Just about everyone on Earth wants to have more money, not because money in of itself is that great but for the things that money can buy, Some of these things cost very little but life’s most precious material items tend to cost a lot. Not to mention, money solves a lot of problems, both immediate and long term, and getting it is what keeps most of us driven each and every day. It is the reason we work, save and invest. However, there is more to money than what meets the eye. Some facts about money are common knowledge, while some will utterly shock you so here are 5 brutal truths about money you need to know now!
Truth #1: Saving Won’t Make You Rich
Saving money is great, but if you’re looking for true financial freedom, saving money in the bank shouldn’t be your only strategy. If you want to buy a car in the next few months, or you want to go on a holiday, or maybe you just need to have a stack of cash put away for unforeseen expenditures in the future, then saving money is an effective tactic. However, if you are looking to multiply wealth and have your money work for you, then savings can only take you so far.
I’m sure you know a good number of billionaires, I’m talking about people like Bill Gates, Jeff Bezos, Jack Ma, Warren Buffett, and Oprah Winfrey. Have you ever asked yourself — Did these people become rich by saving money, or did they become rich by letting their money work for them?
If you don’t have an answer to that then I’ll tell you — They put their money to good use and allowed it work for them. Money is just a tool, and a tool should be put to work, and not left to pile up in a toolbox. So, how can my money work for me, you ask? The answer is simple, you invest it.
You can’t “eat” or “drink” cash, it is only a means of exchange. Therefore, the best use for it, that is if you’re looking to become rich, is to invest it. Real wealth is having lots of assets, and not necessarily lots of cash. This is because assets keep raking in money, while still remaining yours, while money stashed in a savings account generates little to no profits.
Once again, saving money is great, but it should be used to acquire assets that will increase your inflow of cash. Just so you’re clear, an asset is something that generates income for you, a liability is the exact opposite, as it keeps taking money from you. The car you saved up to buy won’t earn you money, neither will a holiday in the Bahamas, but a commercial property in Manhattan will. Saving today doesn’t guarantee your survival tomorrow. There’s a little thing called inflation, and it hurts your spending power significantly. The bottom line is this — If you’re saving, then save to invest, don’t save simply as a means to an end.
Truth #2: Putting Money In The Bank Isn’t Risk-Free
Growing up, we were made to believe that the safest place you can have your money is in a bank. It seems logical, as you can save large amounts in an account without fear. However, putting money in the bank, similar to almost every other thing in the world, comes with its own risks. How risky could stashing my money in a bank be? Well, I’ll point them out to you in a bit. If your reason for opening up a savings account is to make some money via interest, then you will end up disappointed.
In case you don’t know, a savings account is not designed to multiply your money to any significant level. This is because they offer very low-interest rates, so you’re pretty much left with what you put in. Another risk here is inflation. Your returns could be so low, that inflation can eat away the value of your deposit.
For the sake of making returns on your reserves, the better option would be stocks or bonds. They offer much more potential, in terms of generating returns. This is not to say stocks are safer, because they are not, but they offer a lot more rewards than a savings account. Weigh the risks first.
There is also the issue of bank charges. A lot of banks will charge annual fees for running a savings account with them. In most cases, the annual charges on your savings account are actually higher than the interest you make on the same account, and that’s just terrible! There are also several hidden fees that may be charged due to certain activities on your savings account. For instance, if you go below your bank’s required minimum balance, you may have to pay some penalties. For this reason, it would be wise of you to be sure of all the fees associated with your account before you open it. Other than that, you will have several charges stacked up against you, which you never bargained for.
Additionally, operating a savings account comes with certain limitations. Besides needing a minimum balance in your account at all times, there is also a limit to the number of transactions you can make in a day. Lastly, there’s are instances where banks fail, and this could happen for different reasons. If your bank takes a nosedive, then your money will be at risk.
You can protect yourself firstly by understanding all the terms regarding your account opening, and secondly by ensuring your hard-earned cash is insured by the FDIC (Federal Deposit Insurance Corporation).
By doing this, you can have some confidence that your money will be safe, failure to do this will give you sleepless nights when your bank starts showing signs of going under.
Truth #3: A Higher Income Doesn’t Mean A Larger Net Worth
Contrary to popular belief, earning a large income doesn’t mean you’ll have a large net worth.
