What is wealth? Is it the same as income? I guess most of the people usually consider income and wealth as the same thing in their common speaking language. Their common perception is one who is having higher income is wealthier than one with lower income. But they may be wrong. Confused? Don’t worry, I will explain in this article that why I am telling this. Most of us want to be a wealthy person, right? I guess most of us, if not all, want to be wealthy. This article is focused to make the beginners understand the basic difference between wealth and income. Also, this article introduces the concept of leverage which is a key skill to build wealth quickly.
Income Vs Wealth
Let me define income and wealth to get out this mess. So income is what you earn. Income is usually defined in terms of money. The money that an individual or business earn as their salary in returns of providing good, services or through investing capital is called income. It involves the flow of cash.
While wealth is the net worth that an individual owns. It is equal to the value of all their assets minus all their liabilities. It includes all their assets such as money, personal property, and real estate. It takes time to acquire wealth from income.
Let’s make it a little bit more clear. What you get from your salary is your income. Now you spent some part of your salary to buy luxuries and save some part of it. The part you spent in luxuries act as liabilities. The part you save is what you own. It gets accumulated in forms of assets such as money in your bank account or as your personal properties and real estate whose value increase with time. Difference between the value of your assets and your liabilities is your wealth at that time. Wealth keeps varying continuously.
Thus, wealth is dependent on the money you save instead of income you earn. Individuals with higher income spend high to maintain a higher standard of living. Thus, it is not necessary that an individual with higher income is always wealthier than with lower income. So if an individual with lower income saves more than an individual with higher income, the lower income individual is wealthier than the individual with higher income.
Formula of wealth
Since wealth depends on the money one save and its value increases with time, we can express wealth as follow:
Wealth = Rate of accumulating money X Time
Since we have got the formula of wealth, now it is easier to explain the process of enhancing the accumulation of wealth. From the formula, it is clear that either we have to increase the rate of accumulating money or to increase the time.
Now the question is, can you increase the rate of accumulating money? Can you increase the time? Some of you might be wondering, the increasing rate of accumulating money makes little sense, but to increase time makes no sense. You might be thinking that accumulating money can be increased with an increment in the salary. But, the question is, do you have control over your salary increment? No, you don’t. All are dependent on your experiences and company requirements. Now you might be thinking that you can do overtime to earn more and save more. But your time is limited. You have only 24 hours in a day. This way also, you can do it up to a certain limit.
So, is there any method that has no limit to enhance building wealth? Yes, there is. And the method is to leverage.
What is the leverage? Leverage comes from root word-lever. Lever comes from an old French word meaning “to make lighter,” which is an apt description of the power of leverage. You might have seen workers using a lever to lift some big load. The lever makes it so light that even a single worker can lift that which was difficult for many workers to do that simultaneously. Have you ever seen, how quickly driver able to lift the car using the lever to change the wheels? Is he able to lift the car alone without using the lever? No, it is not an easy task.
Similar is the case with money and time. You can use a lever to leverage your money to turns it into manifolds. It means if you invest Rs 100, it gets converted into Rs 10000. You can also leverage your time to get time-consuming work done quickly in much less time using the lever. It means you can make the work of 100 hours get done in 1 hour. The interesting thing about leveraging is there is no fixed limit of how many times your money and time going to manifold. It all depends on you. Stronger the lever you build, the result will be better.
Let’s take the example of Reliance Jio in India to understand the power of leveraging money easily. Do you remember the cost of 1GB 3G internet data couples of years ago before the Reliance Jio brings 4G network in India? It was around nearly Rs 300. There was a lot of competition among several telecom companies in India. Actually, at that time, India didn’t have shifted completely on 3G. India was just shifting from 2G to 3G just 3 or 4 years back. What did the Reliance Jio? Reliance Jio just switched off from 3G and invested in the new generation to introduce 4G at the scalable model. They invested in new technology. Reliance Jio uses new technology as a lever. And what is the result? All the competitors just get washed off from the market. Only a few are left in the market, but they are still struggling. Nowadays India is completely shifted to 4G and only dominant leader is Reliance Jio. Today the cost of 1GB 4G data is just around Rs 3 only. That is the real power of leverage. Here the new technology acts as a lever for Reliance Jio.
Now you might be wondering that how can one use the power of leveraging money in personal life. Let’s take a simple example of a farmer. Suppose a farmer invested to plant a mango tree. He keeps investing for couples of years till the mango tree grow enough to produce the mango. Once the mango tree started producing mangoes, the farmer is going to get much more than he had invested in the initial stage. Here the mango tree works as a lever for the farmer to earn good amount of money each year in returns of some initial sacrifice.
Hence in personal life leveraging money means to invest your saving to build assets. Your assets will work as a lever for you in the future to generate a huge sum of passive income for you. These assets could be your shares in the stock market, some business you build or some real estate you owns.
Apart from leveraging own money, there are several examples where individuals and companies are leveraging money of others. This way they make money for their own and also help the owner of money to grow their wealth. Examples are Ola and Uber taxi services. They don’t have their own cabs, but they are earning money from other cabs and also helping the cab owner to earn money. Similarly, OYO, a leading hotel chain management company of India, do not have properties of their own. They are making money using other properties and also helping properties owners to grow wealthier. Similarly, many wealth management companies are using other money to invest in the stock market to grow their wealth. Simultaneously, they make money for themselves as well.
Since everyone has got the same and a fixed amount of time in a day that is 24 hours. It is impossible to grow your wealth beyond a certain limit just by working for long hours a day.
Then, how can you leverage your time? The most classic example of leveraging your time is by hiring employees. For example, suppose you are a large wholesaler in the pharmaceutical market. You cannot do all things alone like buying products from suppliers, taking orders from customers, making bills, packing medicines, delivering it to customers and collecting payments from customers. It is impossible to run your shop alone due to lack of time. So, what will you do? Obviously, hire some people to take care of different responsibilities. Suppose you hire 6 peoples with a rate of Rs 500 each people per day. So you have to spend Rs 3000 per day. If you earn Rs 10000 per day, then Rs 7000 per day goes to your pocket. So, what is happening here? Initially, you were alone, and you had only 1 man days time while later you had 6 man days times. So hiring peoples you are able to leverage your time. Were you able to earn that amount of money without hiring peoples? Here your employees act as a lever for you and help you grow your wealth.
Please note here that just leveraging do not guarantee for building wealth. You have to use your lever in the right way. If you hire an employee just for your comfort, fun and enjoy, then your employees do not work as a lever for you, while liability for you. And you are not becoming wealthier, but just living high.
Apart from hiring an employee, in business individuals can also leverage their time by collaborating with quality business partners. This is becoming very common in almost every field of business. People have realized the strength of leverage, thus partnerships business are growing rapidly in the nowadays competitive and volatile market.
Leveraging is the most powerful tools for growing wealth rapidly. Several examples are used here to realize the power of leverage. It is also focused here to make you understand that the power of leverage is equally applicable in business as well as personal life.
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