Wealth Creation Lessons · " Timothy Ferriss. Wealth creation is often associated with retirement planning. One of the biggest problems with this strategy is that it takes to long

Copyright, 2011. Roberto Lanzillotti http://waytowealthpro.com

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Wealth Creation Secrets: 10 Key Lessons

on Building Income Freedom


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Wealth creation for the new world: Six rules for building a lifestyle-enabling business

"Forget the old concept of retirement and saving for the future. There is no need to wait and every reason not to." Timothy Ferriss.

Wealth creation is often associated with retirement planning. One of the biggest problems with this strategy is that it takes to long.

Retirement planning requires that you work for up to 40 years, follow a nine to five work routine and make regular contributions to a pension fund. At the end of the day you get to live off an income stream called an annuity, which in most cases is unable to support your desired standard of living.

Traditional wealth creation approaches promote a 'work-style', not a lifestyle. Life does not have to be hard. You can achieve a great living without:

• Waiting 40 years for retirement • Bouncing from one job to another • Taking high risks • Investing in the stock market • Having rich parents • Top academic qualifications • Or subjecting yourself to corporate slavery

The key rests with building a business, but not just any business. Financial freedom is about having the income and time to support your desired lifestyle, which is why you need to build a business that maximizes passive income and reduces effort on your part.

The big question: How do you build a business that supports a lifestyle and not a 'work style'?

There are six essential rules:

Rule1: Do not focus on becoming a millionaire. You'll end up working like a slave. You must focus on increasing your income by working less. You cannot sacrifice the one for the other.

Rule 2: Think mobility. Build a business that enables you to run it from anywhere in the world. The reality is a job or boss restricts your freedom to a single area, and if they move you'll probably have to move, or find another job.

Rule 3: Automate your income. Use technology and leverage (other people's time and money) to maximise output and minimise your personal working


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hours. This will free up a lot of time for you to concentrate on activities that you enjoy most.

Rule 4: Payday must come everyday. Do not rely on a plan that only bears bruit ten, twenty or thirty years from today. Retirement plans are guilty of this big time.

Rule 5: Be the owner, not the manager. Employees get paid for working long hours. Owners get paid for employing managers and assets to work long hours.

Rule 6: Freedom comes from doing what you love. The goal is to experience life! There is no better way than finding your passion and pursuing your dreams.

These simple rules make all the difference. In actual fact, it's what separates true happiness from corporate slavery.


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Wealth creation for the masses: The crippled foundation of an outdated

paradigm

There are ten facts about investment markets that make conventional wealth creation strategies ineffective. The sad part of it all is that experts either ignore the facts or don't know any better.

1. Financial markets are incredibly complex. They are difficult to interpret and predict. And yet, our understanding of them is grossly over-simplified.

2. Modern day investment theory rests on weak assumptions. According to French mathematician Benoit Mandelbrot, 'Markets are very, very risky - more risky than the standard theories imagine.'

3. Standard models do not define or measure risk accurately. The need to measure and predict risk has lead to elegant mathematical equations, which in turn have been used to develop fancy economic models.

However, current models take a highly manageable view of financial markets. For example, the theory assumes that price movements from one moment to the next are smooth, when in actual fact price changes in financial markets are erratic.

The formula used to measure risk ignores the true state of affairs. As a result, retirement funds are subject to extreme 'financial turbulence'. This begs the question: Has your retirement fund taken a holistic view of the risks inherent in financial markets?

4. Standard theory assumes that markets are rational machines. The central idea is that financial markets will always generate the 'right' prices whenever new information becomes available.

According to investment theory, people react logically when presented with new information. No emotions attached. The implication is that buyers and sellers are well-reasoned individuals that assimilate all available information to conclude deals at economically 'correct' prices.

For this to work, it is assumed that everybody has the same investment goals and when presented with certain information, they will all make the same decisions. It is also assumed that these decisions are made independently of each other, meaning that prices reflect a market consensus rather than the opinions of a select few.


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5. People move financial markets. Think of it this way. Markets incorporate thousands of different needs, ideas, investing strategies, tactics, goals, objectives and emotions. As an individual you have no control over price changes.