You may wonder how this is possible since earning more usually means having more right? Wrong!
Let’s be practical…
Jeremy is an accountant who makes $90,000 a year, with a net worth of $10,000. Whereas Luke is a fitness instructor who makes $35,000 a year and has a net worth of $180,000. So, who would you say has more wealth? Jeremy or Luke? Your answer is as good as mine. It’s Luke, and this is because he has a higher net worth, even though he earns less than Jeremy. So, how did Luke do it? Simple, as far as building wealth is concerned, the size of your income doesn’t guarantee you’ll have more in the future. Saving and investing were his habits and he used it to grow his net worth, unlike Jeremy who saved a little and never invested.
When they both retire, who do you think will live a more comfortable life? Luke again! This is because, even though he earned less, he invested more in his future, and that is the key to having a higher net worth.
It’s true that earning a high salary can help you save more and invest larger amounts, so if you’re a high earner, and have the intention of saving and investing your money, then good for you. But if your huge income only leads to extravagant spending and unnecessary show-offs, then it’ll all be a waste at the end. For definition’s sake, let’s be clear on exactly what income is.
According to the IRS, income is all taxable earnings (or wages) an individual receives from working. You can earn income in two ways –
By working for a person or organization
By creating your own means of earning (self-employed)
As for the definition of net worth, well it’s as simple as what you own minus what you owe. Assets — liabilities equals your net worth. But just as I said earlier, high income doesn’t guarantee wealth.
If you earn $5,000 a month, and you spend $7,000 a month, then it means you are in debt. But if you earn $3,000 a month, save $300, invest $500, spend the rest on your personal upkeep, then you could become a millionaire. After all, the initial investment on Facebook was just $1,000!
Truth #4: You Can Only Do So Much With Your Own Two Hands
Some entrepreneurs start and run their businesses alone. There are so many ventures you can go into all by yourself, but it doesn’t mean you have to run it solo.
Why not? You may ask, but many entrepreneurs fail to realize that the more capable hands you have, the higher your productivity, and the more money your business can make.
Let’s be practical once more…
For example, a baker starts his business, and he bakes 5 cakes per day. It costs him $50 to bake a cake, and he sells each one for $100. This means he’s making a profit of $50 on each cake or $250 a day.
He is only human, and there’s only so much work he can do alone, especially when the business starts growing and more orders keep coming in. If he were to continue baking on his own, he would never go beyond his 5 cakes per day maximum meaning he wouldn’t be able to make more than $250 per day from that particular business. If he were to smarten up and employ an extra set of hands to help him bake, he would be able to double his production and start producing 10 cakes per day. Thereby increasing his earnings to $500, as opposed to $250. It’s true that he will have to pay the new guy for his services, but that will just be a fraction of his profits, meaning he would still be earning more than he was when he was baking alone.
Being an entrepreneur doesn’t mean you have to burn yourself out with work. You should share tasks to increase productivity, and also invest in passive income streams so you can also make money when you sleep.
Truth #5: Working Hard Isn’t As Good As Working Smart
We’ve been told from the days of our youth to always work hard if we want to achieve anything good in life. While that seems like good advice, it may not be the best advice, as working smart beats working hard any day. So, what’s the difference between working hard and working smart?
Working hard means dedicating a lot of time and effort to a doing a particular task while working smart means spending a lesser amount of time and effort, but executing the exact same task, or even more tasks. Working hard involves a lot of physical effort to get jobs done, while working smart requires less physical effort, and is dependent more on tactics and ideas. Remember the baker I previously mentioned? At the beginning stages when he was baking the cakes alone, he was working hard and making $250 profit per day. He started working smart by employing an extra set of hands which helped him double his profits.
Imagine all the work he would have had to do if he were to bake 10 cakes per day alone! Smart work will help you save time, keep you better organized, and keep you less fatigued. Also, those who work smarter make more money than those who work harder. Gone are the days of brute strength, hard work will wear you down and won’t give you the time to engage in other profitable activities.
As far as building wealth is concerned, be advised to work smart, and not hard. Know what your potential customers want, and find the fastest, most cost-effective means to reach them and cater to their needs.