The 17 Principles of Creating Wealth

Chapters 14-15

Buy Appreciable Assets

It's probably obvious to you that investments must appreciate in order to build wealth.  However, how much of your spendable income goes for appreciable assets versus depreciable goods?  Do you find yourself at the end of your money before the end of the month?  To build wealth and ensure the proper capitalization of your business, you must first cease the expenditure of your funds on worthless goods and focus every penny you can muster into your personal war against poverty.  The first battle you must win is the Battle of the Budget.  Get control of your spending, or it will control you for the rest of your life.

On a national level, America has not suffered a depression since the 1930s. On average, real estate values have increased every year for the past 70 years, with some spectacular growth noted in boom areas, such as the Southwest, and some decline in values in the industrial heartland. Overall, real estate has consistently been a profitable investment for Americans.

Another area of growth is the stock market. Like real estate, it has noted exceptions, and some bad years. However, over the long run, the stock market, notably quality companies sold on the New York Stock Exchange, have seen consistent growth above inflation rates for the past 70 years.

Antique furniture, automobiles, art, and jewelry also see consistent gains in value, while contemporary furniture, automobiles, and jewelry typically loses value immediately after its purchase. For example, if you purchase a new car, the moment you drive it off the dealer’s lot, it becomes worth significantly less than the payoff for the loan you just signed. Likewise, if you purchase a brand new couch, and choose to resell it, the resale value will be a fraction of your initial purchase price. This is the essence of creating wealth: control your expenditure of scarce financial resources on depreciable consumer goods, and direct those same resources towards the purchase of antique furniture and classic cars that retain their value while you enjoy their use.

One investment that is often overlooked is education.  I'm not necessarily talking about college, although a college education can give you a solid foundation to build upon.  The education I'm referring to is the focused training you can receive that is directly pertinent to your area of interest--such as sales, investments, business management, collectibles, etc.  This training can come in the form of books, tapes, seminars, or hands-on experience. As an alternative to buying tapes (remember, we want to minimize spending where possible), consider visiting your community library. Check out some of the tapes produced by the Nightingale organization and start listening to them during your commutes.

Here is a short list of the most popular wealth and success oriented tapes selling on Amazon, as of August 2006:

Seven Habits of Highly Effective People, Stephen Covey

Think and Grow Rich, Napoleon Hill

The Power of Positive Thinking, Norman Vincent Peale

NLP: The New Technology of Achievement, Charles Faulkner

Multiple Streams of Income, Robert Allen

The Psychology of Achievement, Brian Tracy

5 Steps to Successful Selling, Zig Ziglar

Lead the Field, Earl Nightingale

To achieve personal wealth, you must learn to acquire appreciable assets. Thus, your fourteenth step to wealth is to forego the purchase of depreciable assets and focus all of your resources on acquiring income producing assets that typically appreciate in value, rather than depreciate.

The Power and Risks of Leverage

Leverage is a powerful tool that significantly increases your purchasing and investment power.  Used properly, it can propel you into wealth.  Used improperly, it can send you to bankruptcy court post haste. Therefore, your fifteenth step towards creating wealth is to master the art of using leverage.

Consider this example.  A home in your neighborhood is for sale and the price is $100,000.  It looks like a good investment so you buy it.  In situation one you pay cash for the home: total investment $100,000.  In situation two you put $10,000 down on the house and finance the remaining $90,000.  At the end of the year inflation and some improvements you've made to the property have increased its value to $110,000, a 10% rate of appreciation.  In situation one, your $100,000 investment has increased by 10%.  In situation two, your $10,000 investment has increased by 100%.  This is the power of leverage.

If you had $100,000 to invest, which would you prefer, a 10% return or a 100% return?  Real estate empires are built on the power of leverage. A vitally important concept in the use of leverage is to never touch your capital base. Your capital base is the financial and human resources you have available for investment.

There is a story of a small New England town made up of “old” wealth residents.  Old wealth is wealth held by generations of families, passed from parent to child, over and over.

A visitor noted that the other residents ignored a certain man.  When the man walked down the street mothers would grab their children and race to the other side, just to avoid coming in contact with this man.  The visitor was perplexed and asked a passerby what crime this man had committed.  The answer: “He dipped into his capital base.”

In other words, he had spent part of the money that his forefathers had set aside for investment purposes.  Whenever you “dip into your capital base” you are effectively destroying your wealth building--and sustaining--capability.  Dipping into your capital base is the cardinal sin of investment and empire building.

George Clason’s book, “The Richest Man in Babylon” is an excellent book on this subject. So, your fifteenth step towards wealth is to protect your capital base and use leverage to multiply your efforts.

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