6. Fundamental and technical analyses use historical data to predict future price movements. It is impossible to predict what will happen in the future. Financial markets are inconsistent and most retirement funds are ill-prepared for surprises.

Unless scientists find a way to quantify peoples' emotions, long term investors will probably have to stick to the one size fits all 'diversify, invest and hope' approach.

7. Gloom and doom inspires fear. A friend with a hot tip inspires greed. Following the advice of other people may be harmful to your bottom line. Fundamentally, you need to change the way you invest and conduct business.

8. Market crashes will happen again in future and people will be responsible. When greed gets into the mix, you may have yourself a ticking time bomb. The 2008 sub-prime crisis is testimony to this.

9. The ‘high risk high return’ strategy needs redefining. It is extremely difficult to predict future returns in financial markets and your expected returns may never materialise. A high risk unknown strategy is more apt.

10. Retirement planning as it is today is an ineffective way of creating wealth. The facts show that only 1% of people will stop working with the same standard of living they had prior to retirement.

Consider the following:

• Can one really create wealth if you expose your money to a high risk unknown return strategy?

• Is it a good idea to wait 20 years or more to capitalise on a return that may or may not be there?

Living needs to happen today. This is why a low risk high return strategy is in your best interest.


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The face of an ideal wealth creation strategy

One of the major objectives of a wealth creation strategy is to generate passive income at the lowest possible risk and cost. Risk refers to the likelihood of you losing money due to some external or internal factor. Cost refers to the amount of money that you need to fund your investment or business. However, it also includes the amount of time and effort that goes into actively building or sustaining one. ►What does an ideal wealth creation strategy look like? Strategies are weighed up in terms of risk and return. High risk means you have little or no control over your business, and essentially it means that certain risk factors are unpredictable. This makes your business or investment highly susceptible to factors outside of your control. The lower the risk the more predictable and stable your income stream becomes. A high return business is one that produces sufficient and consistent passive income over the long term. More importantly, the return is able to fund your desired lifestyle. A low return business simply means that you have an asset that does not generate sufficient income. Income or growth may also be inconsistent. A low return strategy is unable to support your desired lifestyle. Most people select this approach because they are familiar with it, it is simple to implement and results may come quickly. Wealth creators are specifically after high returns and low risks. They want to be rewarded for their efforts over and above their costs, they hate losing money and they want a business that is sustainable.


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►There are three things you can do to lower the risks/costs: A) Increase your financial literacy When it comes to developing your business, you need to know how to put together a business plan, how to select profitable markets and how to acquire finance. If you want to invest in the stock market, you need to know what techniques you can use to lower your risks, analyse market trends and select shares. There is a lot more to building wealth than simply using pension funds or retirement annuities. Financial literacy puts more control in your hands, which enables you to make better business decisions. You essentially have the power to raise your return or profits and lower the risks/costs. B) Leverage passive income businesses By using business systems which involve other people and technology you can free up a lot of time and energy as well as lower the costs. Not only that, but you also generate a passive income in the process. A property portfolio for example can be managed by other people completely. This gives you more time to do other things. An online business on the other hand is run entirely using technology. The internet is one way to cut out the need to hire employees, which lowers your costs drastically and raises your profit margins. Compare using systems to working for a boss or yourself. If you don’t work, you don’t get paid. If you don’t get up early and work a full day, you probably won’t get paid. If your income stops, your livelihood stops. C) Focus on consumer needs, not business cycles


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Effective wealth creation is based on meeting consumer needs and not on trying to predict business cycles. Property investing is a business because people require shelter. It’s a basic human need. You supply the property and other people pay you for using it. Information is a business because people will always need good, reliable, practical and timely information to make their lives easier. And the internet is a great way to deliver valuable information which has been correctly packaged. Financial products like pension funds and retirement annuities try and profit from market cycles. When the economy does well, your returns tend to be higher and vice versa. As a whole, market cycles are exceptionally difficult to predict. This is one of the reasons why modern day investing is a high risk, unknown return strategy. Consumer needs on the other hand are a lot easier to identify, track and cater for, which is why a passive income business is a low risk high return strategy.


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Wealth creation systems: Which option is best for you?

