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Unless you're born well-off, the use of debt is likely unavoidable. Most people will not or cannot afford to buy their first house or even their first car without using debt. Therefore, if you want build wealth it is imperative to learn how debt works and how to use it. As you begin to learn about debt, some of the key words you will run into are principal and interest. They are not very complicated concepts but for some reason many struggle to fully understand what they mean. 

Once you fully understand debt and how it works, you have to use it. There are few people that are bigger advocates of the use debt than Robert Kiyosaki. "If debt produces income and puts money into your pocket, it's a good thing", he says. We totally agree. Many people that use debt, use it or the wrong reasons, i.e. to impress others, buy depreciable assets, go on vacations to name a few. Smart people use to it to grow businesses, by rental property or invest in education/training that will increase their long-term income.

When it comes to building personal wealth or "net worth" there is a proven formula. If you are interested in building wealth but do not know where to start don't worry because we have the step by step guide for you. Below we briefly discuss the major areas of focus. We go into greater detail in articles, podcasts, and videos you can find on this site.

Income is where we have to start when we first head down the path to building personal wealth. Obviously, that is because there is nothing to save and nothing to invest if we don't have money coming in. When we think about income in this sense we are talking about the thing you do most of the time to pay your bills or for most people, your day job. 

Savings is the next thing to focus on. Now, we aren’t recommending piling up your cash under your mattress or even in an interest-bearing savings account at your local credit union. We actually believe you have to focus on reducing costs wherever possible. Benjamin Franklin said it best “a penny saved is a penny earned”. You would be surprised how often people pay more than they have to for goods and services. Often times they do this because they don’t know to, or worse, don’t want to take time to shop options. One of the most valuable lessons taught in business school, and later learned better working in business, is to always get at least three quotes when seeking a product or service.

Investments or Passive Income are a must. If you don't have a high income (think 6 figures or more) it is going to be difficult to build wealth without having investments. What are possible investments you might ask. Some of the most common are financial securities such as stocks and bonds, real estate like rental properties, or businesses.

As you think about these things and how you can improve them, first, remember that it takes time and commitment. You won't get anywhere if you don't commit to the idea of building wealth over a life time; so many want to get rich over night and strictly statistically speaking, it essentially isn't possible. So avoid get-rich-quick schemes like the plague. Second, rotate your efforts between the three. That is for example, once you have maxed our your income for the time being, shift your focus to saving as much money as you can. After you have made all of the cost reductions you can, look to make better investments. Continue rotating through them constantly. It is unlikely that you won't be able to improve at least one of them at a time.

As mentioned previously, saving money in a bank account isn't what we mean. In fact, because we live in a environment where most of the world's central banks view 2-3% of annual inflation as a good thing, we can expect the value of our money to decrease each year. Therefore, letting it sit is amongst the worst things you can do when working to build your net worth.  

Focus on cost cutting!

Cost cutting is an art. Some of the wealthiest people you will ever meet are masters of cutting cost. They attempt to get the best deal at every opportunity but are specifically sensitive to major purchases or items that come with recurring costs. For example, according to Dr. Thomas Stanley's "The Millionaire Mind"***, most millionaires are very strategic about their home and vehicle purchases. They are never in a rush and typically spend a great deal of time studying the market before making a purchase. This is because these purchases come at a significant cost, even to millionaires. Sometimes even a half of a percent can equate to huge savings. 

***Note - Many of the thoughts and ideas about building wealth on this site are better explained or explained in greater detail in "The Millionaire Mind". We strongly recommend adding this book to your library if you are serious about building wealth.

First, let's start with what "net worth" actually means and how it is calculated. Net worth by definition is the summation of all assets that belong to you minus all debts that you owe to others. For example, you could look at it this way: let's say you had $1,000 in cash and you owed the bank $500. Your net worth would be $500 ($1,000 - $500). Pretty straight forward, right? Well, the calculation can get much more complex than that but in the most simple form it will always be assets - liabilities (or debt) = net worth.

Now, back to why it is important. Tracking your net worth allows you to see what all of your efforts through income, savings, and investment are totaling. Why would you want to know that? Let's just say when people begin to track their net worth regularly they become much more sensitive to income shortages (ex. lack of a pay raise), poor savings (ex. wasting money on things they don't need), and poor investments (ex. individual stocks that are underperforming index funds).