BIGG success is life on your own terms. It’s about entrepreneuring your life – taking control to design and build the life of your dreams!
There are five elements of BIGG success – money, time, growth, work and play. Today we’ll focus on money.
An equation you must understand
The basic accounting equation tells us that:
Net Worth = Assets – Liabilities
So to increase your Net Worth, you can increase your Assets (what you own) or decrease Liabilities (what you owe).
Of course – if you want to build a high Net Worth – you have to increase Assets a lot. Just don’t think you have to do it all at once. Slow and steady wins this race!
Look at the Forbes 400, the 400 richest people in the U.S. You’ll see that very few of them got rich quick.
You’ll also see that the overwhelming majority own their own business or invest in real estate. These are Assets that help you build a high Net Worth.
Is the ideal goal to have no debt? A lot of people today think that the ultimate status symbol is a paid-off house.
That’s one of the lessons learned from the financial turmoil we’ve experienced in the last few years:
Debt is a two-edged sword
It can work for you or against you. That’s why, when you use debt, it’s often referred to as leverage. It magnifies your return – for the good or for the bad.
The business halls of fame are lined with people who used debt. But so are the graveyards of shame!
Your own home
Most people think of their home as an Asset. Only think about it – if you ran a P&L on your home, you would see no income.
However, you would see expenses – your mortgage, property taxes, repairs and the like.
This Asset is producing a loss. So your return is less than zero.
If you borrow money to finance the purchase, you’ll have negative leverage. Negative leverage is what kills people.
Your own business
So now let’s say you start a part-time business. You invest $1,000 and borrow $9,000. Let’s assume that your interest cost will be $1,000 for the year.
And let’s further assume that this business can make $10,000 a year in profit. So you can pay off your debt with your profit in Year 1.
Then in subsequent years, all the money is yours to keep! Or better yet, reinvest to keep building your Net Worth!
Of course, we’re making a lot of simplifying assumptions here. One of them is that you don’t have to pay taxes which, of course, you do. But you still get the point:
Taking on Liabilities to fund Assets that produce profits helps you build a high Net Worth!
With the house, you had negative leverage. With the business, you used leverage to create a cash flow stream of $10,000 a year. That’s positive leverage.
You’ll have positive leverage when your return on the asset you invested in exceeds the cost of the debt you take on to help fund it.
Positive leverage leads to BIGG success!
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(Image in today's post by svilen001)