There are two types of wealth creation systems at your disposal. Which system are you relying on to build long-term wealth? ►Active and passive wealth systems An active system is the most widely used and includes working for a boss or yourself. As the title suggests, this type of system requires a significant amount of time and energy to maintain. Consider your current job. How many hours do you spend at work every week compared to quality time with your family? One of the biggest downfalls of employment is that when you stop working your income stops. Will you continue to receive a monthly salary if you quit today? The same goes for your own business. If you throw in the towel you may as well consider yourself unemployed. A passive wealth creation system relies on other people and technology to produce income. You essentially separate yourself from your business. As a result, if you are retrenched tomorrow or permanently disabled your business system will continue to pay you a salary. Income streams are passive in nature. A property portfolio for example will not stop generating rental income if you decide to cut ties with your boss. ►Financial freedom = More time + More monthly income Financial freedom is relative. Having more free time is important, if not more important than money. Have a look at the following two scenarios:

• Scenario 1 (Active wealth): You earn $500,000 a year working a day job for a large corporation. Free time comes in the form of weekends and annual leave.

• Scenario 2 (Passive wealth): Your wealth creation system generates $500,000 income each year. You only need to work a couple of hours every month to maintain your business. Free time is ‘whenever you decide’ time.


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So what are you after – time, money or both? What I can tell you is that wealth creators focus on both. And a passive wealth system is one of the best ways to accomplish this. Whichever system you decide to use, it is important to understand the major pros and cons of each system. Only then are you in a position to make an informed decision. ►Active wealth creation Risks:

• You sacrifice time for money. In other words, you need to work to generate an income.

• As an employee, you may have no or limited control over business decision making.

• Active income stops when you retire.

Return:

• A job instils a sense of security. • Employment is a great learning curve. It teaches you the basics of

building a passive wealth system, but only if you are willing to learn.

Strategy:

• High risk unknown return

►Passive wealth creation Risks:

• A system is a business, which means you will have to contend with business-related risk factors.

Return:

• You do not sacrifice time for money. • You are in full control of business decision making. • Passive income continues whether you actively work or not.

Strategy:

• High return low risk


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Assets make investors but the right assets make great wealth creators

The general rule of thumb is that one must accumulate assets to achieve financial freedom and to be considered a wealth creator. This is true, but far from ideal. ►What is an asset? According to Investopedia, ‘an asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit’. By conventional wisdom an asset generally includes everything that is owned by a person that has value. This may include the cash in your current account, your vehicle, equipment, furniture, jewellery, business stock, property, endowment policies or cash value of your life assurance policy. The future benefit indicated in Investopedia’s definition refers to the growth in your asset’s value (also known as capital growth). So if you purchase a house in 2010 for $60,000, and sell it for $100,000 in seven years time, the capital growth on your residence is $40,000. The same can be said for your mutual fund/unit trust or share portfolio. Does this mean that every asset you own including your furniture is suitable for wealth creation? If you suddenly wake up one day and decide to sell your jewellery for $20,000, does that make you a wealth creator? The answer is an emphatic NO. Great wealth creators accumulate the right income generating assets. ►The right assets have a number of important features: Feature 1: Assets generate passive income. In other words, you do not have to actively work to get paid. The income is residual in nature. Feature 2: Assets generate income on a monthly or more frequent basis. Feature 3: An asset’s passive income stream is ongoing or perpetual. Feature 4: An asset is a low risk wealth creation vehicle. Feature 5: An asset generates the required returns to fulfil your lifestyle goals.


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Feature 6: Wealth creators have direct control over their asset’s income stream. Let’s demonstrate by way of example. Suppose you need $1 million dollars in ten years time to retire comfortably. You invest $100,000 in a bank account paying 10% interest per year. Is the bank account the right asset for you? To help answer this question, the account must have all of the 6 features discussed above. Feature 1 is present: The account will generate passive income or interest income, i.e. you do not have to work for interest income. Feature 2 is present: You can earn interest on a monthly basis as long as you don’t use up your capital. Feature 3 is present: Your income stream is ongoing as long as the bank stays in business and your account continues to pay interest. Feature 4 is present: A bank account is considered to be a low risk investment. Feature 5 is absent: This is where the problem starts. Your $100,000 will only grow to about $260,000 after 10 years, which is way short of the required amount. A return of 10% is therefore insufficient. Feature 6 is absent: You do not have direct control over the interest rate on the account. This is controlled by the central bank. Conclusion: The bank account is not an ideal asset as features 5 and 6 are absent. ►Key lesson: Wealth creators focus on accumulating assets. Great wealth creators focus on building passive income businesses, which is the ultimate asset. Income is generated on a monthly ongoing basis and enables you to fund your ideal lifestyle.


