in the world account for half the total wealth around the globe, they tend to think injustice!
An experienced analyst, however, will realise that someone has sacrificed social, family life and many others to succeed as an entrepreneur with a startup venture. There is a large random factor in the success of any company; there is no exact science for a start- up to succeed. So the people you end up reading about in the papers are the ones who are very smart, totally dedicated, and win the lottery in terms of hitting it big time through building a successful business.
Barclays, the UK bank, said 28 percent of the rich it polled made it through selling a business in 2012, against 26 percent who inherited theirs.
It is the second straight year that wealth accumulation through entrepreneurship outpaced that of inheritance. Earnings, property and investments are the other most common sources.
Millionaires’ wealth in Asia-Pacific is forecast to grow 9,8 percent in the next three years, at a pace which is one and a half times faster than the global average.
Jean Lassignardie, sales and marketing chief at Capgemini Global Financial Services, said: “North America’s lead in both population and wealth is likely to be eclipsed again in the future by Asia-Pacific.”
According to Barclays, it takes an average of 12 and 16 years respectively to accumulate wealth in Asia and Africa respectively, while in the US and Europe it takes an average of 28 years and 23 years respectively.
Those in India (59 percent) and South Africa (68 percent) are more likely to have made their wealth from the sale of a business and/or business profits than those in countries such as the US (21 percent), Japan (35 percent) and the UK (45 percent).
The Barclay’s report also tracks how wealth is being spent and shared. There is a marked difference in how those in developed and developing countries want to use their money.
Catherine Grum, head of Emea wealth advisers at Barclays, said: “Those who have made their money through business in more developed markets, such as the UK, would prefer the next generation to carve out their own path, rather than disrupt the entrepreneurial cycle and discourage the entrepreneurial spirit by simply having wealth handed down to them.
“Wealth creators in emerging markets, however, very much see their money as an enabler for their family and to the wider wealth cycle.”
This is true for Zimbabwean entrepreneurs.
Disclaimer
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This article is provided “as is” for informational purposes only, not intended for trading purposes or advice. Prior to execution of any security trade, you are advised to consult your authorised financial advisor to verify the accuracy of all information. Neither GMRI Capital nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
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