How building wealth is so simple that a 5 year old can understand it

I’m sure you’ve seen one of those Tai Lopez ads with the Lambo in his garage with huge promises that he’ll show you how to make millions in your sleep. Or if you search on YouTube, there are countless videos from highly notable financial influencers that preach “wealth building” like Graham Stephan, Andre Jikh, Mark Tilbury and more!

But the thing is, building wealth is super simple: it’s all about reducing your expenses and increasing your income, then saving that surplus amount and investing it in a low-cost index fund/ETF. That’s it!

There’s absolutely no need to complicate it!

I know this doesn’t sound sexy, and you want to hear about a “special untapped wealth source” that’ll make you a millionaire overnight. The fundamentals of building wealth and staying wealthy lie in living below your means and increasing your savings rate.

Here are the steps for building wealth. You’re ready for it

1. Save a surplus amount whenever you receive your paycheck
2. Invest that into low-cost, diversified index funds
3. Rinse and repeat for 10-20 years

You’re probably thinking that there’s got to be more to it, and building wealth involves a complicated formula only the rich people know about.

Well, I’m not kidding, but this is the formula for building wealth. Is it simple? Heck yeah! Is it easy? No, because it requires long periods of patience, consistency, and not falling into get-rich-quick schemes.

Building wealth requires time and patience. No other way around it. And I know 10-15 years sounds like a lot, but think about the last 10 years of your life. How fast does time fly without you even noticing? What could’ve been done during those 10 years?

The point is, time flies by so fast, so we might as well utilise the time that we do have to build wealth and a future desirable lifestyle.

In this article, we’ll dive deep into what “wealth” actually means, the misconceptions of a wealthy person, why you should start when you’re young, and how to figure out how much you need to become “wealthy”.

What “Wealth” Truly Means

Now let me get ONE thing straight: being “wealthy” doesn’t mean winning the lottery or living in a luxury 10-bedroom mansion.

The true definition of wealth means “having investment assets that generate enough passive income to cover your living expenses”. It’s as simple as that.

I say this because if you have investments that generate passive income that covers all your living expenses, then you don’t have to work a job, as your living expenses are covered.

The amount of investments or your net worth doesn’t determine how wealthy you are. A wealthy person should be able to comfortably quit their job and not have a single worry.

For example, let’s say John’s annual living expenses were $50k. This includes his housing, food, electricity, car bills, etc.

He has $1.25M invested in shares and generates $50k per year in dividends.

That means his $50k per year in dividends is enough to cover his living expenses, which means that even if he got fired from his job today, he’ll be able to live comfortably.

That’s the true definition of wealth.

Biggest Misconception About Wealth

I believe the biggest lie about wealth is having the most luxurious lifestyle and trying to live the “Perfect Instagram” influencer lifestyle by showing off cars, luxury mansions, jewellery or a $100k diamond ring.

I personally don’t use Instagram myself, but so many people scroll onto the social media platforms and see all these famous celebrities living luxurious lifestyles and think “man, I wish I could live their lifestyle” or “they are filthy rich”.

The perception of wealth has become “look the part”, so that it’s more than common for most people who “look rich” to actually be broke, with even ZERO dollars to their name.

It’s actually common for so many high-income earners like doctors, athletes and even CEO to go broke in a few years post-retirement.

Why?

Because their heavily inflated lifestyle expenses are on par or higher than the income they generate, which means that once that income source isn’t coming in, then it’s game over.

It’s so easy to look at professional athletes and think, “Wow, how can they blow $100M. That money would’ve lasted me a lifetime”.

Well, the sad reality is that most workers live like professional athletes where their lifestyle expenses are heavily inflated and they don’t even consider investing for their future that it comes back to bite them in the end.

My advice: Don’t be tempted and jealous by the lifestyles of your friends, family or rich celebrities. Instead, turn off social media and read books that instil fundamental financial values that impart wisdom on actually being wealthy.

Why You Should Start When You’re Young

Now, you might think that since you’re still young and still trying to figure out life, building wealth through disciplined saving and investing can be done at a later age.

And I get it.

It’s easy to procrastinate and tell ourselves, “nah, I’ll do it later”.

But the reason you start NOW at a very young age is that it’s significantly easier to build wealth, as some of you at least will still be living with your parents, you have fewer expenses to deal with, and time is on your side.

The earlier you start, the earlier you can build wealth at a younger age and be more financially secure. That’ll set you up for the rest of your life, and you have so much flexibility around how much you want to work.

When you’re still living with your parents, you can save & invest a huge chunk of your income as pretty much all your expenses are paid for. That makes it so much easier to build wealth at a faster scale.

And when you’re in your 30s, 40s or 50s, you’ll have to deal with so many more expenses like childcare, healthcare, bigger rent due to bigger housing for family, etc.

My point is that why start later when it’s by far the easiest time to start saving and investing when you’re young? There’s no need to make it harder and put more stress as you get older, so you might as well get it done.

How To Figure Out How Much You Need To “Wealthy”

Okay, so you’re completely sold on the idea of building wealth for the future.

What next?

The next step is to figure out how much you need to become “wealthy”. Remember, becoming wealthy isn’t about living in a luxury mansion or driving a Ferrari.

It’s being able to comfortably say “I can quit my job and I won’t be even stressed about my finances”. Really, it’s whether you have passive income-generating assets that are enough to cover your living expenses.

This refers to figuring out your FIRE (Financial Independence Retire Early) number.

To simply figure out how much is enough to become “wealthy”, it’s simply your Annual Expenses x 25.

So, if let’s say you needed $50k to live comfortably to pay for basic living expenses and enjoy a bit of lifestyle hobbies like travelling overseas, playing golf, or even eating out a couple of times per week.

Then you’ll multiply $50k by 25, which is $ 1.25 M.

You’ll need $1.25M to reach FIRE, aka become wealthy.

Now, as simple as this is, it doesn’t always work out like this in real life, as things come up in life where we might have to deal with unexpected large expenses, or our plans might change down the line.

It doesn’t have to be a perfect figure, but it’s good to have a starting point on what your “wealth” number goal is.

The higher amounts you can save & invest, the faster you’ll reach your goal.

Lower expenses will also help you reach your goal faster, as you’ll need fewer investments. And you don’t even have to lower your expenses by eating rice and beans.

You could lower your expenses and enjoy a much more comfortable life working less (if that’s your plan) by maybe moving to a cheaper area outside the city, spending less on childcare, cutting back on excessive holidays or moving to a place like Thailand where you can live like a King for less than $2k per month.

Or maybe you still continue working and earning money, in which case your investment portfolio will just compound in the background.

Either way, that investment portfolio is pretty much an insurance protection against your job loss and gives you all the flexibility in the world to do whatever you want with your time, which is your most valuable asset.

The whole point of building wealth isn’t to maximise your net worth, but to BUY MORE TIME!

Summary

In summary, wealth isn’t about owning a Ferrari or living in a luxury mansion, as most people perceive it to be.

Instead, it’s having enough investment assets that generate passive income to fund your living expenses, which puts you in a really good financial position.

And I also believe that wealth also comes with enhancing your mindset, such as taking full accountability, educating yourself every day and knowing that you have enough.

Being content and grateful that you’re living in a beautiful country like Australia is such a powerful mindset, and honestly, it’s so much better than winning the lottery.

I know I’m so grateful to be living in a country like Australia, and honestly, we shouldn’t be complaining at all about our lifestyle, especially compared to how people in 3rd world countries are starving to death.

Always remember to view things from a wide perspective and sit down to realise how truly grateful you are to be in the position you’re in currently. There’s always something to be grateful for, and it’s something that I’m continuing to practice every day.