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The three qualities of a highly effective passive income stream

Passive income forms the corner stone of income freedom. However, the secret to income success depends on building the most effective passive income business. If you truly want to build a life of quality and financial freedom, there is no doubt that you must master the ability to build multiple income streams. Otherwise, whether you work for a boss or for yourself, you’ll have to slave away at your job until retirement. Bear in mind, you cannot simply make an investment in the stock market, earn some dividends and say: “Hey, I’ve got passive income! That was pretty easy”. There is more too it. ►Your passive income streams are going to have to meet three criteria to justify your time, effort and of course financial investment:

• They must be reliable, which means that you are pretty confident that you will get paid in hard cold cash every month.

• They must be predictable. There is no point in relying on a source that may or may not pay you every month. Financial markets are guilty of this.

• They must match your financial objectives. Your passive income business must produce the necessary returns for you to be able to enjoy income freedom one day. As for risk, risk is inversely proportion to your confidence levels or financial literacy. The higher your confidence/financial literacy the lower the risk.

►“I have a couple of fixed deposits, why on earth would I need more passive income?” If you own ten bank deposits and collect the interest every month, you have ten sources of passive income. The real question is does it meet the title of a passive income business? Whether you earn rental income, interest from savings, business income, dividends or royalties (whatever the source), if your income streams do not meet the three criteria above, you have yourself a typical investment, not a business.


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►You must have a passive income business plan. The most important step is to determine how much passive income you need on a monthly basis to sustain your desired lifestyle. If you need $10,000 every month to cover your expenses and travel the world, then you need a passive income business that will generate $10,000 every month. Say you need $10 million in 20 years time to meet your income needs and you currently have $1 million savings.

• If you invest your million in a fixed deposit at 6% interest over the next 20 years, you will have about $3.2 million in your bank account – way short of your target goal.

• At an interest rate of 10%, you’ll land up with approximately $6.7 million after 20 years – still short of your $10 million goal.

• At 12.2% interest, your $1 million will grow to $10 million. Mission accomplished.

►Two key lessons:

1. Choose a passive income source and build a business around it. 2. Absolutely critical: Make sure that the assets you acquire generate the

required return on investment.

You simply cannot chuck your money at any business or investment without understanding your personal needs and income requirements.


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The 3 big wealth creation gaps to fill

The end product of wealth creation is financial or income freedom. However, there are three major reasons why only 1% of people manage to achieve this feat. ►A. Lack of purpose Wealth creation is a journey, and an arduous one at that. There are absolutely no quick fixes, unless you win the state lottery or inherit a large sum of cash. Without a life purpose, your chance of financial success is small and unrewarding due to lack of substance and meaning. Why do you want to build wealth? What does financial freedom mean to you? These are important questions as wealth creation takes time, commitment, patience and requires you to break old habits. Start by writing your answers down on a sheet of paper. Select the reasons that have the most meaning to you and commit them to memory. Say them out loud every day and visualise success. Wealth creation must be done for the right reasons and not for the sake of wanting to be called a millionaire. This may come as a surprise to you, but money plays a small role. In actual fact, money is a byproduct of leading a fulfilled and happy life. Wealth creation is about freedom:

• Freedom to spend more time with your family • Freedom to give your children the very best • Freedom to live your life the way you see fit.

Your number one goal now is to identify your life’s purpose or passion, the one thing that will make you literally bounce out of bed every morning or help you create an extraordinary life in your eyes. ►B. Lack of financial literacy Financial literacy is one of the most important components of wealth creation. It refers to a set of skills or knowledge base that enables you to make an informed decision about money. It is not about handing your money over to a broker, financial planner or asset manager hoping that he or she will do wonders with your bottom line.


