As long as you are not spending more than you earn, you will have money left as savings. Habit of saving money is the fundamental of a sound financial plan. But it just shows you half of the story.
Saving money is not equal to accumulating wealth
How much you save does not tell me how wealthy you will be. It is what you do with your savings that counts. Saving money does not mean you are accumulating wealth. Saving money is only the first step of accumulating wealth. You must understand that your mother’s advice of putting coins in piggy bank just prevent you from getting poor. It won’t get you rich.
What do you buy with your savings?
Now, here is what makes the difference.
You can actually do all sorts of things with your savings. You can spend it on a vacation. You buy yourself a new car. You can invest it for more income. Getting rich or not, it is how you spend money that counts.
The purpose of purchase
We spend money to have something valuable in return.
In order to get rich, the purposes of your purchases shall align with your goals of accumulating wealth. The purchase purposes can be prioritized as below:
- Getting more income
- Increasing knowledge
- Increasing productivity
- To remain healthy
Then all the other purposes become secondary, such as spending money for fun, for more comfort, or keeping up with the Joneses etc.
Two things to buy
There are two major categories of things you can buy – assets and liabilities.
When you buy a dividend stock, which gives you yearly dividend distribution, it generates income. When you buy a growth stock, and sell it for a profit months later, it gives you capital gain. These stocks are assets.
When you buy your own house, it triggers more expenses such as quit rent, more furniture purchase and also renovation cost. Therefore, your house is a liability. We call this expense-triggering possession.
When you buy an iPad, it may increase your productivity. But its value immediately dropped, incurring capital lost. Is it a liability or asset?
When you spend thousand of ringgits on an oversea trip, you gain experience although there is a capital lost. The experience may rejuvenate your tired mind and make you more productive. The experience may also widen your view and inspire your next money-making idea. Who knows?
Over time, you will develop your senses to differentiate which purchase is an asset, and which one is a liability.
Now, think back of your last three major purchases. Are they liabilities or assets?