November 21, 2012

Income Generating V.S Wealth Building

Income Generating V.S Wealth Building

wealth building illustration

Do people make money trading currency, stocks options and speculating on commodities? Sure!

Are these same people creating wealth? No.

As you know, building wealth equal to creating assets. An asset is something that creates income, that provides compounding returns over time, growing your money at a steady and predictable rate.

It is also allows you to peacefully sleep at night knowing that your principal investment is safe.

In a nutshell, let's think income as the amount of money we receive on a regular basis, while wealth is measured in the length of time we could maintain our current lifestyle without receiving any compensation for performing additional works.

Earning a higher income whether it from trading or day job usually comes with more financial commitments as to maintain a higher standard of living. They may come in form of:

  • Paying for our children education
  • Mortgage, home renovation, improvements
  • Luxury spending and travel

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Bali Resort
To explore the distinction between income and wealth, let us read the two fictional around 50-year-old characters. Ted and Fred

Ted earns a large income trading
But he is not wealthy - at least not yet. Unlike Fred, Ted attended an expensive private university, is highly intelligent and hard working. Ted got a job as a trader, starting out earning over $300,000 per year.

Ted's family lives extremely well. He qualified for a mortgage on a lavish $800,000 in an exclusive gated community, complete with a golf course. 

Ted's children attend the most prestigious local private schools. Ted and his wife drive luxury vehicles. A highly-proficient trader, Ted has worked his way up to an annual salary and bonuses of $500,000. But Ted's family's expense - add up. The total cost of it is equal to his income. They ends up living paycheck to paycheck, despite his successful trading activity.

Fred is a wealthy part time trader

But has never earned a large income. Fred began working at age 22, after earning his bachelor's degree at a state university. Although his starting salary was fairly low after graduation. Fred has managed to live well below his means.

He committed to invest at least 10% of his monthly income, and diligently shunned credit card debt. Through hard work and an excellent reputation, Fred has worked his way to a decent managerial position and now earns $55,000 a year.

At the same time, he does part time trading while keep on doing his daily job. Fred's family lives a simple yet decent life. He and his wife paid off the mortgage a few years ago, a small three-bedroom house in a working class neighborhood.

They may not live a lavish life, but the family is not only comfortable - they are debt free. And after 26 years of investing 10% of his income, Fred has built up an investment portfolio worth close to $1.5 million. This could sustain their current lifestyle for more than 30 more years without needed to work again.

Trading alone will never be able to build wealth. It may be able to generate decent income, but it is not for everyone. Investing your money in yourself, your family and your future will do it. Don't messed it up.

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About ArrowFX

Technically analyze the forex market mainly on USDJPY, EURUSD and GBPUSD by using market rhythm method started by Philip Nel on Forex Factory. The thread started on 2007 and still alive.
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