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The process begins with you and ends with you. It is about taking charge of your financial future and giving direction to the financial experts, not the other way around. Think of it this way. You are the chief executive officer and chief financial officer of your money. Where do you begin? Start educating yourself in the three major areas that make up financial literacy.

1. Surplus building 2. Asset selection and strategy 3. Passive income business development

►C. Lack of business planning Wealth creation is a massive project to say the least. It is a long term process which requires planning and measurable goals and objectives. You do not have to invent something brand new or introduce a radical new technology to achieve financial freedom, unless you plan to do so. The easiest way to create wealth is to take existing strategies and build business plans around them. For example, property has traditionally been positioned by society as an alternative investment to the stock market. But what if you take property and make a business out of it? Imagine owning 50 properties that each generates $800 in monthly rental income. That’s a total passive income of $40,000 each month. Information marketing is another example. Imagine selling your expert knowledge, experiences, life story or other information to niche markets online, without doing any active selling. The idea of online business is not new, but it requires a specific plan to develop an online business that works for you. Without one, you may as well use your spare cash to buy yourself an investment product like a mutual fund or retirement annuity. ►Your take home lessons

1. Wealth creation is a continuous learning process which requires action on your part.

2. Financial freedom is achieved by building a passive income business that supports your desired standard of living.


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Four top tips to start building wealth like the pros

If you want to build wealth like the pros, you are going to have to do some work. And I don’t mean visiting your nearest financial planner. When it comes to building wealth, there are four areas you need to address to help you overcome one of the biggest things keeping you back - your emotions. According to scientists, emotions rule the brain’s decision-making process. This is not to say that we are illogical beings. It’s just that emotions play a very big role in our lives, more so than pure intellect. ►The problem comes in when emotions become the number one reason for making important financial decisions. Emotions can stifle wealth creation in a number of ways. Here are two good examples:

1. Emotional spending is a big problem. People are programmed to believe that they shop out of ‘need’ rather than ‘want’. It’s about instant gratification and excessive spending to relieve boredom or stress or to maintain one’s social image. If you cannot control your spending, how on earth can you expect to build wealth?

2. Ever receive a hot tip from the media or friend to buy or sell a particular investment? During good times, people tend to listen to friends about how much money they made investing in certain assets, whereas news about a bad economy or underperforming company brings out the fear of losing money. This is a sure way of destroying wealth. By the time you receive the tip or media report, it’s too late. Never make a financial decision without doing your homework. A hot tip is a bad idea.

►Building wealth without emotional interference is easier said than done. We are human beings, not robots. Our emotions are going to impact every facet of our lives. Just understand that if you intend to build wealth on the basis of emotions, there is a good chance you will land up in the ‘stinky-stuff’ and not the butter. So how do you prevent yourself from tripping over your emotions? ►The key rests with four areas:


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1. Exercise discipline. Clean up your current financial affairs and rid yourself of unwanted expenses or debt. Without discipline, you’d be better off paying a visit to your nearest financial planner. 2. Select your playing field. Focus your time, money and efforts in one area, such as property or information marketing. Do not buy investments, build businesses (That’s not to say that an investment cannot be a business). 3. Run the numbers. This is the only way to keep your decision-making objective.

• What return will your asset or business generate? • How sustainable are these returns? • What are the risks associated with your business? • What is the worst case scenario?

4. Asset selection. Make sure that your asset or business is fully compatible with your wealth creation strategy. This means two things: one, you need a strategy/plan and two your assets must enable you to fulfil your financial objectives.

►The bottom line: Building wealth or a successful passive income business is highly dependent on your ability to quell your emotions.


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Return On Investment (ROI)-How To Cut Through The Marketing B.S.

