In this article
- So the income doesn’t matter?
- How to increase the assets?
- What to do to improve?
I often wonder about the fact that I am earning significantly more than in the past, but basically, my net worth has not grown in parallel. This is because we often confuse two different concepts that do not always go hand in hand, income, and assets.
Wealth creates income
With the passage of time and the growing age of working and personal data, it is easy for on the one hand to increase the income and on the other hand to increase the expenses.
The two things often do not go hand in hand and often a perverse effect is created whereby the salary increases, but expenses, commitments increase and the balance, however precarious, found with so much effort is lost.
Here we soon find ourselves with the paradox that income increases, but assets decrease because expenditure begins to erode it and gradually we find ourselves poorer and unprepared for daily needs.
So the income doesn’t matter?
The income does not count as an end measure in itself but only counts if compared to the expenses incurred. It, therefore, matters much more what portion of the income you manage to merge into your assets.
It is important to put the assets to good use and ensure that this heritage begins to produce income because otherwise it is not possible to generate new resources and there is a risk of losing wealth.
We must not fall into the trap of getting used to income growth and at some point believing that we are rich because we are surrounded by wealthy people who allow themselves certain luxuries. The real reality is that if you fall into the spending trap and focus on income and not on wealth growth you risk eventually becoming poorer.
We must not even think that certain incomes are sustainable forever and continue to spend even when certain additional income is lacking, otherwise, we end up with some sportsmen or famous people who at some point in their lives find themselves covered by debts and a real estate assets that they are forced to sell.
How to increase the assets?
Assets can only grow if invested in assets that have positive net returns and are consistently increased with new liquidity.
You have to calculate your net worth correctly, including all the items of your assets, even the less immediate ones, such as pension funds and real estate.
The addition of new liquidity is all the more important when done at a young age because only in this way can you enjoy the advantage of compound interest and interest on interest.
What to do to improve?
First of all, I advise everyone to do a good constant examination to understand the state of their assets and finances and to understand if they can increase their assets, possibly also drawing on additional sources of income that we can certainly generate. In particular, ask yourself to understand if you earn more than a few years ago and if you spend much more. In this case, you should correct your spending style.
Secondly, I think that for each new income we should ask ourselves the question of how much we can save on it and not how we manage to spend it. This is only because the assets generate constant and perpetual income over time and certainly not the income, which can be interrupted at any moment.