Financial institutions use return on investment or ROI to sell products. This is why you must ask one essential question to cut through the marketing hype. What do we mean by ROI? Essentially, it is what you get back in return for making an investment in a product, project or business. Here are two simple examples: 1. Suzie sells name badges for a living. She makes $1 profit per tag. Each tag costs her $2 to make. By expressing Suzie's profit as a percentage of the unit cost, her ROI is 50%. 2. Mr Greedy has $1000 to invest in a fixed deposit. A sales representative at his local bank informs him that he will earn $100 in interest after one year. Mr Greedy's ROI is 10%. Note that banks will usually quote you an interest rate of 10% when promoting their savings or investment products. The higher your ROI the harder your money is working for you and the more profit you will make. The problem Investment return calculations are highly flexible and can be easily manipulated to suit the user's needs. When financial institutions advertise their products, they are going to tell you about great interest rates. It is only natural for these firms to sugar coat their investment returns to drive sales, which is why you need to ask one important question. What is your net return? Experts will quote you what is known as a nominal ROI on their products. This is the investment return before costs. That is all good, but you should be more concerned about the net ROI or return after costs. Have a look at the following example: Mr Return's financial planner informs him that he can expect a nominal return of 10% on his investment portfolio. Inflation is 4%.


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Firstly, this does not mean that Mr Return's wealth will grow at 10% per annum. Secondly, it also does not mean that he will beat inflation by 6% (10% less 4%). If we look at his net return, it paints a completely different picture. Nominal return: 10% Less inflation: 4% Less tax: 3.8% Less annual management fees: 1.5% Equals net return: 0.7% What does a net ROI of 0.7% mean? If you invest $10000 at 0.7% fixed investment return for 20 years, your real wealth will only grow by about $1500. And that is after 20 years! Key lessons 1. Make sure you look at all the costs when assessing an investment product, project or business. 2. Determine your net ROI. Will your return enable you to achieve your financial goals at the given level of risk? 3. If your net return is not good enough, move on. Do not buy into a deal on the basis of nominal return. 4. Your goal as a wealth creator is to MAXIMIZE ROI at the LOWEST possible risk.


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Interest Rates Keep You Boxed During Retirement

Will you have control over your lifestyle during retirement? Do you know why the so-called 'golden years' is an extremely tough period for over 90% of people around the globe? It has everything to do with interest rates, which is why you must distance yourself from fixed income sources if you want financial freedom. What is a fixed income source? A fixed income source is an investment that secures your money and provides fixed payments over a certain period of time. Examples include bank deposits and government bonds. Interest rate facts: 1. The cost of borrowing money is determined by interest rates. The higher the rate the more you pay. 2. Interest rates determine what you get paid for your fixed investments. The higher the rate, the more you earn as an investor. 3. Interest rates are dependent on many factors including local and international economic conditions. 4. The Reserve Bank is the chief cherry in charge. Their main purpose in life is to control inflation, and they do this by adjusting the primary rate (also known as prime or Federal Funds Rate). 5. The prime rate determines the price at which local banks lend money to consumers or pay investors. 6. The primary source of income for pensioners is bank deposits. 7. The state has direct control over pensioners' lifestyles as the reserve bank controls interest rates. What are the implications? Have a look at the following scenarios: A. Home owner 20 year home loan: $100,000 Interest rate: 10% = Monthly bond repayment of $965 Interest rate: 5%; = Monthly bond repayment of $660 B. Investor Bank deposit: $100,000


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Interest rate: 10% = Monthly interest income of $833 Interest rate: 5% = Monthly interest income of $417 In a high interest rate environment home owners pay more and investors earn more. In a low interest rate environment home owners pay less and investors earn less. What you generally find with retirement planning is that the older you get the more conservative your investments become. In other words, the proportion of fixed investments increases to provide a steadier and more secure source of income. This is where the problem comes in. Income from fixed investments becomes highly susceptible to interest rate changes. This presents a challenging situation for pensioners because lower rates result in lower monthly interest income. I'm sure the problem is obvious to you by now: 1. The greater your reliance on fixed income investments, the more control you relinquish to the state. 2. It is very difficult to predict how inflation and prime rates will change over time. As a result, pensioners face an uncertain and difficult future. Three key lessons: 1. Effective wealth creation is based on control over risk and return. 2. Distance yourself from income sources which are dependent on interest rates. 3. Invest your time and energy in passive income streams which you are in control of. Property and online business are two powerful examples.

Documents

Wealth Creation Lessons · " Timothy Ferriss. Wealth creation is often associated with retirement planning. One of the biggest problems with this strategy is that it takes to long